Joseph Krist

Publisher

The spread of the Delta variant of corona virus has once again put the pandemic at the center of many current debates. We examine several sectors to see how the latest virus-related events are impacting several sectors and issuers. We also note that the argument over vaccine and other health regulations has run into an unanticipated hurdle. Proponents of vaccine requirements will have to overcome legislation and subsequent court decisions which support religious exemptions especially in regard to employment. Those decisions and laws actually make it harder to impose vaccine requirements in the face of claims of limits on religious freedom.

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COVID AND HOSPITALS

Hospitals throughout the pandemic were heavily impacted financially by the pandemic. The unanticipated costs of supplies associated with the pandemic and the loss of revenue associated with elective procedures was highly negative to bottom lines. The initial aid package delivered by Congress enabled many institutions to weather the revenue impact and maintain their credit ratings. The hope was that with the advent of vaccines that the pandemic’s impacts could be lessened and more regular operations would support hospital finances.

The reality has been that the rollout of the vaccine and the reluctance of too many to be vaccinated have led to the situation which prevails today. The rise of more difficult cases has once again strained hospital resources. One unanticipated factor has been the reluctance of healthcare professionals to be vaccinated. In combination with the general issue of a labor pool that is slow to return to the pre-pandemic status quo. When you add in burnout from the pandemic, hospitals are under real pressure.

All of this occurs against the backdrop of the revenue impacts on hospitals as the result of COVID.  Alvarez & Marsal is a consulting firm that specializes in turnarounds in the healthcare field as well as other sectors. They have released research about the impact of the pandemic on hospital revenues. Their data covering the 25 largest not for profit hospital systems showed Net Patient Revenue plunged almost 20 percent from the fourth quarter of 2019 to the second quarter of 2020 as the country locked down. The infusion of federal CARES Act funding enabled revenue to recover at the end of the 2020 calendar year to a drop of just 3 percent from 2019 to 2020.

Operating income declined 11 percent from 2019 to 2020. Discharges decreased 18 percent (4th quarter 2019 to 2nd quarter 2020) and 9 percent year to year (2019 to 2020). Patient Days dropped 13 percent (4th quarter 2019 to 2nd quarter 2020) and 4 percent year to year (2019 to 2020). Length of Stay increased 7 percent (4th quarter 2019 to 2nd quarter 2020) and 6 percent year to year (2019 to 2020). Surgeries fell 36 percent (4th quarter 2019 to 2nd quarter 2020) and 11 percent year to year (2019 to 2020). Emergency Room visits declined 31 percent (4th quarter 2019 to 2nd quarter 2020) and 17 percent year to year (2019 to 2020).

How do hospitals cope? The latest example is the Henry Ford Health System in Detroit. It recently announced the temporary closure of some 120 beds across its system due to the inability to meet state staffing requirements. For a large system like Henry Ford, this represents less than 10% of beds. At smaller facilities, the impact of that number of closures would be significant. It’s not expected to be a serious credit factor at the larger institutions. Once again, the view that bigger is better in healthcare is validated.

COVID MANAGEMENT

From the start of the pandemic, mass transit agencies in general and the MTA in particular have been at the center of efforts to maintain ridership and finances. In New York, this week marked the return to the office for City employees. While there are many concerns regarding the details of the New York City plan (capacity limits, mask requirements, testing for the unvaccinated), one of the major concerns on all sides of the issue has to do with concerns over returning to mass transit.

It is not currently mandatory for MTA employees to get vaccinated, but the authority will begin requiring weekly COVID-19 tests on Oct. 12 for those who do not have proof of vaccination. The agency says that more than 70 percent of MTA employees have received at least one dose of the coronavirus vaccine. Lower rates of vaccination are seen among employees for transit divisions, like trains and buses.

MTA has provided a $500,000 death benefit to its nearly 68,000 employees since last year to vaccinated employees who die from COVID-19. That benefit is being extended through the end of the year. A total of 171 MTA employees have died of COVID-19–related causes since the beginning of the pandemic. Only three MTA employees have died of COVID-19–related causes since June, when the policy was implemented.

The extension of the benefit period through year end is part of the effort to encourage the recalcitrant to get vaccinated. That effort will support efforts to return more private sector employees to an office setting.

COVID LABOR SHORTAGES

Many sectors of the economy are reporting labor shortages, The number of help wanted signs on a wide variety of businesses is significant. It isn’t just private businesses which are seeing the pressure from labor shortages. One area of emerging pressure is an apparent shortage of school bus drivers. Between personal vaccination resistance and the lack of availability of vaccines for many school age children, the situation is not a total surprise. Add to that the uncertainty created by efforts in some states to preempt mask requirements and it is clearly a problem.

It is not clear who will pay the costs of replacing school district workers. In Massachusetts, the governor is committing some 90 National Guard troops to drive school busses due to driver shortages in Chelsea, Lawrence, Lowell, and Lynn. A total of 250 Guard have been activated for the purpose of aiding in addressing a driver shortage throughout the Commonwealth. In Delaware, a charter school in Wilmington, Del., has resorted to offering parents $700 to not use the school bus system to get their kids to and from school.

A more extreme situation confronted Pittsburgh, PA. It postponed the opening of its schools by two weeks. The school district was short 426 drivers (229 CDL and 207 non-CDL), resulting in a seat gap for approximately 10,996 City of Pittsburgh students. A combination of hiring and limits of the availability of buses vs. the option to walk is being used to address the shortage. Pittsburgh also offered to “reimburse” families who transport their children on their own.

COVID LEGISLATION

A review by Kaiser Health News found that 26 states pushed through laws that permanently weaken government authority to protect public health. Some of the more egregious examples are Arkansas (mask ban), Idaho (county officials allowed to override public health orders), and Kansas and Tennessee where school boards, rather than health officials, have the power to close schools.

In at least 16 states, legislators have limited the power of public health officials to order mask mandates, or quarantines or isolation. In some cases, they gave themselves or local elected politicians the authority to prevent the spread of infectious disease. At least 17 states passed laws banning COVID-19 vaccine mandates or passports, or made it easier to get around vaccine requirements. At least nine states have new laws banning or limiting mask mandates. Executive orders or a court ruling limit mask requirements in five more.

The Arkansas law has been stayed by the courts for now. Troubling is the view expressed by the bill’s sponsor who said “It’s time to take the power away from the so-called experts, whose ideas have been woefully inadequate.” The bill was based on a template from the conservative anti-government group the American Legislative Exchange Council (ALEC). ALEC is behind any number of laws designed to achieve conservative goals in state legislatures. The move to limit the powers of local health officials has led to at least 303 public health leaders who have retired, resigned or been fired since the pandemic began.

For ESG investors, these changes should raise flags. When it comes to public health, these issues raise questions about how the potential impact of these changes reduce the ability of officials to deal with crises in real time. That should put issuers operating under those constraints to compare unfavorably with other issuers when it comes to ESG investment measurement.

COVID AND GOVERNMENT EMPLOYMENT

The number of noneducation state and local jobs, which make up about half of the public sector and include workers in areas ranging from city parks and city halls to police forces and correctional facilities, is down by more than 400,000 since the pandemic struck, according to the latest federal Labor Department estimates for August as cited by the Pew Foundation. Private employment is up 3.4% since December, though still not fully recovered from its losses since the pandemic struck earlier in 2020.

The greatest reductions since the pandemic began have been in local governments. As of August, local public payrolls were down 5.3% from pre-pandemic totals, more than 350,000 jobs, excluding education positions.  State government employment—also excluding education—has declined slowly every month this year, with the total down 2.1% from pre-pandemic levels, or about 57,000 jobs.

The research shows that multiple factors are holding down employment. Temporary layoffs have not been fully offset by rehires as in person services are still slow to come back. Budget pressures that led to hiring freezes or furloughs earlier in the pandemic remain in place in some jurisdictions. The “great rethink’ among many workers which is slowing a return to private sector jobs is also hitting government. More workers are leaving government, including retirements. There were fewer noneducation workers in state and local government than in July 2019 except in Rhode Island, South Dakota, Texas, and West Virginia.

One caveat to the numbers. Employment in industries operating in facilities owned by government also include employment at state and/or tribally owned facilities. The best example is tribal owned casinos. Pew notes that Labor Department estimates show that there were nearly 23% fewer workers in state and local government-owned amusement, gambling, and recreation facilities in March compared with a year earlier while fire protection jobs were essentially unchanged.

ILLINOIS CLEAN ENERGY PLAN ENACTED

Exelon plans to refuel its Byron and Dresden nuclear plants ‘as a result of the action taken by the Illinois legislature to enact a comprehensive energy bill.’ The Byron plant was slated for defueling and closure beginning this past week. The Dresden plant was to be taken offline in November.

The municipal credit angle is clear. As we detailed last week, the measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The takeaway from the battle over energy in Illinois is that it highlighted the issues which impact the debate – nuclear vs, no nukes; the loss of employment and tax base, and the uncertainty as to the actual costs of an energy transition. Over the past half century of the environmental debate, the inability of advocates to estimate the real costs of the contemplated changes have always caused skepticism.

In the case of the Illinois plan, the official estimate of the initial costs—an average electricity bill increase of $3.55 per household per month—is likely to be less than the true costs. Isn’t it always? Already, flaws in the law are being cited. One example is the plan to offer rebates of up to $4000 to support electric vehicle sales. The law does not address the fact that existing programs to provide rebates are funded from eight counties in and around Chicago. Absent additional legislation, only residents of those counties would benefit from the rebate.

CHICAGO – FUNDING THE POLICE

The fact that Chicago’s problems with violent crime have become a national issue and the power of local political interests remains intense does not lessen the impact of the announced contract agreement between the City and its police force. Keep in mind that the agreement occurred in the post- George Floyd environment and in the wake of several incidents of questionable police involved shootings.

In this environment, the City has announced a new contract that gives them a 20% pay raise over eight years, more than half of it retroactive. The agreement was still police friendly on other issues. The city did not get the requirement it sought compelling officers to disclose secondary employment or hours worked at those second jobs. It also did not cap those moonlighting hours.

The agreement creates the need for the city to find $377.6 million for four years of back pay. Retroactive paychecks will range from $18,000 to $36,000, depending on seniority and retroactive overtime pay that will add as much as 20% to that amount; and back duty availability pay that means up to $7,600 per officer.

We view the agreement as credit negative for the City. The issue is as much based in concerns about management as it is on the size of the raise. The Mayor has been dealing from a position of weakness in terms of her relationship with the police. But she inherited the lack of a contract from former Mayor Rahm Emmanuel.

How it is dealt with is another issue. The City’s 2021 budget (the fiscal year is the calendar year) set aside just $103.3 million for back paychecks. The city plans to cover the rest by refinancing $1 billion in existing debt to generate $232 million in savings. The city still must find an additional $325 million to cover future costs of the contract. 

The hope was that the negotiations in the face of the pandemic and fiscal realities would create real change in the police department. Here’s how it impacts individual officers. The contract calls for rank-and-file CPD officers to receive a 10.5% retroactive pay raise and 9.5% more through January 2025. The city has also agreed to increase so-called “duty availability pay” to $950 per quarter and the annual uniform allowance to $1,950.

Duty availability pay will be offered “retroactively” from July 2017 to all officers whose probation period has ended after 18 months. Going forward, that pay will be available after 18 months, instead of 42. Rank-and-file police officers will be asked to absorb half of the increase in health care contributions imposed on police sergeants and Chicago firefighters and paramedics. The second half of that increase will be postponed until July 1, 2022 to allow members to retire under the current levels: 2.2% at age 55, or 0% for those 60 and over.

The failure to seize the opportunity reflects the Mayor’s relatively weak position. The details defer much of the difficult work in addressing long term issues with the police (pensions, increasing costs of managing litigation) to future negotiations. For the Mayor, the most important feature of the deal is its length. It guarantees labor peace until after the 2023 mayoral election.

LADWP

The Los Angeles City Council voted to have the Department of Water and Power transition to 100% renewable energy by 2035. That is ten years sooner than was envisioned just three years ago. In March of this year, the LA100 study was released. The study was conducted by the U.S. Department of Energy’s National Renewable Energy Laboratory in partnership with LADWP and USC. It found that the DWP — the nation’s largest municipal utility — can reach the city’s goal by 2045 or sooner if it rapidly deploys wind and solar power, electrical storage and other technologies.

The LA100 study showed that the transition to 100% will cost between $57B to $87B.  The Council estimated that the clean energy transition could create 9,500 jobs. As of calendar year 2019, renewable energy constituted 34% of the overall mix and 51% of the total power generated at LADWP was free of carbon.

ST. LOUIS FOOTBALL LITIGATION

The lawsuit filed in 2017 in state court in Missouri claims the NFL broke the league’s relocation rules by allowing the Rams to leave St. Louis after the 2015 season, and misled the public about its intention of staying here. The plaintiffs claimed the Rams’ departure cost the city millions in amusement, ticket and earnings tax revenue. The suit alleges breach of contract, fraud, illegal enrichment and interference in business by the Rams and the NFL, causing significant public financial loss.

The plaintiffs in the case are the St. Louis Regional Convention and Sports Complex Authority (RSA), the public entity that owns the Dome and in 2015 and 2016 spent $18 million on a failed plan to keep the Rams in St. Louis with a Mississippi riverfront stadium, and the city of St. Louis and St. Louis County. The RSA gets its funding from the city, county and state of Missouri.

Absent a settlement, a trial is scheduled for January in the midst of the NFL’s playoffs.  St. Louis is seeking $1 billion or more through the litigation. The total return to the plaintiffs will be smaller as they have agreed to pay their attorneys 35% of any award.

NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

One of the longstanding sources of support for the Tar Heel State’s local government credits has been the Commission. The existence of the Commission and the powers it has have long been cited for the State’s generally positive local government credit profile. While the State does not directly support local credits, the Commission has established a perception that it is a key factor in preventing defaults.

Some 1,100 municipalities, counties, boards of education, public hospitals, utility districts, mental health agencies, housing authorities, universities, airport authorities and other public authorities are subject to the Commission’s oversight. Established in response to the negative impacts of the Great depression on local North Carolina credits, the Commission approves debt issuance and reviews the financial operations of issuers. Recently, evidence of the Commission’s positive role came in the announcement that 38 municipalities had been released from its Unit Assistance List. This reflects the strengthened condition of those issuers.

The State is not taking things for granted. SB 314 was passed by the General Assembly and signed into law last month.  The new law provides for a legal process for the voluntary or involuntary dissolution of a distressed governmental unit that is no longer viable. It also gives the LGC the authority to mandate specialized training for officials in a unit of local government exhibiting fiscal distress.

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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NEW YORK PENSIONS

Throughout all of the years when the State of New York’s credit was on its way down, one area which remained a positive was the management of the State’s various pension funds. It has been a reflection of regular funding, good investment management, and flexibility in terms of the structure of the pension fund obligations.

Over recent years, the issue of how to effectively lower pension benefits and funding requirements in states with significant unfunded pension obligations has been a continuing problem. One way is to introduce different tiers of pension beneficiaries based on date of hire. It is a slow path but a steady one and it has proven out.  New York has had several tiers of pension categories which clearly establishes a precedent.

Another issue has been the debate over how realistic the discount rates being applied were when pension funds estimated their unfunded liabilities. The higher the assumed return to the fund the better off the fund would be so long as the annual actuarially required contribution (ARC) from current funds was made. These assumed rates of return were kept high even in the face of poor investment performance. It allowed legislators to reduce annual ARC requirements and avoid tax increases.

Eventually, one has to pay the piper and the pension funds have been no exception. Slowly, assumed rates of return have been lowered. There has still been concern that in many states the assumptions remain too high. Here once again, NYS finds itself in a leading position. The State Comptroller and pension fund overseer has announced that the long-term assumed rate of return on the Fund’s investments will be lowered from 6.8% to 5.9%.

In 2010, he decreased the rate from 8% to 7.5%, in 2015 to 7% and in 2019 to 6.8%. The median assumed rate of return among state public pension funds is 7.0% as of August 2021, according to the National Association of State Retirement Administrators. This comes as the State was able to report a funding ratio of 99.3%.

MEET ME IN ST. LOUIS

The City of St. Louis has always suffered economically in comparison with its surrounding St. Louis County. The trend of migration from the City to the County in the post WWII era accelerated in the late 1960’s. The resulting damage to the City’s tax base and economic base has been a drag on its credit for years. The existence of the City and County as two distinct governments created tensions between the two governments which have interfered with sound regional infrastructure development and the provision of many services.

At the same time, the City’s financial management was weak and its fiscal position and ratings continued to decline. The result was a decline to a Baa2 rating for general obligation bonds and a Baa3 lease appropriation rating. Now, the City has benefitted from the strong pre-pandemic economy and reported consecutive years of current budget surplus. Add $ 498 million of federal funding through the American Rescue Plan Act (ARPA) to the mix and the outlook improves.

And so, it is as Moody’s upgraded the City of St. Louis, MO’s general obligation unlimited tax (GOULT) debt rating to A3 from Baa1. Appropriation debt is now rated Baa2. The balanced current operations along with the aid provides a more stable base to support the credit. The city has remained the center of employment in its region and it does have a tax structure which captures revenues from commuters through economically sensitive activity taxes such as earnings, payroll, and sales tax revenue. This is a real factor in offsetting the less favorable economics and demographics of the City. Thus, the positive fiscal result.

NYC AND ELECTRIC VEHICLE CHARGING INFRASRUCTURE

The City of New York will pilot the installation of public vehicle chargers for electric vehicles. They will be provided at newly reserved curbsides beginning in Manhattan. They are designed to charge a vehicle in under one hour up to at least 80% capacity. Charging will cost of 35 cents per kilowatt-hour. 

Press reports indicate an expectation that the DOT will also announce plans to expand its network of curbside charging stations from the current 24 stations — each with two plugs — to 10,000 by 2030. However, those chargers will be of the slower “Level Two” variety. The initial 24 stations are part of a pilot program to install 100 curbside chargers by next month. The installations are part of a four-year “demonstration”. 

It is the sort of investment if cities are serious about their curb management from both business and transportation perspectives. Reservations of curbsides for these vehicles as well as reservation of curb for deliveries are two ways localities can take a forward leaning approach to vehicle management. Larger cities are in a unique position to take advantage of their effective ownership of their streets including curb space. It is a way to drive results and not just policies.

WEST VIRGINIA COAL UPDATE

We have regularly discussed the role of regulation in the process of decarbonizing the electric power grid. In particular, discussed the role out of state regulators play in the regulation of the operation of coal fired generating units which supply power to those states. Recently, we focused on regulatory actions in Virginia and Kentucky which could impact the operations of coal fired generation in West Virginia. Decisions in those two states limiting the amounts which could be charged to customers in those two states have made an earlier closing date for coal assets more likely.

Now, Appalachian Power and Wheeling Power petitioned the West Virginia Public Service Commission to approve making West Virginia customers responsible for $48 million annually to cover wastewater compliance work to keep the John Amos, Mountaineer and Mitchell coal-fired generating plants in Putnam, Mason and Marshall counties federally compliant with federal effluent limitation guidelines. The companies are asking West Virginia customers to shoulder all of the cost burden for these planned upgrades required to keep the plants compliant with wastewater discharge guidelines. Not making the wastewater treatment upgrades would require that the plants shutter in 2028.

ENERGY AND ASSESSMENTS

The vulnerability of reliance on extractive energy industries has been made clear. What policy changes could not accomplish in terms of the production of fossil fuels, the pandemic and its impact on oil demand did. One example of the potential impact of a changing energy environment occurs in Colorado.

Colorado is better known for its relationship with fossil fuels through mining. There are areas which produce oil. One of them is Weld County. This northern Colorado county produces an estimated 90% of the oil extracted in the state. The County has gone through the declines in production associated with the pandemic which reduce unemployment and support tax revenues. Now that process has impacted the County through a reduction in assessed valuations for oil and gas properties.

Weld County its all-time oil production peak at nearly 170 million barrels in 2019. Production dropped to just under 150 million barrels out of the ground in 2020. According to production data kept by the Colorado Oil and Gas Conservation Commission, this year’s yield is on pace to fall an additional 30 million barrels. The County saw an unprecedented $2.7 billion reduction to its assessed property valuation last year, a nearly 18% decline from 2019. This resulted in property tax revenue declines of $45 million. 

The County is not unprepared. It has $100 million in a general contingency fund, another $100 million in its public works reserve fund and $36 million in a reserve account for county buildings. This should aid in the transition from extraction Colorado’s oil and gas sector is taxed at a property assessment rate of 87.5%, three times what commercial property is taxed at and more than 12 times the rate for homes.

At the local level, the reliance on large taxpayers is not without risk. The Platte Valley School District relies on oil production facilities for an estimated 95% of revenues. The assessed property value in the school district last year went down even more sharply — 34% — than the county as a whole.  That could have implications for the County tax base going forward. Much of the population increase in the County is suburban sprawl from Denver, fueled by lower housing costs and property taxes. Those lower residential taxes reflect the revenue derived from energy extraction.

NYS AND ELECTRIC VEHICLES

One of the questions we asked when Andrew Cuomo resigned was what does the change in governor in New York mean for a variety of policies – criminal justice, the economy, the state’s role in economic development, the environment? This week we received our first indication of where policy might be going under a Hochul administration.

The new Governor has signed legislation that will require all passenger vehicles sold in the state to be emission-free by 2035. Hochul signed an order instructing the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. A simultaneous executive order calls for the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. The goal is to eliminate emissions from medium- and heavy-duty vehicles by 2045.

The actions make New York State the second, after California, to enact limitations on sales of internal combustion powered vehicles.

CLIMATE LITIGATION

Hoboken, NJ will have its lawsuit against fossil fuel producers heard in state, rather than federal, court. Hoboken sued oil and gas companies in 2020, charging climate change-related violations both of state common law and New Jersey’s Consumer Fraud Act. The city joined several others in pursuing legal remedies to address climate change issues.

The companies petitioned to move the case to federal court which is seen as a friendlier venue for these suits. The judge ruled that Hoboken’s lawsuit is not subject to “complete preemption” under the Clean Air Act or the Outer Continental Shelf Lands Act and that no federal officer is implicated in the city’s suit.  At the same time, he cautioned the city that “federal law may ultimately block Plaintiff’s claims through ordinary preemption.” 

That issue will have to be decided in state court. The defendants are likely to appeal the matter to the U.S. Court of Appeals for the 3rd Circuit.

VEHICLE MILEAGE TAXES

In California, the legislature recently extended a road usage charge pilot program until Jan. 1, 2027.  The debate spotlighted the usual suspects in terms of the arguments made and the pitting of rural versus urban interests. Rural voters and their representatives complain that the mileage tax would penalize then because of their need to travel relatively large distances as part of their day-to-day life.

That argument ignores the reality that under the current scheme, electric car drivers get all of the benefit of infrastructure while only gas-powered drivers pay those costs through taxes. If your car gets 20 mpg and you take a 60-mile trip, you use three gallons of gas which generates an average of 27.9 cents per gallon. So that trip cost (in terms of a tax) 84 cents. A 1.4 cent per mile mileage tax would generate the same level of revenue for the same trip.

The logical conclusion is that vehicle mileage fee proponents have done a bad job of addressing this concern. Take Pennsylvania where initial estimates of what a vehicle mileage fee would be are around 8 cents per mile.  That simply is not going to fly with long distance drivers. It then generates opposition to the concept rather than the price. The actual amount of the fee is not the big hurdle but it gets in the way of acceptance of the concept. It also comes as very mixed signals come out of Washington.

On the one hand, are the climate deniers and fossil fuel defenders who oppose any change. There is however, some bipartisan support for vehicle mileage fees in Congress and the Transportation Secretary has spoken very favorably about the VMT concept. Nevertheless, the proposed $3.5 trillion infrastructure package originating in the House does not include a VMT.

MUNICIPAL UTILITY IN MICHIGAN

The State of Michigan has not seen the creation of a municipal electric utility since 1912. Reliability issues, especially in the recent past have led many to question the ability of investor owned, profit based electric utilities to properly invest in grid resilience and reliability. It is an issue which has gained heightened attention in the aftermath of winter storms in Texas and the current disaster in Louisiana. We expect that this trend will continue.

The latest municipality to deal with these issues is the City of Ann Arbor, Michigan. The City Council voted unanimously, to ask the city’s Energy Commission to make a recommendation by Dec. 31 on whether the city should undertake a feasibility study to explore alternatives to the current situation which relies on DTE Energy. The hope by proponents of municipal power is that the process could lead to recommendations for the formation of a municipal utility.

Such an action would have to be approved by the City’s voters. State approval is not needed. In the City, the Energy Commission is expected to make recommendations to the City and then a feasibility study would be undertaken. Supporters of a municipal utility hope that the process leads to a ballot initiative in November, 2022.

PURPLE LINE P3

Maryland’s Purple Line has been a poster child for what could go wrong with a public-private partnership. The project was supposed to be completed by the Spring of 2022 but litigation and other construction delays destroyed that timetable. Eventually, the private partner pulled out of the project threatening its viability and completion.

The State of Maryland stepped into the process designing new partnership agreements dealing with many of the issues which disrupted the project. The net result is that the State would have to accept more of the financial costs of delays associated with approvals and litigation. Now, the Maryland Transit Administration, said the agency and private team managing the project expect to have a new contractor selected in December and a new construction contract finalized by Feb. 17. 

The hope is that this process could allow substantial construction to resume in the Spring or early Summer of 2022. A new construction contract previously had been scheduled to be finalized this month but, construction teams bidding on the project asked for more time to submit proposals. The timing change because it would modify a $250 million Purple Line legal settlement approved in December.

MDOT has been able to fund some work over the past year, including moving utility lines and manufacturing light-rail vehicles and some of the system’s electrical components.

PRIVATE HIGH SPEED RAIL

We always notice that high speed rail developers highlight the “private” nature of their projects and the lack of reliance on grants for funding. The effort is designed to make the projects look like products of an all private approach to funding. In the end though, these projects all seem to rely on some form of cost subsidy from a government funding source.

The latest example is the Texas Central, a proposed high speed line between Dallas and Houston. Texas Central has publicly stated that construction is projected to begin at the end of 2021 or beginning of 2022. Now, it appears that the start of construction hinges on the inclusion of federal lending in the infrastructure bill currently being written in the House.

The cost of the project is estimated at $24 billion. Financing commitments from private lenders cover about half of that amount. The remainder would be financed by federal loans to the project. That funding would be cheaper than private funding. Texas Central estimates that the fare for the train would be $150 based on comparisons with current airfares.

Land acquisition remains a hurdle for the project. 40-percent of the land required for the train has already been secured.  The remainder is planned to be acquired after financing is in place. The only sure section of the project is to be an initial test phase. Once financing is secured, the first 50-miles of track will be built from Dallas to the south so engineers can conduct tests. 

ILLINOIS POWER

A 100% clean energy sector by 2050 is the goal of legislation in Illinois which was under consideration as we go to press. The plan would lead to the closure of private, for-profit coal powered plants that generate more than 25 megawatts of electric generating units by 2030, and it would close down municipally-owned coal-fired power plants and natural gas power plants by a deadline of 2045. The proposal includes $694 million in taxpayer funds for Exelon to prop up its carbon-free nuclear power plants in Byron, Dresden, and Braidwood. 

Governor Pritzker’s office said the current version of the Senate bill would still allow the municipally-owned Prairie State and Springfield City, Water, Light, and Power coal-fired plants to “continue polluting for 24 years with no restrictions.” The measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The pressure to protect the public power owners of the Prairie State Generating plant was intense. After all, municipal purchasers of the plant’s output are spread across three adjoining states to Illinois. The significance of the target date of 2045 for public power operators is that essentially all of the debt of the various agencies and municipalities which has been issued to finance Prairie State by that time. There is however, no guaranty that future legislatures will not enact legislation which could shorten that time frame. Should that be the case, some of the borrowers would find themselves paying for stranded assets. 

Prairie State emits 12.7 million tons of carbon dioxide per year, the most of any generating plant in the state.  The two IOU owned nuclear facilities are cited for their lack of carbon emissions and their role as employers of over 20,000.

CARBON FREE BUT…

The Illinois debate reflects many facets of the national energy debate. Obvious existing carbon free generation – nuclear and hydroelectric – are under pressure on other environmental grounds. While debates continue around the country – nuclear in Illinois and hydro in the Pacific northwest – the impact of drought on the debate complicates it.

The drought has significantly reduced the total amount of carbon free power for the West and Southwest. Hoover Dam’s normal capacity is 2,074 MW. Currently it is limited to 1,567 MW. The dam requires a power pool minimum elevation of 950 feet to produce power (with an expected capacity of 650 MW), Lake Mead’s elevation as of Aug. 31 was 1,067.96. feet. USBR’s California hydropower reservoir water levels are expected to remain above power pool minimums throughout the remainder of 2021, including at the 663-MW Shasta power plant at Shasta Dam and the 162-MW Folsom plant at Folsom Dam. Against this backdrop, there is growing support in the Northwest for removing dams in the name of species preservation.

The nuclear issue comes down to dollars and cents. New York and New Jersey subsidize their nuclear generators. A move to do so in Ohio has resulted in a significant criminal scandal. The energy industry has been at the center of scandal in Illinois. Nuclear generation has threatened municipal utilities in South Carolina and Florida. This has created a huge hurdle to overcome the carbon free nature of nuclear generation.

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

The reversal of the pandemic has reinstated pressure on many credits. Many areas are reinstating limits on activities. School districts are having to quarantine students who test positive. Indoor activities are increasingly seeing mask requirements and testing requirements. Reopening of cultural and entertainment facilities are being delayed. The specter of a second Christmas season is a real risk to local finances.

It is not realistic to assume another massive federal bailout. So, the risks of the pandemic, especially in those states most resistant to regulation, are arguably as big a threat to credit as they have been at any time since the onset of the pandemic. So, we look at local credits, hospital credits, and higher education credits as likely being at the front of the line in terms of exposure to pandemic risk.

GIG WORK BACK IN COURT

After we went to press last week, a California judge found that determined that Prop. 22 infringes on the power the state Constitution explicitly granted to the California Legislature to regulate compensation for workers’ injuries. This is the law which sought to treat workers like those for Uber and others as independent contractors. The initiative had several different goals. The judge in the case cited that factor in declaring the law unconstitutional. The ballot measure also violates a constitutional provision that requires laws and initiatives to be limited to a single subject.

The ruling is based on the idea that a ballot initiative cannot be amended after it is passed by voters, any unconstitutional provision renders it unenforceable. The decision effectively kicks off a period of what is likely to be a year while appeals work their way through to the California Supreme Court. If the TNCs are successful in getting an initiative on the Massachusetts ballot in 2022, the election and the court decision could occur at the same time.

PUERTO RICO WATER FLOATS

Once again, the long-term financial strength and credit strength reflected in water and sewer utilities has been validated. One successful part of Puerto Rico’s financial stabilization was completed when the Puerto Rico Aqueduct and Sewer Authority restructured its outstanding debt. The refinancing, which was priced on Tuesday, will generate approximately $570 million in debt service savings over the life of the refunding bonds. The Authority was able to execute transactions that included an exchange, a tender for cash, a current taxable refunding, and a forward delivery refunding.  

The all-in interest cost, including expenses associated with pricing and selling the new issue, was 3.24%. If that doesn’t validate the notion that it is a great time to be an issuer, I’m not sure what will. The pricing reflects an assumption that a net rather than a gross revenue pledge will secure debt service. All in all, it marks an important milestone in the process of Puerto Rico’s financial recovery. A successful refinancing in December 2020 and this current transaction have lowered Prasa’s annual debt service requirement by an average of $35 million per year and approximately $920 million during the life of the bonds. 

INTERSTATE REGULATION

The Commonwealth of Virginia State Corporation Commission approved a request for a rate increase for Appalachian Power. So far so good. What did not get approved was the full request made by the company. That request was designed to generate revenues sufficient to fund environmental improvements to two coal-fired power plants that generate the bulk of the utility’s electricity. The SCC’s ruling, while not final, could force the closure of the Amos and Mountaineer plants — both in West Virginia — by 2028, Appalachian has said.

This puts the West Virginia plants in jeopardy even though the Mountaineer State’s regulators take a more sympathetic view. Once completed, the improvements will keep the plants in operation until 2028. The denied portion of the rate request would have funded additional surface water protections, which would have extended the plants’ lifespan by another 12 years. It’s not like there is a strong forward market for coal generated electricity past then.

The Virginia Clean Economy Act passed in 2020 requires Appalachian to use all carbon-free electricity by 2050 for its approximately 524,000 customers in Virginia. So, despite the location of the plants in another state, the regulatory requirements of the service area apply.  It is an example of a number of similar situations where operations of generating facilities in one state can be impacted by regulatory actions in another.

The municipal angle is that there are several municipal agencies who either own or participate in fossil fueled generation with investor owned partners from other states. Their state regulatory schemes will apply and could force changes in ownership of out of state generating assets. The Pacific Northwest is the likeliest region to see these phenomena as strong regulation in Washington State is threatening the ability of the state’s utilities to hold fossil fueled assets.

NYC REBOUND

With so much attention focused on the course of the pandemic as the Delta variant expands, it is easy to overlook some positive signs for NYC. There remains significant concern about the outlook in an environment where limits on rental payments and evictions expire.  Yet there are signs that the residential market is returning to form. July is typically the highest turnover month for apartments in the city.

While many tenants are in place as the result of rent and eviction imposed for the pandemic, the demand for new apartments has skyrocketed. Along with that boost to demand has come a major escalation in rents. In light of the recent experience, it is not surprising that landlords are seeking every dime they can. Not only are sticker prices up but the days of discounting appear to be over.

Nonetheless, the recent positive turn in the residential market does not necessarily bode well for the commercial market. It is still unclear what the ultimate breakdown will be between in office vs. remote work. The full approval of vaccines may finally alter that dynamic. While we believe that some greater proportion of workers will be permanently remote than was the case before the pandemic, we think that ultimately the realities of corporate management and culture will lead to most office workers returning to that setting.

That will be the long-term key for those businesses reliant on essentially daytime traffic associated with work versus the kinds of establishment which rely on tourism and/or entertainment.

EVICTION MORATORIUM

“If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.” And with that the federal moratorium on evictions currently authorized through executive order comes to an end. Now we move into the next phase of recovery from the pandemic, a return to more “normal” conditions. The decision from the Supreme Court holding that the C.D.C. had exceeded its authority will now either force Congress to enact legislation or end the moratorium.

The decision comes as there is much focus on the poor distribution of funds authorized to provide aid to renters directly. In turn, the pressure on landlords continues as owners have not been allowed to avoid the costs of operating buildings. Localities still need to collect property taxes. Only about $5.1 billion of $46.5 billion in aid authorized had been disbursed by the end of July, according to the Treasury Department.

Now that the moratorium has been declared illegal, the focus turns to those states where tenant protections are weaker and eviction proceedings more rapidly concluded. Four states – South Carolina, Tennessee, Georgia and Ohio – have the highest levels of rent backlog and will be at the leading edge of the issue. The long-term answer is legislation but we see that as unlikely.

METROPOLITAN OPERA

This leading cultural institution and contributor to the NYC economy has been on a pronounced downward trajectory for the last ten years. Changes in management led to changes in the Opera’s programming with an emphasis on “newer” (younger) customers. As the transition unfolded over that time period, attendance and demand continued to be pressured as the new offerings did not generate enough new interest to offset the negative impact of the programming changes.

Since then, the Opera and its unions have engaged in pitched battles over the effort to contain costs in the face of disappointing attendance. That continued as the Opera faced the realities of the pandemic including giving up a bit over a season and a half of cancelled performances. This culminated in the decline of the Opera’s credit ratings to Ba2.

Looming over the Opera regardless of the course of the pandemic was its problematic relationship between it and the employees, especially musicians. The ongoing labor standoff threatened the reopening of the Opera even as the pandemic waned. Now, an agreement with the most prominent union, that representing musicians has been reached. This should enable the Opera to conclude remaining more minor disputes and allow performances to occur.

That is good for the City and its tourism and entertainment industries. They lie at the heart of any city recovery. At the same time, the Met’s settlement with its workers reflects its long-term operating realities. The pay deal reached reduces the number of permanent musicians and it requires the remaining musicians to take a 3.75% pay cut. There are provisions linking pay levels to attendance levels and resurgent revenues. Nonetheless, the immediate impact is negative.

NPPD STUCK IN THE CLIMATE MIDDLE

Nebraska Public Power District has long been a reliable electric utility credit. Its construction programs were generally successful and it managed to be a stable credit even through construction of nuclear generation. It is not a criticism to view it as a sleepy credit. Now, the District finds itself in a controversial position despite its history.

As the owner of a nuclear facility and a large coal fired generating facility, NPPD now finds itself in the political crosshairs. The climate debate has now extended its reach into the Cornhusker State. On one side are environmental and climate activists who oppose fossil fueled and nuclear fueled generation. They would like to move the District away from both of those sources and develop new renewable generation. They also wish to prevent large scale transmission projects.

On the other side is Governor Pete Ricketts. He advocates the use and expansion of nuclear power and investment in carbon capture in order to save coal plants in general and the District’s huge Gentleman goal fired generator. A recent opinion piece from the Governor sums up his position. He buys into the notion that wind and solar are unreliable and that only fossil and nuclear fueled generation is the answer. To that end, the District has been encouraged to partner with a private carbon capture developer to employ carbon capture at the Gentleman plant.

The real game is revealed farther on. “Nebraska is the second largest ethanol-producing state in the nation. The future of ethanol is tied to the future of oil production and combustion engines. “This is the kind of ideological approach that puts tried and true credits in the middle of an argument over which it has no control nut for which it may ultimately incur a financial obligation. So far, efforts to involve NPPD in this sort of project has not put it at significant financial risk.

The concern is that the devotion of effort and resources in an effort to preserve 20^th century legacy assets could put NPPD at a disadvantage if the plants can’t be operated. Carbon capture just has not been able to work at scale and certainly not at the scale required to make it an economically viable technology.  The effort to enlist NPPD in the carbon capture effort has been going now for eight years.  It would be disappointing to see a conservative run financially sound credit harmed by ideological considerations.

THE WATER WARS GET LOCAL

So far, we haven’t seen a municipal system lose its water supply directly due to competition for groundwater sources from agriculture interests. Yet we are seeing on a smaller scale what might happen as drought conditions drag on in the American West. As the drought continues to impact surface water supplies, agricultural interests are often the first target of water use restrictions and supply cutbacks. In those cases, the use of groundwater supplies is the preferred alternative even if it is costly.

Now the impact of the long-term drought becomes clear. In addition to the obvious impact of lower snowpack, runoff, and river and lake/reservoir levels, the lack of water from the atmosphere prevents underground aquifers from having their supplies recharged. Ultimately, those sources will become far less reliable. In the short run, we will see residential and agricultural issues clash as they are currently on a smaller scale.

We came across a story about residents near Klamath Falls, OR. They are finding that local aquifers which supplied water to their area have been being depleted at rates well above historical levels. This is occurring because of significantly higher use of underground water by agricultural interests in the face of reduced rain and surface supplies. The greater use of the water has put residential wells at a disadvantage. This results in individual residential wells drying up leading to reliance on outside supplies.

This takes on more relevance as population trends show people moving to areas without sustainable long-term water supplies.

WIND PRODUCER HEADWINDS

One of the major obstacles to the development of offshore wind turbines has been concerns expressed by fishermen about the potential disruption of fishing grounds. It has led to changes in Maine’s offshore permitting process to placate lobstermen. Now, concerns about aquatic wildlife are being used in an attempt to delay the Vineyard Wind project which will be located off the shores of Connecticut, Rhode Island, and Massachusetts. The question is do the plaintiffs in the latest case really care about the whales or is the issue people’s view of the ocean.

Opposition to wind turbine locations have long characterized the islands off the New England coast. Opponents of early projects were pretty straightforward in framing their opposition as one of aesthetics. The concern about ocean views drove much opposition to proposed plants off Martha’s Vineyard. As the demand for and acceptance of renewables accelerated, there was less support for the aesthetic concerns.  Now, project opponents are trying a different tack – saving the whales.

ACK Residents Against Turbines is a group of Nantucket residents who oppose the siting of wind turbines some 14 miles off the coast. The basis for the suit: a belief that the proposed turbines will negatively impact whale breeding grounds. A closer look at the plans makes a good case that the environmental issues are just a smokescreen for the latest form of NIMBYism – not in my view. This project has been through its environmental review process and received federal approval to begin development.

The group of plaintiffs had participated in litigation against earlier projects. That experience has emboldened opponents of the turbines.  So far neither side has been able to amass enough objective information to persuade the other. In the absence of such data, it makes it look like the aesthetic concerns are what is driving the litigation.

Those concerns are cited by opponents of wind and solar power. The panels might cause too much glare, they might take away my view (usually of someone else’s farm), they might do any number of things. The irony is that much of that opposition comes from people who claim to be environmentalists and/or supporters of renewables. In the end, the arguments come down to NIMBY.

ZONING UP FOR A VOTE

Zoning rules, specifically those rules governing the development of housing, are at the center of the debates over economic justice. Numerous attempts have been made to legislate answers the issue of housing supply and affordability. One issue which can be addressed legislatively is zoning policy. Zoning is under scrutiny as a tool of economic injustice, Regulating lot sizes and individual development limits has long been understood as way to influence development. In particular, single- family zoning has been under the most focus.

Affordable housing advocates have long sought to permit lot owners to be able to create multiple residential housing units on traditionally single-family land. Now, legislation is moving forward in the California Legislature which could permit two-unit buildings on currently single-family lots. That could potentially create a net 3 new units on parcels which only had one. The move comes after previous efforts to encourage development of multifamily housing near transit facilities (high rises around BART stations, e.g.) failed over concerns about potential gentrification and displacement of current residents.

Rhetoric on both sides has been predictably hyperbolic. There is not a lot of objective research to assuage all possible concerns.

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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CENSUS

The long awaited 2020 Census has begun to yield information on state and local basis. It yielded some surprises at the same time it confirmed some trends which were pretty clearly emerging.

Phoenix’s population grew from 1.4 million people in 2010 to 1.6 million in 2020, a rate of 11.2 percent, according to the Census Bureau. That made it the fifth largest city in the country leapfrogging Philadelphia. Overall, the largest county in the United States in 2020 remains Los Angeles County with over 10 million people. The largest city (incorporated place) in the United States in 2020 remains New York with 8.8 million people. 312 of the 384 U.S. metro areas gained population between 2010 and 2020. The fastest-growing U.S. metro area between the 2010 Census and 2020 Census was The Villages, FL, which grew 39% from about 93,000 people to about 130,000 people.

72 U.S. metro areas lost population from the 2010 Census to the 2020 Census. The U.S. metro areas with the largest percentage declines were Pine Bluff, AR, and Danville, IL, at -12.5 percent and -9.1 percent, respectively. Five counties (metro areas in parentheses) gained at least 300,000 people during that period: Harris County, Texas (Houston-The Woodlands-Sugar Land); Maricopa County, Arizona (Phoenix-Mesa-Chandler); King County, Washington (Seattle-Tacoma-Bellevue); Clark County, Nevada (Las Vegas-Henderson-Paradise); and Tarrant County, Texas (Dallas-Fort Worth-Arlington).

The 10 largest metro areas all grew between 2010 and 2020, led by two in Texas: Dallas-Fort Worth-Arlington and Houston-The Woodlands-Sugar Land each grew by approximately 20%. Dallas-Fort Worth and Houston were also two of the nation’s three metro areas to gain at least 1.2 million people over the decade. New York-Newark-Jersey City, NY-NJ-PA was the third.

Five metro areas crossed the 1million person threshold between 2010 and 2020: Grand Rapids-Kentwood, MI; Tucson, AZ; Urban Honolulu, HI; Tulsa, OK; and Fresno, CA. Among all U.S. metro areas, The Villages in Florida grew the fastest, followed by Austin-Round Rock-Georgetown, TX; St. George, UT; Greeley, CO; and Myrtle Beach-Conway-North Myrtle Beach, SC-NC.

At the state level, Texas experienced the largest numeric increase between 2010 and 2020, followed by Florida, California, Georgia and Washington. Utah was the fastest-growing state, increasing by 18.4% between 2010 and 2020, followed by Idaho, Texas, North Dakota and Nevada, which each grew by 15.0% or more.  California was the most populous state in 2020 (39.5 million), followed by Texas (29.1 million), Florida (21.5 million), New York (20.2 million) and Pennsylvania (13.0 million). The populations of three states — West Virginia, Mississippi and Illinois — and Puerto Rico declined over the decade.

One city which likely surprised people was the weakest big city credit, Chicago. Overall, the city’s population grew nearly 2% from 2010 to 2020 — from 2.6 million residents to 2.7 million, according to data released from the 2020 census. That’s a change from the population decline the city had experienced from 2000 to 2010, when the city lost nearly 7% of its population. It seems that the demise of the City of Chicago was not such a sure thing.

MANAGING THE TRANSITION TO CLEAN ENERGY

A bill has been introduced in the Wisconsin legislature which is intended to assist municipalities that have experienced a power plant closure by lengthening the period over which the payments they receive from the state for hosting those facilities incrementally decrease. Utility aid payments are paid by power companies to the state in lieu of property taxes. In Wisconsin, power plant sites are not subject to local property taxes. The state then passes funding from those payments along to municipalities that have power plants. After a plant is decommissioned, the state phases out the payments by 20% per year over five years.

The bill would lengthen the period over which payments phase out to 10 years. The payments decrease by 10% annually. The new timelines only would apply to power plants that are decommissioned after Dec. 31, 2020.  The idea is to facilitate the transition to other uses for the sites of decommissioned generation plants. This is also designed to offset the usually seen reductions in revenues from property taxes versus the revenues received through utility aid payments.

MANAGING THE RESURGENCE

Cultural facilities which saw their operations heavily impacted were among the first to try to reopen under significant limitations on attendance. In cities like New York, cultural facilities are at the center of tourism development activities. In New York, tourism has become the fulcrum underpinning the City economy with over 60 million visitors pre-pandemic. The resurgence of the pandemic especially with the spread of the Delta variant has put that recovery at risk.

To deal with the situation, the 33 museums and arts groups operating in city-owned buildings or on city-owned land — known as members of the Cultural Institutions Group have announced plans to require visitors to its museums and other cultural institutions to be vaccinated. The plans will require that visitors and employees at the city’s museums, concert halls, aquariums and zoos be vaccinated. Children younger than age 12, who are not eligible to be vaccinated, will have to be accompanied by a vaccinated person and will be encouraged to wear masks.

Broadway is beginning to open and/or reopen at least some its stages with a full reopening scheduled for September. It follows an earlier plan announced by the City that vaccinations would be required for indoor concerts — as well as for gyms and restaurants. New York was the first U.S. city to issue such a mandate.

ANCHORAGE AIRPORT

The airport serving the City of Anchorage has benefitted from its unique location in terms of both geography and world affairs. After it opened in 1951, it served as a refueling stop for airlines serving the Asia- North America market. For many airlines – cargo and commercial – flying by way of Anchorage allowed them to offset the limits of Soviet and Chinese air space restrictions. By the time, those obstacles were removed the role of the airport as a freight transfer facility had been clearly established.

That is where the politics comes in. Ted Stevens name is on the airport for a reason. Senator Stevens secured unique trade exemptions for Anchorage, Fairbanks and the Port of Anchorage in 2004 that allows cargo landed in the state on its way to and from the Lower 48 to be between not only planes but to different carriers at that time without being subject to federal regulations. That enabled the airport to become a significant transshipment hub. The revenue from those operations allowed the airport to transition from a fuel-based stopover to a freight hub.

With ocean ports in the lower 48 straining to handle the demand from a recovering economy and costs for container shipments skyrocketing, air cargo becomes a more cost competitive method. The pandemic also put the Anchorage Airport in good position. Data from the Airports Council International showed that total tonnage among the world’s top 10 busiest cargo airports increased 3 percent in 2020.

Landings at Anchorage were some 15 percent higher on year-over-year basis to over 3.1 million tons of cargo. This allowed Anchorage to surpass UPS hub Louisville, Ky., which saw a 4.6 percent growth in cargo business last year, for the fourth spot behind the Shanghai, Hong Kong and Memphis, Tenn. (Fed Ex), airports.

DROUGHT LIMITS ANNOUNCED

The Colorado River originates in the upper portions of the Colorado River Basin in the Rocky Mountains. The Upper Basin experienced an exceptionally dry spring in 2021, with April to July runoff into Lake Powell totaling just 26% of average despite near-average snowfall last winter. The projected water year 2021 unregulated inflow into Lake Powell—the amount that would have flowed to Lake Mead without the benefit of storage behind Glen Canyon Dam—is approximately 32% of average. Total Colorado River system storage today is 40% of capacity, down from 49% at this time last year.

This led the U.S. Bureau of Reclamation to announce that downstream releases from Glen Canyon Dam and Hoover Dam will be reduced in 2022 due to declining reservoir levels. In the Lower Basin the reductions represent the first “shortage” declaration in the history of the Colorado River system—demonstrating the severity of the drought and low reservoir conditions. The required shortage reductions and water savings contributions under the 2007 Colorado River Interim Guidelines for Lower Basin Shortages and Coordinated Operations of Lake Powell and Lake Mead, 2019 Lower Basin Drought Contingency Plan and Minute 323 to the 1944 Water Treaty with Mexico are: Arizona:  512,000 acre-feet, which is approximately 18% of the state’s annual apportionment; Nevada:  21,000 acre-feet, which is 7% of the state’s annual apportionment and Mexico:  80,000 acre-feet, which is approximately 5% of the country’s annual allotment.

The likely initial loser in this scenario is the agricultural sector of Arizona.

MORE UNCERTAINTY FOR MEAG

An agreement negotiated by the state Public Service Commission staff and Georgia Power proposes that regulators will continue reviewing semi-annual progress reports on the Votgle nuclear project moving forward. However, the commission will now wait until the final two reactors are up and running before deciding if Georgia Power’s expenses are reasonable. The stipulation order replaces a cost review mechanism established in 2017. The change reflects the continuing trend of cost increases which have continually plagued the project.

The decision was also accompanied the approval of $670 million in expenses at Plant Vogtle incurred during the final half of 2020. The moves by the Georgia state regulators clearly reinforce the continuing uncertainty regarding final costs of the expansion. So long as this is the case, we view the uncertainty as a continuing drag on the credit of MEAG and the Oglethorpe Electric Cooperative.

MAINE PUBLIC POWER

This year’s legislative session in Maine saw the legislative approval of and subsequent veto by the Governor of bills which would have enabled voters to decide if the wanted a pubic power agency to one the operating assets of Central Maine Power. Now in the aftermath of those actions, supporters of public power in the Pine Tree State have submitted applications for two initiatives to be placed on the 2022 ballot. The strategy of two proposals is undertaken with the goal of getting at least one question to voters by next fall on whether they would like to buy out the infrastructure of the two investor-owned entities.

Power to create the consumer-owned Pine Tree Power Co. has become a more serious issue especially as it pertains to CMP. The service issues which have plagued CMP’s customer base since it became owned by a subsidiary (Avangrid) ultimately owned by a Spanish company. Those service issues are currently the subject of robust debate in New Mexico where the proposed purchase of Public Service of New Mexico by Avengrid is under regulatory review. (Full disclosure – I am an Avangrid customer through another subsidiary as well) and none of the complaints are surprising. Proponents of the Maine initiative must collect over 63,000 signatures by January to get an item on the ballot.

CARBON CAPTURE STILL IN THE STATION

One hope of fossil fuel generation operators is that carbon capture technology can be developed which could allow older coal fired generation to operate. It has been proposed in connection with coal plants in North Dakota. It is at the center of the debate over what to do with one of the largest coal fired facilities, the San Juan plant in New Mexico. The owners of that plant were not able to attract interest from private investors and failed to fund even their share of a private study for the billion dollar proposal. 

Enchant Energy is a New Mexico-registered company that is acquiring the San Juan Generating Station near Farmington, New Mexico.  Enchant plans to retrofit SJGS with state-of-the-art carbon capture equipment that, when completed in 2023-2024, will transform the facility into the lowest emissions fossil fuel plant in the Western United States. The Department of Energy revised a cost sharing agreement with Enchant in January 2021 to increase the share paid by taxpayers for the study. The agreement was made during the final week of the Trump administration.

Enchant Energy is now also seeking a $906 million loan guarantee from the Department of Energy for the carbon capture proposal, lobbying Congress for expanded 45Q tax credits and other subsidies, and urging the state of New Mexico to accept long-term liability for sequestered carbon dioxide.  quarterly reports submitted by Enchant Energy to the Department of Energy shows that Enchant Energy has not lived up to funding commitments under previous agreements with the DOE.

Here’s the concern. The head of the Department of Energy’s Office of Fossil Energy and Carbon Management has stated “The office has invested a great deal of time and resources in CCS on coal. And it’s clear that carbon capture may not make economic sense on the remaining existing fleet of coal fired power plants in the United States, plants that are mostly based on subcritical efficiency boilers and nearing retirement over the next decade.”

The potential for liability issues to derail the project are real. As Enchant itself says, “No private entity could bear the burden. There’s a concern that the long-term liability is just not supportable by the private insurance industry.” All of the lobbying efforts with the state and federal governments seems to center on the currently uneconomical nature of the technology. Notwithstanding these outstanding concerns, the  Carbon Capture Improvement Act has passed the Senate as part of the Infrastructure Investment & Jobs Act. The Act makes it easier for power plants and industrial facilities to finance the purchase and installation of carbon capture, utilization, and storage equipment, as well as direct air capture (DAC) projects through the use of private activity bonds (PABs).

OKLAHOMA POWER LEGISLATION

The Oklahoma Development Finance Authority approved a series of steps to begin the process of issuing debt to help to ameliorate the financial impact of the February, 2021 winter storm that caused massive spikes in energy prices. This follows the enactment of a couple of pieces of legislation in the Spring and early Summer.  In April, the Oklahoma Legislature passed SB 1049 to create a program to securitize debt owed to unregulated utilities such as, potentially, the Grand River Dam Authority, municipal power authorities and electric co-operatives. Similar legislation was enacted for the customers of the state’s investor-owned utilities.

The plan centers around the issuance of up to $4 billion of securitized debt. It would be paid for from separate standalone charges on customer utility bills. Such securitization techniques have been undertaken for municipal issuers like the Long Island Power Authority. The plan is straightforward. The Oklahoma Development Finance Authority will issue bonds. The ODFA will pay proceeds to the utility companies and other impacted entities. Those impacted entities will pay off their bridge loans they took out to cover their debts to wholesale gas producers and sellers. The impacted entities will pay back ODFA over time with money obtained from higher charges to ratepayers, but the charges will be spread out over a longer period of time and at a lower rate.

One of the entities which could potentially benefit is the Grand River Dam Authority. GRDA is a well-established issuer of municipal bonds. Some opposed giving the financing option to GRDA because of its perceived credit strength. It would not make sense to extend this support to investor-owned utilities without making it available to municipal systems.

AMERICAN DREAM

For some, the recent announcement of a debt service reserve fund draw to cover debt service requirements on bonds issued to finance the American Dream Mall in East Rutherford, N.J. was inevitable. Given the long and winding road the project took to open, the last thing it needed was a restriction inducing pandemic. But that has indeed been the case and operations at the mall have begun behind schedule and without the expected customer market as the pandemic unfolded. In this case, the bonds in question are taxable bonds backed by a portion of sales tax revenues. The shortfalls resulting in reduced economic activity have reduced the funds available for debt service.

The result was an unscheduled draw on the debt service reserve in the amount of $9,285,625.00 was made in order to pay the debt service due on the Bonds for the period of February 1, 2021 to July 31st, 2021 which was payable on August 2nd, 2021. After the draw, $9,286,082.87 remains in the Debt Service Reserve Fund established under the Indenture.  The Bonds mature in 2024. It is not clear what the prospects for the mall are given the increasing likelihood of restrictions on indoor gatherings and masking and vaccination requirements.

ENERGY DEBATE COMES INTO FOCUS

We came across news about a rural electric cooperative in Virginia that is seeking to increase charges for “fixed costs”. As is implied, this portion of the bill contains charges for certain costs which are not dependent upon usage. The effort and the regulatory process are helping to shine a light on the kinds of tactics being employed by legacy energy providers. Recently, rural electric cooperatives have found themselves taking leading positions in the obstruction of the implementation of clean energy.

Shenandoah Valley Electric Cooperative serves 96,000 customers along the I-81 corridor in northwestern Va. It is seeking a 5% increase in the fixed charge of its customers bills. The Cooperative says it needs to fund system upgrades with the increase. Customers however, take a different view. They note that when a utility can shift more of its cost base for ratemaking and regulation purposes, that the value of alternative energy sources in terms of customer bills is reduced. This is especially true for potential solar installers.

Customer advocates estimate that one third of a customer bill would not be related to consumption. Ratemaking like this is seen as regressive in that the fixed portion represents a bigger claim on low in come customer resources. Research shows that poorer folks use less electricity. A customer advocacy group estimates that 17% of the co-op’s households — about 14,800 — would qualify as low-income with an average income of $16,206 per year. 

It will take different forms but the efforts by cooperatives to stymie the growth of alternative energy sources are an emerging factor in the space. As we’ve been following, inflated “exit fees” for cooperative participants are being used to fight efforts to reduce coal generation. These are the sort of “on the ground” tactics which movement advocates overlook. These conflicts over rates will have real consequences while the Green New Deal debate will likely drone on.

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

PANDEMIC THREATS RETURN

It was always an uncertain process with the potential for “many a slip, twixt cup and lip” as the economy tried to rebound from the limits of the pandemic. Nonetheless, the recent surge of the “Delta variant” has put a lot of the best laid plans of FY 2021 budget makers at all levels of government in jeopardy. Now we may see ourselves in a politically charged environment which will influence limits on economic activities. A push to keep as many businesses open as possible is likely.

The pressures on school districts will be enormous as we believe that they are the foundation of any permanent recovery. There are still some 7 million fewer people employed than prior then prior to the pandemic. Many were in jobs requiring physical presence. It’s why the hospitality industry is having such a hard time hiring. Childcare needs are likely as much a factor as extended jobless benefits when deciding whether to return to work. A safe open school environment will be a key need to be addressed going forward.

The corporate world will also have a role in dealing with the pandemic. While much emphasis has been placed on businesses requiring some or full in office presence, the resurgence of the virus and the “Delta variant” is already leading some significant employers to extend or make permanent remote work structures. The resurgence also imperils operations at higher education institutions and health facilities. The return to campus will be important for revenues at the schools. The healthcare system is again overwhelmed by new cases and that will likely exacerbate the negative impact on both healthcare revenues and patient health that have stemmed from the pandemic.

Unfortunately, the ultimate responsibility for responding to the pandemic is now primarily in the hands of the private sector and local government. That does create risks especially in states like Florida and Texas as their governors threaten pay and school funding if masks are mandated by local elected school districts. In many cases, local governments are requiring vaccinations or testing. The need to lead by example so that schools can reopen and economies fully reopen. It’s a bizarre way to deal with the multiple issues the pandemic raises.

GIG WORK ON THE BALLOT AGAIN?

The transportation network companies (TNC) are trying to build in their victory in California and have moved to place an item on the Massachusetts ballot affirming the right to classify their drivers as independent contractors rather than employees. So far, the industry has been successful in the U.S. (at least in CA) but has lost its argument in Britain. Last year, Massachusetts sued Uber and Lyft, claiming they misclassified drivers as independent contractors and that litigation is continues.

The Massachusetts Coalition for Independent Work, proposes exempting gig workers from being classified as employees but offering them some limited benefits, including minimum pay of $18 per hour spent transporting a rider or delivering food. If the TNC are successful, the ballot item could appear on the November, 2022 ballot.

EV REALITIES

Only 9.7% of people in the 50 largest U.S. cities have a public charger within a five-minute walk of home. Remove the two top performers — New York City and LA — and the figure drops to 6.2%. There is $7.5 billion in funding for them in the bipartisan infrastructure bill. In Los Angeles, more than 24% of the population has close-by access to more than 3,100 charging stations, which is twice as many as any other city. In New York City, 18% of the population has such access — although most chargers are on the crowded island of Manhattan, and many come with an access fee in commercial parking garages.

So far, the deployment of charging infrastructure has been reflected in local demographic data. The better off an area is, the more likely there will be demand for charging infrastructure. So, the private sector has reacted just as one would expect. They follow the money. Given the price of electric vehicles, the fact that the EV phenomenon is pretty much a rich, upper middle-class thing is not a shock.

What it does do is to make a case for government to provide such infrastructure. In water, much the same way as mass transit expansion fostered development in the 20^th century, electric charging infrastructure expansion could support more demand for electric vehicles.  This is especially true in rural and less populated areas.

COLORADO AND CLIMATE

Two opposite but related natural phenomena are occurring at the same time in Colorado which highlight the complexities of management of climate change. Last week, a mudslide closed I-70 the maim interstate highway link through Colorado. The State is facing significant costs in clearing the road, estimating damage, and funding and conducting repairs. I-70 is known for its unique design which minimized its footprint through Glenwood Dam and it is that area that the damage occurred. The State has petitioned the federal government for some $116 million to fund the repairs.

At the same time, the impact of the log-term drought plaguing the West is creating an opposite set of issues. Some 32 entities in Colorado are facing limits on the availability of electric power generated by hydroelectric generators at the Reidu Reservoir some 20 miles from Aspen. Water levels at Reidu Reservoir could fall so low this winter that the city of Aspen could have difficulty making hydroelectric power and those who own water in the reservoir could see shortages. The U.S. Bureau of Reclamation operates the reservoir as a storage and flood control mechanism. It also generates electricity for purchase by among others, municipal electric systems.

Those systems buy the power to achieve green power goals. Now the U.S. BOR is warning that officials estimated the reservoir will fall to around 55,000 acre-feet this winter. A year ago, the reservoir stood at 96,000-acre feet. So, within some 30 miles of each other we have too much moisture to hold the hillside over an interstate but steadily declining water and power availability. And in that relatively small area, the entire climate issue can be neatly summarized.

NEW YORK AND CALIFORNIA SITTING IN LIMBO

A year ago, no one would have predicted that New York and California could both be headed by new governors by this Fall. It is a certainty in New York where Governor Cuomo has resigned. It is a possibility in California where Governor Newsome retains a slim majority in recent polls in his effort to defeat a potential recall vote next month. While the circumstances leading to this predicament could not be more different, the results of changes in management which would result present similar challenges to each of the potential replacements.

Assuming that the recall in California is successful, both New York and California would be being run by short-term replacements. Both would be facing scheduled elections for their new offices in November, 2022. That will lead to even more highly charged political atmospheres in Sacramento and Albany at times when both states will be remerging from the limits and impacts of the pandemic and its resurgence. A political vacuum would exist which would limit the ability of either governor to respond in real time as effectively as might be the case.

In New York, the fraught relationship between the Mayor of NYC and the state government will be complicated by the first term status of the new mayor and the temporary status of the Governor. With the City and the State’s recovery at stake and massive decisions about housing and transit funding to be taken, it is a bad time for the jockeying and posing which can be expected as the result of this unanticipated opening.

California already went through this once when Gray Davis was recalled in 2003 and replaced by Arnold Schwarzenegger. Schwarzenegger was able to be elected to a full term and governed less ideologically than was expected. Schwarzenegger signed the Global Warming Solutions Act of 2006, creating the nation’s first cap on greenhouse gas emissions. In the end, he wasn’t able to substantially address the state’s fiscal issues especially its pension underfunding situation.

We do not believe that either of these potential changes present major credit issues for the states. The New York budget process will remain “three people in a room” but as was the case this year, one of those people will be politically weaker than the others. Long term, the issue is who will be Governor as of January 1, 2023. This will make the 2022 legislative election, the real place to watch. If veto proof majorities are maintained in the Legislature, the next Governor will have a hard time getting their priorities through if they do not match the goals of the legislative leaders.

In terms of municipal bond credits backed by revenues, the governorship of New York carries with it a raft of appointments to major issuers. Primary among them are the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. Many forget that the MTA is a state not local entity. The Governor’s role in appointing board members puts the Governor at the center of NYC and metropolitan NY transit policy decisions. The governors of NY and NJ are unusually positioned to address the region’s transit needs.

In terms of specific projects, both Newsome and Cuomo were driving forces behind major transit projects which may or may not succeed. The California High Speed Rail project has been a huge disappointment and is viewed by many as an endless financial drain. It is used as a cudgel against Governor Newsome. The New York legacy is a bit different. As he leaves office, a major rail link to LaGuardia Airport remains in limbo and is less likely to happen without Governor Cuomo. At the same time, several successful bridge and airport public/private partnership projects must be credited to Governor Cuomo.

MISSOURI SPITTING INTO THE WIND

A Missouri county court justice issued an order that said that officials must implement the voter-approved Medicaid expansion immediately in Missouri. A decision by that same judge was overturned recently by the Missouri Supreme Court. The new decision was in response to that decision which ordered him to “issue a judgment for the plaintiffs.” 

An estimated 275,000 people in Missouri are now eligible to gain Medicaid coverage. The state argued it needed time to develop a plan to accept newly qualified people in the Medicaid program and asked for a two-month delay in implementation of the expansion. It was noted that the Governor had initially submitted a plan for expansion to the federal government before withdrawing the paperwork in May.     

The constitutional amendment makes adults between the ages of 19 and 65 eligible for Medicaid if they make 133 percent of the federal poverty level — or about $35,200 for a family of four. It also prohibits the state from enacting work requirements for Medicaid recipients. And the federal government will cover 90% of the additional costs of expansion in its first year.

RAISE A GLASS OF WATER FOR NEWARK

As Congress considers the infrastructure bill, one example of what it seeks to fund is the replacement of lead water pipes. Lead water pipes are one of the leading sources of lead poisoning and elevated levels of lead in children. The negative impacts of lead exposure in childhood have been well known. In the 1960’s, the primary source of exposure was lead paint in residences. Now, testing for lead exposure especially through lead paint is an important part of the home purchase process. This reflects the enactment of legislation throughout the country limiting the use of lead paint.

As these efforts slowly paid off, it became clear that there was still risk from lead exposure especially in older homes. This stemmed from the use of lead pipes to connect individual homes and businesses. Many of those pipes are located in areas of older homes which tend to be owned by lower income residents. While the need for replacement was clear, the funding for replacement was not. Simply stated, most residents who were at risk from potential lead exposure from pipes could not afford the cost of replacement.

In 2016, elevated lead levels were found in the water supplied to several public schools in Newark. At the end of 2017, Newark, N.J. was informed by the federal government that Newark was in violation of the federal action level for lead in drinking water for a second consecutive water monitoring period. The City was required to undertake the replacement of thousands of pipes connected to water mains. According to the EPA, the average cost of replacing just one line is $4,700.

The problem was coming up with the funding for the cash strapped city and its water customers. Here is where municipal bonds played their role. To pay for the project, an agreement was made with the state that Essex County, of which Newark is the county seat, would issue $120 million in bonds were issued through the county’s improvement authority. That plan also came with legislation that allowed the lead lines to be replaced without the consent of the property owners. That was an important factor in a city where 74 percent of the population are renters. 

Now two years after the plan was created and implementation began, the replacement of nearly all its 23,000 lead service lines, which had tainted the drinking water, and replaced with copper pipes.  The City may have been dragged kicking and screaming to undertake this project but once a viable funding and financing source was identified, it moved aggressively.

PENSION RETURNS MIRROR STOCK MARKET

The strong performance of equities over the last year especially in 2021 clearly benefitted state and local pension funds. After single digit returns in FY 2020, the turnaround in performance was remarkable. States like New York and Minnesota had returns in excess of 30%. Double digit returns were the rule rather than the exception.

The positive returns will show up in improved unfunded liability ratios. This should take have some positive impacts on annually required contribution levels. The majority of funds have return assumptions of between 6% and 8% so these results are well above those thresholds. Now the issue becomes one of will on the part of legislators. Maintaining current funding levels in the face of these extraordinary returns will be an important credit issue going forward.

HIGH SPEED RAIL

The Brightline high speed rail service will resume running trains in November after suspending service in March 2020 because of the coronavirus pandemic. Schedules and fares would be similar to those before the suspension. Riders will have to wear masks onboard and the company will also require Covid vaccines for its employees. 

In Illinois, Gov. J.B. Pritzker recently signed a bill authorizing the formation of the Illinois High-Speed Railway Commission. The commission is tasked with conducting a ridership study and issuing its findings and recommendations concerning a governance structure, the frequency of service and implementation of the high-speed rail plan. The goal is the development of a system which would start at O’Hare International Airport in Chicago and offer a 127-minute ride to reach downtown St. Louis. Trains would stop in Champaign-Urbana in less than an hour and in Springfield in 78 minutes. The line would be integrated with existing Amtrak, Metra and intercity bus services, and connect the Illinois cities of Decatur, Moline, Peoria and Rockford. 

In California, the infrastructure bill will not include any new funding specifically for the California High Speed line. There is some $12 billion of funds available for unspecified intercity rail development but the federal government is not bailing out the line. The hope is that some funding could be generated to allow the state to finish the existing portion under construction in the Central Valley.

MORE INTERSTATE REGULATION ISSUES AND CLIMATE

Montana has enacted legislation which effectively requires owners’ unanimous consent to close a coal-fired power plant. In this case, the Oregon and Washington based co-owners of the Colstrip coal fired power plant are asking a federal judge for a preliminary injunction to stop the Montana attorney general’s office from enforcing a law they say changes the terms of their private ownership contract.

Utilities in those two states are under pressure to divest from fossil-fuel fired generating plants. At the same time, efforts to move from fossil fuels in Washington are facing a potential vote in November in eastern Washington. If approved by city voters in November, the Spokane Cleaner Energy Protection Act, or Proposition One, would preemptively prohibit the Spokane City Council from enacting a ban on natural gas service or hydroelectric power for homes and businesses in Spokane.

A volunteer group formed under the City Council’s direction, included a proposal to ban “gas hookups from all new commercial and multifamily residential buildings by 2023, and from all new construction by 2028” in a draft “action plan” released earlier this year. This led to the development of the proposed initiative.

The legal action seeks an injunction to prevent the measure from appearing on the ballot, and alleges that the initiative is illegal in three ways. The initiative would stand in the way of the city’s quest to meet greenhouse gas reduction goals outlined by the state legislature, the lawsuit argues, and local initiatives cannot threaten “to interfere with city or county efforts to implement state policies.”

The plaintiffs also contend that by preventing the city from amending its own building codes, the initiative would deprive the Spokane City Council of the authority granted to it by the state legislature. The third contention is a matter of process, as the groups argue that the issue is an “administrative matter.”

This all comes at a time when climate change is at the forefront of concerns. Over the past three decades, more than 600 local governments across the United States adopted their own climate action plans setting greenhouse gas reduction targets. These pledges were in addition to America’s commitment to the 2015 Paris Agreement.

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

________________________________________________________________

COLORADO CLIMATE CHANGE LITIGATION

Boulder County, CO is suing ExxonMobil, and Suncor, a Canadian company with its US headquarters in Colorado, to require that they “use their vast profits to pay their fair share of what it will cost a community to deal with the problem the companies created”. The companies are pressing to move the trials out of state courts and into a federal system where laws on deceptive marketing and consumer fraud do not apply.

The County is looking to the plaintiffs to pay for an estimated $3 million in annual costs assumed by the County to adapt transport and drainage systems to the climate crisis, and reduce the risk from wildfires. The litigation accuses the companies of deceptive trade practices and consumer fraud because their own scientists warned them of the dangers of burning of fossil fuels but the firms suppressed evidence of a growing climate crisis. The lawsuits also claim that as the climate emergency escalated, companies funded front groups to question the science in order to keep selling oil.

We’ve seen this song before. In this case, support for the lawsuit is less than universal. Boulder County has undergone significant growth. Some have questioned the County’s role in facilitating development in areas where that growth heightens fire risk. Editorial opinions have reflected a view summed up as “The companies didn’t create the demand for fossil fuels. We did through our lifestyles and consumption, including every single member of the communities who now wish to target corporations for a legal shakedown.” 

NUCLEAR DELAYED AGAIN

The expansion of Plant Vogtle’s nuclear generating facilities in Georgia is delayed again. Southern Co., announced yet another delay in its completion of the nuclear expansion of Plant Vogtle and said its share of the costs have increased by nearly half a billion dollars. Now, it projects the second quarter of 2022 for the first, and the first three months of 2023 for the last reactor. In each case that is three or four months later than what it had said in May and reasserted again last month.

That puts the plants some six years behind schedule. Southern says it will cover the increase from its own resources. It took a charge in the second quarter which will cost it $346 million. Southern also laid the groundwork for additional delays. The company said in a regulatory filing that “various design and other licensing-based compliance matters” have arisen or may arise that, if not resolved, could lead to additional delays and costs. In June, the GA State PSC staff noted that the Vogtle expansion “is in a worse condition than past U.S. new construction nuclear plants were at this same stage of construction/testing.”

CHICAGO BOARD OF EDUCATION

Legislation was signed as we went to press last week which calls for a newly constituted Board of Education for the Chicago Public Schools. At present, the mayor appoints a seven-member board, including the president, without an approval process. The seeds of this legislation reflect issues which arose during the Emmanuel administration when many expressed frustration with school consolidations and closures. The plan is for a new board to be comprised of ten elected members and 11 members appointed by the Mayor.

Unsurprisingly, the Mayor was not in favor of the legislation. She directly referenced the poor financial position of CPS and its reliance on funding from the City of Chicago. “I remain extremely concerned about various proposal components, many of which revolve around CPS finances, and the district’s future ability to function without appropriate safeguards, recognizing the district has remained solvent due to annual City of Chicago subsidies.” 

Diminished mayoral control has been a long-term goal of the City’s powerful and confrontational teachers’ union. The newly signed law mandates that the first elected members would run in the November 2024 general election for a four-year term. Though the mayor would continue picking the board president, the City Council would need to confirm that pick. After two years, the seats of the board president and the 10 appointees would become elected ones in January 2027 through a November 2026 election. Those members would also serve four-year terms.

The city would initially be divided into 10 districts for the 2024 school board elections, then expand to 20 districts for the 2026 ballot. That map would need to be drawn by February 2022.

Increased politization of school administration and management is not credit positive. The shift to mayoral control in the late 1990s was a direct reflection of the poor fiscal position of CPS and the hurdles which politics had created towards reform and improvement. For years prior, the Chicago Board of Education was a chronically failed system financially as reflected in a long time below investment grade rating. The new structure for the Board does not give real comfort given the history of politicized decision making.

DETROIT DUCKS CREDIT BULLET

The City of Detroit dodged a credit bullet when a voter initiative to revise the City Charter and mandate hundreds of millions of dollars of new (unfunded) spending even as its recovery from bankruptcy continues. Proposal P  sought to revise Detroit’s charter in ways that supporters believed would push toward a more just and equitable Detroit, including better access to broadband internet, greater water affordability, a task force on reparations and justice for African Americans. 

The item was defeated soundly with 67% voting against and 33% supporting it. The issue will come up again as the 2012 charter had indicated that a revision question should be put before voters in 2018, and at every fourth gubernatorial primary thereafter. We would expect charter revision efforts to continue over time.

PUERTO RICO

The disclosure statement offered in support of the expected refunding and restructuring of Puerto Rico’s tax backed debt is out. At over 2500 pages, it is full of detail and qualifications and caveats. One key section of the document however, clearly lays out the dilemma facing potential investors in new general obligation debt from the Commonwealth.

The dilemma results from the statement’s clear language regarding the apparent unwillingness of the Commonwealth legislature to enact statutory authorization for the bonds. The lack of such legislation is acknowledged and the Oversight Board offers several strong arguments that the proposed debt is already contemplated in existing statutory authority. It is under that authority that the current outstanding and defaulted debt was issued.

Relying on that authority, the Board is proceeding with the proposed bonds as a refunding of the debt to be refinanced and restructured. For some that will be enough to address concerns over the validity of the debt. It’s an issue because the Commonwealth sought to invalidate some previously issued debt in an effort to lower its debt service obligations.

So, do investors insist on legislative action or a high enough coupon to be paid for the willingness to pay risk? The government is already resisting proposed pension cuts which require legislation. Even under the dire circumstances of the bankruptcy, populism has served as an obstacle to reform and we expect that it will continue to do so. That’s enough to demand a lot of compensation in terms of coupon. The lack of statutory support demands that much more.

HOSPITALS, PROPERTY INSURANCE, AND COVID 19

The latest large not for profit hospital chain to sue their insurer over claims for lost revenues due to the COVID 19 pandemic is the Allegheny Health System. It joins nearly 180 other hospital providers who have sued a U.S. subsidiary of Zurich Insurance after Zurich would not cover claims for lost revenues due to the pandemic. In 2020, Allegheny reported an operating loss of $ 136 million, a decrease of $ 180 million year-over-year due to a decrease in elective surgeries, government shutdowns and other expenses related to the pandemic. The company said inpatient visits decreased 9%, outpatient registrations decreased 2%, and physician visits 7% compared to 2019. 

Allegheny and other systems are suing claiming that they should be paid under insurance which covers losses from business interruption due to communicable diseases, property protection and preservation, patient protection and additional expenses at the more than 350 healthcare system locations, according to demand. The coverage was valid from October 2019 to October 2020 and did not exclude virus claims in the final contract provided to the hospital system, according to the lawsuit.

Will they win? The odds are against them. One major system in NY, Northwell Health – saw a similar claim dismissed recently in the federal courts. Based on decisions to date, that was not a surprise. So far, it is estimated that some 92% of these cases have been dismissed early on in the litigation process. The dismissals have been emphatic as they have been dismissed fully and with prejudice in the vast majority of cases.

WHEN GREEN IS RED

So much of the debate over climate change seems to emphasize a blue state/red state dynamic. While it is fair to say that regulatory activity might reinforce a view along those lines it is also fair to say that the market view is different. We see this reflected in data released from the American Clean Power Association. 

Texas leads all states with 37,443 MW of cumulative clean power capacity installed, followed by California (20,354 MW), Iowa (11,394 MW), Oklahoma (9,395 MW), and Kansas (7,058 MW). Texas added the most clean power capacity last year with 6,320 MW, followed by California with 2,193 MW, Florida with 1,267 MW, Iowa with 1,218 MW, and Oklahoma with 1,182 MW.

In 2020, Texas led all states in land-based wind capacity additions with 4,137 MW and utility scale solar capacity additions with 2,044 MW. California led in battery storage additions, with 573 MW. When it comes to electricity generation, Texas led all states by generating over 100 million MWh of renewable electricity in 2020.

However, when it comes to the share of total electricity generated in a state, Iowa led with 57.6% of electricity generated from clean power in 2020. Other top states for clean power generation share include Kansas (43.4%), Oklahoma (35.5%), South Dakota (32.9%), and North Dakota (30.8%). The numbers show the power of a market-based move to a cleaner electric grid.

VACCINATION AS A CREDIT FACTOR

The resurgence of the pandemic though the explosion of the Delta variant has given us cause to see if there are real differences in economic and fiscal performance in states with low vaccination rates. There is already a regional pattern to the resurgence and it reflects vaccination rates. Going forward, we will have to see how limited economic activity becomes and then determine how much of an appetite there is for any additional fiscal bailouts to those jurisdictions seen as hindering vaccinations.

As is the case with so many things, the corporate response will likely be key. Industry and higher education seem to be coalescing around mandates for employees and students to be vaccinated. The real test will come in several weeks when extended unemployment benefits run out and workers are forced to choose between work and vaccination. While not widespread, the first sets of new regulations are being imposed to deal with the resurgence.

CALIFORNIA DROUGHT REALITIES

The ongoing drought in the West continues to wreak havoc especially in California. Much attention is rightly directed towards the huge wildfire problem. Underlying it all is a lack of water and the magnitude of the drought is leading some communities to look again at alternative sources of water. The latest example is in northern California’s Marin County.

Chartered on April 25, 1912, the Marin Municipal Water District was the first municipal water district in California. It serves more than 191,000 people in central and southern Marin from 100 % locally sourced drinking water. About 75 % of the water supply comes from our reservoirs on Mt. Tamalpais and in west Marin, with the remaining supply coming from neighboring Sonoma County’s Russian River water system. Both of these sources have been seriously compromised by the drought. Now, the district is looking at the potential revival of one alternative rejected years ago for its cost – a desalination project. A proposed desalinization plant was scrapped in 2010 after water use declined.

Others have tried. The city of Antioch is building a plant to clean brackish water from the San Joaquin River. It’s supposed to be completed in 2023. When the $100 million project is finished it will allow water to be used from the river year-round instead of purchasing costly water from other agencies. Purchases of water from other agencies is being considered in Marin.

Such a plan would require construction of a pipeline over the bridge from Richmond to San Rafael to pump water from the East Bay. It would cost between $66 million and $88 million. A small desalinization plant would provide less water but would cost $37 million.  

The situation in Marin County provides a window into the set of challenges facing municipal water systems throughout the West. Historically among the most secure of credits reflecting the necessity of water and its relative availability, water credits are beginning to see increasing pressure related to environmental and climate issues. Now, limits on water use and availability become more critical decision items facing potential residents and businesses looking to locate.

The limits are not just local. The State Water Resources Control Board voted unanimously to pass the “emergency curtailment” order for the Sacramento-San Joaquin Delta watershed from the Oregon border in northeastern California down into the Central Valley. About 5,700 Northern California and Central Valley water rights holders — who collectively hold about 12,500 water rights — will be subject to the forthcoming curtailments. The order will largely affect rights holders using water for agricultural irrigation purposes, though some municipal, industrial and commercial entities also will be affected. 

THE TRI STATE SAGA CONTINUES

Tri State Electric Cooperative continues to play financial hardball with participants looking to reduce their fossil fuel exposure. (7/26/21;6/28/21). One of the individual Colorado cooperatives at the center of the dispute is seeking to achieve a “partial” withdrawal from all requirements purchase terms.

La Plata Electric Association has proposed a partial contract buyout which would allow LPEA to seek outside power suppliers to provide 50% of the electricity it delivers to its members. LPEA believes this will allow the cooperative to deliver more electricity generated from renewable and local sources. LPEA also believes it can find electricity cheaper than prices it currently gets from Tri-State, which currently provides about 95% of LPEA’s electricity. That is based on the receipt of nine responses from non-Tri-State power-suppliers submitted to LPEA on its request for proposal to supply it with 50% of the electricity.

It’s not unreasonable that there be some compensation to Tri State from exiting members but the initial proposal was hard to take seriously. A long-term view would indicate that a generation utility like Tri State should be preparing for a sooner than later date for an end to the use of coal.

FLORIDA SENDS CRUISE LINES A LIFE PRESERVER

The State of Florida will provide some $250 million to fifteen ports in the state used by cruise ships. The funds are designed to replace much of the revenues not generated from port activities due to the limitations of the pandemic. The Florida aid package will provide ports with reimbursement grants equivalent to nine to 12 months of net revenue, or six to nine months of operating expenses, based on pre-COVID levels.

Unlike the many ports which depend primarily on cargo rather than passenger operations, Florida ports have continued to struggle because cruises account for a larger proportion of their revenue than they do for most other US ports. These ports have generated virtually no cruise revenue since April 2020. In addition, cruise lines and cruise ports did not receive any federal aid, despite the pandemic affecting them as severely as airlines and airports, which did receive federal aid. That forced the cruise industry to cut employment more rapidly in the face of an effective ban on activity.

Which ports are positioned to benefit most from the plan in that they took the biggest hits? Cruises accounted for 80% of 2019 revenue at Port Canaveral and 55% at Port Miami.  The revenue reductions were 35% each at Port Everglades and the Port of Palm Beach. The aid package is credit positive from both a liquidity viewpoint but also positions the ports to be able to be more flexible as the pandemic continues its course.

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                                                                                                     

INFRASTRUCTURE PACKAGE ARRIVES

The President and the bipartisan group announced agreement on the details of a plan for investment in our infrastructure, which will be taken up in the Senate for consideration. In total, the deal includes $550 billion in new federal investment. The Bipartisan Infrastructure Deal will invest $110 billion of new funds for roads, bridges, and major projects, and reauthorize the surface transportation program for the next five years. The bill includes a total of $40 billion of new funding for bridge repair, replacement, and rehabilitation.

The deal invests $39 billion of new investment to modernize transit, and improve accessibility for the elderly and people with disabilities, in addition to continuing the existing transit programs for five years as part of surface transportation reauthorization.  This is the largest Federal investment in public transit in history, and devotes a larger share of funds from surface transportation reauthorization to transit in the history of the programs. Nonetheless, it represents a reduction of $10 billion from the original White House proposal for mass transit. The deal invests $66 billion in rail to eliminate the Amtrak maintenance backlog, modernize the Northeast Corridor, and bring world-class rail service to areas outside the northeast and mid-Atlantic. 

The bill invests $7.5 billion to build out a national network of EV chargers. The bill invests $17 billion in port infrastructure and $25 billion in airports to address repair and maintenance backlogs, reduce congestion and emissions near ports and airports, and drive electrification and other low-carbon technologies. $55 billion will be dedicated to replace all of the nation’s lead pipes and service lines. The deal’s $73 billion investment is meant to upgrade and expand the transmission grid and invests in demonstration projects and research hubs for next generation technologies like advanced nuclear reactors, carbon capture, and clean hydrogen.

The proposal has something for every region whether it be resiliency, grid expansion, mass transit, rail, rural broadband funding. This what legislation looks like. We expect to hear lots of complaints that the bill doesn’t satisfy everyone’s needs fast enough. There is something for cities as well as rural areas and funding for things like lead pipe remediation has numerous benefits in terms of freeing up local resources for other pressing issues.

The funding side may be more problematic. Negotiators agreed to repurpose more than $250 billion from previous Covid relief legislation, including $50 billion from expanded unemployment benefits that have been canceled. It also proposes to recoup $50 billion in fraudulently paid unemployment benefits during the pandemic. Increased IRS enforcement did not make the cut. It is the Democratic version of Reagan’s fraud, waste, and abuse.

Two major hurdles remain. The bill needs five more Republicans beyond the members of the negotiating group. But the Democratic side presents a hurdle of its own. Speaker Nancy Pelosi of California has said she will not take up the bipartisan infrastructure bill in the House until the $3.5 trillion “human infrastructure” package — expected to pour billions into programs to address climate change, health care, child care and education — passes the Senate.

PUERTO RICO

The Puerto Rico Aqueduct and Sewer Authority (PRASA) is in the midst of a marketing effort to facilitate a restructuring of the outstanding debt of PRASA. It has announced the sale of some $1.7 billion of debt. The proceeds will finance the purchase of outstanding debt carrying coupons ranging from 5.125% to 6%. That debt matures as soon as 2024 and as far out as 2047.

The new bonds will be backed by a net rather than the former gross revenue pledge.  That’s a distinction that practically speaking gets you a better spot on line in a bankruptcy but you need to cover expenses which generate revenue. A net pledge is certainly a standard security.

Bonds not tendered will remain outstanding. Bonds can be tendered for purchase as well as for exchange. 

On other fronts, Puerto Rico’s Financial Oversight and Management Board (FOMB) announced Tuesday that it had filed a sixth amended commonwealth Plan of Adjustment (POA) that reflects new agreements with bond insurers Ambac Financial Group and Financial Guaranty Insurance Company (FGIC). The deals settle both insurers’ asserted callback claims against the government of Puerto Rico and debts issued by the Puerto Rico Infrastructure Financing Authority (PRIFA).

PRIFA bondholders will receive $260 million in cash, including restriction fees and consummation costs. In addition, the agreement includes a contingent value instrument based on potential outperformance of Puerto Rico’s 5.5% sales and use tax relative to projections in the 2020 certified fiscal plan and Puerto Rico’s general fund rum tax collections relative to projections in the 2021 certified fiscal plan.

PORT REBOUND CONTINUES

The recovery of the economy is being reflected in the level of port activities seen in the first half of 2021. The Port of Los Angeles, the nation’s busiest facility, reported a 26.7% year-over-year increase in June, processing 876,430 20-foot-equivalent units compared with 691,475 the previous year. Long Beach reported a 20.3% year-over-year increase, handling 724,297 TEUs compared with 602,180 in 2020.

The Port of Oakland processed 222,483 containers in June, which is almost identical to the numbers posted in April and May. The 2021 figure is up 43.3% year-over-year. Six months into 2021, the port is up 11.4% compared with 2020. Port facilities in Seattle; Tacoma, Wash.; Alaska and Hawaii, saw volume jump 19.9% year-over-year to 344,280 containers compared with 287,036 in the year-earlier period.

The Port of Virginia notched a 33.5% year-over-year increase in volume, moving 281,346 TEUs, compared with 210,669 in June 2020. Officials said June marked the 10th consecutive month of record-breaking volumes, which pushed Port of Virginia’s fiscal 2021 number to a record 3.2 million containers. Since fiscal 2019, volume is up more than 25%.  The Port of Savannah in Georgia saw a 32% year-over-year increase, moving 446,815 containers in June. In 2020, the port processed 338,287.

The Port of Charleston saw a 40% year-over-year volume increase in June, moving 231,758 TEUs compared with 156,494. In fiscal 2021, ending June 30, Charleston handled 2.55 million TEUs, a 9.6% increase from fiscal 2020. With five automobile, truck and military vehicle plants in South Carolina, the port handles tens of thousands of vehicles each year. The port said roll-on, roll-off cargo increased nearly 61% compared with 2020, moving 23,096 vehicles.

Along the Gulf of Mexico, Port Houston reported a 39% year-over-year increase, handling 292,627 containers in June compared with 210,932 in 2020. Through the first six months, the port is running 13% ahead of last year’s rate.

MTA

It has become clear from the return of less than a quarter of the pre pandemic office staff to the office, that recovery in NYC especially Manhattan will take some time. That has had a real impact on operations of the MTA in particular, the subways. With staffing shortages limiting the number of trains, wait times are up. Crime on the subways has also heightened concerns about long wait times. It’s a vicious cycle.

One thing which the MTA can do on its own is raise fares. An increase had been anticipated and the plan was to raise subway fares by 4%. Now that demand for the subway remains depressed, MTA has decided to hold fares steady through year end. To some degree, things are beyond its control in terms of whether workers are required to return to offices.

For bondholders, it is a non-event. That fact of the matter is that the anticipated 2021 revenue from a fare increase was only about $17 million.  MTA has received $4 billion of federal pandemic aid so far, and expects to receive the remaining $10.5 billion through a multiyear reimbursement process that will cover its operating losses.

The transit agency has raised fares every other year since 2009. 

THE OTHER GOVERNOR FACING RECALL

Don’t look now but another governor is facing the potential of a recall election. The Alaska Supreme Court ruled that a campaign to recall Republican Gov. Mike Dunleavy may proceed. The Court found that the effort contains legally sufficient grounds to bring forth the matter to voters. The recall’s supporters specifically cited allegations that the governor violated the state Constitution by using his budget veto to punish judges for abortion-rights rulings, and that he used government funds for political purposes. 

The ruling does not indicate anything about the validity of any charges against the Governor. It specifically leaves it up to the judgment of potential signers of a recall petition to make that determination. The Governor has been a lightning rod as he imposed a strong view that spending needed to be cut. He sought to preserve the State’s annual Permanent Fund payment to state citizens even at the cost of substantial cuts to the State’s University and ferry systems.  

With the long-term decline in demand for oil, Alaska has faced steadily more difficult choices as Permanent Fund revenues slow and diminish. Like many other ideologically driven officials, the Governor has had a difficult relationship with the State legislature. Many saw the cuts to the university system as politically driven. Anger at that and cuts to the State ferry system which significantly increased inconvenience for already isolated coastal communities.

ZONING REFORM

Zoning regulations have come under increasing scrutiny in recent years. Advocates for affordable housing development have seized on single family zoning regulations especially as a major hurdle to increases in the affordable jousting stock. In California, housing is among the hottest of hot button issues. Previous attempts to expand housing availability in the state, like SB 50, have been beaten back. Opponents argue that such changes would lead to gentrification instead of expanded low income housing opportunities.

Now, Senate Bill 9, designed to allow up to four homes on most single-family lots and spur the construction of badly needed new housing has passed in the State Senate. It is expected to be taken up in the Assembly Appropriations Committee by Aug. 27. If approved, it would go to a final vote in the Assembly. Opposition comes from both local governments and private interests.

Looming behind all of these efforts across the country is the increasing g role of real estate developers and investors in the conversion of single family homes to rental rather than ownership status. Many opponents of the bill fear gentrification but also fear the development of more and more properties for rental purposes. The development of this sort of housing does nothing to solve the affordability gap which has arisen from the increasing number of housing units offered for rental rather than sale.

Housing advocates fear that an increasing number of housing units will be offered for rental rather than sale. They also argue that developers are likely to target Black and Latino communities in areas where land is cheaper, and demolish houses to build high-cost rentals that would limit the ability of people of color to build wealth.

UNIVERSITY SYSTEM OF CALIFORNIA TUITION AND VACCINATION

The University of California announced that COVID-19 vaccinations will be required before the fall term begins for all students, faculty and others, becoming the nation’s largest public university system to mandate the vaccines even though they don’t have full federal approval. The University of Vermont also announced it will require vaccines regardless of when approval occurs. They join eleven other state university systems poised to require vaccination. Several other states (including the state and city systems in NY) will require vaccinations upon full FDA approval of vaccines.

It is hard to know whether vaccine requirements will make an institution more or less attractive from a competitive standpoint. In states where the public system is not mandating vaccination, we note that many of the best-known private institutions in those states are. All of the Ivies are requiring vaccination as well as their major competitors.

There is no surprise as to where requirements lag. North Carolina, Tennessee, Texas, Utah, West Virginia, and Wisconsin are among the laggards. Ohio is apparently waiting for vaccination approval before it decides what to do at the Ohio state system. Ohio is one of the states where the politics of the pandemic have been problematic.

Our view is that vaccination requirements will be more of an attraction than a detriment to the institutions requiring them. In a first legal test of such a requirement, eight student plaintiffs had argued that requiring the vaccine violated their right to bodily integrity and autonomy, and that the coronavirus vaccines have only emergency use authorization from the Food and Drug Administration, and should not be considered as part of the normal range of vaccinations schools require. 

A conservative group of anti-vaccine doctors is bankrolling the litigation. They vow to go to the U.S. Supreme court if necessary.

While the vaccination requirement was rolled out, the University of California Regents, citing the need for financial stability and more grant aid, approved a tuition increase of 4.2% for incoming freshmen in the fall of 2022. The 4.2% increase in tuition and fees — $534 added to the current annual level of $12,570 — will apply only to incoming undergraduates entering in fall 2022 and stay flat for up to six years for them. Successive undergraduate classes would get a similar deal.

The regents’ action marked UC’s second tuition increase since 2011. It comes as the University admits its most “diverse” class ever but also one with significant affordability concerns.

MISSOURI MEDICAID EXPANSION

The Missouri Supreme Court unanimously upheld an expansion of Medicaid that had been secured via a ballot initiative. That could mean an additional 275,000 people will have access to it. Opponents of expansion in “red” states realize that ballot initiatives usually need legislative action to fund the program.  So, GOP legislators in those states refuse to enact enabling legislation. The Missouri court ruled that expansion was legal in that it did not require the legislature to appropriate money specifically for new patients under expansion. Since the state funded Medicaid for FY 2022, the legislature will have to appropriate funding or else provider payments might not be made.

The absurdity of the situation – a voter supported policy that someone else pays 90% of – is clear. Medicaid expansion itself ordinarily sees the federal government pays 90 percent of the cost of extending Medicaid to non-senior adults who earn up to 138 percent of the poverty line.  Because, MO was slow to expand, it will perversely benefit from provisions in the stimulus which provide for extra funding through the American Recovery Plan for states which expanded Medicaid during the pandemic.

PENNSYLVANIA AND FRACKING ROYALTIES

The Commonwealth of Pennsylvania Department of Conservation and Natural Resources’ Oil and Gas Fund — derived from natural gas drilling on state forest land — to the state’s general fund to help balance the annual budget. The ruling came in a case brought by the PA Environmental Defense Foundation which hoped that the Supreme Court would overturn a lower court decision which allowed the diversion of more than $110 million from the Oil and Gas Fund between 2017 and 2019, to pay operating expenses rather than using it for conservation purposes.

The decision does not however require the funds to be transferred back to the Oil and Gas Fund. The decision found the Commonwealth Court’s 2020 ruling was at odds with its own 2017 ruling on the same issue, when foundation members challenged the transfer of $594 million from the fund between 2008-16. Foundation officials argued that “all funds from the oil and gas leases, including the royalties, bonus and rental payments, are part of the public trust, and must be used to conserve and maintain the public natural resources, including our state forest.”

From our standpoint, the management of the fiscal potential of fracking has been poor. We see tremendous resistance to things like severance taxes and other charges which can be easily linked to the activities of the natural gas industry. For a long time, the evolution of the fracking industry and its taxation in Pennsylvania will be viewed as a substantial missed opportunity.

IS CARBON CAPTURE COMING TO THE MUNI MARKET?

The San Juan coal fired generating plant in New Mexico was one of the nation’s largest. It’s role in climate change was undisputed. So, it was a big deal when the plant was scheduled for closure in response to the market realities facing fossil fueled generation. That decision by Public Service of New Mexico, the plant operator, was accompanied by news that a private merchant generator wanted to take over the plant and use it as a showcase for carbon capture technology.

The technology is controversial and has never been implemented at industrial scale. In that way, it resembles any number of “new technology” projects which have made their way to the municipal bond market over the years, often without success. Medium density fiberboard, manure to methane, and paper deinking come to mind.

Farmington’s city-owned utility currently holds a 5% stake in San Juan. It will become the nominal owner when the other co-owners depart on June 30, 2022. And under the private generator Enchant’s agreement with Farmington, the city will then turn the facility over to Enchant to be operated as a merchant power plant. One that was able to run on coal but not emit carbon dioxide into the atmosphere.

So, it caught our eye that the private generator, Enchant, updated the progress being made on carbon capture installation and operation. When it announced the carbon capture plan in 2019, Enchant said it would begin construction on plant conversion by 2021 and start operating it with carbon capture in place by January 2023. Now those dates have been delayed until year-end 2024 to have carbon capture partially operational at San Juan, and mid-2025 for it to be fully functioning.

Enchant executives previously said they would use private investment to convert San Juan, the company is now seeking nearly $1 billion in low-interest loans from the U.S. Department of Energy and other federal entities to help fund the project. That’s where our interest as a muni market participant comes in. The ownership of the utility by a municipal entity leaves a door open for a project like this to seek tax exempt financing if federal financing is not available or sufficient.

RANSOMWARE BANS

The increasing frequency of hacking attacks on governmental entities has spawned a variety of responses.  The increasing number of ransomware attacks and a lack of information on how and for how much ransoms are paid have focused state legislators’ attention on the subject.  The payment of ransoms by primarily private sector players has raised concerns that the practice will continue to expand and include government payors. As is often the case, proposed legislation does not take a particularly deft approach. Suffice to say, the legislative sledgehammers are out. Well intentioned but likely off the mark.

Three states—New York, North Carolina and Pennsylvania—are considering legislation that would ban state and local government agencies from paying ransom if they’re attacked by cybercriminals. A similar bill in Texas died in committee earlier this year. The sponsors seem to believe that making it illegal to pay ransom will make it unattractive to hackers to attack systems as it would serve as a stop on negotiations.  As one sponsor put it “We’re saying we cannot negotiate with you. It’s not legal for us to pay anything. You need to stay away from North Carolina.”

At least there is some money -$15 million – in the North Carolina bill to fund local government efforts at improving system security. The need for funding remediation highlights one weakness that plagues many local government systems. That is the issue of outdated systems. In many cases, a combination of old technology and software combines with really poor system management to create vulnerabilities. They will exist without serious funding increases.

The issue may not be just with government data. Weak local governmental security practices still create environments which are attractive to criminals. Many local government systems hold a significant amount of citizen data – birthdates, addresses, social security numbers – which can still provide opportunities for criminal profit. And many of the services provided by government deal with life and death situations which require rapid reinstatement of systems.

The Pennsylvania legislation attempts a bit more subtle approach. In Pennsylvania, legislators are considering a broader ransomware bill that would make possessing, using or transferring ransomware a criminal offense, ranging from a first-degree misdemeanor to a first-degree felony, depending on the ransom amount.

Leave it to New York to take a more clumsy approach. One of two pending bills would ban ransom payments by businesses and health care entities as well as government agencies. It also would require agencies to report ransomware attacks to the state. Would it be effective? Even its sponsor thinks not. “We decided to introduce the bill like a blunt instrument to force this discussion. Granted, I understand this is probably not the way to go about it. How do we tell private businesses what to do?” “But we need to do something. If we continue to just stand back and do nothing, that’s not a solution.”

In many cases, local governments do not use well established security procedures which have been standard best practices in the private sector.  Remote access requirements which arose during the pandemic highlighted major flaws. A 2019 study by researchers at the University of Maryland, Baltimore County found that local governments “on average, they practice cybersecurity poorly.” And it is that flaw which is often at the root of local cybersecurity issues.

The rising concern with cybersecurity for governments has not been accompanied by standardization of practices or by sufficient funding of cybersecurity efforts at the local level. Stronger access procedures especially for remote workers and the availability of funding for remediation costs are the most logical step. Merely banning ransom payments on its own is not an answer. The FBI testified this week that “It would be our opinion that if we ban ransom payments, now you are putting U.S. companies in a position to face yet another extortion, which is being blackmailed for paying the ransom and not sharing that with authorities… It’s our opinion that banning ransomware payments is not the road to go down.” 

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 week our issue is devoted totally to developments in the electric utility sector. As the smoke from the western fires blew east, it served as a reminder to all of the dominant role of climate change in the current political debate.

We highlight a number of situations illustrative of the many challenges that climate change and its management present to producers, distributors, and investors in the utility industry. As is always the case, municipal providers and issuers will be at the center of those debates. Every level of government – state, federal, local – is involved in them.

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MULTI STATE REGULATION AND CLIMATE CHANGE

The Kentucky Public Service Commission issued an order Thursday rejecting Kentucky Power’s request for a certificate to implement and recover costs for federally required environmental upgrades at the Mitchell plant near Moundsville, WV that would keep the plant operational for another 19 years. Instead, the commission approved completing only enough environmental upgrades to keep the plant federally compliant and operating through 2028. Kentucky Power had contended that making the necessary environmental upgrades to keep the 50-year-old Mitchell facility operational through 2040 was the most economical option, noting that the company will have a substantial capacity shortfall if Mitchell is retired in 2028.

The total estimated cost of allowing Mitchell to operate through 2040 was $133.5 million. The total estimated cost of allowing only implementation of and cost recovery for complying with rules regulating handling and disposal of coal combustion residual materials was $35.1 million, excluding the cost of capacity that Kentucky Power will need to obtain once Mitchell is retired. Kentucky Power and Wheeling Power each own 50% interest in Mitchell.

And that complicates the process of closing coal plants with joint owners and different regulatory jurisdictions having oversight of those owners. Add in the fact that Kentucky Power and the West Virginia owners presented differing viewpoints as to the potential overall financial impact of closing Mitchell in 2028 vs. 2040. Appalachian Power and Wheeling Power said in their December filing with the West Virginia Public Service Commission that performing only the coal combustion residual compliance work at Mitchell and retiring the plant in 2028 has “comparable costs and benefits” to making the additional wastewater compliance investment to allow the plant to operate beyond 2028.

It is not a cost-free decision as to the plant’s future. There were 214 people employed at the Mitchell plant that were compensated a combined $26.8 million in wages in 2020, according to Appalachian Power and Wheeling Power.

GROWING PAINS OF AN ELECTRIC FUTURE

We came across stories recently about what can best be described as growing pains experienced by one mass transit system as it attempted to add all electric buses to the vehicle mix. We found one that puts a municipal transit agency right in the center of the issue.

SEPTA is the mass transit provider for Philadelphia and its surrounding metropolitan area. In 2016, it announced that it would purchase a fleet of 25 electric buses. The goal was to gradually add to the electric fleet with the intention of replacing all 1500 of SEPTA’s buses with electric vehicles. The first of the buses went into service in 2019. They cost some $1 million each so it was a substantial investment even with federal aid. So, it is all the more troubling that those 25 buses no longer operate but may turn out to be a major impediment to the development of all electric public transit fleets.

Proterra is the nation’s largest manufacturer of electric buses. More than 100 public transit customers throughout the U.S. and Canada have purchased Proterra buses. So, it is a problem when a system like Philadelphia reports structural issues with the buses. It turns out that the problem may not be manufacturer specific. The problem in Philadelphia is that the issues include cracked chassis and other defects, some discovered before operation.

Proterra buses were also taken out of service in Duluth, Minnesota, after officials realized that hilly routes and heaters were draining batteries too quickly. Proterra buses were also taken out of service in Duluth, Minnesota, after officials realized that hilly routes and heaters were draining batteries too quickly. It would seem to be a quality and warranty issue specific to the manufacturer.

But wait, a battery fleet from Chinese manufacturer BYD was taken out of service in Indianapolis for upgrades due to range issues, while officials in Albuquerque, New Mexico, returned 15 BYD buses for similar reasons.  BYD is the manufacturer in House Minority Leader McCarthy’s district.  The issue seems to be more related to the weight of electric vehicles. The battery technology used is quite heavy, so manufacturers naturally seek to reduce the weight of vehicles through the use of plastics and the like.  Logic says that cracking should not be a surprise.

The pandemic and its impact on the demand for mass transit has already left many systems in a vulnerable financial position. Now as the politics of climate change get more intense, transit agencies see themselves in the position of having to accept some level of operating risk as electric vehicles develop. That risk translates into potentially significant financial risk if capital investments in rolling stock do not satisfy service requirements. It’s just one more hurdle for mass transit providers to overcome.

GREEN NEW DEAL AND JOBS

One of the primary issues impacting the debate over how to best address climate change is the issue of economic displacement. The closure of older existing power plants always causes disruptions to local economies and workers. It is one of the main arguments that supporters of the status quo in terms of the environment cite when explaining opposition to the transition to cleaner energy. Proponents of the Green New Deal always claim that it will provide “good-paying” union jobs to replace those lost at existing generation facilities.

Unfortunately, initial indications are that this will simply not be the case. An electricity plant powered by fossil fuels usually requires hundreds of electricians, pipe fitters, millwrights and boilermakers who typically earn more than $100,000 a year in wages and benefits when they are unionized. So far at least, those jobs do not have comparable replacement roles for workers on renewable generation facilities. This is especially true for solar installations. It takes far more people to operate a coal-powered electricity plant than it takes to operate a wind farm. Many solar farms often make do without a single worker on site.

A NY Times article illustrated one example. In 2023, a coal- and gas-powered plant operated by Consumers Energy in Michigan, is scheduled to shut down. The plant’s 130 maintenance and operations workers, who are represented by the Utility Workers Union of America and whose wages begin around $40 an hour plus benefits, are guaranteed jobs at the same wage within 60 miles. The utility, Consumers Energy, concedes that it doesn’t have nearly enough renewable energy jobs to absorb all the workers.

The staffing industry says that about two-thirds of the roughly 250 workers employed on a typical utility-scale solar project are lower-skilled. They can make $20 an hour. That’s a far cry from $60 an hour at a union site.  It is a significant obstacle to generating political support for the Green New Deal. And it is typical of how the environmental movement has constantly understated the true overall costs of the changes it wants. It’s not just about the price of power to the customer. There are also issues associated with worker displacement. When all of those costs are included in the analysis, the economics of the Green New Deal are much less appealing.

That may account for why the Times chose to publish its article on a Saturday, the traditional landing date for bad news.  An announcement this week from the Department of Commerce’s Economic Development Administration (EDA) highlights a Coal Communities Commitment, which allocates $300 million in American Rescue Plan funds to coal communities. This investment will ensure that they have the resources to recover from the pandemic and will help create new jobs and opportunities, including through the development or expansion of a new industry sector.

The U.S. DOE reports that Electric Power Generation declined by 63,300 jobs from 2019 to 2020 for a total of 833,600 jobs. Not all types of generation declined. Wind added 2,000 jobs, an increase of 1.8%. Solar, which includes both Concentrating Solar Power and Photovoltaics, shed the most jobs, declining by 28,700. The largest year over year percent decline was in coal, which decreased 10%, or 8,300 jobs.  

Employing 937,700 workers in 2020, the Fuels sector declined 211,200 jobs from 2019. This 18% loss was the highest out of any of the five categories. Job losses were concentrated in oil and gas, with oil declining by 121,300 and gas decreasing 66,000. Job losses in biofuels were the lowest, ranging from 1,000 for Woody Biomass to 1,400 for Corn Ethanol.  

NUCLEAR

Earlier this year we commented on a proposal for the development of “modular” nuclear generating units. The Carbon-Free Power Project was to build 12 interconnected miniature nuclear reactor modules in Idaho to produce a total of 600 megawatts. It would be the first small modular reactor in the United States. The plan was to have the plant owned largely by members of the Utah Associated Municipal Power Agency.

The initial plan was not supported by all of the UAMPS members even though it would provide carbon free power to replace coal fired power. So, the project’s sponsors went back to the drawing board. “After a lot of due diligence and discussions with members, it was decided a 6-module plant producing 462 MW would be just the right size for (Utah Associated Municipal Power Systems) members and outside utilities that want to join,” according to UAMPS.

The reactor is planned to be built on the DOE’s 890-square mile desert site west of Idaho Falls at Idaho National Laboratory. The plant is expected to be running by 2029. Initially, the plan did not have unanimous support from all of the UAMPS members. The downsizing reflected a more reasonable assessment of the level of financial risk with which the project would be viewed. Right now, 28 UAMPS participants have committed to a total of 103 MW. 

Downsizing the project reduces the project’s costs and the amount of power it can produce, overall. The energy cost that project partners will pay rose from $55 per megawatt-hour to $58 per megawatt-hour. And the amount of power each of the six modules can produce has risen from 50 to 77 MW. The project is currently working toward submitting an application to the NRC in 2024 to build and operate the reactor. Even project proponents are concerned about the lack of commitments for more project capacity however.

UNDERGROUNDING TRANSMISSION

There are many costs to be considered when you look at the cost of grid resiliency investments by electric systems. One of them is the cost of undergrounding transmission lines. The demand for these actions is best reflected in the ongoing saga of California wildfires. One major transmission network has been under threat from the massive Oregon fire. Now, one of the newest California fires may be able to claim PG&E transmission lines as its source.

As a state report assigning that blame came out, the company announced a plan to bury at least some of its transmission infrastructure. Today, PG&E maintains more than 25,000 miles of overhead distribution power lines in the highest fire-threat areas (Tier 2, Tier 3 and Zone 1)—which is more than 30% of its total distribution overhead system. Now it has announced a multi-year effort to underground approximately 10,000 miles of power lines. Based on underground power line proposals that PG&E has previously submitted to state regulators, the project could cost about $4 million per mile

About 18 percent of the country’s electric distribution lines are buried, including those for nearly all new residential and commercial developments, according to the Edison Electric Institute. As one might expect, most of the negative reaction to the plan reflects a desire to see ratepayers unaffected by the cost of these investments. It’s hard to argue against wildfire mitigation but as is the case with so many aspects of climate change, it has to be paid for. The expectation of some ratepayer impact is not unreasonable.

The significant public ownership of much of the electric grid in the NorCal and Northwest regions is where municipal debt exposure to fire is. Joint action transmission issuers as well as the many Oregon/Washington public utility districts can be exposed as well.

TRI-STATE GENERATION

Last month (6/28) we outlined issues facing the large rural electric provider Tri-State Generation Co-op. Now, the story moves to its next phase. As we discussed $136.5 million prior, Tri-State was under pressure to provide estimates of projected “exit fees” for Tri-State participants who wished to leave the Co-op. Now, Tri-State has provided this information to two such participants and the reaction has been negative.

Tri-State said that its exit fees are based on the higher number of two calculations: the exiting cooperative’s share of the utility’s debt, or the present value of all the electricity Tri-State would have sold the co-op to 2050, minus any sales of the departing member’s share of the association’s electricity in wholesale markets. Tri-State’s total debt at the end of 2020 was $3.3 billion, according to a federal filing. 

The resulting numbers for United Power and Durango-based La Plata Electric Association — were $1.5 billion and $449 million. In contrast, two other members who left Tri-State – the Kit Carson Electric Cooperative, in Taos, New Mexico, which left in 2019 and paid fees of $37 million and the Delta-Montrose Electric Association in 2020 which paid $136.5 million. Should those fees stand, local co-op participants could see their financial standing quite negatively impacted.

OHIO CORRUPTION AND THE ELECTRIC INDUSTRY

Over the recent months, we’ve followed the ongoing fallout from the nuclear power industry’s efforts to derail clean energy policies and legislation in the State of Ohio. The House Speaker has been indicted, aides have taken pleas, and utilities have faced charges. Now,  FirstEnergy agreed to a $230 million penalty for bribing former House Speaker Larry Householder and former Public Utilities Commission of Ohio chairman Sam Randazzo.

FirstEnergy and its affiliated companies had hoped to see passed a $1 billion bailout for two FirstEnergy Solutions-owned nuclear plants, secure money for FirstEnergy Corp. through a decoupling Between 2017 and March 2020, FirstEnergy Corp. and FirstEnergy Solutions, now called Energy Harbor, donated $59 million to Generation Now, a dark money group controlled by Householder. The $230 million fine will be split 50-50 between federal and state government. Ohio’s $115 million will go toward a program that helps Ohioans pay their utility bills.

And in spite of the guilty pleas from the bribe payer, the Speaker still insists that the payments were legal campaign donations. In the meantime, renewable development took a hit when Ohio became a bit of an outlier in terms of preemption. A new law says county governments can pass resolutions to ban large wind and solar developments, or say that certain parts of their counties are off-limits to wind and solar projects. Developers need to give county governments at least 90 days’ notice before filing an application with the state regulator, the Ohio Power Siting Board, so that county officials have time to review the plan and take action before the state board begins its review.

This follows enactment earlier this year of a law which bans local governments from restricting the use of natural gas. Local governments already are barred by the state from taking actions that would limit oil and gas production.

MMWEC

The Massachusetts Municipal Wholesale Electric Company (MMWEC) plans to build a 55-megawatt natural gas-powered peaking generation plant in Peabody, MA at the site of an existing plant. That 20 MW facility will be closed and replaced by the 55 MW plant. The decision to retire the older, less efficient plant was made after hearing the concerns of ratepayers and analyzing new census data which shows an increase in the number of “environmental justice areas” surrounding the plant.

Local residents had cited health concerns as well as what are broadly characterized as equity or economic justice issues. Originally, the new plant would operate as well as the older plant. Recently, the old plant’s owner Peabody Municipal Utility reviewed 2020 census data showing the number of at-risk communities living in the areas surrounding the industrial park. The decision to not operate the old plant followed quickly thereafter.

It is just one example of the range of potential obstacles facing developers of new generation in the current political environment. In urban areas, economic justice and equity issues will drive opposition. In rural areas, concerns about aesthetics and land usage will drive opposition. The road to clean energy remains bumpy.

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

Recently we sat down with the Daily Bond Buyer and discussed some current trends I see in municipal credit. It’s available at https://www.bondbuyer.com/podcast/unexpected-turns .

MISSOURI SHOWS US A GAS TAX

Missouri Gov. Mike Parson has signed into law raising the state’s gas tax, The law will gradually raise the state’s 17-cent-a-gallon gas tax to 29.5 cents over five years. The first 2.5 cent increase is slated to take effect in October, which will bring the gas tax to 19.5 cents. Once fully implemented, the gas tax hike could generate more than $500 million annually for state, county and city roads. The Missouri Department of Transportation estimated that the state faces a $745 million annual funding gap for roads and bridges.

Now opponents to the increase are working to get a refund if they keep track of their receipts. to force the issue to a vote by the people. Since voters approved a constitutional amendment in 1996 requiring all tax increases over a certain amount to go to a statewide vote, not a single general tax increase has passed. The expectation is that if the proposed initiative gathered enough signatures, it could be on the ballot in 2022. This despite provisions in the law allowing residents to get a refund if they keep track of their receipts.

That provision makes it likely that the tax will not generate sufficient funds to close the existing gap between what the state needs for transportation and what the net proceeds of the proposed tax would generate after refunds. It shows how hard it is to raise gas taxes.

CRYING WOLF?

There has been nothing but lamentation and fiscal gnashing of teeth in the oil and gas producing states since the Biden Administration announced that it was suspending the acceptance for consideration applications for leases of Federal land for oil and gas exploration and production operations. While the spigot of new leasing applications has been turned off, that doesn’t mean that new leases are not being approved.

Approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president. The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data.  Some 2100 of those approvals came after January 20.

New Mexico and Wyoming have been leading the steady opposition to the lease suspension. Nonetheless, New Mexico and Wyoming had the largest number of approvals. This news comes as gasoline prices have steadily increased since the reopening of the economy. This increases the likelihood of some increased production and that at least some of the approvals will result in new drilling. Drilling on public lands and waters is estimated to account for about a quarter of U.S. oil production.

The continued growth in oil/gas leasing comes as more evidence of the decline of Wyoming coal comes in. The Energy Information Administration (EIA) on Wednesday said U.S. coal production fell in 2020 to its lowest level since 1965. U.S. coal production totaled 535 million short tons (MMst) in 2020, a 24% decrease from the 706 MMst mined in 2019. Coal production in Wyoming, where more coal is produced than in any other state, was 21% lower in 2020 than it was in 2019, while the second-largest producer West Virginia experienced an annual decline of 28%. U.S. coal-fired generation fell 20% year-on-year and exports were 26% lower in 2020 than in 2019.

GARDEN STATE OUTLOOK

The trend of improved ratings on state general obligation credits continues. The latest beneficiary is the State of New Jersey. Moody’s affirmed the A3 rating on New Jersey’s outstanding general obligation debt, and revised the outlook to positive from stable. This ultimately benefits some $40 billion of state agency and local debt with a state backup. The State was able to weather the pandemic storm.

It applied much of the revenue windfall resulting from the stimulus to address longstanding credit weaknesses. Specifically, Moody’s cited the fact that “The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management. These actions include debt reduction and avoidance and acceleration of pension contributions.”

The budget included a $6.9 billion pension payment and a $3.7 billion debt defeasance fund to pay down obligations. These items were keys to the improved outlook. While the budget also included recurring expenses which were not totally offset by recurring revenues, the pension payment was the largest in 25 years and it reverses a trend of consistent underfunding under the Christie administration which contributed to some 11 negative rating actions during that administration.

MAINE PUBLIC UTILITY VETO

Gov. Janet Mills on Tuesday vetoed LD 1708, An Act to Create the Pine Tree Power Company. The bill aimed to create a nonprofit, consumer-owned utility that would take over Central Mainer Power and Versant Power. It was approved by the legislature but not with a veto proof majority. It comes as the utilities are perceived to provide significantly less reliable service since CMP was purchased by a foreign owner. (Full disclosure – the owner Avingrid is also my utility supplier. Maine, we feel your pain.)

And the Governor seems to agree. In her veto message, the governor called the recent performance of Maine’s utilities “abysmal” and said that “it may well be that the time has come for the people of the State of Maine to retake control over the [utilities’] assets.” 

There does seem to be a consensus in favorable of a decarbonized grid in Maine but it has not produced clear results. The effort to import hydroelectric power from Quebec requires a transmission line which has encountered significant opposition. The effort to develop off shore renewables has been strongly opposed by the state’s lobster industry.

It’s another good example of the clash of interests which arises from the effort to significantly alter the energy production, distribution, and consumption chain. It is that environment that means that unless the Legislature is able to override the governor’s veto by two-thirds supermajorities in both the House and the Senate, the question of consumer ownership of Maine’s two investor-owned utilities will not be on the November 2021 ballot. The Legislature will reconvene on July 19 to vote on the veto and on all other vetoes Mills has issued since July 1.

While the veto process plays out, it is of note that a law was enacted which requires the Governor’s Office of Policy Innovation and the Future to define “environmental justice,” “environmental justice populations,” “frontline communities” and other terms. Officials will also have to develop methods to incorporate equity into decision-making at the Public Utilities Commission, the Department of Environmental Protection and other state agencies.  These definitions would guide the development of future legislation.  It could provide a good starting point for the process of actually developing consensus about what the terms mean on a granular level.

Maine joins several other states in such an effort. It’s clear that economic and environmental justice mean different things to different people. Seven states have adopted definitions of “environmental justice” or related terms in state law. Several states have also implemented definitions as part of agency initiatives related to pollution reduction and toxic facility siting.

New Jersey passed an environmental justice law in September 2020. It requires the state’s Department of Environmental Protection to deny permits for new polluting facilities deemed to have a negative environmental or public health impact on overburdened communities. Notably, it requires the department to consider “cumulative impacts” when making its decision: factors outside the facility in question, such as other existing sources of pollution, that could collectively create a higher burden for the community.

VIRGIN ISLANDS

Well before the pandemic, the U.S. Virgin Islands was a very troubled credit. This while relying on tourism, rum, and oil production. Oil production reflected the presence of what in its day was the largest oil refinery in the western hemisphere. For years, it was operated by a consortium consisting of the Venezuelan state oil company and the Hess Oil Company. As the politics of Venezuela became more unstable and incompetent, the refinery fell on hard times. As the source of over 1100 jobs on St. Croix, the loss of those jobs was problematic.

The refinery filed for bankruptcy in 2015. The economic failings of the plant created operating issues for any subsequent buyer and/or operator. ArcLight Capital purchased the refinery out of bankruptcy in 2016 for $190 million​. The current owner, Limetree Bay Refining LLC is controlled by EIG Global Energy Partners, which said it became the “reluctant” owner of the troubled refining operation in April as part of a restructuring. They are even more reluctant now since the most recent effort to restart the refinery earlier this year was halted in May under EPA orders. The operation had resulted in significant pollution – air, water, and directly.

Now Limetree has filed for bankruptcy protection. In the absence of any interim funding, Limetree’s refinery operations are forecast to burn through nearly $7 million over the next three weeks. The refinery only had about $3.5 million in cash on hand when it filed its Chapter 11 petition. The plant employed roughly 400 people as of the date of the bankruptcy filing, most of whom were required to be U.S. Virgin Island residents.

Full operations have not occurred since 2012 but there remained a significant economic interest in having it operate as a source of both employment and revenues. With the U.S.V.I. already dealing with legacy budget and pension issues and a utility on the constant edge of insolvency, this just one more brick on its credit load.

COULD LITHIUM REVIVE THE SALTON SEA?

Much attention has been focused on the need to develop significant sources of lithium to supply the production of batteries. Batteries will be a key towards moving renewables to the center of the energy supply as the nation moves to decarbonization. The attention comes from the need to mine lithium and there are environmental concerns being raised in regard to environmental destruction and possible pollution associated with lithium extraction.

While those issues are hashed out through the political process, the need for lithium batteries continues to substantially increase. This has led to the development of other sources of lithium including the extraction of the mineral from brine. The issue has been one of availability of lithium and the extraction process is one way to address that.

That’s where the Salton Sea comes in. The body of water was an accidental creation. When irrigation canals from the Colorado River jumped their levees near the U.S./Mexico border in 1905 on the desert east of San Diego, millions of gallons of fresh water spilled into the Salton Trough, historically an arm of the Lower Colorado River Delta at the head of the Gulf of California. When the water finally stopped, it filled a trough 45 miles long, 17 miles wide, and 83 feet deep.

Over time, the lake became an inland resort. Then in the late 1970’s, continuing drought and the fact that the “sea” was not fed by any flowing waters (rainfall became the primary source of replenishment caused the Sea to begin to shrink. The lack of new water and increased temperatures badly impacted the native fish species. The reduced attraction of the Sea became a vicious circle leading to the abandonment of seaside communities and businesses.  The waters continued to recede and the exposed lake bed became a source of toxic dust impacting nearby communities.

Most of the lithium used for batteries today comes from either South America or Australia and it is processed in China.  It makes sense that it would be more economical to develop lithium sources in closer proximity to end user customers. That’s why GM has recently invested in one domestic provider of lithium derived from brine.

The Salton Sea region is unique in that some researchers estimate it contains enough lithium in the geothermal brines that it could supply a third of the world’s current lithium demand. The lithium also could be processed in tandem with developing geothermal power plants that could generate significant clean energy and local jobs. That has led to increased investment in the development of geothermal power in the Sea. Now, the demand for lithium has led to new development of facilities to extract lithium from brine in the waters.

The potential exists for such a project to be a source of jobs and tax revenues for Imperial County.  

PENNSYLVANIA ROAD FUNDING DEBATE CONTINUES

The latest party to weigh in on what the funding mechanisms should be for transportation, particularly roads, in Pennsylvania is the 42-member Transportation Revenue Options Commission. The Commission was created in March and charged with developing recommendations and changes environment.  Road funding has been an ongoing problem for the Commonwealth given opposition to higher gas taxes or tolls.

The recommendations are sure to be contentious. The proposal calls for changes in three phases: the first two years, the next two years and five years or longer, with the new or increased charges starting at various times because some of them would require approval by the General Assembly. The largest new revenue source and the most dramatic change would the enactment of a tax of 8.1 cents a mile for each mile a vehicle is driven. That move — which wouldn’t begin until the third phase and would require legislative approval and a pilot period to test a collection method — is projected to generate $8.9 billion a year.

Other fees: A fee of $1 for every package delivered by major companies like Amazon, FedEx and UPS, as well as local groceries and restaurants. No government is charging such a fee at this time. Transportation networks such as Uber and Lyft would be charged fees of $1.11 for each trip. Existing taxes and fees like the vehicle rental fee would increase by $3 to $5; vehicle registration would double to $76 for passenger vehicles initially, then be replaced by a fee based on the value of the vehicle; and aircraft registration and jet fuel taxes would increase.

All of this is designed to replace the existing $8.1 billion of revenue derived from taxing fuel and the existing fee infrastructure.

PR

U.S. District Court Judge Laura Taylor Swain issued a preliminary ruling rejecting creditor objections to the document filed by Puerto Rico’s Financial Oversight and Management Board (FOMB), but delaying a final approval until the fiscal panel and insurers conclude negotiations. The hearings analyzed whether the disclosure statement provides accurate information to creditors, retirees, public employees, contractors and other parties who will be affected by the POA, which would restructure approximately $35 billion in commonwealth debt and $50 billion in pension liabilities, and include an 8.5 percent cut to monthly retirement payments. 

The deal reduces the outstanding general obligation (GO) and Public Buildings Authority (PBA) debt as well as other claims by almost 80%, from $35 billion to $7.4 billion in new GO debt that would be issued by the commonwealth government. The government’s debt service would be $1.15 billion, or 8% of fiscal year 2020 own-source revenues. The rulings and agreements reached with bond insurers allow the process of approval of the Plan of Adjustment offered by the Commonwealth.

Judge Swain established a preliminary calendar for the Plan Of Adjustment discovery and confirmation process. A U.S. District Court Judge will oversee the discovery process lasting from Aug. 3 to Oct. 11, assuming the order for the disclosure statement is issued. The confirmation trial will commence on Nov. 8 and end on Nov. 23. That trial will include cross-examination of witnesses. The judge said that objections to the proposed confirmation order should be filed on Oct. 22, while the FOMB’s reply should be filed on Oct. 29. 

There still remains the possibility of additional delays. As outlined by Judge Swain “in order for there to be a practical possibility of holding confirmation hearings beginning in November, as proposed by the oversight board, discovery will need to begin immediately” and “Fulfilment of the oversight board’s request to begin confirmation hearings in November is dependent on the government entities’ cooperation in discovery… The court expects the oversight board and the Fiscal Agency & Financial Advisory Authority to fully respond to every request,”.

The continuing political opposition to parts of the Plan does cast a pall over the proceedings. The Governor and his party are doing everything they can to avoid having to agree to cuts to pension payments. There is still plenty of room for mischief.

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

________________________________________________________________

ILLINOIS UPGRADE

In perhaps the surest sign that state credits are coming out of the pandemic in much better than expected shape, Moody’s upgraded the State of Illinois’s general obligation (GO) rating to Baa2 from Baa3. In connection with this action, ratings on Build Illinois sales tax revenue bonds were upgraded to Baa2 from Baa3, and annual appropriation bonds issued by the Metropolitan Pier and Exposition Authority Ratings were upgraded to Baa3 from Ba1.

Total debt affected amounts to about $33 billion, including $27.7 billion of general obligation bonds, $3 billion of Metropolitan Pier and Exposition Authority bonds, and $1.9 billion of Build Illinois bonds. The outlook remains stable. The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act.

The Metropolitan Pier and Exposition Authority upgrade stems directly from the upgrade of the State.  The credit is supported by the state’s commitment to provide funds for debt service when pledged taxes on Chicago-area meals, hotel stays and other tourist activity is insufficient. That commitment was tested during the pandemic but the State did step up and assist the Authority to keep current on debt service.

Illinois nonetheless is far from being out of the woods. The failure of the income tax amendment in November was telling in terms of where the State’s politics are. The return to fiscal stability and strength remains a long way off.

SUMMER ELECTRIC OUTLOOK

The U.S. Energy Information Agency has made an assessment of regional electric reliability based on estimated demand and projected available generation capacity. The highest risk of electricity emergency is in California, which relies heavily on energy imports during normal peak summer demand and when solar generation declines in the late afternoon. Although California has gained new flexible resources to help meet demand when solar energy is unavailable, it is at high risk of an electricity emergency when above-normal demand is widespread in the west because the amount of resources available for electricity transfer to California may be limited.

The Electric Reliability Council of Texas (ERCOT) typically has one of the smallest anticipated reserve margins in the country, meaning it has relatively little unused electric generating capacity during times of peak electric load. ERCOT’s anticipated reserve margin increased from 12.9% last summer to 15.3% for this summer as a result of adding new wind, solar, and battery resources. Although ERCOT’s anticipated reserve margin is higher this summer, extreme summer heat could result in supply shortages that lead to an electricity emergency.

The Midcontinent Independent System Operator (MISO) and ISO-New England have sufficient resources to meet projected peak demand. However, if above-normal levels of electricity demand (which NERC calculates based on historical demand) occur in these regions, demand is likely to exceed capacity resources. In that case, additional transfers of electricity from surrounding areas will be needed to meet demand.

NEW YORK CITY

It looks like the next Mayor of New York will be Eric Adams. It is a big win for the city’s business community, especially the real estate industry given Mr. Adams long history with that sector. The win also is seen as a blow to those who support things like defunding the police. That issue was prominent in the campaign although the result argues that those arguments did not resonate. One thing that characterized the debate was a general lack of knowledge on the part of voters as to how much the City actually spends on criminal justice.

Now, we have some real data from the City’s Independent Budget Office (OMB) about how much is spent on criminal justice by the City. Spending by the agencies involved in the criminal justice system has grown from $5.1 billion in 2001 to $9.2 billion in 2020, an increase of 83 percent over two decades. When adjusted for inflation, though, the growth in spending is a far more modest 1.3 percent.  Funding from the city typically covers about 90 percent of the cost to support the system—$4.6 billion in city-generated funds in 2001 and $8.2 billion in 2020.  The police and correction departments have consistently absorbed most of the funds for the justice system. But over the past two decades, the two departments’ share of system spending has declined from 84 percent in 2001 to 79 percent in 2020.

Conversely, despite the decline in the number of arrests over that period, there has been no corresponding decline in the share of criminal justice spending on the offices of the District Attorneys or Special Narcotics Prosecutor.  A number of expenses such as pension and fringe benefits for criminal justice agency staff, as well as debt service and the cost of legal settlements are not part of the budgets of the individual agencies involved in the justice system. The city budget carries these expenditures centrally. When the “fully loaded” costs of the system are taken into account, projected spending totals $14.1 billion for 2021 (as of the 2021 Adopted Budget), compared with direct agency costs of $8.3 billion.

The largest agency in the system is the New York Police Department. The NYPD budget pays for all patrol and enforcement activity, as well as traffic enforcement, transit police, and school safety officers. The police budget increased by 43 percent from 2001 through 2013, from $3.4 billion to $4.9 billion, and by another 24 percent to just over $6 billion in 2020. In total, the budget grew by 77 percent from 2001 through 2020. Adjusted for inflation, police department spending over this period was largely flat, with spending about 2 percent less in 2020 than in 2001.

The Department of Correction (DOC) is the second largest agency within the criminal justice system. DOC oversees security and operations for jails on Rikers Island, as well as the city jails and court pens in each borough. In 2001, DOC’s budget was $835 million. It increased 31 percent, to $1.1 billion, in 2013 and another 19 percent, to $1.3 billion, in 2020. Over the entire 2001 through 2020 period, the DOC budget increased by 56 percent.

Spending did not keep pace with inflation, however, decreasing by 13 percent since 2001 in real terms. The budget for alternatives to incarceration and community programming increased 163 percent (46 percent with inflation), from $285 million in 2001 to $752 million in 2020. As a result, spending for this category has grown from 6 percent to 8 percent of the overall criminal justice system budget over the period.

PR

The Puerto Rico Oversight Board approved a $10.1 billion budget which was the product of collaboration by the governor, the legislature, and the Oversight Board. It represents the smoothest process of developing and approving the Commonwealth’s budget since the establishment of the Board. The fiscal 2021-2022 General Fund budget is $10.112 billion. The major expense categories are  $2.12 billion for health, $2.06 billion for pensions, $1.88 billion for education, $1.28 billion for the Department of Public Safety and Corrections, $416 million for economic development, and $371 million for the courts and the legislature.

The start of fiscal 2022 also saw the Board approve the operating and maintenance budget for the Puerto Rico Electric Power Authority of $3.13 billion, up from $3.06 billion in the previous fiscal year. The authority’s revenue is expected to be $3.1 billion, up from $2.9 billion. The approved budget for the Puerto Rico Aqueduct and Sewer Authority anticipates $1.03 billion of revenue in fiscal 2022, $43 million less than the previous fiscal year due to lower population and lower demand.  

The Highways and Transportation Authority budget calls for $681 million in operating and capital expenses in fiscal 2022, down from $862 million in fiscal 2021. Operating and capital revenues are projected to decline to $710 million from $862 million. No general fund transfers into the Authority are planned in the budget. That is a savings of some $250 million relative to the subsidy provided in FY 2021.

OPIOID SETTLEMENTS

Fifteen states have reached an agreement with Purdue Pharma, the maker of the prescription painkiller OxyContin.  The proposed settlement would provide some $4.5 billion from the family which owned Purdue Pharma an increase from the starting bid of $3 billion. The plaintiffs (including the states, some 3000 governmental plaintiffs) are also obtaining a significant amount of documents from the company. The negotiations were under the auspices of a bankruptcy court where Purdue Pharma’s bankruptcy filing occured.

The terms of the proposed settlement call for the Sacklers to pay $4.325 billion. Trustees appointed by a national opioid abatement fund would oversee Sackler charitable arts trusts worth at least $175 million. Those funds would go toward addressing the opioid crisis. The settlement is key to the company’s hopes of emerging from bankruptcy. Creditors have until the 14th of July to approve the deal. If sufficient approvals are achieved than the plan could be confirmed in the second week of August. That would make $500,000,000 immediately available to plaintiffs.

The plan doesn’t produce a windfall like the ones from the tobacco settlements. This means that any hoped for new securitization of payments will not be viable. There is less money and the payment period is only 9 years. There is no evergreen recurring annual payment after that time.

New York and Massachusetts were in the lead in terms of pursuing the documents from the company. The other joining states were Colorado, Hawaii, Idaho, Illinois, Iowa, Maine, Nevada, New Jersey, North Carolina, Pennsylvania, Virginia and Wisconsin. There are still states holding out from the settlement. Other litigation remains unresolved. Distributors are facing a bench trial in a West Virginia federal court and they and other manufacturers are being tried before a jury in a New York state court. 

WAYNE COUNTY UPGRADE

Wayne County, MI has certainly seen its share of fiscal difficulties especially when its major other governmental entity declared bankruptcy. The City of Detroit has been able to start its recovery process and get out from under state control. While that process unfolded, the County dealt with several fiscal issues as well. While the City’s credit faces some concerns resulting from proposed City Charter provisions, the County had slowly but steadily moved forward.

It’s reward? Moody’s has upgraded to A3 from Baa1 the issuer rating of Wayne County, MI. It also maintained a positive rating outlook. ” The upgrade of the issuer rating to A3 reflects the county’s material bolstering of operating fund balance and liquidity aided by restructuring of retiree benefits which greatly reduced the county’s annual fixed cost burden. Also considered is an expanding tax base, which creates some cushion against the state’s strict property tax caps that can result in revenue losses during time of tax base contraction.”

The historic risks which result from dependence on the auto industry continue. The County remains the economic center of Michigan even after the decline of auto manufacturing. Plans to build electric cars in Michigan will help as well.

CLIMATE WATCH

Missouri enacted legislation prohibiting local governments from banning natural gas hookups on newly-built buildings. A law to restrict local limits on natural gas and propane was enacted on Ohio. In Indiana, legislation making local zoning boards the arbiters of solar siting is designed to hinder solar development at the local level.

Preemption bills were introduced in 19 states this year –  Alabama, Arkansas, Colorado, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, Texas, Utah, West Virginia, and Wyoming). Fifteen of these bills have been enacted into law or awaiting final signature from the state’s governor (AL, AR, FL, GA, IN, IA, KS, KY, MS, MO, OH, TX, UT, WV, WY). Four other laws went into effect last year (AZ, LA, OK, TN). 

The Ohio legislation was backed by the Ohio Oil and Gas Association and the Ohio Chemistry Technology Council, would block any city or county from issuing any law or zoning code that “limits, prohibits, or prevents” people and businesses from obtaining natural gas or propane service. The Florida legislation recently passed, preempts local governments from blocking or restricting the construction of “energy infrastructure,” including the production and distribution of electricity. Prior to the rule, the county commission was required to grant a special exception for a major utility on an agriculturally zoned property.

In Florida, the Sand Bluff solar project was to be connected to an existing Gainesville Regional Utilities substation in Alachua County and produce about 50 megawatts of electricity a day. Issues of racial and environmental justice were raised and they were enough to discourage approval. It is the last time a county level approval would be required under the new Florida legislation.

Maine enacted a law which would prohibit state and local governments from licensing or permitting the siting, construction or operation of wind turbines in the state territorial waters that extend three miles from shore. The ban would have no effect on activities in federal waters beyond the three mile limit. It’s another example of the conflict between labor and the environment coloring so many aspects of the effort to decarbonize.  In this case the law placates Maine’s lobstermen.

COSTS OF COAL EVEN AFTER ITS GONE

Appalachian Voices been an advocate for post-coal Appalachia as the region transitions from the mineral extraction industry. Recently, they studied the magnitude of the cost involved with reclaiming old abandoned mining sites. As more coal companies declare bankruptcy, fewer companies remain to take over mines, so the number of companies forfeiting reclamation bonds and deserting their cleanup responsibilities will only increase. In many states, the funds generated by bonding programs may fall short of the actual reclamation costs that are passed to state agencies and taxpayers.

Using state and federal reclamation data, the organization estimated the amount of outstanding reclamation at active SMCRA permits for seven Eastern coal mining states: Alabama, Tennessee, Virginia, Kentucky, West Virginia, Ohio, and Pennsylvania. The total estimated cost of outstanding reclamation is $7.5 to $9.8 billion dollars across all 7 states. Total available bonds across the seven eastern states amount to about $3.8 billion dollars.

Without federal funding, it’s likely that the states would foot the bill. The silver lining of the problem is that addressing the reclamation backlog could put a substantial number of people back to work. If the remaining 633,000 acres in need of reclamation were reclaimed, this would create between 23,000 and 45,000 job-years across the Eastern states. It is likely not a long term fix but it could lessen some of the issues resulting from the demise of coal.

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.