Joseph Krist

Publisher

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PURPLE LINE

The long-awaited light rail project between Prince George’s and Montgomery Counties is moving forward under the recent agreement between the State of Maryland and the private consortium constructing the Purple Line (4.25.22 MCN). Now the contractors have given more detail in an interview with the Washington Post. It includes new estimates as to the schedule for completion and the likelihood that it will be achieved. We are struck by a couple of items sprinkled amongst the rest of the interview.

Obviously, the level of due diligence undertaken by any of the potential contractor groups would be a major component contributing to a more solid and likely completion estimate. “We had an opportunity [to inspect the work done by the initial contractor] during the proposal phase but only for those things that we could actually see above ground. Now it’s a question of having a look at, understanding and feeling confident with those things that are below ground, things that we have to uncover.”

We note this because of our comment just last week about a Virginia P3 that had contract issues related to soil composition along the project route. That is one potential risk to the date. The contractor did note that there is a $200,000 daily penalty for a late project. It would still be a surprise if the current completion date holds.

PENN STATION

One of the Bloomberg administration’s primary successes (in its view) was the development of Hudson Yards. The formerly industrial area was rezoned and developed into office and residential space. The development was supported in part by debt issued through city and state agencies and debt service on some of that debt was supported by annual appropriations by the City.

Now, just one block east of the Hudson Yards area a new development is being proposed to generate tax dollars for the reconstruction of Penn Station. There is 

no need to belabor the present state of the station and the continuing inability to bring the project to fruition. The scale of the proposed project and the need for it to meet projected revenue expectations have raised concerns among many that the plan as it exists could turn into a fiscal issue for the State and City.

The NYC Independent Budget Office was recently asked to review the current plan advanced by the Sate’s Empire State Development Corporation (EDC). The project, announced by then Governor Cuomo and now being continued under the current Governor, ESD would take title to eight sites surrounding Penn Station and allow private developers to build greater density than city zoning currently permits, bypassing the city’s normal land use processes. The expected property tax revenues and fees from the new development would be applied to the repayment of the debt funding Penn Station’s improvements and nearby public space upgrades.

Here are the conclusions of the IBO review. They raise some red flags. The total cost of the Penn Station improvement project and, therefore, the revenue needed to cover those costs remains unclear. ESD estimates the total public cost of the transit improvements, including the Hudson River Tunnel, to be $30 billion to $40 billion, with costs shared by the federal government, New York State, and New Jersey. New York State estimates its share of the cost from $8 billion to $10 billion, and thus far has authorized $1.3 billion in capital funding for the project.

Bond or other debt financing is expected to cover most of the remainder, although ESD has yet to provide details on how exactly this debt would be structured. ESD would use value capture financing, where payments in lieu of property taxes (PILOTs) and fees from the development sites are used repay the debt funding the station project costs. Because the Land would technically be owned by the state, it is exempt from city property taxes. This makes the funding mechanism the payment of PILOTs to ESD, not property taxes to the city.

The state has not released any revenue projections for these PILOTs, nor has it specified how the PILOTs would be structured, including, importantly, to what extent any property tax discounts would be offered. 

Currently, there are 55 property tax lots on the eight sites slated for new development. In fiscal year 2022, the city collected $60 million in property taxes on these sites, a very small share of the city’s more than $29 billion in total property tax revenue. ESD has indicated that it intends to reimburse the city for this lost tax revenue (with annual escalations), although this also has yet to be formalized.

Did the City learn anything from the Hudson Yards experience? Apparently not. The report clearly notes that ESD’s plan would finance near-term station improvements with revenue from future private development, posing a timing risk. The station reconstruction and expansion projects are expected to be completed by 2032, but the development sites would not be fully completed until 2044. When there was a similar timing issue for the nearby Hudson Yards development—financed by the city in a similar manner—the city provided hundreds of millions in debt service payments from its own coffers until adequate revenue was available.

NYC OFFICE CHALLENGE

The Partnership for NY, the entity which represents the major New York business interests released a survey covering the return to the office. In this case, it’s more like the lack of it. The Partnership surveyed 160 businesses and found that only 8% of full time return to the office has occurred. On the average weekday, 38% of Manhattan office workers are in the office. Respondents reported that employers expect that the number will rise to 49% by September. 

That would be the level projected to already be achieved by this April when the same questions were asked in January. Before the pandemic, 6% of businesses were operating under “hybrid” models. Now, that number has grown to 78%. Those changes grow in importance daily, as reduced office attendance shows up in mass transit use and general economic activity in central business districts.

It is clear, at least in Manhattan, that the local economy is a long way from full recovery. The small businesses which drive much first time and less educated employment to the benefit of those are still reeling. This has reduced employment and threatens to prolong and dampen the recovery.

It all matters because the City has baked in a fair amount of permanent increased spending and must make some difficult capital spending decisions. The speed and magnitude of the recovery will go a long way to determining the long-term credit outlook for the City.

SEC AND ESG

The Securities and Exchange Commission has extended the comment period for its proposed disclosure requirements related to climate change issues. Issuers would have had to be able to provide more disclosures regarding their carbon footprints. The rules were seen as requiring companies (and municipal bond market issuers) to be able to provide information even as it relates to actions by suppliers. The Commission received much criticism for an initially short comment period and this extension is in response.

The proposals have not exactly generated a rational response. One Utah state official likened the effort to a form of financial terrorism and at the federal level Republican House members called it an attempt at a scorched earth regulatory policy.

MILEAGE FEES

The Pennsylvania Department of Transportation (Penn DOT) is working with the state legislature on a proposal to enact alternatives to its gasoline tax. A series of proposed revenue sources are being examined with a mileage- based fee being the most likely alternative. The process is a reflection of the complex set of issues that make road finance and funding reform such a contentious issue in the Keystone State.

It’s easy to forget that the first commercial oil well in the U.S. was in Pennsylvania. The Commonwealth’s reliance on coal production and products which relied on coal like steel have long driven energy policies. This was only reinforced through the introduction of fracking which accessed vast natural gas supplies. That’s 175 years of reliance on fossil fuels.

So, Pennsylvania is using the tried and true process of identifying a question to be answered by a commission. Legislatures use this to try to fend off opposition to contentious provisions of legislation. In this case, the Governor formed a commission and that group has now made two primary suggestions for hybrid or electric vehicle owner fees: a flat annual fee or a fee based on actual miles driven.

The process has yielded data which has been used to serve as a base for estimating and comparing fee alternatives. PennDOT research found that the average passenger vehicle driver pays 2.9 cents per mile in gas taxes. For hybrid drivers it’s 0.7 cents per mile. An electric vehicle operator would pay nothing. Current driving habits show the median number of miles driven by passenger vehicles is about 9,000 a year.

Approximately one in four drivers travel account for in excess of 14,000 miles a year. The data showed that a 14,000-mile driver generated gas taxes of $400 per year. That number could serve as a jumping off point for calculating a fee which would generate revenues while being publicly acceptable. The amount of the fee will be one hurdle. The next will be the ever present issue of “privacy”.

Privacy concerns have always been raised when it comes to the introduction of technology which generates location information. Urbanites can laugh at those issues but it was a real issue when electronic payments were introduced into urban metro systems. It comes up with electronic tolls and is an issue with congestion fees. Now it comes to the issue of mileage fees.

There is data on what attitudes really are. The Eastern Transportation Coalition (the former 17 state I-95 Coalition) has produced research which weakens some of the claims of fee opponents. The tests conducted in Oregon and Utah have used plug-in equipment to monitor mileage. There are two plug-ins: one with GPS and one without. It matters if one drives a lot out of state as the fees only apply to in state use.

The Coalition’s 2020-2021 State Passenger Vehicle Pilot provided participants with two mileage reporting options, both of which utilized a plug-in device that inserts into the vehicle’s on-board diagnostic (OBD-II) port: plug-in device with GPS and plug-in device without GPS. How important was “privacy”? The vast majority of participants (80%) chose the plug-in device with GPS. This option used GPS technology to differentiate mileage by the state where the miles were accrued. The state-specific per-mile rates were applied to the mileage driven in each state, less a fuel tax credit based on the fuel consumed in each state and the state-specific fuel tax.

We think that the long-term answer is mileage-based fees collected with electronics and GPS. This will enable states to levy different rates reflecting their unique transit profiles.

PORTS

During the pandemic we commented on the impact of the pandemic, capacity issues, and the economy in general on port revenues. Whether it was revenue constraints due to pandemic limitations on operations or pressures associated with cargo backlogs at the major commercial ports Los Angeles and Long Beach, ports have been a good indicator of what was happening in the economy as a whole. In the Fall of 2021, those ports threatened the imposition of fees for containers not promptly moved to address trucking-based backlogs. Recently, after a period of more regularized operations, the waiting time for ships entering those ports was approaching one week.

Now, labor issues at the ports may be the next stumbling block. This past week, negotiations between the major West Coast ports and the unions representing dockworkers commenced. The existing contract expires July 1. The International Longshore and Warehouse Union (ILWU), represents dockworkers at the more than two dozen ports on the West Coast. They have long been aggressive negotiators very willing to use strikes. The ports include the Los Angeles Harbor Department, CA, Long Beach Harbor Department, CA table), Port of Seattle, WA and Port of Everett, WA (A2). The Alameda Corridor Transportation Authority, CA), a rail project jointly owned by the ports of Los Angeles and Long Beach, would also be affected.

Pressure will come from the effects of the pandemic and the potential for more future automation. After the development of containerization and its resulting crushing impact on port employment some 60 years ago, automation is a key component of every dockworker negotiation. Wages and salaries may be the easiest issue. It will be hard to argue that the ports aren’t busy and generating revenue. Maintenance of staffing requirements will likely be a key source of contention as the ports and shippers seek to speed the process of unloading in an effort to help the supply chain.

VOUCHERS

Vouchers have been a favorite of many conservatives to address a range of issues. It has been more acceptable to them than direct housing development as it also allowed proponents to claim racial integration benefits. In much the same way, voucher programs to address education inequality have been a favorite solution for “school choice” advocates. Now, in Connecticut we see vouchers offered as a solution to some environmental justice and equity issues.

The omnibus Connecticut Clean Air Act was enacted this week. The legislation significantly expands funding for an existing electric vehicle rebate program. The program – the Connecticut Hydrogen and Electric Automobile Purchase Rebate, or CHEAPR – offers rebates of $750 to $2,250 on the purchase of battery-electric vehicles and plug-in hybrid electric vehicles. Higher incentives are available for fuel cell electric vehicles.

Before the legislation, the program was funded by the first $3 million in greenhouse gas reduction fees paid every year on car registrations. As of July 1, all of those fees will be directed to the rebate program. It is estimated that this could increase funding by as much as $5 million annually. The program will be required to give the highest priority to residents of environmental justice communities, residents with incomes at or below 300% of the federal poverty level, and residents who participate in state or federal assistance programs, including the Operation Fuel energy assistance program.

COAL REALITIES

Even in a friendly regulatory environment there is only so much one can do to fight the market. The news that the owner of one of Montana’s major generating facilities will shut down last a large coal plant as a part of the bankruptcy of its owner. Talen Energy specifically cited the non-competitive nature of coal generation versus primarily natural gas. The Colstrip plant in Montana is not being converted from coal by Talen.

The closure affects the last of three units at the site. In 2020, Talen and Puget Sound Energy, which evenly split ownership of Colstrip Units 1 and 2, closed the units because the generators were no longer profitable. The situation highlights the ability of regulators in one state to influence the operations of a facility in another even though it is operated under its home state’s regulations. Oregon and Washington have set firm dates for their investor-owned utilities to stop using coal. Those utilities own 70% of Colstrip 3.

As the company’s filing said ““The previously low price of natural gas has meant that coal-fueled assets are no longer economical to run or keep updated. “

EMINENT DOMAIN UPDATE

There seem to be constant developments in the effort by the sponsor of a proposed carbon pipeline to move carbon dioxide from ethanol plants toa storage facility. The South Dakota regulators have noted that they have received more comment on proposed regulatory actions involving carbon capture pipelines than any other issue in memory. Five North Dakota counties have issued resolutions (albeit non-binding) against eminent domain use to acquire pipeline right of way.

The issue still remains on a larger scale in Iowa. Legislation to halt its use for one year was passed in its lower chamber but ultimately did not make it out of the Senate. With both carbon capture and transmission line developers seeking easements from landowners in the state, it remains a significant issue.

In Missouri, legislation was enacted that requires companies to pay landowners 150% of the fair market value on their land; would require that developers start construction within seven years of getting easements. If that did not occur, their rights to the property would expire. Court-appointed commissions would be established to undertake the process of determining the fair market value of a farmer’s land during eminent domain proceedings. They would be required to include a farmer who has lived in the area for at least a decade. 

Prior Grain Belt legislation required that at least 50% of the power carried by a transmission line be kept in the state for use by Missouri customers. Under this overriding bill, it would be required that transmission lines be set up to provide an amount of power to the state proportional to the length of the line running through Missouri. 

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

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THE TRANSMISSION BOTTLENECK

Researchers at the US Department of Energy’s (DOE) Lawrence Berkeley National Laboratory surveyed seven electric grid operators and 35 major utilities, which together cover 85 percent of the US power load. They found that 1,300 gigawatts of wind, solar, and energy storage projects had been proposed as of the end of 2021, enough to meet 80 percent of the White House’s goal of carbon-free electricity generation by 2030. That is the good news.

Then there is the key issue of transmission capabilities. The researchers found that only 23 percent of the renewable generation projects seeking grid connection between 2000 and 2016 have actually been built. That is a result of the failure of transmission development to keep up with generation development. DOE found that the number of newly built high-voltage transmission lines has declined from an annual average of 2,000 miles in 2012-2016 to an average of just 700 miles in 2017-2021.

This gets us to where we are today. Renewable generation expansion is outpacing transmission expansion. Transmission expansion creates real issues over land use and right of way. Iowa’s Grain Belt Express is a perfect example. The issues over transmission are potentially working in favor of offshore wind generation. Coastal utilities would not need the sort of transmission infrastructure that other utilities might to access this source of power.

TRANSIT ISSUES POST-PANDEMIC

The City of San Diego currently permits seven operators permitted for 11,050 devices. The rapid increase in the availability and use of scooters has returned certain issues associated with their use back to the fore. Many of those issues concern the use and storage of these devices outside of the street setting. Riders on sidewalks and the predilection of users to leave the scooters all over have raised concerns.

Now the City is considering a plan which would reduce the number of devices by almost 4,000. Currently, devices must be permitted every six months. Through that permitting process, the City is proposing to use the permit renewal process to achieve the reductions. The proposals under evaluation by the City Council would see companies chosen through a request for proposal process, and then be contracted by the city. Chosen companies would be required to pay an annual $20,000 fee in addition to $0.75 a day per device. The number of devices would be capped at 8,000.

The importance of a revenue stream not dependent upon farebox revenues has been reinforced. New York’s MTA debt is supported by farebox revenues and the ongoing declines in ridership attributable in part to fear of crime have caused some to be concerned about the credit long term. Other systems across the country also see ridership under pressure but given that their funding for debt service is not farebox related it is less of an issue.

Case in point – the Chicago Transit Authority (CTA). The CTA is the second largest transit system in the US and provides service within the City of Chicago and several neighboring communities. Its debt is secured by the authority’s Sales Tax Receipts Fund (STRF), to which the Regional Transportation Authority (RTA) transfers both regional sales taxes and allocations of the state’s Public Transportation Fund (PTF) matching payments. Moody’s announced that it has upgraded to A1 from A2 the rating on approximately $2.1 billion of outstanding senior lien sales tax bonds of the Chicago Transit Authority, IL.

The upgrade reflects good recovery of pledged sales tax revenues from the impacts of pandemic restrictions. The pledge of sales tax revenues reduces significantly the Authority’s exposure to ridership pressures. The upgrade accompanied the upgrade of the RTA, the holder of the senior lien on some of the taxes pledged to the CTA bonds.

The same sales tax recoveries which bolstered the CTA are also positively impacting the RTA. An additional RTA factor is an assumption that state funding will remain stable and timely given improved fiscal conditions of the State of Illinois. In past years, the authority’s receipt of state public transportation funds had been subject to months of delay as the state faced its own fiscal challenges. The state is currently making distributions in a timely manner. 

ILLINOIS

Over the last decade as the State of Illinois’ credit and its ratings steadily deteriorated. Those declines also impacted the credits of the many issuers who receive significant resources from the State like the transit agencies we mentioned. The other sector which clearly saw downgrades related to the State’s difficulties was public university credits. Now that the State’s ratings have stabilized, the positive impacts are finally reaching bonds for facilities in the state university system.

This week Moody’s reflected that in several rating actions. The upgrade “reflects continued strengthening of the State of Illinois’ (Baa1/stable) fiscal condition with positive downstream effects to the university contributing to an improving operating environment. The state’s recently enacted fiscal 2023 budget increases direct operating appropriations to the university by 5%, as well as increased monetary assistance program (MAP) funding which provides financial aid for students.

Both are favorable for the university’s operating environment, aiding greater budget predictability and supporting student affordability. Increased pension contributions by the state lessens the risk of the state shifting future pension liabilities and associated contributions to the university.”

VIRGINIA P3 OUT OF NEUTRAL

The expansion in Virginia of the 95 Express Lanes to the Fredericksburg area is scheduled to be complete late next year. Construction of the new toll lanes is now 60 percent complete. That leads to a scheduled opening in December 2023. That would represent a delay of more than a year behind the existing schedule. Work on the 10-mile extension began in 2019 and was scheduled to be complete in October. 

Work was slowed while issues over the composition of the soil along the construction route were assessed and negotiated over. Transurban, the operator of the project and its contractor recently settled a dispute over the costs and timeline of the project. In an arbitration hearing last October, the contractor successfully argued that geologic conditions in the construction zone affected their ability to keep the project on schedule. An arbitrator ruled that it was entitled to a price adjustment and more time to complete the project. 

The ultimate cost of the needed mitigation required to deal with the soil challenges will increase the original cost of $565 million by about $100 million. Transurban is financing the project including the increased costs.

NATURAL GAS

Central Electric Power Cooperative, Inc. is the largest customer of the South Carolina Public Service Authority (Santee Cooper). Central, through its member co-ops serves about 1/3 of the Palmetto State’s population. That puts it at the center of the problems facing Santee Cooper especially those

related to the ill-fated Sumner nuclear expansion. That has raised the ire of co-op customers regarding the future course of their utility.

Now that discontent has been manifested in the decision by Central on behalf of its member distribution co-ops to oppose efforts by Santee Cooper to replace coal-fired generation with natural gas-fired generation. Central is supporting efforts to expand the renewable resources available for clean power generation. In 2021, Santee Cooper contracted for its share of 425 megawatts (MW) of new utility-scale solar power that will be added to the utility system in 2023. Central Electric Power Cooperative has finalized contracts with the same developers for the remaining share.

In Connecticut, the state has decided to end a program which provided cost incentives for homeowners to switch to natural gas. The program began in 2013 and was originally scheduled to be in place for ten years. The spike in natural gas prices and the growing sentiment that natural gas is not as clean as advertised led state regulators to conclude that the incentive program “no longer furthers the state’s overall climate and energy goals …. (and) is no longer in the best interest of ratepayers.” Connecticut’s Public Utilities Regulatory Authority has given the state’s three natural gas utility companies 90 days to end the conversion incentives.

SOLAR SPRING

Solar electricity generation has been a hot topic of legislative debate. Most of the argument is over the issue of net metering whereby a homeowner still on a distribution line from a utility generates power from their solar panels and then distributes any excess power back to the utility. The total monthly usage is calculated and the homeowner is billed for the amount of power used net of the solar power generated by the customer. The payment due is effectively a number net of the value of the solar power distributed to the utility.

The arguments to date have been based on differing views of how the value of a kilowatt hour generated by solar is established. It is becoming a significant political issue. Legislation in Florida which would have significantly reduced the value of solar power for net metering was vetoed by the Governor. Legislative efforts seek to both limit the period of time during which the more favorable net metering rates would impact a customer’s bill for solar generation. North Carolina regulators are considering Duke’s plan to add a $10 monthly charge for customers who install solar panels and to reduce what they get paid for excess electricity sent to the grid. 

TEXAS AND SYMBOLIC LEGISLATION

Much ado has been made over an effort by the State of Texas to “punish” financial firms which will not bank the fossil fuel industry. The State hopes to develop a list of offending firms and prohibit their participation in transactions such as bond issues from the State. The State is particularly focused on institutions which have made public pledges not to invest or run mutual funds which state that they will not invest in fossil fuels.

The State’s actions got a lot of attention but a closer reading indicates how merely symbolic they are. Companies that want to work with Texas can still avoid investing in fossil fuels as long as they are doing so for strictly financial, rather than ethical or environmental reasons. The ridiculousness of such a stance is clear. While a given institution may decide that fossil fuel investment is bad business, is it not reasonable to assume that the environmental and political factors behind the demand for ESG investments are what make it bad business.

A recent report by NPR cited comments from the state treasurer of West Virginia on the issue. They show the contortions that these state’s go through to create symbolic efforts. “(If) they’re saying we, as a financial institution, will not lend money to coal, for instance. That is a blanket statement that is a problem for the state of West Virginia.” “If they’re making a business decision somebody comes in for a loan for a coal company, and they decide that it’s a big credit risk, and they don’t want to do it, then that’s fine.” Why do they think it’s a credit risk?

It was also pointed out that for firms managing and investing money who have a strong ESG orientation, being put on the Texas list of ineligible firms might actually be a beneficial marketing tool. Back in the day, a theatrical production which had been “banned in Boston” often benefitted from that as it drove curiosity and ticket sales. This isn’t much different.

VIRGIN ISLANDS

This week Moody’s commented on the credit of the US Virgin Islands in light of the recent bond sale which sought to shore up the territory’s funding for its pension system. Some observers hoped that the outstanding Caa3 rating on the territory’s debt might be raised as a result of the refinancing. Those investors will be disappointed as the rating agency maintained the rating at its current level.

In maintaining the rating Moody’s noted that “Whether the government’s
statutory contributions plus dedicated matching fund revenues will be
sufficient to maintain the retirement system’s solvency will depend not
only on the performance of matching fund revenues, but also on the
retirement system’s investment returns.” Moody’s is rightfully concerned about investment performance. We have seen other pension funding deals fail to deliver their expected benefits when markets turn unfavorable. Ask New Jersey about that.

We agree that more is needed to produce real credit improvement. The move to refinance the retirement system is clearly a positive relative to no action. Nevertheless, the underlying economic problems continue and the infrastructure problems especially at the water and power authority continue to be a drag on economic improvement. Moody’s was right to hold the rating until more sustainable trends can be established especially in light of the redirection of rum tax revenues away from general revenues.

The USVI remains exposed to oil-related risks which have helped to destabilize the power system. It obviously is exposed to hurricane risk. So, it remains a highly speculative credit.

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

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WHY REEDY CREEK MATTERS

The effort on the part of Florida Governor Ron DeSantis to punish Disney becomes more embarrassing by the day. This week, the Governor’s office admitted that there is no plan to actually implement on a practical basis the dissolution of the Reedy Creek Improvement District. There needs to be a resolution of the emerging conflict between the goals of the Governor and the Legislature and state law.

Disney points out that “Pursuant to the requirements and limitations of Florida’s Uniform Special District Accountability Act, which provides, among other things, that unless otherwise provided by law, the dissolution of a special district government shall transfer title to all of its property to the local general purpose government, which shall also assume all indebtedness of the preexisting special district.”  That would be mostly Orange County and some to Osceola County. That is something the counties do not support. DeSantis’ office released a statement Friday saying it does not expect any tax increases for any residents from this new law. Without additional implementing legislation, the details of any transfer are unknown.

What is clear is that the concept of non-impairment whereby an entity like a state covenants not to take any actions which would impair the ability of another debt issuer to meet its obligations is now subject to question in Florida. It is a view shared by Fitch Rating’s which said that Florida’s move to dismantle Reedy Creek “heightens bondholder uncertainty” and if the state doesn’t find a way to resolve the debt issue it “could alter our view of Florida’s commitment to preserve bondholder rights and weaken our view of the operating environment for Florida governments.”

ILLINOIS

Two years ago, Illinois was the only state to borrow from the Federal Reserve Bank’s Municipal Liquidity Facility. Now, with the recovery from the pandemic underway the State’s financial position is much improved from that time. Between better than expected revenues and a windfall of aid from the Federal government, the State’s fiscal position is clearly sounder. This set of circumstances has manifested itself in a rating upgrade from Moody’s.

Moody’s Investors Service has upgraded the issuer rating of the State of Illinois to Baa1 from Baa2. This change supports the following upgrades: to Baa1 from Baa2 the rating on the state’s outstanding general obligation bonds, to Baa1 from Baa2 the rating on the state’s outstanding Build Illinois sales tax bonds. Moody’s has affirmed the Baa3 rating on outstanding Metropolitan Pier & Exposition Authority bonds that are partially paid with state appropriations. The outlook is stable. The upgrade reflects continued progress towards paying down accounts payable. The state is also increasing pension contributions, indicating increased commitment to paying its single-largest long-term liability.

The stable outlook balances the financial progress being made by the state with the uncertainty of the present economic climate. The state’s lean financial reserves, and heavy long-term liability and fixed cost burdens make it more vulnerable than other states to a negative shift in the national or global economy, which presently limits the probability of further rating improvement.

UTAH AND ESG

The State of Utah is emerging as the lead dog in an effort to discourage the use of ESG factors in determining creditworthiness. In March of this year, the SEC proposed new disclosure requirements for securities issuers regarding climate factors and their exposure to them. This will include municipal bond issuers as well as corporations. As one might expect, the proposal has generated some strong responses.

The most recent example comes from the State of Utah. The State’s political establishment authored a letter to S&P signed by Gov. Spencer Cox, Treasurer Marlo Oaks, other state constitutional officeholders, legislative leaders, and Utah’s Congressional delegation, stated their objection to any ESG ratings, ESG credit indicators, or any other ESG scoring system that calls out ESG factors separate from, in addition to, or apart from traditional credit ratings. The State considers ESG issues to be non-financial and therefore of no consequence to investors. It implies that environmental concerns are a leftist plot against the fossil fuel industry.

Here is what the SEC proposes to be included in financial statements and other disclosure from issuers. They will be expected to address how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; the registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.

If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks; if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts; if a registrant uses an internal carbon price, information about the price and how it is set; the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements.

Some of the details will be harder for governmental issuers. Those items include the registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production); indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emission, in absolute terms, not including offsets, and in terms of intensity.

It is a lot for issuers to deal with and it is likely that the requirements will be modified. Nonetheless, the knee jerk ideological reaction in Utah is not realistic either. The State has had a hard time as proposals for “inland coal ports” and efforts to establish facilities in West Coast states for the export of coal have been rejected. The large Intermountain Power Agency is converting its massive coal generating facility in Utah. So, it is a tough time for coal in Utah.

In many ways, the effort to reject ESG considerations in the investment process is a case of closing the barn door after the horse has left. The Commission began efforts to provide investors with material information about environmental risks facing public companies in the 1970s and most recently provided related guidance in 2010. Over that time, ESG investing grew from a niche position and increasingly has become a major driver behind the investments of large institutional investors. In the case of fund groups, retail mutual fund investors are driving the demand for more ESG investment.

Ironically, the letter was released as Utah’s Intermountain Power Agency was issuing revenue bonds. And what are the proceeds being applied to? The new debt issued by Intermountain Power Agency (IPA) will finance the construction of a new 840 MW natural gas generator with up to 30% hydrogen burning capability power plant (the new Intermountain Power Project or new IPP) and a new natural gas pipeline connection. This is the first of three expected bond issuances for the new Intermountain Power Project with the others expected to close in 2023 and 2024 for a total estimated par amount of about $1.5 billion to $1.7 billion depending on market conditions.

The project received a big boost with the announcement this week by the US Department of Energy (DOE) that the proposed source of hydrogen for the plant would be the beneficiary of a loan guarantee for $500 million. DOE said the project would include “one of the largest deployments in the world” of electrolyzers, which can use wind and solar power to split hydrogen from water molecules, in a zero-emissions process.

REGULATION

Washington State is the first to establish regulations requiring builders to install electric heat pumps for space and water heating in most new commercial buildings and multifamily residences with four or more floors. The Washington State Building Code Council (SBCC) also sent several proposals requiring heat pumps in residential buildings to technical advisory groups for review. The SBCC is the entity which could ultimately regulate residential fossil fuel use. Cities do not have the authority to amend the state residential energy code, which covers single-family homes and multifamily buildings with up to three floors.

In California, Carlsbad is considering an ordinance that would require all-electric residential construction as part of the 2023 update of its Climate Action Plan. It would join 54 other governments in California which require water heaters, clothes dryers, space heaters and other appliances in all new construction to be electric instead of natural gas.

Tennessee has enacted legislation which would preempt lower levels of government from regulating oil and gas facilities especially pipelines. One source of power which the law would reserve to localities – regulation of solar energy projects. The legislation was driven by the Tennessee Chamber of Commerce and the Tennessee Fuel and Convenience Store Association supported the legislation.  It comes after community opposition in Memphis halted a pipeline development.

In the Midwest, carbon sequestration and capture proponents are pushing for legislation which would transfer the liability associated with carbon capture and storage to governments. Four states have passed laws over the last year that allow companies to transfer responsibility for carbon storage projects to state governments after the operations are shut down. The concerns over carbon capture liability parallel the situation facing states with abandoned oil and gas wells.

Supporters say the legislation establishes certainty for investors who may have concern with liability issues. Opponents fear that the liability shift from operator to government will encourage less stringent operating conditions and allow the industry to walk away from its damage. It is legitimate to ask if the technology is so safe, why is the industry so afraid of potential liability?

CANNABIS TAXES

The Institute on Taxation and Economic Policy has released a study of trends in the growth of revenues associated with legal recreational cannabis sales. The study focused on 11 states where cannabis sales have been in place for several years. In 2021, the 11 states that allowed legal sales within their borders raised nearly $3 billion in cannabis excise tax revenue, an increase of 33 percent compared to a year earlier. Seven of those states that allowed cannabis sales last year raised more revenue from cannabis excise taxes than from alcohol excise taxes and profits (in the case of state-run liquor stores). In total, cannabis revenues outperformed alcohol by 20 percent by this measure.

Michigan, Oregon, Alaska, and Maine still collect more taxes from cannabis than from alcohol. The relationship between the two sources can be influenced by the divergence in tax policies governing pot and alcohol which yield some surprising results. Colorado has the biggest proportional disparity. Yes, it’s the home of Coor’s but Colorado also has among the lowest alcohol tax rates in the nation at 2.7 cents per shot of liquor, 1.3 cents per glass of wine, or 1 cent per pint of beer. Those taxes raised a total of $53 million last year. Colorado’s cannabis taxes are levied at higher rates per serving (a 5-milligram edible might incur around 16 cents of state tax, for example) and raised $396 million. 

The growth remains consistent. It is enough that in more established jurisdictions, King Tobacco is no longer the source of the most “sin tax” collections. Cannabis revenue outperformed tobacco by 17 percent in Colorado and 44 percent in Washington State last year.  As rates of tobacco use continue to decline, it becomes more likely that cannabis will become the leading source of these excise taxes. 

NYC BUDGET

New York City Mayor Eric Adams presented New York City’s $99.7 billion Executive Budget for Fiscal Year 2023 (FY23). It projects increased revenues from the mayor’s first Financial Plan update in February. Revenues of $1.089 billion would provide additional monies for programs as well as increased deposits to the City’s general reserves and rainy day funds. The budget will undergo significant review and debate but, in the end a balanced package will result.

We are more interested in where the relative spending occurs and how it relates to the budget as a whole. The Plan submission shows that the City will spend more on pensions than it will on debt service. The City will spend $8.1 billion on public assistance including its share of Medicaid. That is 7.5% of the budget. Debt service is a manageable 6.1%. Personal income taxes project to some 22% of tax revenues. Federal and state transfers to the city comprise some one-quarter of proposed city spending.

FY 2023 is balanced but the ensuing years follow a fairly traditional pattern by showing expected budget gaps of $3.3 to $3.9 billion in fiscal years 24, 25, and 26.  One concern is the size and timing of projected gaps. The great influx of federal aid to states and localities effectively dries up after 2024.

DECARBONIZATION

The process of decarbonizing Colorado’s electricity grid continues to unfold. We have been following the ongoing saga of the tax-exempt borrower Tri-State Generation and its disputes with its members over their desire to decarbonize. This week, The Federal Energy Regulatory Commission (FERC) rejected United Power’s attempt to provide Tri-State Generation and Transmission Association with a non-binding, conditional withdrawal notice. FERC agreed with Tri-State’s position that conditional withdrawal notices are not permitted under the contract termination payment (CTP) tariff that the federal regulator accepted in November 2021.

While seen as a reprieve, other pressures could force Tri-State to decarbonize faster. The State’s other major investor-owned generator is moving in a different direction. Xcel Energy submits an electric resource plan every four years to regulators. It projects the amount of electricity the utility will need and the sources it will use. The latest iteration of the plan speeds up the timetable for the retirement of coal generation and the full termination of the last unit in Pueblo, Co. That plant has been often inoperable adding to the pressure to close.

If approved as is, Xcel projects it will meet more than 80% of its customers’ energy needs with renewable sources by 2030 and cut carbon dioxide emissions by at least 85% from 2005 levels by 2030. Pueblo County will receive 10 years of property tax payments to compensate for the earlier retirement of Comanche 3.

DROUGHT

The Metropolitan Water District of Southern California declared a water emergency. The declaration allows the District to impose usage restrictions. The first takes effect on June 1. It would restrict outdoor watering to one day a week in parts of three counties – Los Angeles, Ventura and San Bernardino. A population of 6 million is covered by the limits. The MWD’s board has never done this before. Cities and smaller water suppliers that get water from the MWD are required to start restricting outdoor watering to one day a week, or to find other ways to cut usage to a new monthly allocation limit.

The latest projections for water levels in Lake Powell show they may get as close to 11 feet away from the hydropower cutoff in less than a year, even with the new round of releases. The decline has been the subject of much concern. (See MCN 3/28/22) Now, four impacted Colorado River states have agreed to the release of 500,000 acre-feet of water from the Flaming Gorge Reservoir, located on Utah – Wyoming border.

This follows a proposal from the US Department of the Interior that would cut back on allocations to California, Arizona and Nevada. The water would instead support the retention of some 480,000 more acre-feet of water in Lake Powell. The two moves could support hydrogeneration at the Glen Canyon Dam. Snowpack in the Colorado River basin is largely near or below average. Water storage in the Colorado River reservoirs is at a historic low with Lake Powell at 25% capacity, and Lake Mead at approximately 35% capacity. Releasing less water from Lake Powell has the potential to reduce Lake Mead by about another seven feet in elevation.

The Southern Nevada Water Authority draws its supply from Lake Mead. The Authority was scheduled to turn on a low lake level pumping station to a full operational status instead of its current testing status. Designed to draw water from the lake bottom, this pumping facility would be unaffected by the decline in water levels. SNVA has three intakes. One is now above the water line, the second is close to its required line.

NET METERING VETO IN FLORIDA

Florida Governor DeSantis has gotten plenty of publicity for his efforts to punish Disney for opposing legislation. Now the Governor has delivered an unexpected veto of legislation backed by Florida’s largest investor-owned utility. The Governor vetoed legislation which would have sharply reduced the benefits to customers of installing rooftop solar.

Was it a policy issue that drove the veto or was it a short-term political consideration? “Given that the United States is experiencing its worst inflation in 40 years and that consumers have seen steep increases in the price of gas and groceries, as well as escalating bills, the state of Florida should not contribute to the financial crunch that our citizens are experiencing.” The initial bill would have eliminated net metering. It was amended to instead call for solar panel owners to get a decreasing rate over time until 2029, when no more subsidies would be allowed. Solar panel owners also would have been grandfathered in under the bill for 20 years.

BUDGET TRENDS

While non-financial issues are getting much attention during the budget season, a number of trends in terms of taxes and gas prices are emerging. New York enacted its budget with gas tax reductions beginning July 1. Connecticut will enact a $24 billion state budget that features nearly $600 million in tax cuts, including up to $750 later this year for families with kids, and an extended gasoline tax holiday running through Dec. 1. More than half of the nearly $600 million in tax relief in the plan is guaranteed for just one year.

In Virginia, Gov. Glenn Youngkin’s proposed three-month gas tax suspension did not make it out of committee.  The plan would have taken 26 cents off each gallon for consumers – and cost the state about $437 million. The debate over the issue came in the wake of the end of a one-month gas tax holiday in Maryland.

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

GOVERNANCE, FLORIDA, AND DISNEY

As we go to press, Florida Governor DeSantis is expected to sign into law legislation to effectively end the existence of the Reedy Creek Improvement District. The move is in response to Disney’s public position on what has become known as the Don’t Say Gay law in Florida. Reedy Creek is the special district created in the late 1960’s to support the development of what became Disney World. It issues debt for infrastructure development in the District and repays the debt from special assessments paid by Disney.

If Gov. Ron DeSantis signs the bill into law, the Reedy Creek special district would be dissolved effective June 1, 2023. The majority of the District is in Orange County with the remainder located within adjoining Osceola County. Dissolving the district would mean Reedy Creek employees and infrastructure would be absorbed by the counties, which would then become responsible for all municipal services as well as the debt issued by Reedy Creek.

Currently, Disney pays taxes to both counties as well as the Reedy Creek district. Florida law dictates that special districts created by the legislature can only be dissolved with a majority vote of the district’s landowners. For Reedy Creek, that’s the Walt Disney Company. It all has the makings of an extended litigation process as the counties, Disney, bondholders, and bond insurers all face uncertainty as the details of the law emerge.

The District issues debt backed by utility revenues and it issues debt payable from ad valorem taxes. The utility debt is rated in the low AA category. The ad valorem tax debt is rated A. It is not clear what the rating impact of a dissolution would be as it would be reliant on non-related county ratings.

The governance issue is pretty clear. Regardless of one’s view of the law, the Governor and the Legislature are taking governance down to the level of fourth grade class elections. Disney is the largest employer of Florida residents in the state. It is not expected that Disney would vote to end the current arrangement unless there was a financial benefit to the company. So, in the end, is the legislation just ultimately a piece of performance art?

THE NUMBERS DON’T LIE

A couple of weeks ago we discussed the issues surrounding efforts by individual electric cooperatives to move their demand to new sources of power from new providers. Those coops were customers of Tri-State Generation and Transmission. This large cooperative wholesaler is battling efforts by members to end their status as distribution customers while remaining transmission customers. Now, one of the original coops to successfully move its demand to another supplier has provided real financial benefit from leaving.

In 2016, the Kit Carson cooperative in New Mexico reached agreement on a price that would allow Kit Carson to end its power purchases from Tri-State as its wholesale supplier. Now that any debt obligations associated with the buyout are maturing this year, the lowered debt service and lower purchased power costs are reducing its revenue needs. Now, Kit Carson is projecting that in late summer or early fall, customers could see decreases of up to 20 to 25% in their monthly bills.

The circumstances are not going to be the same everywhere – after all this is the utility serving Taos. Two industrial scale solar projects are run by the coop and they employ large scale batteries for storage. It’s no surprise that support for those projects would cause problems for a still fossil based generator like Tri-State.

P3 PROGRESS

The private consortium managing Maryland’s Purple Line project has signed a $2.3 billion contract with a new construction team. The total cost of the project is now $3.4 billion, an increase of $1.46 billion from the last estimate. The initial budget was $1.9 billion. The construction contract is between the Purple Line Transit Partners (PLTP), the private concessionaire led by infrastructure investor Meridiam and the construction group led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. 

The consortium’s new financing includes a $1.76 billion low-interest federal loan, which has grown from the original $875 million loan, $643 million in private activity bonds issued to PLTP and $293 million of its own equity. To finance the increased construction costs, the state will pay back those costs with higher monthly payments — averaging about $255 million annually — over the 30-year contract term. 

MIXED SIGNALS ON NEW YORK STATE

Moody’s announced that it has upgraded New York State’s general obligation rating to Aa1. It cited “a significant increase in resources combined with agile financial management that has resulted in balanced or nearly budgets projected through the state’s five-year financial plan. Recognizing its need for a financial buffer to counter the volatility inherent in the state’s economic and revenue structure, it has channeled some of those resources into expanded reserves, reductions in certain outstanding liabilities, such as postponed pension contributions, and risk reduction, such as termination of outstanding interest rate swaps. These actions point to the role of strong governance in triggering the upgrade.”

We note that the reference to strong governance came in the same week that the newly appointed lieutenant governor had to resign after being indicted. We also note that the significant increase in resources comes from federal aid and that pandemic related financial assistance is only expected to last through fiscal 2024. The politics of the budget process which saw increased social service spending build into the budget to offset political opposition to the subsidy the state will provide for the Buffalo Bills stadium.

We also note that the economic situation, especially in the State’s economic driver New York City remains uncertain. It is increasingly apparent that New York’s central business district will not return to pre-pandemic normal. Office attendance will not be 100% and the businesses which rely on office workers will have a slower road to recovery. The recent incident on the subway will not help that. Added to that is the potential impact of the expected congestion fee which is likely to be imposed .in 2023. The outlook for the City’s economy remains uncertain so given the role of the City in the State’s economy we do not see a stable situation.

HOLD THE SALT

The legal effort to overturn the changes to the tax laws in 2017 which capped the amount of state and local taxes one could deduct from their calculation of adjusted gross income has quietly dies. The U.S. Supreme Court declined to hear an appeal from four states of a decision which upheld the limits. New York, Connecticut, Maryland and New Jersey brought a legal challenge in 2018 which argued “a deduction for all or a significant portion of state and local taxes is constitutionally required because it reflects structural principles of federalism embedded in the Constitution.”

CARBON CAPTURE ECONOMICS

In an initial filing to the Wyoming Public Service Commission, PacificCorp estimated that Adding carbon-capture systems to existing coal-fired power plants in Wyoming could cost the average residential ratepayer an additional $100 per month. The retrofit costs alone were between $400 million and over $1 billion

according to PacifiCorp.

Legislation passed in 2020 requires regulated utilities to determine how much CO2 capture can be applied to existing coal plants and still justify the costs to ratepayers.  Statutes enacted to support the goals of the legislation allow a utility to forego installing CCUS on a coal plant if it can prove to the Commission it is not viable for ratepayers. 

PacifiCorp is asking the Wyoming PSC to approve a 0.5% surcharge to all its Wyoming customers to pay for studies of the issue of carbon capture. The surcharge would initially generate some $3 million but ultimately that number is expected to grow to $15 million annually. That money would be applied to the costs of retrofitting coal plants.

CO-OP CHALLENGES FAIL

We have focused much attention on the efforts by local distribution cooperatives to buyout their requirement to purchase power from generation and transmission coops primarily from the western US distributor Tri-State Generation. While the most visible situation of its kind, the issues facing Tr-State are not unique. This has led other distribution coops to see if they can better meet their supply needs at lower costs from renewable rather than fossil fueled sources. It has also led to litigation.

The latest example is the Central Electric Power Cooperative in South Carolina. The Palmetto State has been dealing with the issues associated with the South Carolina Public Service Authority and its ill-fated participation in the Sumner Nuclear plant expansion. Those issues have created pressure for SCPSA and its partners to lower rates and increase renewables. The rate impact of Santee Cooper’s missteps continues to trickle down to retail customers.

Central is Santee Cooper’s largest customer. So, the effort by a local distribution coop to get out of its requirements to buy its power from Central was a potential issue for SCPSA.  Marlboro Electric, headquartered in Bennettsville, South Carolina has a contract with Central which expires at the end of 2058. Marlboro argued that Central’s failure to provide it with fair and equitable terms to exit the supply contract was a breach of the wholesale power contract and the wholesale cooperative’s bylaws. Marlboro Electric claimed the alleged breach allowed it to end its contractual obligations.

Unlike the situation with Tri—State, the wholesale power contract executed with Central does not have clear provisions regarding withdrawal from contract requirements.  Tri-State customers are arguing over the cost formula for withdrawal. In the South Carolina case, the judge ruled that “The WPC unambiguously requires ‘mutual agreement’ for termination prior to December 31, 2058, and the bylaws unambiguously require Marlboro to meet ‘all contractual obligations’ to Central, including coming to a ‘mutual agreement’ for early termination of the WPC, to withdraw from the cooperative.” 

The decision is a short-term positive for generation and transmission cooperatives but in the long run will just raise customer dissatisfaction. That will maintain pressure on wholesalers from their distribution customers.

PUERTO RICO LOSS IN SUPREME COURT

The US Supreme Court in an 8-1 ruling found that the decision by Congress decades ago to exclude Puerto Rico from the Supplemental Security Income (SSI) program did not violate a U.S. Constitution mandate that laws apply equally to everyone. The decision strikes a blow against efforts to increase federal support for Puerto Rican residents. The federal government estimated that a ruling in favor of providing the benefits would have had an annual cost of $2 billion.

It is estimated that some 300,00 Puerto Rican residents would qualify for the benefits. The case stemmed from efforts by recipients to continue to receive benefits in Puerto Rico which they originally qualified for as residents of the states. Congress decided not to include Puerto Rico when it enacted the SSI program in 1972. Puerto Ricans are eligible for a different government program, called Aid to the Aged, Blind and Disabled. The federal government’s central argument was that the congressional decision to exclude Puerto Rico was rational based on the fact that Puerto Ricans do not pay many federal taxes, including income tax.

LOCAL FOSSIL FUEL REGULATION

While a number of states have undertaken legislative efforts to preempt local regulation of the use of fossil fuels, one state is taking a different approach. This week, Vermont enacted legislation which authorizes the City of Burlington to impose carbon fees and “alternative compliance payments” on both commercial and residential property owners.  A charter change ballot item passed with 64 percent of votes .

The state law was needed to allow Burlington to follow through on its plan. The use of carbon taxes rather than bans provides an interesting alternative strategy for fighting the preemption phenomenon. It is less a revenue generator than it is an example of the “nudge theory” which uses regulation and financial incentives to motivate desired changes in behavior. It has already been suggested that revenues generated could be used to help less well off residents finance and fund energy upgrades to their properties.

THE PRICE OF ENVIRONMENTALISM

Legislation gas been introduced in the NYS Legislature which would prevent companies that received an approved rate plan dating back to 2021 from increasing rates for four years. Companies that have not increased rates would have their rates frozen for two years. The legislation is in response to rising utility bills which are blamed on higher natural gas prices.

What is not being said so loudly is that the closure of the Indian Point nuclear plant created a loss of some 2,000 megawatts of power which needed to be replaced while the development of hydropower resources (in Canada) takes place. The required transmission infrastructure to deliver that power has yet to be developed. Until that happens, the need to fill that power capacity gap will often be satisfied by natural gas power.

The situation is another example of a phenomenon which has plagued progressives for years. The goals of environmentalists are quite laudable and the end results are nearly always greeted with widespread support. The problem comes when the cost of all of these environmental improvements is tallied. Whether it is replacing fossil fueled or nuclear generation, burying transmission lines, or breaching hydroelectric dams, the true economic costs seem to always be underestimated.

The fact is that the closure of Indian Point was going to likely increase prices as utilities transitioned to newly developed power sources. That is a detail that closure proponents never seemed to fully deal with.  It is what leads to legislative proposals like this one which seek to insulate consumers from the choices they make.

In California, the trust which was established to fund payments to victims of wildfires sparked by equipment issues at assets owned by PG&E may be running out of money. The financial impact of wildfires on PG&E has caused the value of PG&E equity to fall. This has impacted the investment results at the Trust which had a healthy chunk of PG&E stock as the source of funding for payments. A private sector result for a private sector problem.

Now it may become a public sector problem. The Trust is trying to make the case for why the State of California should lend the Trust $1.5 billion to fund payments. The State set up the independently-run Fire Victim Trust with $6.75 billion in cash and 477 million shares of PG&E stock. The stock can be sold to fund payments. For the victims to receive the full $13.5 billion it was agreed that they were entitled to, the trust must sell its shares for about $14.15 a share. The trust’s remaining 377.7 million shares were worth about $4.6 billion based on Tuesday’s market price. That would leave the trust about $1 billion short.

Some 20% of the shares have been sold but they have been sold at $12.09 and $12.04 a share. That is more than a two-dollar shortfall relative to the required average sale price. The Fire Victim Trust has paid out nearly $3.4 billion in claims so far. The idea of the loan is that it would fund payments without forcing the sale of more PG&E stock. The hope is based on the idea that PG&E will be able to begin paying dividends on its equity shares. That is projected to occur sometime in later 2023. The hope is that the resumption of the dividend will have appositive impact on the price of the stock and enable to Trust to meet its payout requirements and repay the loan to the State.

It is a problem despite the enactment of legislation in 2019 created an insurance pool that utilities could use to finance the payment of claims from large wildfires. The pool is funded by ratepayers and company shareholders; PG&E has said it plans to file the first claim, for $150 million, to cover a portion of the damages from last year’s Dixie Fire. The AB 1054 pool is limited to wildfires that occur in 2019 or later. That means that the victims pressing for payments for pre-2019 fires find themselves ineligible for payments.

PANDEMIC FUNDS SUPPORT STATE LARGESSE

It has become clear that the high level of assistance to the states from the federal government has created a real dilemma for state budget makers. It has been interesting to see that the real difference between the red and blue states is how this unexpected windfall is used. In New York State it generated all kinds of spending increases and a new stadium for the Buffalo Bills. In the redder states – taxes were cut as pandemic aid funded expenses. Then there are some examples that do not fit the template.

In Missouri, legislation has begun to move through the process which would see the State of Missouri pay its full share of public school transportation costs for the first time in two decades. The approved FY 2023 budget would be the State’s largest ever at $46 billion. The school spending is a way to provide aid to local districts as transit funding uses a different formula than basic school aid. This increases the number of districts receiving new aid. The theory is that money not spent on transit can remain in the instructional budgets of the local schools.   

Here’s where Missouri diverges. The spending increase for schools, along with a $500 million one-time payment to the state’s pension system represent real departures from prior budget processes.

TRANSIT TEST VOTE IN TAMPA

Hillsborough County, FL commissioners voted in favor of putting an additional 1% sales tax on the November ballot.  Now, the county’s voters will need to approve the tax in order for it to be effective. If the ballot does not approve the tax, it cannot be voted on again until 2024. Voters agreed to an almost identical proposal in 2018. That vote was overturned in the courts on a technicality by opponents of the tax. The new referendum language is designed to address the technical issues.

The vote is being driven by the Infrastructure and Jobs Act. The incremental new revenue is meant to support funding which would enable the County to address federal requirements requiring matching funds. A County commissioned report estimates the county could qualify for up to $229 million in federal grant funding. Given support for the concept in 2018, a vote in favor could be expected. The timing reflects fears from tax advocates that a 2024 approval would come to late in the competition for grants. The program will exist for a maximum of five years without reauthorization and funding.

The vote becomes a test as it will provide a reasonable window into the actual level of public support for infrastructure funding. The pandemic clearly did economic damage regardless of macroeconomic data. The change in office attendance and different demands on transit will have a yet to be understood effect. It is one to keep an eye on.

POSITIVE SIGNS FOR BORDER CREDITS

The recovery from limits on cross-border travel which diminished the value and volume of freight traffic at the northern and southern US borders continues. The US Department of Transportation reports that freight shipped across the U.S. borders with Canada and Mexico by all modes of transportation was valued at $112.5 billion in February 2022, down 1.1% from January 2022 ($113.7B) but up 17.3% from February 2021 ($95.86B) and up17.2% from pre-pandemic February 2020 ($95.95B).

Freight between the U.S. and Canada totaled $56.2B in February 2022, up 18.6% from February 2021 ($47.4B). Freight between the U.S. and Mexico totaled $56.3B, up 16% from February 2021 ($48.5B). Also in February 2022, trucks moved $69.2 billion of freight, up 16.3% compared to February 2021 ($59.5B), and railways moved $15.3 billion of freight, up 19.0% from February 2021 ($12.8B).

Our other primary take from this data is the need for transit planners, especially those for all forms of ground transportation, to acknowledge the role of trucks in moving goods and materials throughout the continent. Truck Freight had a value of $69.2 billion (61.5% of all transborder freight). U.S.-Canada truck freight was valued at $29.7 billion (52.8% of all northern border freight). On the Mexican border, Truck Freight was valued at$39.5 billion (70.2% of all southern border freight). That number will show how impractical Gov. Greg Abbot’s effort at state border inspections was (if it was not just a stunt).

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

Joseph Krist

Publisher

This year we see the effective convergence of holidays of three major faiths – Easter, Passover, and Ramadan. With so much to celebrate, we think that we could all use some time to rest and reflect. So, the Muni Credit News will take a week off. Our next edition will be April 25.

TIS THE SEASON

This year the relative financial cushion provided by the federal government to the states has made the budget process on its own less contentious than it has in the past. That is not to say that the process is smooth just that the outstanding budget debates are about policy not revenue levels. The various state budget debates seem to be moving along the same political lines as other issues.

New York represents one perspective. The unexpectedly favorable revenue influx reflects the fact that for the first time in decades the state received more federal money than its residents paid in federal taxes. That has framed the NYS budget debate in terms of what new services could be provided. In other states, the effort is being directed towards financing tax cuts. In either case, the fact that some three quarters of governorships are up for election in 2022 is driving the debates.

The latest example is Virginia. The Republican Governor wants to double the standard deduction on personal income taxes and eliminate state and local taxes on groceries. The Democratic state senate wants to eliminate the 1.5 percent portion of the grocery tax levied by the state but leave in place a 1 percent levy that goes to localities.

NEW YORK STATE BUDGET

One week late, New York State has a fiscal 2023 budget. It is a record setter at $220 billion. One year after the sky was falling fiscally, the budget speeds up the timing of tax cuts for the middle class. It also includes another record – the largest public subsidy for a stadium. The $600 million to be applied to a new stadium for the Buffalo Bills is due to be funded with monies from the State’s settlement with the Seneca tribe and its casino operation (January 31, 2022 MCN).  

As is always the case with the NYS budget process, a number of policy issues were addressed. They include significant increased spending for child care – $7 billion dollar investment over four years that will help subsidize child care for families who earn up to $83,000 for a family of four. It also funds some $350 million for increased childcare salaries. It does not include a statewide ban on new natural gas hookups. A tax break for the development of “affordable” housing in NYC was not renewed or replaced. Mayoral control of the NYC school system was not extended.

The budget would also allow the licensing of three casinos in New York City. It will likely expand the operations of two existing gaming facilities on the edge of the City. A third license is thought to go to a Manhattan location. Each new license is expected to generate $500 million.

A couple of provisions highlight the fact that this is an election year in NYS. A gas tax holiday from June through the end of 2022 was included. The sale of individual alcoholic drinks to go by restaurants and bars was renewed for three years. A higher minimum wage for home care workers is effectively funded by the State which reimburses many of those costs.

We view the budget as credit neutral in the short-term. The issue is whether the long-term spending trends baked in to this budget will be sustainable in the long run. Two items of interest to New York City remain – transit funding and public housing funding. The huge capital backlogs facing those two sectors represented by the MTA and the NYC Housing Authority still face daunting funding challenges for the nearly $100 billion of capital investment needs the two agencies have identified.

Let the election process begin!!

HOSPITAL MERGER

Colorado-based SCL Health, which operates eight hospitals and dozens of clinics across three states has received an opinion from the Colorado Attorney General that its proposed merger with Intermountain Healthcare does not violate Colorado law. The resulting entity will operate under the Intermountain name. SCL has about 16,000 employees and owns four hospitals in Colorado while Intermountain has about 42,000 employees and operates 25 hospitals, along with a number of clinics, in Utah, Idaho and Nevada.

Intermountain Health comes into the deal with a AA+ rating. It is likely that the merged entity will reinforce the benefits of size and consolidation.  The biggest public concern about the merger revolves around perceived improved pricing power at the merged entity. A 2020 report by the Rand Corp. found that SCL’s hospitals charge patients 187% of Medicare prices, on average. That was below the national average of 247%. The report found that Intermountain’s prices were 271% of Medicare’s.

The attorney general’s office did not evaluate whether the merger will raise prices at SCL’s hospitals in Colorado. It did opine that the merger would not change the charitable purpose of SCL Health and it would also not cause a “material amount of hospital assets” to leave the state.

The credit implications are clouded by the fact that Neither SCL Health nor Intermountain agreed, upon completion of the Merger, to assume any liability for or otherwise guarantee the debt of the other party.

BELIEFS VS. BALANCE SHEETS

Another side of the consolidation wave in the healthcare sector is playing out in southern California. In 2013, the California Attorney General’s Office approved the affiliation of then-St. Joseph Health System (now Providence) with Hoag Memorial Hospital Presbyterian (Hoag) in Orange County. In 2020, Hoag filed a lawsuit to terminate the affiliation as it was prohibiting the provision of abortion services. The settlement will allow Hoag to become an independent entity, and as part of the agreement, Hoag has committed to expand reproductive health services in Orange County. 

Now the fiscal impact of the disaffiliation is being felt at Providence. Moody’s downgraded the Providence credit to A1. Specifically, it cited the disaffiliation. PSJH disaffiliated with Hoag effective January 31, 2022, and the result was to reduce unrestricted cash and investments by $2.9 billion (23% of PSJH’s total), reduce debt by $573 million (just 8% of PSJH’s total), and reduce operating cashflow (proforma 2021) by $303 million (43% of PSJH’s total in 2021; in 2019 and 2020 the average was more typical at 14.5%). The reduced financial position in at least the short run is the price paid for the restrictions on services resulting from religious sponsorship.

PSJH remains a strong credit with a very large revenue base of over $25 billion; leading market share in all of its markets; The loss of financial flexibility during a very difficult operating environment generally does increase the vulnerability to factors such as significant and persistent operating pressures, variable utilization, and weaker liquidity (excluding Medicare advance payments and deferred payroll tax), pressure from payers, exposure to labor unions, material competition in many markets, the reliance on temporary labor, and persistent underperformance in certain markets.

SOUTHWEST CANNABIS

On April 1, New Mexico became the latest state to implement a retail system for recreational marijuana. Anyone 21 and older can purchase up to 2 ounces (57 grams) of marijuana or comparable amounts of vapes and edibles. New Mexico is the18th state, including neighboring Arizona and Colorado as well as the entire West coast, that have legalized pot for recreational use. That means that the US side of the Mexican border from San Diego to El Paso now includes legal recreational markets.

The entrance of New Mexico now positions a fully legal market on the Texas border. Unlike many other states, local governments can’t ban cannabis businesses entirely, though they can restrict locations and hours. Local governments will receive a minority share of the state’s 12% excise tax on recreational marijuana sales, along with a share of additional sales taxes.

The emergence of the market could put Texas back in the spotlight over the issue of marijuana. The lone Star State has long been an outlier in terms of its enforcement of marijuana laws.  

EMINENT DOMAIN

We’ve commented on the issue of eminent domain as it pertains to Iowa and its role in proposed regional carbon transmission pipeline developments. Under legislation passed by the Iowa House and is in front of the Iowa Senate, the Iowa Utilities Board could not schedule a hearing before Feb. 1 in which a carbon sequestration company is requesting the right to use eminent domain for a project. The proposed moratorium would take effect as soon as the bill becomes law.  The hope is that negotiations can be concluded in the open time window the legislation would establish.

In Iowa’s immediate neighbor to its south Missouri, the proposed transmission line is dealing with the same issues. A Senate panel was scheduled this week to hear testimony on a House bill which seeks to halt the Great Basin Express power line, which would carry wind energy from Kansas across Missouri and Illinois before hooking into a power grid in Indiana that serves eastern states.

While this process is playing out the private line developers have moved ahead with land acquisition. It claims that it has now completed voluntary right-of-way acquisition on 71% of the route in Missouri and Kansas. It has filed 12 eminent domain proceedings. Grain Belt Express said it is paying landowners 110% of the market value of the land and $18,000 for every transmission structure sited on their property. Iowa’s Agriculture Secretary has said he would “much rather” see the companies strike voluntary deals with landowners and the Iowa Utilities Board should be careful in considering private property rights before granting eminent domain for land seizures.

It is a process which will continue to play out as the nation’s transmission system is realigned to reflect the realities of how and where power can be most effectively produced. There is a consensus which supports the view that significant new transmission capacity must be developed to satisfy an “all electric” world. Transmission is at the center of disputes over the pace of individual solar development, the scale of industrial solar, and siting of windmills.

POPULATION PANIC

Interim data from the U.S. Census is showing that large cities experienced significant population declines in 2021. Combined with the emerging resistance to full time office attendance, such declines can be a real concern. Given the inherent flaws in the information used to allow Census Bureau models to estimate annual population changes the data may reflect temporary realities. We know from the pandemic experience that many of the moves were not necessarily permanent. Nonetheless, things like voter registrations, tax submissions, and mail changes did serve to contribute to the decline measurement.

The other side of the coin is that as the nation and its hot spots emerge from the pandemic that certain data looks positive. Rents in places like NYC are up significantly even before all restrictions were removed. One issue is that many of the renters who left often decamped to already owned second homes. In some cases, the pandemic merely accelerated some plans to move by families.

One other aspect of the urban population decline is the impact of more restrictive immigration policies over the recent 6-10 years. The reality is that large urban centers provide a relatively “safer” environment for many immigrants – legal and illegal. We also know that the population of largely legal immigrants was intentionally undercounted under the Trump Administration. That means that the data is essentially unreliable.

What would be of more concern are the actual socio-economic characteristics of the permanent departees. We know that the lower end of the economic spectrum took the biggest illness hit in places like NY, LA, Chicago. That may account for new data showing large numbers of sustained absences from the public school systems in L.A. (250,000) and New York (375,000). That would support a guess that many poorer people left dangerous jobs (like healthcare) and moved elsewhere

BANKS, FOSSIL FUELS, AND LEGISLATION

Texas has been most prominent in using litigation and legislation in an effort to punish those who believe in a future without fossil fuels. The State and its local governments are now restricted from allowing financial institutions which will not provide financing to the fossil fuel industry from participating in things like underwriting their securities.

While that process has attracted the majority of the market’s attention, another effort to achieve a similar aim advanced in West Virginia. The legislature recently enacted a law which directs the State Treasurer to publish a list of financial institutions engaged in boycotts of energy companies; publicly post the list and submit the list to certain public officials.

It authorizes the Treasurer to exclude financial institutions on the list from the selection process for state banking contracts; to refuse to enter into a banking contract with a financial institution on the list; to require, as a term of a banking contract, an agreement by the financial institution not to engage in a boycott of energy companies; limiting liability for actions taken in compliance with the new article; and exempting the Investment Management Board from the new article.

GAS TAX POLITICS

This week, legislation which would have suspended Michigan’s 27-cent-per-gallon tax on fuel for six months was vetoed by Governor Whitmer.

Interestingly, the bill would not have suspended the tax until 2023. The nonpartisan Senate Fiscal Agency estimated that the average driver in Michigan would save about $75 over six months had the bill been signed into law based on driving habits from 2019. This tax is in addition to the retail sales tax (6%) also imposed on fuel.

The Governor supports suspension of the 6% retail sales tax on gasoline. Legislative opposition is based on a belief that the sales tax suspension would cause the amount of savings to fluctuate with the price of gas, whereas suspending the state’s gas tax would be a constant 27-cent-per-gallon savings.

An opposite tack is being taken by Virginia’s Governor. Governor Glenn Youngkin has sent legislation to the General Assembly to suspend Virginia’s gas tax for three months. The Motor Vehicle Fuels tax (26.2 cents per gallon of gasoline and 27 cents for diesel) would be suspended in May, June and July before being phased back slowly in August and September. The annual adjustment to the gas tax would also be capped at no more than two percent per year.

New research by the American Road & Transportation Builders Association found that state-level fuel tax “holidays” do not necessarily result in significantly lower diesel and gasoline retail pump prices, nor deliver “big savings” to motorists. The association examined 177 changes in state-level gasoline tax rates in 34 states between 2013 and 2021 and found that, on average, motorists received just 18 percent of an any increase or decrease in the retail price of gasoline in the two weeks after a change took effect.

TRI-STATE TRANSMISSION IN ANOTHER FIGHT

A small electric distribution co-op is at the center of a dispute with the New Mexico city it serves. Socorro is a town of some 9,000 in eastern New Mexico. It gets its electricity from the Socorro Electric Cooperative under a franchise agreement which ends in 2024. The City has long disputed Socorro Co-op’s ratemaking methods which have been the subject of a state Public Regulation Commission review. That review orders Socorro to restructure its electric rates. 

That restructuring would require Socorro to lower rates to larger commercial and industrial customers while raising rates for residential and small commercial users. This led the City Council to offer a proposal to buy out the co-op. That was rejected by the co-op. Now, the City is planning to terminate the co-op’s franchise in 2024. The City contends that it would be able to better and more cheaply serve its needs through a municipal electric distribution utility.

That determination reflects negotiations which the City says can allow it to provide power to more customers at lower cost. These savings are based on negotiations with third-party power providers who could supply wholesale electricity through such renewable resources as solar generation at nearly 50% lower cost than the co-op. Where does the Socorro Co-op get its power? Tri-State Generation and Transmission. The City points out that Socorro pays 8.5 cents per megawatt hour to Tri-State, but the City can get “greener” wholesale power for just 4.5 cents.

PORT FEES AND THE ENVIRONMENT

The Ports of Long Beach and Los Angeles find themselves in the middle of any number of contentious situations. Many of them are tied to the perceived environmental impact of the ports and of the vehicles which service them. For years the ports have been under pressure to streamline and reconfigure operations to try to reduce the pollution coming from trucks transporting freight from the ports. The latest effort began this week.

The two ports began to charge a Clean Truck Fund Rate fee on cargo using the port which is not transported on zero-emission vehicles. Cargo that is not being transported on zero-emission vehicles is subject to the tariff, which is $10 per 20-foot-equivalent unit—the standard measurement for shipped cargo—and $20 for every container that is larger than that.

The fee is charged to the companies that own the shipments. The ports expect to generate $90 million in the first 12 months from these fees. The revenues will be used to fund purchases of emission-free trucks. Natural gas-powered trucks that emit low amounts of nitrogen oxides—also known as low NOx trucks—are exempted from the fee.

Each of the ports will levy slightly different fees.  For the Port of Long Beach, exemptions will last until either Dec. 31, 2034 or Dec. 31, 2037, depending on when the vehicle was purchased and registered with the Port Drayage Truck Registry. The Port of Los Angeles will sunset its exemption on Dec. 31, 2027.

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

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NYS BUDGET

The New York State fiscal year begins on April 1 and the Legislature is supposed to have approved a budget for the Governor to sign. Nevertheless, New York State has historically adopted a flexible approach to the budget deadlines as policy disagreements have often held up final budget resolution. One might have hoped that the wave of money that has been received by the State from federal pandemic relief funding would have lowered the tension.

This however, is New York and this year several policy issues are causing the State to miss its budget deadline as we go to press. None of the particular points of contention – gambling in NYC, the Bills Stadium (see our next section), bail reform, and mayoral control of the NYC school system – raise short-term credit concerns. In most cases, the Legislature is looking to spend more than the Governor on certain issues and there are real disagreements over the price tag for them.

There are concerns that in many states, the temptation will be to fund expanded spending and services which are affordable under present conditions. The question is where the funding will come from in the long-term when federal spending is reduced. While the particular issues in the New York process are specific to the State, the unfolding process is reflective of many debates underway in many state legislators. Whether it’s tax cuts or spending, the sustainability of underlying revenue assumptions will remain a key credit factor.

BILLS STADIUM TOUCHDOWN

State Senator Sean Ryan, a Democrat from Buffalo – “Subsidies for sport stadiums are a bitter pill. Nobody is happy about doing this, but this is the best deal we could expect under the circumstances.”

The Buffalo Bills are approaching the finish line of their efforts to get a new stadium largely funded with public money. New York State announced that it had reached a deal with the Buffalo Bills to use $850 million in public funds to help the team build a $1.4 billion stadium — the largest taxpayer contribution ever for a pro football facility. The deal calls for the state to finance $600 million of the construction costs. Erie County, the location of the existing facility and the new one is expected to finance $250 million. The remainder would be financed through a $200 million loan from the N.F.L. that was approved on Monday, plus $350 million from the team’s owners.

The state would own the stadium and lease it to the Bills under a 30-year commitment from the team to play in the new stadium. The timing is fortuitous. The state is comparatively awash in money (for now) and the deal is being brought for legislative approval four days before the start of the fiscal year. That will limit scrutiny and deal making in the budget process. The state funding would have to be approved as a part of the budget.

We think that the comments of State Senator Ryan pretty much sum up the deal. There was much criticism of the redevelopment plan which came to be known as the Buffalo billion undertaken under the Cuomo administration. That program was intended to reinvigorate downtown Buffalo and redevelop its waterfront. It ended in scandal and criminal convictions.

While those issues are not expected to impact this project, the proposed expenditures would make more sense if the stadium was part of downtown Buffalo’s redevelopment. The location of these facilities in the suburbs is a throwback to the mentality of the sixties and seventies which saw many stadiums located in suburbs.

A downtown location would make the largest expenditure of public money for any NFL stadium in the country more logical. In this case, building at the existing site just looks like an out and out subsidy to the owner.

This transaction comes just as some other aging stadium projects receive more attention. In Kansas City, the ownership of the Royals of MLB is actively discussing the replacement of their current stadium at the Truman Sports Complex in MO. That project is expected to be undertaken downtown in keeping with the trend that emerged during the 1990-2010 era of stadium replacements in downtowns. “The Chiefs and the Royals are under contract until at least (January) 2031.”

Given that the Chiefs of the NFL play in 50-year-old Arrowhead Stadium, they too are looking at a replacement. Being the sole facility at the Truman Sports Complex does seem to have much attraction to Chiefs’ ownership. In their case, they have broached the idea of locating on the Kansas side of Kansas City. That could set up an interstate competition of incentives. “Kansas City has proudly hosted the Chiefs since the early 1960s. We look forward to working with the Chiefs, our state of Missouri partners, and local officials to ensure the Chiefs remain home in Kansas City and Missouri for generations to come.” – Kansas City mayor Quinton Lucas 

It is easy to forget that NY Mayor Bloomberg wanted to build a stadium ultimately to house the Jets of the NFL in Manhattan. It was only after that idea was rejected that the current stadium in the NJ Meadowlands was built with essentially private financing. That is not likely the case in KC.

SOUTHEAST POWER

South Carolina Public Service Authority (Santee Cooper) may have extracted themselves from the Sumner nuclear debacle, the bill for it continues accrue. The state-owned utility can’t increase rates until 2025 under a rate freeze approved by the General Assembly when the Sumner expansion was abandoned. Now, the recent increases in gas and coal prices have put the utility in the position of having to carry increased costs at the same time it is legally restricted from raising revenues.

Santee Cooper must now find some $100 million of expense reductions to stay within the constraints of a limited revenue base. Officials suggested taking $30 million from operating and maintenance and $70 million from capital projects. That has negative implications for both current operations and future rate increase needs.  It comes as the utility faces $130 million in increased fuel costs.

Moody’s Investors Service has upgraded JEA, FL – Electric Enterprise (JEA) ratings as follows: the senior lien electric system revenue bonds to A1 from A2; subordinate lien electric system revenue bonds to A2 from A3, St. Johns River Power Park System (SJRPP) revenue bonds to A1 from A2, Bulk Power Supply System revenue bonds (Plant Scherer revenue bonds) to A1 from A2. JEA has been through a lot as it challenged the take or pay contract it entered with MEAG for a share of the expanded Votgle nuclear plant. JEA has also revamped the membership of its Board of Directors. These changes all occurred after the ill-fated attempt by some in local government to privatize the electric system.

Now a new board is seen as a credit positive factor. The litigation over the power purchase contracts has been resolved. This means that JEA’s most significant credit challenge is related to its indirect exposure to nuclear construction risk at the Plant Vogtle project through its 20-year Project J Power Purchase Agreement (PPA) with MEAG Power and the impact to the construction budget and the schedule owing to the multiple delays in construction completion which could now extend into Q-1 2023 and Q-4 2023 for Vogtle Units 3 and 4, respectively. There is some cushion in JEA’s relative rate position versus other utilities. JEA has plans to raise its rates by about 1.5% annually beginning in 2022 through 2026 to manage the increasing obligations under the Project J PPA.  

This improvement in JEA’s rating laid the groundwork for another utility upgrade. Moody’s Investors Service has upgraded Municipal Electric Authority of Georgia Plant Vogtle Units 3&4 Project J Bonds to A3 from Baa1, affecting approximately $2.10 billion of outstanding rated debt. The rating outlook has been revised to stable from positive. The settlement of the JEA litigation challenge to the PPA and the perception that JEA’s willingness to pay were no longer in question, the threat to MEAG’s credit posed by the potentially invalid PPA have been eliminated.

TRI-STATE SAGA CONTINUES

The latest shot in the ongoing battle between Tri-State Generation and Transmission Cooperative comes in the form of a study for the Federal Energy Regulatory Commission. FERC is reviewing the effort by Tri-State’s largest customer – United Power- to exit from its power purchase agreements. Those agreements call for the payment of an exit fee which is designed to cover a proportional amount of the fixed costs incurred by Tri-State.

Tri-State has been fighting efforts by its members to exit their agreements for several years. Tri-State is a primarily coal reliant utility. That and a price scheme which has produced rates higher than those of competitors have lessened support for buying power from Tri-State. As a part of the exit process, Tri-State calculates a contract termination payment, or CTP. Tri-State tallied the portion of the overall debt a cooperative is responsible for based on its revenues, plus the cost of all the electricity it would have bought between now and the end of the contract in 2050.

The distribution utilities do not contest some financial obligation to Tri-State for leaving. They do believe that Tri-State’s calculations generate fee estimates that are meant to make exit so punitive that the members will stay with Tri-State. That may change in light of the fact that the FERC study found that in the case of the largest local distribution coop which gets its power from Tri-State, the proposed exit fee of $1.6 billion was much higher than would be needed to pay off the distribution utilities share of Tri-State’s debt service requirements.

Two cooperatives — the Kit Carson Electric Cooperative, in Taos, New Mexico, and the Delta-Montrose Electric Association, in Delta — have already left. They paid exit fees. Kit Carson paid a $37 million exit fee in 2019 and DMEA paid $136.5 million in 2020.  The exit fees for both were about double their annual billings, not eight times annual billings as Tri-State is seeking from United Power. The risk to Tri-State is clear.

When S&P lowered Tri-State’s rating to BBB+ and revised its outlook to negative from stable, they were clear about the concerns the proposed withdrawals create. “We revised the outlook to negative to reflect our view that the utility faces more pronounced governance exposures following the initiation by three of Tri-State’s members of the two-year notice period for withdrawing from the utility… We believe the utility faces significant governance risks. Over more than a decade, three CEOs have struggled to placate members that are expressing dissatisfaction with the level of rates and the utility’s carbon intensity. The notices of intent to withdraw compound these risks.”

UBER CONTINUES ITS NEW COURSE

Fresh off its landmark agreement with New York City’s yellow taxis, Uber is seeking a similar arrangement in the City of San Francisco. This coming week, the San Francisco Municipal Transportation Agency will decide whether to approve a pilot program involving Uber and Flywheel, which operates an app used by hundreds of taxi drivers in San Francisco across several taxi companies to accept rides. Pending final approval by the city’s director of transportation, service could begin in early May.

The upfront cost that Uber charges customers to get a taxi through its app will not be required to be the same as a metered taxi ride.  This has raised some opposition from existing taxi drivers who will face the potential downward pressure on fares. The plan comes at a time when San Francisco has seen real declines in the number of taxis on its streets. Pre-pandemic there were some 1300. That number bottomed out at 400 during the pandemic and is now only slower recovering toa current level of 600.

We note that SF and NY also share something in common which may drive the need for these agreements. These two cities have the lowest rates of returns to the office among the largest US cities. They also are like many other large cities still dealing with pandemic-related population declines. In 2021, population declined in San Francisco by more than 6%; Boston’s Suffolk County 3%, with New York City and Washington, D.C., seeing drops of over 2%. Los Angeles County, Chicago’s Cook County, Miami-Dade County, Philadelphia, Milwaukee and Minneapolis were reduced by over 1%. That implies lower demand for these services that appears to be likely to be sustained.

VIRGIN ISLANDS

As we go to press, the US Virgin Islands was hopeful of completing the successful sale of some $920 million of securitized debt. The bonds would be secured by a pledge of Federal Excise Tax Revenues which are normally received by the USVI government. This transaction has created a sale of the USVI government’s right to these revenues to a special purpose corporation created for this purpose.

The Matching Fund Special Purpose Securitization Corporation will receive the federal excise tax collected on rum that historically supported Matching Fund Bonds. Debt secured by those funds will fund the redemption of all VI Public Finance Authority debt outstanding secured by matching fund revenues. This then creates a flow of funds which covers debt service and based on history will generate “residual” revenues which can then be applied by the USVI government to fund its pension funding requirements.

Rum taxes have financed government in the USVI since 1954 under the current arrangement so the revenue stream projected is based on a long history. All of the rum subject to the tax is sold in the U.S. minimizing the risks to distribution. The challenge was in insulating investors from ongoing financial stress for the USVI government. The asset sale structure helps to create an entity and revenue stream protected from any bankruptcy or similar action by the USVI government.

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

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WESTERN WATER

A wet December raised some hope that the long-standing drought in California might see some relief. Unfortunately, a very dry January quickly diminished that hope. Now, the drought in the West drags on. Water agencies that serve 27 million people and 750,000 acres (303,514 hectares) of farmland, have been informed that will get just 5% of what they’ve requested this year from state supplies beyond what’s needed for critical activities such as drinking and bathing. That’s down from the 15% allocation state officials had announced in January, after a wet December fueled hopes of a lessening drought. The January-March period will be the driest start to a California year at least a century. 

Lake Powell water levels dropped below 3,525 feet this week, or just 35 feet above the lowest level at which the dam can still generate hydropower. That is its lowest level since the lake filled after the federal government dammed the Colorado River at Glen Canyon in 1963. Lake Powell steadily filled with water before reaching full pool in 1980. Some 5 million customers in seven states — Arizona, Colorado, Nebraska, Nevada, New Mexico, Utah and Wyoming — buy power generated at Glen Canyon Dam.

The U.S. Bureau of Reclamation officials last summer took an unprecedented step and diverted water from reservoirs in Wyoming, New Mexico, Utah and Colorado in what they called “emergency releases” to replenish Lake Powell. In January, the agency also held back water scheduled to be released through the dam to prevent it from dipping even lower.

Even if the drought were to end and the lake could be fully refilled, the years of reduced flows have impacted storage capacity. Current storage capacity at full pool (3702.91 feet above NAVD 88) is 25,160,000 acre-feet. Compared to previously published estimates, this volume represents a 6.79 percent or 1,833,000-acre-foot decrease in storage capacity from 1963 to 2018 and a 4.00 percent or 1,049,000-acre-foot decrease from 1986 to 2018.

UBER’S NEW ARRANGEMENT

It was the stated goal of Uber to more than disrupt local transportation systems. We have written often about the issues arising from the “disruptive” playbook flaunting rules and laws followed by the transportation network companies (TNC). Prior to the pandemic, the competition against legacy transit modes (mass transit and taxis) put mass transit under enormous pressure. Once the pandemic hit, the demand for all sorts of public mass transit plummeted.

For a while, Uber was surviving essentially as a food delivery enterprise. Now with the recovery tentatively underway, oil prices have driven the costs for TNC drivers to levels which make the cruising around empty that some of those cars have to do uneconomical. While stepping away from driving might work for some drivers, the TNC business model relies on more not fewer drivers.

Now the disruption has shifted directions negatively impacting the TNC business model which relies on more not fewer fares. In NYC, Uber has announced that it has partnered with two taxi-centric tech companies to provide an app which would allow the city’s medallion taxi drivers provide rides. This marks the uniting of what were two groups with opposite interests.

The new Uber-taxi partnership in New York did not require the approval of the city’s Taxi and Limousine Commission, which oversees the taxi industry. Passengers can still wave down yellow taxis in the street or order them through two taxi apps, Curb and Arro, which offer upfront pricing like with Uber rides.

The benefit for Uber is that it integrates a competitor without directly limiting that competitor. It gives Uber more access to drivers and they do get a fee for every ride ordered through the app.

GAS TAXES

Maryland became the first state to enact an actual gas tax holiday. Maryland’s gas tax of 36 cents per gallon is now suspended for 30 days for both regular and diesel. A driver of a vehicle with a 12-gallon tank could save about $4.32 a fill-up. The legislation does not mandate that retailers reduce their prices by 36 cents. The state estimates it would lose about $94 million in revenue under the 30-day suspension.

Gov. Brian Kemp signed a law suspending Georgia’s motor fuel tax through the end of May. The measure would also abate Georgia’s taxes on aviation gasoline, liquefied petroleum gas and other fuels including compressed natural gas. Suspending collections could cost the state up to $400 million. The Governor expects to use part of the roughly $1.25 billion in leftover surplus from the last budget year.

A 2020 report from the American Road & Transportation Builders Association that analyzed 113 state gas tax changes enacted over several years found that only about one-third of the value of previous gas tax cuts or tax increases were passed on to consumers.

PANDEMIC IMPACT ON NYC SCHOOL FUNDING

The Mayor’s Preliminary 2023 Budget includes $30.7 billion in 2023 for the Department of Education (DOE), $1.3 billion less than the amount budgeted in the current year. The city’s traditional public schools experienced an unusually large decline of almost 38,000 students between the 2019-2020 and 2020-2021 school years, the largest decline in a decade, with an additional decline projected from 2020-2021 to 2021-2022. much of the enrollment loss experienced by traditional public schools last year occurred within the youngest cohort of students.

The DOE’s portion of the city’s Program to Eliminate the Gap (PEG) is $557 million of savings. The largest is a $375 million reduction in spending that stems— according to city budget documents—from a reduction in authorized headcount following enrollment declines at many schools. The savings result from a reduction in the number of city-funded positions allocated within the DOE’s general education instruction budget that are currently vacant. A portion of the headcount reduction resulting from the PEG is offset, however, by the reallocation of federal Covid relief funds from other areas of the DOE budget. Those funds will not be available after fiscal 2024.

CLIMATE, DISCLOSURE, AND THE SEC

The Securities and Exchange Commission proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.

The proposed rule changes would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

MEMPHIS AT THE CENTER OF CLIMATE DEBATE

The Tennessee Valley Authority (TVA) supplies Memphis and Shelby County with all of its electricity. Recently, TVA announced plans to replace coal fired generation with natural gas fueled plants. The decision seemed to fly in the face of the current Administration’s goal of reducing and eliminating fossil fuel fired generation. The decision comes as Memphis Light, Gas, and Water is evaluating whether to remain as customers of TVA of to pursue other options.

MGLW is not without options. MLGW has received 27 bids from the private sector on its electricity supply.  TVA has also appointed an officer to be located in Memphis to try to keep MLGW as a customer. Multiple studies, including a detailed one from an MLGW consultant, have shown the opportunity for substantial annual savings of more than $100 million if the city moves away from TVA.

Is it important to TVA? The Authority is offering funds for weatherization and the offer of purchasing MLGW’s power transmission system for about $400 million. It offers to move more than 100 employees into Memphis as part of a new regional headquarters and spend tens of millions on home weatherization and reducing energy burdens. It is estimated that some $1 billion of TVA revenues could be lost if Memphis leaves.

Memphis has also been at the center of a significant pipeline dispute. The pipeline would have connected the Valero oil refinery in south Memphis to Byhalia, Mississippi. Part of the pipeline would have passed through low-income Black neighborhoods in south Memphis, and there were fears the pipeline would contaminate the Memphis sand aquifer, where the city gets its drinking water if it leaked. Strong local opposition led to the project being abandoned by its sponsor.

Now, the Tennessee legislature is considering preemption legislation which would effectively limit local regulation and permitting of utility infrastructure. This puts Memphis at the center of issue like environmental equity and justice, climate change, and economic justice. No matter how the issues are decided, the results could have ratings impact. In August, 2020 Moody’s maintained its solid Aa2 rating on the electric system debt.

It noted that its long-term power supply contracts were a positive credit factor. “Challenges confronting the utility, however, include the below average socioeconomic profile within its service territory, uncertainty around its relationship with TVA moving forward and system reliability. That was before the issue of the TVA contract had really moved forward and before this winter’s storm which crippled the City’s transmission and distribution system for over a week. Now those concerns are real and the system’s ratings could take a hit.

PREPA RATE INCREASE

The Puerto Rico Electric Power Authority and LUMA Energy, which operates the transmission and distribution of PREPA’s electricity to the island, are currently seeking an increase of 4.265 cents per kilowatt-hour from the Puerto Rico Energy Bureau for the April through June quarter. This would amount to a 16.6% increase in rates. Gov. Pedro Pierluisi withdrew his government from PREPA deal that had been reached in May 2019 earlier this month, arguing it was too generous to bondholders and would increase rates too much.

It is not as if the spike in oil prices will make the already difficult effort to reach a settlement of the restructuring of PREPA’s debt any easier. Any such settlement will result in higher rates. It may be that the deal which the Governor rejected may be the best that could be obtained. Here is where the failure to reimagine Puerto Rico’s electric grid leaves the system vulnerable to fossil fuel price risk. The continued orientation towards a centralized generation and transmission system vs. the development of microgrids and more localized generation (primarily renewable) maintains that vulnerability.

PORTS

This week, Moody’s reaffirmed its positive outlook for the port sector. After a difficult period, attributable largely to pandemic factors, ports have begun to return to more levels of activity. Some have raised concerns about the impact of the war in Ukraine. Moody’s notes that the US and Russia have little direct waterborne trade. Russia accounted for less than 2% of all trade at US ports in 2021 as measured by value, according to the US Census Bureau.

Any impact is more likely to be seen on East Coast ports. Container trade between the US and Europe represents about 15% of total container volume for US ports.  One quarter of this trade is handled at the Port Authority of New York and New Jersey.

The cruise industry, having only recently begun to recover from the coronavirus pandemic, now faces pressure from a combination of higher fuel costs and weakened booking trends during this time of uncertainty. Bookings are strong for the second half of 2022. Cruise accounts for less than 10% of revenue for the US ports sector overall. Florida is an outlier in that regard. It is estimated that cruise ships are an important source of demand (25%-70% of revenue) for a handful ports in Florida and on the Gulf Coast.

POWER AUTHORITY DEBT FOR TRANSMISSION

Moody’s Investors Service has assigned an A2 rating to New York State Power Authority’s $569 million Green SFP Transmission Project Revenue Bonds. This is the initial financing for the two projects secured away from the NY Power Authority’s general credit. the repayment of SFP Transmission’s debt obligations derived solely from and secured by a pledge of revenue earned by the specific transmission projects’ assets.

Proceeds from the bond offering will be used to fund capital expenditures related to two transmission projects currently under construction, the Central East Energy Connect Transmission Project (CEEC) and the Smart Path Reliability Transmission Project (Smart Path).

CEEC is designed to increase electric transmission from Central to Eastern New York. It is approximately 36% complete (anticipated commercial operations in late 2023) and ownership is split between NYPA (37.5%) and an unaffiliated third-party (62.5%). The project will be managed by NYPA’s senior partner. NYPA is the sole owner of Smart Path and will manage that construction.

Smart Path involves rebuilding transmission lines that extend approximately 86 miles from the St. Lawrence Power Project’s Robert Moses Power Dam Switchyard to the Town of Croghan, Lewis County, NY and consists of 6 separate segments, 3 of which have been completed (about 64% complete) with full operation anticipated in mid-2023.

According to NYPA’s General Resolution, separately financed projects such as the ones under SFP Transmission will not receive any support from NYPA’s general credit, must be self-supported by pledged revenues, and pay for its own costs of operations. Moreover, there will be no cross default between the two entities.

MUNIS AND BIOFUEL

Cascade County, Montana is moving forward with the process of approving the issuance of $550 million of tax-exempt municipal bonds which would finance the construction of a renewable fuels refinery capable of processing renewable feedstocks into sustainable alternatives. The project would be adjacent to an existing oil refinery.

The renewable manufacturing refinery will be processing soybean oil feedstock into renewable diesel fuels. The company estimated that construction would begin in the fall of 2021 and the project would be completed by the end of 2022. The proposed project would have a production capacity of about 15,000 barrels of biodiesel daily.

The bonds would provide project finance and would be secured under loan agreements between the issuer and Montana renewables.

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

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REGULATION

Arizona lawmakers are advancing legislation backed by utilities to shift the regulatory duty governing the regulation of the disposal of toxic ash produced by coal-fired power plants from the U.S. Environmental Protection Agency to the Arizona Department of Environmental Quality. Proponents say that the legislation would require that the state’s rules be as strict as those of the EPA. So why the change from federal to state regulation?

The state regulatory history suggests that the utilities believe that they would have an easier time with state regulators given the history of wastewater regulation in the state. Environmental advocates cite that history in opposition to this bill. The state is seen as supportive of coal fired generation. It comes as efforts continue on the part of investor-owned utilities to stifle the installation of residential solar.

The move comes at the same time that the U.S. Environmental Protection Agency is proposing a plan that would restrict smokestack emissions from power plants and other industrial sources that burden downwind areas with smog-causing pollution. This would likely burden the four remaining coal fired generating plants still operating in Arizona. The EPA proposal would affect power plants starting next year and industrial sources in 2026. The plan would cover boilers used in chemical, petroleum, coal and paper plants; cement kilns; iron and steel mills; glass manufacturers; and engines used in natural gas pipelines.

Obviously, the impact of renewed and strengthened environmental regulation will impact unevenly on a geographic basis. The newly proposed rules would apply in varying degrees to 26 states, located mainly in the East and Midwest but also hopscotching to include Wyoming, Utah, Nevada and California, none of which was covered by the last major “cross-state” pollution rule issued more than a decade ago and updated six years ago.

The folks at Inside Climate News have put together a great chart showing where the coal demand comes from to generate power.

PREPA FIGHTS THE FUTURE

When Hurricane Maria destroyed much of Puerto Rico’s electric distribution and generation system, we saw the situation as a huge opportunity. We discussed the suitability of the island to derive power from renewable generation and the view that microgrids would go a long way towards addressing the twin issues of supply and reliable distribution. That view gained traction over the next 18 months and culminated in the enactment of Act 17 in 2019.

That law requires that 100% of the territory’s electricity come from renewable sources by 2050. The legislation also sets ambitious benchmarks along the way, including 40% renewable energy by 2025 and 60% by 2040. In February, the Biden Administration and the Commonwealth reached an agreement that would provide some $12 billion in Federal recovery and grid modernization funds.

Then reality hit. The management of PREPA showed itself again to be an agent of obstruction. Just a couple of weeks after the agreement was announced PREPA’s executive director, testified that “To say that in three years there will be 40 percent of energy production in a stable, commercial manner and in compliance with all the requirements in service, I really don’t see it viable.” PREPA’s executive director, said he expects Puerto Rico to obtain one quarter of its total electricity from solar, wind and hydroelectric by 2025. The territory currently generates just 3 % of its total power from renewables, according to the U.S. Energy Information Administration.

The Puerto Rico Energy Bureau in 2020 ordered PREPA to procure contracts for at least 3.5 gigawatts of renewable energy development and 1.5 gigawatts of battery storage by 2025. PREPA is more than a year behind schedule on the procurement process. Some two-thirds of the required contracts have yet to be fulfilled. This in the face of A 2021 study by the Institute for Energy Economics and Financial Analysis which found that rooftop solar could reasonably generate 75% of all of Puerto Rico’s electricity within 15 years.

SALT RIVER PROJECT AND NATURAL GAS

The Salt River Project finds itself in the middle of yet another debate about how to best serve its continually growing service area. SRP has already gained notoriety as an opponent of net metering as it hopes to stave off the impact of rooftop solar in its sundrenched service area. Now, it finds itself in the middle of the debate over whether natural gas can be a viable bridge to renewable generation and the concept of environmental justice or equity.

SRP currently operates a 12-turbine gas fired generation facility in Pinal County, AZ. It hopes to be approved to expand the plant with the addition of some 16 new turbines. The Arizona Corporation Commission (ACC) is the regulatory body reviewing SRP’s application. The Arizona Power Plant and Transmission Line Siting Committee recommended that the ACC approve the application.

Now the project needs the final ACC approval and SRP is implying that without this expansion the utility will face reliability issues as soon as the summer of 2024. SRP says that it must have an approval by the end of this month. The host community believes that the approval process is being rushed to avoid opposition.

SRP has made it hard to believe in recent years that it is committed to lower or eliminate its use of fossil fuels. Its insistence that gas is necessary in combination with its clear efforts to hobble solar on anything other than an industrial scale place make SRP one of the more obstructionist utilities. It is something that environmental or green investors should take notice of.

MONEY FOR NOTHING

Energy Harbor will exit the fossil business through a sale or deactivation of its W.H. Sammis Power Station in Stratton, OH and its Pleasants Power Station in Willow Island, West Virginia in 2023. These plants represent 3,074 megawatts (MW) of generating capacity. Energy Harbor already closed four of the Sammis plant’s seven units in 2020. It blamed impending federal wastewater regulations for those closures.

The Sammis plant was scheduled for closure this year until the infamous HB6 bill was passed. The bill was designed to support nuclear generation. It was however, cited as a reason to keep the coal-fired plant open. Energy Harbor could use the savings from the nuclear subsidies in the bill to keep other generation on line. The nuclear bailout was repealed last year after federal authorities charged ex-Ohio House Speaker Larry Householder and five others with using $60 million in FirstEnergy bribe money to secure the passage of the HB6.

HB6 was not repealed in its entirety. Ohio residents still pay surcharges to support the Ohio plant but also one in Indiana. Now, proposed regulatory changes at the EPA may make the two plants uneconomical. In January, the U.S. Environmental Protection Agency proposed denying requests by the two plants to continue using unlined surface ponds to hold coal ash.

The irony is that a lot of many was spent and careers destroyed by the lobbying effort to get the aid for the two plants. The ex-Ohio House Speaker, along with a former Ohio Republican Party chair, will go to trial next January. Three other defendants have pleaded guilty, and one committed suicide.

OIL AND ALASKA

The recent surge in oil prices has led revenue forecasters to increase their estimates of oil-related revenues expected to be realized in the fiscal year 2023 beginning in July. The relatively low prices of oil in recent years have pressured the State’s budget, This has led to significant expenditure cuts to basic services and reduced Permanent Fund payments to residents.

Now, forecasters at the Alaska Department of Revenue have raised the state’s two-year forecast of oil revenue by $3.6 billion. In the current fiscal year, which ends June 30, state revenue is expected to be $6.95 billion, an increase of $1.2 billion from the state’s prior estimate. In Fiscal Year 2023, which starts July 1, the new forecast is for $8.33 billion, up $2.4 billion from a forecast in December. 

Last spring, the Alaska Legislature approved a $5.3 billion budget. Now it is up to the Legislature to decide how much they can rely on the revised estimate. The Revenue department estimates oil prices at $101 per barrel, an increase of $30 from December. The Legislature is moving towards an $80 per barrel figure. At $80 per barrel, the state would collect about $6.7 billion in FY23.

PREEMPTION

In 2021, St. Louis County passed an ordinance requiring new buildings to include electric vehicle charging and for charging to be installed at existing buildings in the case of renovations or changes of use. The city of St. Louis passed similar legislation early last year with more details and exemptions for some types of businesses. Brentwood, a city in St. Louis County, requires all new or renovated homes to include electrical infrastructure for charging. 

Now legislation is being offered in the Missouri legislature that would, like so many similar efforts in other states, seek to preempt local regulation. The bill would prohibit cities from passing building codes requiring businesses to install chargers unless the municipalities pay. The St. Louis law required that newly-built or renovated residential, apartment and commercial buildings be “EV Ready,” meaning that they have the necessary electrical capacity and other infrastructure to easily install an EV charger.

Parking lots with more than 50 spaces would have to provide chargers on 2% of them, and 5% of the spots would need to be EV ready. By 2025, 10% would have to be EV ready. The legislation requires that businesses with smaller parking lots have one or two spaces that are EV ready or have a charger installed depending on their size. 

NUCLEAR

The Nuclear Regulatory Commission (NRC) informed Florida Power & Light Co. (FPL) that its two Turkey Point nuclear reactors must go through a full environmental review before the agency will allow them to run for an additional 20 years. The NRC originally signed off on the extension in late 2019, using what’s known as a generic environmental study. NRC will not issue any further licenses for subsequent renewal terms until the NRC staff … has completed an adequate National Environmental Policy Act (NEPA) review for each application,” 

The reactors had to be able to quantitatively demonstrate numerous performance metrics to show that the plant’s structural and protective integrity could withstand an additional 20 years of operations. The NEPA review will evaluate impacts on the environment including the potential impact on groundwater supplies.

The Nebraska Public Power District (NPPD) and Entergy jointly announced that they would end their near two-decade operating agreement at Cooper Nuclear Station. Entergy was contracted by NPPD to help the District address operating problems at the plant. It was some 20 years ago that federal regulators had given Cooper the lowest grade a nuclear plant can have while remaining open. NPPD now owns 100% of capacity and has the sole operating responsibility.

EMINENT DOMAIN FIGHT CONTINUES

A second effort to legislate regulations on the use of eminent domain to obtain right of way for pipelines in Iowa is underway. A bill has been offered which would states that the Iowa Utilities Board shall not grant any requests for eminent domain and that a pipeline company shall not seek or exercise any eminent domain rights until March 1, 2023. The bills are designed to try to stimulate negotiations between one project sponsor and landowners.

Summit Carbon Solutions has proposed a pipeline which would cross 680 miles of Iowa land across 29 counties. There are potentially 15,000 Iowa landowners in the pipeline’s path. Negotiations have secured easements on more than 100 miles of the proposed route in Iowa, and that agreements on another 70 miles are in the final stages.

The threat of eminent domain has been cited as an obstacle to negotiations. Without the threat of its use, eminent domain becomes less valuable as leverage for the entities building the pipelines. This typically forces them to spend more than they wanted to acquire rights of way.  The case is being made that the pipeline will increase the value of corn through ethanol enough to offset any negative impacts from the pipeline. But if the ethanol is for fossil fuel applications….?

ZONING

Connecticut will take a crack at the issue of zoning and its impacts on housing, transportation, and jobs. A new zoning bill would allow denser housing development around Connecticut’s train stations, with goals of making housing more affordable and providing easier access to transportation. House Bill 5429, backed by advocacy group Desegregate Connecticut, would require towns to allow housing with at least 15 units per acre within a half mile of a passenger, commuter rail or bus rapid transit station. At least 10% of the units would have to be designated as affordable.

If enacted, the law would take effect on October 1. It would significantly streamline the approval process by allowing developers to avoid the public hearing process to build in those areas. It fast tracks the decisions process on permit applications by requiring that they must be issued within 65 days of submission. Certain types of land are exempt from the requirement, including wetlands, steep slopes and areas necessary for protecting drinking water.

A 2017 law, 8-30j, requires towns to develop affordable housing plans every five years. The first is due in July. The politics of the bill quickly became clear. Less prosperous towns like New Haven and others see support for the bill. Communities like Greenwich and Westport are seen as opposing the bill over worries about property values. It’s not a new development. It is even predictable.

BERKELEY HOUSING – NEVER MIND

It only took eleven days for the CA legislature to enact the repeal of certain provisions of the California Environmental Quality Act (CEQA) after a court decision upholding requirements that housing proposed to serve the UC Berkeley campus would have had to meet was handed down. The University announced that it would have to rescind admissions to the campus by some 2,600 because of a lack of student housing. The proposed project was designed to address that.

The California Legislature voted unanimously to change the law, sending a bill to Governor Newsom, who quickly signed it. The decision had put the University squarely in the middle of a conflict between the need to offer more places at the school to improve access with limits on their ability to develop housing for those students.

The law Newsom signed is narrowly tailored to fix the specific problem at UC Berkeley. It did however, shine a spotlight on the impacts of the use of the environmental law to halt all sorts of projects. The issues cited by the opponents of the housing project focused on things like traffic and rents rather than on traditional “environmental” concerns. There is now at least some debate over whether the scope of the CEQA could or should be narrowed.

GAS TAX HOLIDAYS

The wide range of potential solutions to the spike in gasoline prices reveals a complete lack of consistency and highlights the political nature of the proposals. Massachusetts just rejected a gas tax holiday over the threat it posed to bond covenant compliance. New York’s pending budget would suspend gas taxes from May 1, 2022 through the end of the year.

The Maryland legislature is considering altering current law that started in 2013 which mandates the increase of gas taxes annually based on inflation as measured by the Consumer Price Index. The current inflation rate is 7.48%. Republican state lawmakers are pushing legislation to repeal that provision, or at least pause it for two years. The Georgia legislature is considering a suspension of its state’s gas tax for two months.

It is a topic of short-term value. The real answer would be to replace fuel taxes with mileage-based fees and drive demand away from fossil fuels. It’s a completely political answer to a question which needs a more nuanced response.

SEC FRAUD CHARGE

The Securities and Exchange Commission charged the Crosby Independent School District (Crosby ISD) in Texas and its former Chief Financial Officer with misleading investors in the sale of $20 million of municipal bonds in order to pay its outstanding construction liabilities and fund new capital projects. The SEC also charged Crosby’s auditor with improper professional conduct in connection with the audit of the school district’s 2017 fiscal year financial statements. The complaint charges that the District failed to report $11.7 million in payroll and construction liabilities and falsely reported having $5.4 million in general fund reserves in its audited 2017 fiscal year financial statements.

The Commission charges that the District knowingly included the false and misleading financial statements in the offering documents used to raise $20 million through the sale of municipal bonds in January 2018. In August of 2018, seven months after the offering, Crosby ISD disclosed that it was experiencing significant financial issues, including that it had a negative general fund balance. The following month, ratings agencies downgraded Crosby ISD’s bonds. 

As is often the case in situations like this, Crosby ISD agreed to settle the SEC’s charges by consenting, without admitting or denying any findings, to the entry of an order finding that it violated the antifraud provisions. The CFO greed to pay a $30,000 penalty and not participate in any future municipal securities offerings. The auditor agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after 3 years. They also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until reinstated by the SEC.

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

PUERTO RICO BEGINS THE JOURNEY BACK

Puerto Rico is poised to undertake the first debt sale as part of its ongoing debt restructuring this week. The GO deal next week poses an interesting opportunity. I look at where the old debt was held and ask myself how many of those holders will be able to buy the new bonds. Do the insurers want to go through this again? Do investors have faith in the government without some supervision? Do you believe that the politics of the Commonwealth will change on a sustained basis? Will PR be able to make the kind of timely disclosure going forward? Will as many individuals who owned PR debt as retail buyers be willing to do so again?

It’s still a distressed situation so that will effectively keep many of the old buyers out of the deal. It would be surprising to see the level of retail ownership that existed prior to the default if only because the vehicles for retail ownership (bond insurance and bond funds) will face limits on their participation.

If the sale is considered a success, it would weigh positively on the PREPA restructuring but the PREPA debt remains in its own category as opposed to tax backed debt.

As for whether I would want to invest, there is no way to go longer than 10 years. I don’t believe that the government is committed to real fiscal reform and the resistance to oversight will continue. This is a credit for speculators and hedge fund type investors. At a price, they will be there. It’s time for mom and pop to move on.

PREPA RESTRUCTURING HITS A ROADBLOCK

The Governor of Puerto Rico and AAFAF’s executive director announced that the government of Puerto Rico has exercised its rights to terminate the restructuring agreement (RSA). The Governor characterized the Commonwealth’s objective as “conversations with all stakeholders to achieve a restructuring agreement that can be implemented.” The Ad Hoc Group asked the Court to appoint a nonjudicial mediator. The group hopes to retool the RSA to be able to be implemented without legislative action by the Commonwealth. It proposed that this specific creditor group be allowed to negotiate with PREPA.

The Court denied the Ad Hoc Group’s Motion insofar as it seeks an order requiring the Oversight Board to participate in, and PREPA to provide unlimited financing for, mediation focused on the interests of a particular subset of creditors under the provision of an RSA that AAFAF has purportedly terminated. The Court noted that “the RSA termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” Nonetheless, the effort to restrict the group of negotiating creditors raised issues of equity.

Overhanging all of this are deadlines looming in the fourth quarter of 2022. To address those deadlines, the Court ordered that the Oversight Board shall promptly meet and confer with AAFAF, the Ad Hoc Group, and all other major stakeholders and interested parties whose collaboration it believes is necessary to construct a viable basis for a plan of adjustment, to consider whether a consensual mediation arrangement can be entered into promptly to resolve key plan-related issues.

The Oversight Board shall file, by May 2, 2022, a proposed plan of adjustment, disclosure statement, and proposed deadlines in connection with consideration of the disclosure statement, plan-related discovery, solicitation and tabulation of votes, objection period in connection with the confirmation hearing, and proposed confirmation hearing schedule for the PREPA Title III case; or a detailed term sheet for a plan of adjustment or a proposed schedule for the litigation of significant disputed issues in PREPA’s Title III case, or a declaration and memorandum of law showing cause as to why the court should not consider dismissal of PREPA’s Title III case for failure to demonstrate that a confirmable plan of adjustment can be formulated and filed within a time period consistent with the best interests of PREPA, the parties-in-interest and the people of Puerto Rico.

It is not a surprise that the resolution of PREPA’s debt issues would be the most contentious. Only when an RSA can be completed and implemented will the real impacts of a restructured entity become clear. For now, the lack of a resolution holds off the worst fears of management and the workers for at least a little while. The Legislature needs to step up and be part of the solution.

PIPELINES

The Texas Supreme Court heard arguments in a case to determine whether a company has eminent domain authority to build a pipeline across private land to carry a product other than crude petroleum. In this case the substance is polymer-grade propylene (PGP). The issues are whether the pipeline would be a public use as required by the constitution, whether the pipeline company has statutory authority to condemn the property, and finally if the property is condemned, how it should be valued.

The dispute is as much economic as anything else. This not an environmental fight. The landowners have a history of successfully selling easements. Much of the argument centered on valuation issues. That said, it may be decided on non-economic issues by the court with a decision in favor of the landowners seen as a major weapon against eminent domain.

These cases are unfolding as the Tennessee legislature is considering bills which would limit the ability of localities to regulate the location of pipelines within their boundaries.

SOLAR BACKLASH

The effort to impose what are effectively economic penalties for customers who wish to install solar panels to generate energy. The ability of solar owners to sell excess power they produce to the legacy utilities which serve their area under so-called net metering arrangements have been crucial to development in the industry. A number of utilities across the country have made varying efforts to use economic disincentives to discourage or eliminate net metering even in sun drenched states like Arizona and Florida.

Now in Florida, legislation has been passed which would limit and then eliminate net metering. The legislation requires that solar customers pay all fixed costs of having access to transmission lines and back-up energy generation as determined by the Public Service Commission. Florida businesses and homeowners will have until December 2028 to install rooftop solar and receive any financial credit for selling excess energy back to their electric utilities

Starting in 2029, the PSC will impose new rules for how much solar users will be paid when they sell excess energy back to the grid, and how many fees they are charged to stay connected to the grid. That may require additional legislation as the newly passed legislation establishes no standard to guide that decision.

MUNICIPAL UTILITY PRICES

One of the arguments in favor of municipal utilities is their cost of service-based business model rather than a model designed to generate returns for investors. The theory is that the only “profits” a municipal utility would generate would be to fund necessary operation reserves and meet debt service covenants. According to the January 2022 totals released by the Florida Municipal Electric Association, the average residential bill for 1,000 kWh for a municipal utility in the state is $120.67.

The investor-owned utilities are unsurprisingly at the top of the list. Florida Power and Light Northwest and Duke Energy have average bills approaching $200. There is one exception to the rule – Gainesville, FL Regional Utilities. GRU average bills were some $154. That makes this municipal utility the third most expensive – public or IOU. This comes in the wake of a leadership shakeup at GRU which saw the general manager lose his position and the elimination of the chief operating officer position.

P3 FUNDING

Maryland’s troubled Purple Line project was approved for a $1.7 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) loan through the Build America Bureau. The project had previously been approved for a $874.6 million TIFIA loan in 2016; this loan replaces and restructures the previous loan. The funding announcement follows the settlement of contractor issues for this major P3 project. The project also received an additional $106 million in funding through the American Rescue Plan to keep the project alive through the pandemic and the resolution of the contractor issues.

U.S. Department of Transportation also announced that the Build America Bureau provided a $1.05 billion low interest loan to Capital Beltway Express, LLC to refinance an existing loan for the Capital Beltway express lanes and construction of a northern extension called the 495 NEXT Project. This P3 project will extend the existing express lanes by 2.5 miles from the Dulles Access Road to the George Washington Memorial Parkway near the state line. 

The Bipartisan Infrastructure Law, signed by President Biden in November 2021, expanded project eligibility for the TIFIA credit program and extends maturity of the loans, giving borrowers additional flexibility. 

In Pennsylvania, PennDOT announced that Bridging Pennsylvania Partners (BPP) was selected as the Apparent Best Value Proposer to administer the Major Bridge Public-Private Partnership (P3) initiative to repair or replace up to nine bridges across the state. The Major Bridge P3 Initiative is designed to raise revenue through tolling on nine bridges located on Interstate highways throughout the Commonwealth. The department and BPP will now enter into a pre-development agreement to finalize the design and packaging of the bridges to be built, financed, and maintained.

CYBER SECURITY LEGISLATION

On 1 March, the US Senate passed legislation requiring critical infrastructure owners to report relevant cyberattacks to federal agencies. The proposed legislation would require that critical infrastructure owners and operators disclose a major cybersecurity incident to the Department of Homeland Security’s Cybersecurity and Infrastructure Agency within 72 hours and any ransomware payments to Cybersecurity and Infrastructure Security Agency (CISA) within 24 hours.

The legislation comes as utilities are considered to be vulnerable to possible Russian cyber-attacks in connection with its invasion of Ukraine. There is no one particular standard which governs what a cyber-attack target is required to disclose or to whom such disclosures must be made. One goal of the legislation is to provide a standard to address the inconsistency which flows from the lack of one. The thought is that a standard will encourage more fulsome and timely disclosure of events.

DETROIT CLIMBS BACK

Moody’s Investors Service has upgraded the rating on the City of Detroit, MI’s general obligation unlimited tax (GOULT) bonds to Ba2 from Ba3. The outlook remains positive. The city has about $2 billion of debt outstanding. The upgrade and maintained outlook reflect the real progress the City has made in terms of maintaining fiscal balance. It also follows the defeat last summer of a voter initiative which would have forced the city to incur hundreds of millions of expenses without a source of revenues to fund them.

The upgrade action acknowledges the structural weaknesses in the City’s credit – weak property tax wealth, volatile revenue structure, limited revenue raising flexibility and, the city’s significant leverage from debt and pensions. Pension costs remain the one area over which the City has little control. Moody’s lays out a view of what would drive another upgrade – robust revenue growth that makes rising fixed costs easier to accommodate; strengthening of full value per capita, median family income and population trends; accumulation of additional resources in an irrevocable trust to reduce budgetary risk of rising pension costs.

FRAUD, LOSSES, AND DISCLOSURE

The Fresno Bee reported that the city of Fresno lost about $400,000 in 2020 after falling victim to an electronic phishing scam.  The fraud involved the use of fake invoices which a city employee mistook for a real one and paid it.  There were two such payments. The issue isn’t one of fiscal solvency or short-term budget stress. After all, it’s $600K out of a $1.4 billion budget.

It does raise an issue for investors concerned with governance. The prior administration had been aware of the problem but chose not to disclose it either internally or to the public.  A new mayor was informed by the press.  Here’s the rub. The City reported the fraud to federal authorities but not to its City Council or its investors. It was put in the middle of its obligations to disclose material financial information and comply with requests from law enforcement. When the case was turned over from investigators at the Fresno Police Department to the Federal Bureau of Investigations, FBI officials asked investigators from the City of Fresno to keep the information from being disclosed to the public.

Now, the information was leaked to the press anyway.  More concerning are the comments of the mayor regarding other potential municipal victims.  FBI officials told Fresno City officials that the scam targeted “several municipalities across the United States who were victims” including one that lost twice the amount as that of Fresno.

AIR INDUSTRY CONTINUES TO RECOVER

U.S. airline industry (passenger and cargo airlines combined) employment increased to 733,491 workers in January 2022, 3,411 (0.47%) more workers than in December 2021 (730,080) and 16,848 (2.25%) fewer than in pre-pandemic January 2020 (750,339). The January 2022 figure is the highest industry headcount since the start of the COVID-19 pandemic. U.S. scheduled-service passenger airlines employed 450,065 workers in January or 61% of the industry-wide total. Passenger airlines added 5,285 employees in January for a ninth consecutive month of job growth dating back to May 2021. 

The January industry-wide numbers include 625,753 full-time and 107,738 part-time workers for a total of 679,622 FTEs, an increase from December of 3,765 FTEs (0.56%). January’s total number of FTEs remains just 1.71% below pre-pandemic January 2020’s 691,457 FTEs. U.S. cargo airlines employed 253,262 FTEs in January, up 478 FTEs (0.19%) from December. U.S. cargo airlines have increased FTEs by 18,048 (7.67%) since pre-pandemic January 2020.

ENVIRONMENTAL TAX IN PORTLAND

Measure 26-201 was approved by Portland, OR voters in 2018. Voters approved the tax to create the Portland Clean Energy Fund in 2018 as an ambitious way to tackle climate change and social inequities. It created a 1 percent gross receipts tax within the city limit. The tax would apply to retailers with more than $1 billion in national sales and $500,000 in Portland-specific sales. It would also include large service-based firms, including retail banking services. Supporters estimated the tax would raise approximately $30 million a year. City officials expected revenues of $44 million to $61 million annually. Businesses said it would raise far more than that.

It turns out that the businesses were right. This week, an audit from the City of Portland showed that at the end of the last fiscal year, the tax had generated more than $185 million since its inception.  Actual revenues were $63 million in Fiscal Year 2019-20 and $116 million in Fiscal Year 2020-21. That’s great from the point of view of a “social” investor.  From a governance standpoint, the situation has raised issues. The Portland City Auditor’s Office found the program has still out not finalized methods to track, measure and report its performance, as required by the 2018 ballot measure that created it.

The program had made progress with some elements, but othe­­­rs were not yet fully implemented or needed direction from City Council. The program did not report on whether its activities by grant category were consistent with target proportions in the legislation. The presentation of the recommended grants to Council used descriptions that were a mix of funding category and grant type. 

It is a weakness of several prominent efforts to devote public funding to efforts backed by limited notions of what constitutes accountability and transparency. The Thrive NY program led by former Mayor DeBlasio’s wife faced withering criticism over its lack of accountability and transparency. It is not the first time that Portland has been satisfied with less than adequate disclosure. It has in the past made the case that better disclosure is a choice between better information or public safety. For ESG investors, this stuff should matter.

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

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OPIOID SETTLEMENT

The effort to recover some of the costs of the opioid epidemic has been settled.  The nation’s three largest drug distributors and a major pharmaceutical manufacturer announced a settlement in the litigation against the companies by states and localities across the country. The total cost to the companies: $26 billion.

The settlement will require Janssen, Johnson & Johnson’s pharmaceutical division to pay $5 billion. That payment will be broken into annual payments over nine years. McKesson, Cardinal Health and AmerisourceBergen, the distributors, will pay a combined $21 billion over 18 years. The settlement requires that at least 85 percent of the payments will be dedicated to addiction treatment and prevention services.

While the settlement is the second largest multi-state settlement to be reached, it did not turn into the next tobacco deal. The settlement announcement does indicate that it was approved by at least 90 percent of those governments eligible to participate, and 46 of 49 eligible states for the distributors and 45 for Johnson & Johnson. This settlement comes as additional litigation is either settled or moves closer to settlement.

An agreement arrived at earlier this year produced a tentative settlement with Native American tribes. It will not produce a substantial windfall for any of the tribes. The 574 federally recognized tribes could receive $665 million in payouts over nine years.  There could be more money available from the ongoing Purdue Pharma bankruptcy proceedings. That litigation, focused on the Sackler family, continues. The Sacklers recently increased their dollar offer in negotiations but may plaintiffs remain unsatisfied.

Washington, Oklahoma and Alabama are not participating. Oklahoma’s Supreme Court overturned a lower court’s $465 million verdict that concluded that Johnson & Johnson’s opioid marketing created a public nuisance in the state. Other court efforts have generated a mixed bag of rulings which may lead ultimately to U.S. Supreme Court review. These three states obviously believe that they can do better even though the experience to date might indicate otherwise.

That strategy may be vindicated by the announcement that a reworked settlement between the Sackler family which owned Purdue Pharma and the states had been agreed. That settlement came in the wake of the rejection of Purdue Pharma’s bankruptcy plan in December. The District of Columbia and nine states — California, Connecticut, Delaware, Maryland, New Hampshire, Oregon, Rhode Island, Vermont and Washington had rejected that earlier plan. Mediation talks between that group of plaintiffs and the Sacklers led the family to increase its proposed share of the settlement by $1 billion.

By holding out and conducting their own negotiations, the hold out states did generate increased payout to the states. At the same time, the Sacklers will pay out the new $1 billion over 18 years versus the nine-year timeframe established in the prior rejected settlement. It is well below what many thought would be the required payout and there is a fixed timeframe for payments. The hope that opioids would become the new tobacco in terms of supporting debt issuance will not be realized.

TRANSIT FUNDING

The federal Urban Mass Transportation Act of 1964 was enacted to develop and revitalize the country’s public transportation systems.  This Act, in part, allows state and local transportation authorities to obtain federal grants.  Urban mass transportation authorities created pursuant to this section receive federal grants administered by the Federal Transit Administration.  Receipt of these federal grants requires certification from the United States Department of Labor. 

Now to ensure that public transit agencies in West Virginia are able to continue to receive federal grants, House Bill 4331 has been introduced. The bill tweaks existing state law to make clear that labor unions are recognized by these agencies. To preserve this source of federal funds for urban mass transportation authorities, only for urban mass transportation authority employees whose public authority employer is a recipient of federal funds, the term “deductions,” as used under Chapter 21, Article 5, shall include amounts for union, labor organization, or club dues or fees.

NEW JERSEY UPGRADE

New Jersey continues its journey out of the credit wilderness as it reaps the benefits of federal funding and a recovering economy. This week Moody’s said it has upgraded New Jersey’s general obligation and Garden State Preservation Trust, NJ bonds to A2 from A3, and the state’s related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects. What is essential? The essential-purpose appropriation financings include bonds issued by the New Jersey Transportation Trust Fund Authority and school construction bonds issued by the state’s Economic Development Authority. Less essential debt is issued by the New Jersey Sports & Exposition Authority. 

Much agency issued debt also benefitted from the State’s upgrade. The program ratings for the state’s aid intercept enhancement programs – the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -were upgraded to A3 from Baa1. The Liberty State Park Project Bonds issued by the New Jersey Economic Development Authority were affirmed at Baa1. Federal Highway Reimbursement Revenue bonds (GARVEEs) issued by the New Jersey Transportation Trust Fund Authority were raised to A3 from Baa1. The ratings on the bonds issued by the South Jersey Port Corporation were affirmed at Baa1.

The vast majority of the State’s debt is paid from monies that are subject to annual appropriation. That reliance on that mechanism, rather than the use of general obligation debt, has always been seen as a strong source of support for the view that failure to appropriate would be an act of fiscal suicide on the part of the Stater. It would undue all of the benefits of better pension funding which will still be a long term drag on the State’s ratings. The reversal of the trend of inaction during the Christie administration regarding pension funding and its role in the steady declines in the State’s ratings has clearly boosted the outlook for the State.

NYC BUDGET

The NYC Independent Budget Office has released its analysis of the proposed budget for FY 2023 recently offered by Mayor Eric Adams. It is the analysis of the economy that we find most informative. It highlights the benefits as well as the costs of the City’s dependence upon Wall Street and the many associated businesses that benefit from the economic activity the FIRE sector generates for NYC.

The first example concerns wages and personal Income. The city’s recovery in terms of aggregate wages and salaries has been much more robust than its recovery in total employment. The sectors experiencing the slowest recovery, and for which IBO projects employment will not have recovered by the end of 2026, have some of the city’s lowest average wages, while the sectors that are projected to recover the most rapidly have some of the highest average wages.

The leisure and hospitality sector and retail trade sector, for example—which lost the most jobs and are projected to have the slowest expected recovery—have average annual salaries of $54,700 and $57,300 respectively. Conversely, the information and professional services sectors, which have recovered much more quickly, have some of the city’s highest average annual wages, $144,500 and $181,300, respectively.

A second example is that of real estate. After a sharp decline in 2020 in the wake of the onset of the pandemic, real estate sales in New York City rebounded strongly in 2021. The total value of taxable sales rose 81.5% to $111.3 billion compared with 2020, with residential sales up 88.7 %, and commercial sales increasing 71.2 %. Residential sales were $68.1 billion, far exceeding the previous record of $55.4 billion set in 2017. That does not mitigate longer term concerns. the future of the commercial real estate market remains uncertain.

While many observers expect an increase in the number of workers returning to the office as 2022 progresses, the total demand for office space, particularly in “non-trophy” buildings, is likely to remain soft, and the continuing shift to online shopping will weaken the market for retail space. Retail spaces may face the most uncertainty. Storefront vacancies are the most visible sign of the impact of the pandemic. The role of the individually owned small retail business in the employment of non-college graduates in large cities cannot be overstated. The recovery of these sorts of businesses will be a key to resolving issues of unemployment especially at the lower range of the pay scale.

We recently documented the Mayor’s plan to eliminate projected budget gaps through headcount management. That would represent a real reversal from the DeBlasio years. IBO estimates that nearly half of the $5.4 billion in total savings proposed in the Mayor’s Plan to Eliminate the Gap (PEG) for the current fiscal year through fiscal year 2026 are achieved through headcount reductions ($2.5 billion). Headcount reductions of between 3,500 and 6,000 are projected annually. The primary method? Most of the positions proposed for elimination are vacant.

And there are the usual tricks. The reductions occur only with vacant positions, ones that agencies have budgeted for—but do not actually have staffed. In fiscal year 2023, nearly 1,800 of the city-funded positions eliminated in the PEG at DOE are restored with federal funds, with approximately 900 vacancies eliminated in the PEG in fiscal year 2024 restored with federal funds. The expiration of federal Covid-19 relief funds occurs in 2025.

The Preliminary Budget includes a budgeted full-time headcount for fiscal year 2022 of 306,291, a level similar to what it was prior to the onset of the pandemic. In fiscal year 2026, the final year of the Adams Administration’s current financial plan, full-time budgeted headcount drops below 298,000. This would be the lowest budgeted headcount since calendar year 2017.

REGULATION

In North Dakota, the Board of University and School Lands, better known as the Land Board, has been appealing to the North Dakota Supreme Court in a case with issues surrounding royalties from the development of state-owned minerals.  Those issues include deductions oil and gas companies removed from royalties to account for transportation and processing costs. The Land Board has for several years sought to collect those deductions following a favorable Supreme Court ruling in 2019 in a case involving oil producer.

House Bill 1080 was enacted last year. The law limited the length of time for which the state in the future could seek to collect unpaid royalties at seven years. That created a cutoff date of August 2013 that would apply to the money the state is seeking to recover from dozens of companies. Now, the Board has decided not to pursue collections from prior to that date. The Department of Trust Lands has estimated the state is owed $69 million in royalties from production before that date. 

NO TOLLS ON THE OHIO

Kentucky and Ohio plan to seek $2 billion in federal funds to help pay for the overhaul of the Brent Spence Bridge corridor near Cincinnati without using tolls. The money would come from the federal infrastructure bill that Congress passed last year which includes $17.5 billion in national grants for large projects like this project. It would retrofit the Brent Spence Bridge, which carries Interstates 71 and 75 between Covington, Kentucky, and Cincinnati, a nearby companion bridge, and work on approach roads on both sides of the Ohio River.

Unlike another major bridge project – the Ohio River Bridges Project, the Kentucky-Indiana bridges built in Louisville – this one will not use tolls. That would clash with the stated intent of the USDOT to encourage the role of user fees, aka tolls. The Kentucky General Assembly banned tolls on interstate crossings between Kentucky and Ohio in 2016. This will clash with the stated goals of encouraging public/private partnerships in the finance and execution of large transit infrastructure projects.

DETROIT

Michigan law requires that the City of Detroit to hold independent revenue conferences in September and February each fiscal year to set the total amount available to be budgeted for the next four years.  The latest forecast predicts a faster recovery for Detroit than the State overall. Resident employment will recover to pre-pandemic levels by the end of 2022. Meanwhile, jobs at establishments within the city boundaries will recover by early 2023. The City’s economy continues to grow through 2026 with blue-collar jobs leading the way. 

Recurring City revenues are forecasted to exceed pre-pandemic levels in the current fiscal year ending June 30, primarily due to stronger income tax collections and the implementation of internet gaming and sports betting last year. The City presented FY2022 General Fund recurring revenues projected at $1.087 billion for the current fiscal year ending June 30, up $23.8 million (2.2%) from the previous estimate in September 2021. General Fund recurring revenues for FY2023, which begins July 1, are now forecasted at $1.147 billion, an increase of $60 million (5.5%) over the revised FY2022 estimates. General Fund revenue forecasts for FY2024 through FY2026 show continued, but modest, revenue growth of around 2% per year on average.  

AIRPORTS

The data is on regarding airport volumes in 2021.  The volume of flights operated in 2021 (6.2 million), although more than 2020, was 78.1% of the volume of flights operated in pre-pandemic 2019 (7.9 million). In 2021, the 10 marketing carriers reported 6.3 million scheduled flights, 78.0% of the 8.1 million scheduled in 2019.  In December 2021, the 10 marketing network carriers reported 580,238 scheduled domestic flights, 13,773 (2.4 %) of which were canceled. In pre-pandemic December 2019, the same airlines reported 679,941 scheduled domestic flights.

At the same time, the industry is applying heavy pressure in light of the new guidance issued by the Centers for Disease Control and Prevention that relaxes many COVID-era policies – including indoor mask wearing. The U.S. Travel Association, the American Hotel and Lodging Association, Airlines for America and the U.S. Chamber of Commerce are appealing to the White House Coronavirus Response Coordinator to replace pandemic-era travel advisories, requirements and restrictions with endemic-focused policies.  

BEIGE BOOK

The Federal Reserve issued its latest view of the economy as the nation moves towards treating COVID 19 as an endemic rather than a pandemic. Several themes were consistent across all regions. Transportation costs (fuel), labor shortages, higher costs, and higher wages were noted across the board. Steady increases in prices are supported by demand. As retail activity increases and inflation remains high, the resulting rise in prices will contribute to higher sales tax revenues.

For NYC, the Fed reported that New York City’s residential rental market has picked up steam in recent weeks, as vacancy rates have continued to edge down and rents have accelerated. Rents have fully rebounded across much of the city. Commercial real estate markets were mixed but, on balance, slightly stronger. Office markets were mostly steady, with both office availability rates and market rents essentially flat throughout most of the District.

ELECTRIFICATION REALITIES

The effort to promote electrification of homes has run into some of the realities of the costs of electrification. Residents who lost homes in the Marshall Fire already faced issues in terms of costs and insurance to replace their lost homes. Many were confronted with the reality that replacing their homes and complying with new electrification requirements left many of the 1,000 impacted homeowners facing costs well in excess of the replacement values included in their homeowner’s policies.

One of the two communities most affected by the fire was Louisville in Boulder County. The Louisville City Council voted this week to direct city staff members to draw up potential changes in its building codes in the wake of the Marshall Fire for future vote. The changes would roll back building codes to the 2018 codes in place well before the fire for those whose homes were lost in the blaze, possible with a three-year time limit. In that process, the city gathered estimates of the costs of meeting the updated codes over what was in place prior to October with the 2018 codes. It found the extra cost for the construction of an average 2,800 square foot home was about $20,000.

The situation focuses attention on the cost of “green” building. As is the case with so many environmental issues, proponents often underestimate the cost to individuals of environmental regulation. It is one thing to require corporations to incur the extra costs, it is proving to be another to get support for imposing costs on individuals.

BERKELEY HOUSING DISPUTE AND COLLEGE ADMISSIONS

After the impacts of the pandemic on the demand for public universities unsurprisingly increased demand, it raised demand for housing as well. To address such increased demand at the University of California, UC proposed construction of additional residential facilities adjacent to its campus in Berkeley. This would have facilitated a student population of 45,000.

Now a local group with a long history of opposing university expansion of its physical plant has stymied the plans in court. The California Environmental Quality Act requires state and local agencies to study the environmental impact of construction projects before approving them. The group has obtained rulings in a suit under the CEQA which say that the existing environmental study is inadequate. UC recently asked for a stay of the initial lower court rulings on the matter while it is under appeal. The request was denied.

The real problem? UC Berkeley plans to begin mailing admissions offers on March 23. The university has said that it would limit those offers to 15,900 applicants if a stay was denied, down from its original allotment of 21,000 admissions offers for the next academic year. It occurs just as California has dedicated funding to expand enrollment by 5,000 full-time students at University of California schools and 10,000 full-time students at the California State University System.  

Pending legislation would exempt certain campus housing developments from the California Environmental Quality Act.  The shortage of housing in California especially “affordable” housing can be blamed on many factors. It is disappointing for advocates of smarter less impactful housing development to be stymied by opposition from the areas which would benefit the most. The university will try to reduce the number of new students it turns away, through encouragement of online enrollment and for some incoming students to delay enrollment until January 2023. California residents and transfer students from within the California Community College system will be prioritized for fall in-person undergraduate enrollment.

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.