Joseph Krist

Publisher

NYC

The realities of the current situation with the Office of the Mayor of the City of New York and his merry band of long time “associates are in full view. He stood as a lonely and forlorn figure at this week’s Tuesday with Eric, alone at the podium. He didn’t get to enter to his walkup music. Yes, the Mayor had walkup music as if he was coming to bat at Yankee Stadium. It reflects the reality that since our last issue, the Governor has reminded Mr. Adams of her power to remove him.

It is clear that his survival depends on a reshuffle at City Hall. Two of his most influential and long-time associates left and it’s clear that hanging on is not a strategy. It would not be a surprise to see additional administration insiders depart sooner rather than later. The implications that more charges could be filed will likely generate some more reflection and action.

We still remain sanguine about the City’s willingness and ability to pay debt service. From the point of view of consumers of public services, the next 15 months will be rocky at best. There are significant vacancies in the city’s civil service ranks with many spots vacated in the face of the pressure from the City to return to work quickly during the pandemic. Many of the job “cuts” announced by the City over recent financial plans are actually just acknowledgement that many of those positions have become unfillable under current conditions.

Still think the rating is stable?

HOSPITAL CONVERSION

The Lee Health System operates 6 hospitals in Southwest FL, numerous specialty and service centers, and employs over 15,000 people. The healthcare system first opened its doors in 1916 as a community-centered nonprofit. In 1968, Lee Health began operating as an independent special healthcare district created by the State and governed by an elected Board of Directors. Now, the system wants to convert into a private nonprofit healthcare provider.

Moody’s announced that the proposed conversion of Lee Memorial Health System (LMHS) from a governmental unit to a private, nonprofit corporation would not, in and of itself and as of this point in time, result in a reduction, placement on review for possible downgrade or withdrawal of its current rating of A2. Lee Health System, Inc. will the sole remaining member of the Obligated Group under the existing Master Trust Indenture and solely responsible for the repayment of the outstanding bonds. 

Management has desired the change to enable the System to expand its footprint into neighboring counties. Some 20% of patients are from out of the county. This change would for example, allow the system to own and operate physician practices and the like in adjacent counties.

AUTONOMOUS VEHICLES

Cruise, the autonomous driving unit of General Motors, has agreed to pay a $1.5 million penalty for failing to properly report an accident in which one of its self-driving taxis severely injured a pedestrian last year. That accident was largely responsible for Cruise vehicles to be taken out of service in San Francisco. Cruise will also face increased oversight of its activities as it restarts testing of its technology in Phoenix, Houston and Dallas, the regulator, the National Highway Traffic Safety Administration

Waymo continues to offer autonomous rides in San Francisco, Los Angeles and Phoenix. The company is also testing its service with human drivers in Austin, Texas. Zoox, a subsidiary of Amazon, is also testing a self-driving taxi service that uses a car with no steering wheel or driver’s seat. Humans monitor vehicle operations from a remote command center. Cruise has resumed autonomous driving operations in Phoenix and Dallas, but with humans at the wheel who can intervene.

Prior to October 1, New Jersey residents who purchased an electric vehicle did not have to pay state sales tax on that purchase. This week, legislation took effect that reduces that subsidy by half. Now, a sales tax of 3.3125% will be included in the purchase price of the vehicles. The establishes that the state’s full sales tax of 6.625% is to be levied on transactions involving zero-emission vehicles, beginning July 1, 2025.

The NJ Office of Legislative Services estimates that the phaseout of the sales-tax exemption is expected to bring in $75 million in new revenue for the budget’s general fund during the 2025 fiscal year.

HELENE

The hurricane has moved on but the impact is likely to be around for a long time. We’ve been asked what we think the credit impact might be on communities damaged. In terms of debt repayment, we are not concerned in the near term. We see the greater pressure reflecting the role that local and county governments will play in any recovery going forward.

Even under these circumstances, a process needs to be followed. As issuers and overseers of a variety of regulations and procedures, localities and counties will bear the brunt of the demand for services. Managing building on this scale within a limited amount of time will create bottlenecks in the system. Government workers will be torn between their jobs and their need to rebuild and/or relocate.

The storm will also focus attention on transportation, particularly the road and bridge infrastructure. A number of local bridges were not just damaged but destroyed, and floated away In the short term, I-40 and I-26 suffered significant damage and were closed. The barriers to workers and goods moving about to respond are significant. The situation calls out for quick solutions but some of the damage points to longer term issues.

In total, according to data from PowerOutage.us, about 1.3 million electric customers remained without power on Wednesday morning, almost a week after Helene struck Florida as a Category 4 storm. About 500,000 of the outages were in South Carolina; North Carolina and Georgia each had more than 300,000 outages remaining. 

FEMA can spend as much as it needs to on disaster recovery thanks to a provision Congress approved a few days ago and special caveats for emergencies. The stopgap spending bill enacted last week, which keeps the federal government running through Dec. 20, included a provision allowing FEMA to spend money from its Disaster Relief Fund at a faster rate than would have otherwise been allowed. Provisions covering “immediate needs funding” or INF are designed to facilitate recovery. INF restrictions do not affect individual assistance, or public assistance programs that reimburse emergency response work and protective measures carried out by state and local authorities.

The role of insurance is always important in the process of recovery from natural disaster. In dozens of counties in Georgia, North Carolina and South Carolina that were flooded by Helene, less than 1 percent of households have flood insurance through the federal program that sells almost all of the nation’s flood policies. In South Carolina, just 0.5 percent of the 770,000 households in disaster counties have FEMA insurance. In North Carolina, 0.8 percent of households in disaster counties have FEMA insurance.

In Georgia, 8.5 percent of properties in disaster counties have FEMA insurance, though the figure is inflated by a large number of policies in coastal Chatham County, which includes Savannah. Excluding Chatham, 0.7 percent of households in disaster counties have FEMA insurance. In Florida, which has one of the highest rates of FEMA coverage, 24 percent of households in disaster counties are covered.

Arguably, flooding has been a greater destructive force than have wildfires. As more of these events become likely, the more attention will be paid to the issue of flood insurance. The lack of insurance purchases for flooding along with the increased likelihood of more flooding going forward may drive demand for some government insurance program for natural disaster losses. Flood insurance is something the industry has little stomach for especially in light of its recent storm and fire payout experience.

CLIMATE HAVENS

I have always been amused by the notion that climate change could drive migration to areas perceived as cooler and less exposed to things like rising seas. That things would get sufficiently difficult in Florida or North Carolina that millions would seek to relocate from say, Miami to Buffalo. Over the last few years, the strength of that notion has been tested. The storm will only stir more debate. It does remind us of some instances in that time which might rebut the concept.

One of the communities which was often mentioned by supporters of the concept was Buffalo, NY. Its location on a Great Lake was both a positive (supply of fresh water) and a negative (rising lake levels) but the lower average temperatures seemed to tip the balance. And then winter returned to explain why its so hard to live in a climate haven like Buffalo. A couple of moved or delayed Bills playoff games only highlighted extraordinary conditions which can prevail in that climate haven.

In New York, voters approved a ballot item in November, 2022 creating a “right” to a safe environment. They enshrined it in the constitution. It was meant to drive the transition to a green environment. The electric industry and cars were its primary target. Then fast forward to June of 2023 when you couldn’t walk outside up here in the climate haven mountains I live in and one needed a mask just to walk along the road because our neighbors to the north were on fire.

Now, Asheville, NC is being tested as a “climate haven”. The mountainous area and inland location were seen as being shielded from the potential worst impact from storms. The winters weren’t too bad snow wise. It was hundreds of miles from an ocean coastline. It’s easy to underestimate the flood risk in mountain communities (like theirs and mine) but every large storm leads to more “water events” in these areas.

They drive more damage to land which then undermines infrastructure. Roads quickly become unpassable and alternatives limited. Infrastructure for power tends to be more vulnerable and the distances covered make rebuilding that much harder. Water and sewer infrastructure is significantly damaged. Not much of a haven.

NUCLEAR

The Supreme Court agreed to review a ruling by the 5th U.S. Circuit Court of Appeals that found that the Nuclear Regulatory Commission exceeded its authority under federal law in granting a license to a private company to store spent nuclear fuel at a dump in West Texas for 40 years. The outcome of the case will affect plans for a similar facility in New Mexico.

The NRC contends that the states forfeited their right to object to the licensing decisions because they declined to join in the commission’s proceedings. A second issue is whether federal law allows the commission to license temporary storage sites. Texas and environmental groups, unlikely allies, both relied on a 2022 Supreme Court decision that held that Congress must act with specificity when it wants to give an agency the authority to regulate on an issue of major national significance.

On the first issue, two other federal appeals courts, in Denver and Washington, that weighed the same issue ruled for the agency. Only the 5th Circuit allowed the cases to proceed. In its ruling for Texas, the 5th Circuit agreed that what to do with the nation’s nuclear waste is the sort of “major question” that Congress must speak to directly.

HOSPITAL PRESSURES CONTINUE

In the aftermath of the pandemic, demand for hospital services has been negatively impacted. Utilization rates remain behind where they were and this has had the expected impact on revenues. It has put many of these facilities in retrenchment mode regarding staffing. Many of those positions are visible if administrative. Nevertheless, finances remain tight at many facilities. The latest example is in Oklahoma.

Norman Regional Hospital Authority (NRH) is a regional hospital system located in Cleveland County, Oklahoma (south of Oklahoma City) with 387 licensed beds and $566 million of operating revenues. NRH operates as a public trust and operates Norman Regional Hospital, Norman Regional HealthPlex, Norman Regional Moore facility, and recently opened Norman Regional Nine facility, as well as numerous outpatient locations.

This week, Moody’s announced that it had downgraded NRH’s rating to B1 reflecting a material and precipitous decline in liquidity well in excess of projections. Cash and liquidity are king in hospital ratings. A short-term line of credit is currently fully drawn, and ongoing cash flow losses continue. This and an outlook which seems unimproved over the near term keep the credit under review for further downgrade. The line of credit renewal needed to carry the status quo and failure to achieve it will further damage the rating.

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

NUCLEAR

Constellation Energy said announced that it plans to reopen the shuttered Three Mile Island nuclear plant No. 2 in Pennsylvania. It’s easy to forget that the second unit of the plant was able to be restarted after the 1979 accident and it operated until 2019. Economics drove that decision. Microsoft, which needs tremendous amounts of electricity for its growing fleet of data centers, has agreed to buy as much power as it can from the plant for 20 years.

Constellation plans to spend $1.6 billion to refurbish the reactor that recently closed and restart it by 2028, pending regulatory approval. It is reflective of the federal tax credits available to keep operating nuclear plants open. They are supporting the extended life of Diablo Canyon. Credits are driving the effort to restart the Palisades plant in Michigan. The combination of carbon free power and the data center driven demand spikes seen in many areas are driving the effort.

If restored, the TMI reactor would have a capacity of 835 megawatts, enough to power more than 700,000 homes. This week, The U.S. Nuclear Regulatory Commission (NRC) has received a petition for rulemaking requesting that the NRC revise its regulations to include a Commission-approved process for returning a decommissioning plant to operational status. The NRC denied a similar petition in 2021. The petition was submitted in connection with the Palisades plant.

The plant owner, Holtec International remains on track to restart operations at Palisades in October 2025. NRC expects to issue a final decision on the required licensing actions by July 31. The NRC will continue to follow existing regulations while it evaluates the petition.

MEDICAID ON THE CALIFORNIA BALLOT

California’s managed-care tax comes from a levy imposed on health plans, based on monthly numbers of both Medi-Cal and commercial insurance enrollees. The money raised is matched by the federal government, doubling the spending power. That federal money is subject to reauthorization and appropriation by Congress every three years. California has had a tax in some form since 2009. It is one of 19 states to levy similar taxes.

Now, a ballot initiative up for vote in November may throw a wrench into the current system.  Proposition 35, a November ballot initiative that would create a dedicated stream of funding to provide health care for California’s low-income residents. It would change the funding structure in that it would specifically designate the purposes for which it is being levied.

The measure would use money from a tax on managed-care health plans mainly to hike the pay of physicians, hospitals, community clinics, and other providers in Medi-Cal. So far, it all sounds good. Some have focused on the risk being created in that Proposition 35 sets specific dollar amounts through 2026, which are based on the managed-care tax approved by the federal government last year. the tax requires another federal approval starting in 2027, the year the ballot measure would make funding permanent. The initiative does not provide for revenue reductions (like the federal matching funds) but mandates revenue levels.

The real concerns arise from some of the “mechanical” aspects of the proposal. The desire to be specific in purpose has raised concerns that some currently paid under the existing structure may not qualify for the new health tax program. Instead of relying on a dedicated fund for some of these costs, they would be funded out of the State’s General Fund. That would put these costs at risk of General Fund problems in future.

That’s because the ballot measure would supersede the budget, and it leaves them out of the health tax proceeds. The ballot measure contains flexibility for small changes, it requires a three-fourths majority vote in the legislature for any major changes. The Centers for Medicaid/Medicare Services also has issues with how the State currently levies its tax and what it funds. California’s tax derives revenues mainly from Medicaid services (instead of non-Medicaid services) and uses these revenues as the state’s share of Medicaid payments.

It leads to the CMS to find that the tax is not sufficiently redistributive as is required under the rules governing the federal program. Federal rules require that the commercial health plans be reimbursed for the tax they pay on their Medi-Cal membership. Since the Medi-Cal rate is around 100 times as much as the rate on commercial membership, 99% of the revenue from the tax is on the Medi-Cal side. It is a conscious choice in an effort to keep private premiums down.

INSURANCE AND TAXIS AND UBERS

The American Transit Insurance Company provides coverage for about 74,000 for-hire vehicles in New York City, or more than 60 percent of the available cars, according to city records. Recently, the company disclosed that it is insolvent. It faces more than $700 million in losses from existing and projected claims from past accidents. Were the company to collapse altogether, thousands of taxis, Ubers, Lyfts and livery cars would be immediately taken off the road until they could find other insurance.

The situation is complicated by the fact that the company is a privately held entity with a history of financial issues including misappropriation of funds. State regulators have ordered American Transit to explore all options to obtain more funding, including a potential sale of the company. The firm submitted two remediation plans, which included rate increases and setting up a blockchain platform where policies could be bought and sold as nonfungible tokens.

If it is not purchased, the company could go into receivership with the New York Liquidation Bureau, which would use American Transit’s remaining assets or a state fund to pay off active claims. Citywide, more than 780,000 trips are taken each day in taxis, Ubers and Lyfts. The firm was established in 1972, had its first public incident with the NYS Insurance regulators over finances in 1979 and managed to still be allowed to write business. Sounds like a major regulatory failure.

NYC

The indictment of Mayor Eric Adams is an unprecedented event in the history of one of the market’s largest issuers. The closest period of time since the 1975 financial crisis to this is the last Koch administration. Extensive as the corruption of the “City for Sale” era was, it did not have legal consequences for the Mayor. This is truly different. Fortunately for the City’s bondholders, the mechanisms established in the wake of the experience of the late 1970’s provide security for them.

The City’s GO debt is secured and paid by property taxes. These tax proceeds are effectively in a lock box where they remain until the collections are certified at which time moneys are released to the various sinking fund accounts for the bonds. Regardless of the outcome of the Mayor’s legal entanglements, those taxes will be levied, collected and deposited in to the lock box. We are not concerned about the full and timely payment of the City’s debt. Other related debt like that issued for the Transitional Finance Authority are also secured by revenues directed into appropriate funds for the payment of debt service. From our standpoint it is ongoing trading value rather than the issue of full payment that should be the concern of bondholders.

Functionally, if the Mayor vacates office before his term ends (12/31/25) the Public Advocate becomes the Mayor. That individual would then have to call a special election for a new Mayor. It would have to be done quickly as there are restrictions in state law as to when such a vote can be held relative to the primary dates for the 2025 mayoral election. It will be a very tumultuous time for City government at a time when it will be facing crucial funding issues.

The Mayor will have to issue a Financial Plan Update in mid-November. He will likely be looking for significant financial assistance from the State. If Adams resigns, it is unclear how badly this will hobble the City’s efforts in Albany especially in light of New York State’s fiscal year and budget timing (4/1). It will also come in competition with the ever increasing demands for state funding from the MTA.

Regardless of who is Mayor, the City’s prison system is in increasing legal trouble. Federal Judge Laura Taylor Swain ordered Department of Correction leaders to meet with lawyers for prisoners to create a plan for an “outside person” who could run the system. They must discuss whether a receiver would work with or replace a commissioner; how a receiver might be appointed; his or her tenure; and qualifications for the position

Given the upheaval in City government, it is highly likely that we see a receiver appointed. We would not be surprised if the receiver actually runs Rikers in the absence of a commissioner. It’s not clear what fiscal impact would result but reform of the City’s jail system will not come cheaply. The next court date is November 12.

NEW JERSEY TRANSPORTATION

A unanimous vote by members of the New Jersey Legislature’s Joint Budget Oversight Committee approved a plan to refinance some $3.2 billion of New Jersey’s transportation-infrastructure debt secured by the Transportation Trust Fund (TTF). Under the proposed refunding transaction, the planned share of pay-as-you-go spending will increase by about $1 billion through the end of the 2029 fiscal year. Over the same period, the projected amount of new borrowing will drop, from about $8.5 billion to $7.5 billion.

The decision comes in the wake of the latest five year reauthorization of the TTF and the taxes which support it – the state gas tax, the sales tax, and contributions from state toll-road authorities. In addition, the legislature approved a registration fee on electric vehicles established as a new source of revenue for the TTF. The gas tax will continue to see regular increases in the rate to offset declining receipts.

UPDATES

Brightline West – The $3 billion federal grant supporting construction of the Brightline train between Southern California and Las Vegas has been formally awarded. Along with a $3.5 billion private activity bond allocation, half of the projected funding need is filled. It’s expected that the other half will be debt and equity funded. Serious construction is now expected to begin in early 2025. Plans are for the high-speed rail system to be built and operating before the 2028 Olympic Games in Los Angeles.

MTA – the MTA formally submitted its capital program for the next five years. It comes in the wake of the “pause” in congestion pricing this summer. The $68 billion funding estimate accompanying the plan is only half funded. Some $22 billion in federal, state and local government funding is assumed. The MTA predicts $13 billion of new debt of its own. Here’s the rub. That only accounts for half of the plan’s needs. It will be one of the dominant items of the FY 2026 state budget.

Grid Terrorism – A conspiracy to launch an attack against five Maryland electric substations led to a sentence of 18 years in a federal prison. The plan was to try to start a race war in Baltimore. Other plots have been met with harsh sentences as well. Given the relative vulnerability of these pieces of the electric infrastructure, it’s important to discourage the threat given how hard it is to secure remote stand alone facilities.

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

Joseph Krist

Publisher

NYC

You know it’s reflective of something bad when the news is dropped on a Saturday evening. The latest departure from the Adams administration (City Corporation Counsel) over “personnel matters” just piles on the trouble for the Mayor. The management of three of the most important issues – police, migrants, and education – has been hampered and executed poorly.

This all comes as the commercial sector still is conducting efforts to revive in-office work. Transit remains an issue (a state problem) hindering a full return. Attendance at many entertainment and cultural venues across a wide spectrum of offerings remains lower. The restaurant industry remains stressed.

Under those circumstances, good government is as important as fiscally sound government is. With so much change in his management team and the whiff of criminality about City Hall, instability rules. Tuesday is always an interesting day for the Mayor. His weekly press event affectionately known as Tuesdays with Eric is reviving an old sport from the Cold War. Just like on May Days of old when you looked to see who was on Lenin’s tomb, the shift and deletions from the dais each Tuesday can be watched as well. 

FLORIDA BUDGET OUTLOOK

The Long-Range Financial Outlook (Outlook) is issued annually by the Legislative Budget Commission as required by article III, section 19(c)(1) of the Florida Constitution. The Outlook provides a longer-range picture of the state’s fiscal position that integrates expenditure projections for the major programs driving Florida’s annual budget requirements with the latest official revenue estimates. The 2024 Outlook includes projections for Fiscal Years 2025-26, 2026-27, and 2027-28.

Expenditure projections, or budget drivers, are grouped into two categories: (1) Critical Needs, which are generally mandatory increases based on estimating conferences and other essential needs; and (2) Other High Priority Needs, which are issues that have been funded in most, if not all, recent budgets. This year’s Outlook identifies 14 Critical Needs budget drivers and 28 Other High Priority Needs budget drivers, with total General Revenue needs of $7.5 billion in Fiscal Year 2025-26; $6.9 billion in Fiscal Year 2026-27; and $6.6 billion in Fiscal Year 2027-28.

The revenue and expenditures estimates included in the Outlook reflect current law requirements. The budget drivers do not include any assumptions regarding the creation of new programs or expansion of current programs. Further, the Outlook does not make any discrete adjustments for potential risks, such as major hurricanes or other natural disasters. In January 2024, the Seminole Tribe of Florida resumed revenue sharing with the State of Florida. That has generated over $300 million for the State in FY 2024.

While total revenue collections exceeded expectations since last years’ estimates by $1,085.7 million (or 2.3 percent), nearly 60 percent of the revenue gain was related to two sources: Corporate Income Tax and Earnings on Investments. There are no surprises regarding the expected expense outlook. In Fiscal Year 2024-25, Medicaid service expenditures are expected to be $33.2 billion. Total Medicaid expenditures for Fiscal Year 2025-26 are expected to be $34.7 billion, an increase of $1.5 billion. Education funding tied to enrollment growth continues to grow. Pension funding will require annual increases to meet actuarial requirements. 

The stat which interested us the most was the relatively flat growth from sales tax revenue. It is as good a current indicator as anything else as to the level and trend of economic activity. This is especially true in non-income tax states. That flat growth buttresses concerns about the level of economic activity in the State as revenue drivers like tourism show signs of weakness. The best example is diminished attendance at the Central Florida theme parks. The multiplier effect can be negative as well.

NET METERING

Another effort to promote residential solar energy has been swatted down in the courts. A North Carolina court ruled that the new net metering scheme which has been operating for nearly a year been properly vetted under state law. The State Utilities Commission had approved the changes which lower payments to residential generators without conducting their own study of the plan. The plan the regulators relied on was developed by Duke Energy.

The Court’s decision results in a less than straightforward decision. The Court agreed that “The commission erred in concluding that it was not required to perform an investigation of the costs and benefits of customer-sited generation,”. Nevertheless, the Court let the decision by the regulators to stand. Here’s where the Court confuses everyone involved.

The Court goes on to find that “however, the record reveals that the commission de facto performed such an investigation when it opened an investigation docket in response to [Duke’s] proposed revised net energy metering rates; permitted all interested parties to intervene; and accepted, compiled, and reviewed over 1,000 pages of evidence.”

The fruits of legislation in Arkansas are emerging and not everyone likes the taste. Legislation passed in 2023 limited the benefits of solar installations. The new policy created by the Legislature in 2023 is called “net energy billing,” and it will lead to far lower compensation for homes and businesses. Net energy billing will allow utility companies to decide a price for the bill credits that solar customers get now based on “avoided costs,”. That will lower payments substantially.

HIGH SPEED RAIL

The latest front in the battle to establish high speed rail as a viable transportation mode is not centered where the proposed high speed rail lines are located – Texas, California, Florida. Projects which are funded through the Inflation Reduction Act include “Buy American” provisions requiring the acquisition of equipment and rolling stock. The requirement is pitting two European manufacturers against each other – Alstom a French company and AG Siemens a German company.

Alstom has been producing equipment for Amtrak’s Acela service in upstate NY for several years. The program has been the subject of multi-year delays. There have been safety issues holding up deployment. The Siemens plant is under development in The State’s Southern Tier about one hour away. That plant is being built to comply with “Buy American” provisions of the Inflation Reduction Act.

Earlier this year the In July, Alstom filed a lawsuit against the US Department of Transportation, challenging its decision to award the contract for Brightline West’s train sets to Siemens.  Alstom contends that the new Amtrak Acela fleet it’s building at its existing Hornell, New York, facility should be considered a domestic option. The contract award came despite the fact that the Siemens plant is some two years from operating.

Siemens also took an unusual approach to its potential workforce. The company announced an advance agreement with the International Association of Machinists and Aerospace Workers to allow for union representation talks at its new Horseheads facility once there are employees to organize. 

NEW YORK WEED

The initial stages of the development of a legal cannabis market in New York State have been characterized by an understaffed regulator leading to slow approval of licenses. The delay in approvals has been cited as one of the reasons the legal weed market in NYC has been so chaotic. Enforcement has been held up by legal challenges to the State’s right to regulate sales. The effect has been to lower the available revenue stream to NYC in particular that had been expected to follow legalization.

So, what is the outlook for legal cannabis in New York State broadly but for NYC in particular. The NYC Independent Budget Office (IBO) has recently released its findings about the NYC market. Based on cannabis market growth in California, Colorado, Massachusetts, Oregon, and Washington state—all of which have seen at least five years of legal cannabis sales—IBO determined New York City may eventually see annual taxable sales between $833.6 million and $1.2 billion. A market of this scale would yield between $33 million and $47 million in annual city revenue.

If the New York State Division of Budget cannabis revenue forecasts for the coming four state fiscal years are accurate, IBO estimates that the city would receive $4 million, $20 million, $31 million, and $43 million in cannabis tax revenue in fiscal years 2024 through 2027, respectively. The New York City Office of Management & Budget estimates cannabis revenue of $38 million by fiscal year 2027, which translates to $950 million in sales that year.

New York rolled out a pretty complex system since it was trying to achieve so many different goals with its programs. How does it work? Under the MRTA, the cannabis industry is subject to three taxes: (1) a potency tax; (2) a state excise tax; and (3) a local excise tax. When cannabis product manufacturers sell to distributors, the distributors pay a potency tax based on the THC content of the products they buy. The potency tax rate depends on the form of the cannabis product: $0.03/mg THC for edibles, $0.008/mg THC for concentrates, or $0.005/mg THC for flower products.

If the manufacturer sells products directly to consumers, then the potency tax is applied at the point of retail sale. At the time of sale of cannabis product to a consumer, the retailer collects a state excise tax of 9 percent of the product’s price. A local excise tax of 4 percent is also imposed on retail sales, which is collected by the state and distributed to local governments based on where the retail dispensary is located.

The botched rollout in NYS has led to additional efforts to eradicate the illegal market especially in NYC. In February 2023, Manhattan District Attorney Bragg targeted over 400 stores for potential eviction proceedings for unlawful cannabis sales. In May 2023, Governor Hochul signed a law that increased OCM’s ability to assess civil penalties against unlicensed cannabis businesses, including fines up to $20,000 per day. In August 2023, the New York City Council passed a bill that prohibits commercial owners from knowingly leasing commercial space to unlicensed sellers of cannabis and other illicit products.

MTA

New York’s Metropolitan Transportation Authority released a proposed capital budget for the next five years. The $65 billion list of projects includes buying new subway cars, fixing century-old tunnels and installing new elevators. Half of the $65 billion has already been funded through bonds, federal grants and direct appropriations from the city and state. Congestion pricing has been “paused”.

It’s hard to know how much of the list is real given the politics of transit in NY. In the wake of the congestion pricing “pause”, the MTA has targeted certain projects for slowdowns. Access facilities for the disabled were a prominent target which may not have been the most politically astute move. Nor was the potential for delay in the northern extension to the Second Avenue subway. The authority’s chairman highlights the politics of the moment when he says that the report sought to be as “comprehensive” as possible in hopes of persuading lawmakers to increase state funding to the agency. That’s a nice way of saying wish list.

The Authority now appears to be aiming at increased state funding by trying to emphasize its role as an economic driver throughout the State. It is highlighting new rolling stock for the commuter railroads being built in the state. Those cars will be on lines which serve some of the largest sources of opposition to congestion pricing. The issue of MTA funding is likely to be at the center of the FY 26 budget process. We are only three months away from that.

CYBERSECURITY

Last month, the Port of Seattle, WA was the target of a cyber-attack. Now, the Port has gone public about the situation because it is taking a step many have supported in concept. Hackers are demanding $6 million in bitcoin from the Port which operates among other things, the Seattle-Tacoma International Airport for documents they stole during a cyberattack last month and posted on the dark web this week.

The Port of Seattle has decided not to pay. Flights were able to operate, but the attack did interfere with ticketing, check-in kiosks and baggage handling. Passengers on smaller airlines had to use paper boarding passes. The same group has targeted other municipal operations. Columbus, OH was one of their targets and data was stolen. No ransom was demanded.

CALIFORNIA WATER

A California Superior Court has issued a preliminary injunction that prevents the State Water Resources Control Board from requiring fees and reports from growers who over-pump the area’s groundwater. The heavy drawdowns of underground water by the agriculture industry are at the heart of the California water debate. The use of that water during times of drought to support water dependent crops has long been an issue. According to a State Water Board staff report, water extraction had caused so much damage to certain areas that the Tulare Lake basin sunk as much as six feet from June 2015 to April 2023.

The Board put the abusing water agencies under probation which provides for farmers who pumped 500 acre-feet or more of water each year to have had to meter and register their wells at a cost of $300 each, report their pumping activities and pay $20 for each acre-foot extracted. The judge found that the Board had exceeded its authority while offering the court’s recognition of the State Water Board’s responsibility “to consider adverse impacts groundwater extraction would have on public trust resources,” while acknowledging the need “to protect such resources where feasible.”

The dispute is likely to make its way through the California courts right on up to the California Supreme Court. This ruling is effectively a hometown local court ruling in Kings County where agriculture is the economic mainstay.

MISSISSIPPI RIVER BLUES

Water levels have been dropping in the lower Mississippi since mid-July, according to federal data, reaching nearly 8 feet below the historic average in Memphis on September 12. In October 2023, water levels reached a record-low 12 feet in Memphis. Those conditions have raised prices for companies transporting fuel and grain down the Mississippi in recent weeks, as load restrictions force barge operators to limit their hauls.

The drought is in its third year. The resulting restrictions on the loads which can be shipped on barges leads to higher costs and a much less climate friendly result from other shipping modes. According to a trade association for businesses that use the Mississippi River, a standard 15-barge load is equivalent to 1,050 semitrucks or 216 train cars. So, there is an environmental cost as well.

It has been worse as unlike the two prior years, no barges have grounded themselves this year. It’s all about reduced rural incomes in the face of increasing competition. The majority of U.S. agricultural exports rely on the Mississippi to reach the international market. More than 65% of our national agriculture products that are bound for export are moved on rivers like the Ohio and Missouri feeding the Mississippi on this inland waterway system

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

CHESTER PA BANRUPTCY

The City of Chester, PA has been in Chapter 9 bankruptcy proceedings for some two years. It has been operating under a state-appointed receiver since before the bankruptcy. Now that receiver is facing opposition over a plan to put the City’s water authority up for sale to generate funds for pension funding. The City’s pensioners comprise the largest group of creditors in the bankruptcy so their needs do matter. Pensions have also been developing a more favored creditor status in recent municipal bankruptcies.

Some three years ago, a sale of the system was contemplated and an agreement was reached in which a private entity – Aqua Pennsylvania – was the purchaser. The agreement would have generated $410 million over a period of years. That agreement was not approved by the state receiver because it would have privatized the water system. Significant rate increases were likely. Subsequently, the City filed under Chapter 9.

Now as part of the plan of adjustment proposed in bankruptcy court, the same receiver is proposing the creation of a mechanism to allow a regional water authority to purchase the assets of the Chester Water Authority. A sale would be designed to fund the purchase over a period of years under a schedule which could provide a steady stream of reliable revenue to the City.

One goal would be to bring the three water infrastructure pieces – water, sewage, stormwater under one roof. Currently, three distinct entities bill for and collect revenues for each service. Chester Water Authority supplies water to 34 municipalities in Delaware and Chester Counties. Wastewater treatment is provided throughout Delaware County. The City operates a Stormwater Management Authority. Lots of overlap and bureaucracy.

A new wrinkle is a motion by the pensioner group to drive the sale of the water assets to a private concern like Aqua Pennsylvania. The unfunded benefits for the city’s retired workers amount to about $300 million, the majority of that to police alumni. The goal would be to get a buyer to put up a significant up-front payment and agree to pay substantial annual fees. The pensioners believe that the greatest amount of money would be generated through a privatization. The receiver believes that the resulting revenue requirements from the private operator would lead to substantially higher water rates. Given the poor economics and demographics of the service area, there is limited ability to support significantly higher rates.

TRI-STATE GENERATION

Tri-State Generation and Transmission Association delivers power to 41 member cooperatives across four states, 16 of them in Colorado. It has long been a fossil fuel dependent generator with a particular reliance on coal. Over the last several years, Tri-State has been engaged in disputes with some of its member utilities over that reliance. The results have enabled some members to diversify their power sources and reduce demand for Tri-State’s coal-based power threatening the association’s finances.

Those finances look to be in line for a boost in the form of federal money designated to support the clean energy transition in rural areas. The money comes from a program called New ERA (Empowering Rural America), which was funded through the Inflation Reduction Act (IRA) passed by Congress in 2022. Tri-State and one of its large former members United Power are expected to receive $671 million and $261 million respectively. United used to get 95% of its power from Tri-State but that changed in May of this year.

The federal money will be used by Tri-State to support the retirement of 1,100 megawatts of coal-fired generation. It shut down one coal plant in New Mexico in 2019 and has plans to close the three coal-burning units it operates at the Craig Generating Station from 2025 to 2027. It had originally planned to close Springerville 3, a coal plant in Arizona, in 2040, but the promise of the federal funding has given Tri-State the comfort to pay off undepreciated debt in the plant and move up its retirement to 2031. 

United Power just became its own generator and supplier this past May after it withdrew from Tri-State. The federal money will support the development and/or acquisition of nearly 500 MW of renewable power. Like Tri-State, Western was held back by its non-profit status. Tax credits available to IOUs were not for the cooperatives. The IRA provided for this program to offset the inability of cooperatives to benefit from tax credits.

A total of 16 cooperatives have applied for funding for the program. They are located throughout the country. Projects in the application process would shut down coal generation and replace it with renewables, acquire new renewable generation and support the restart of the Palisades Nuclear plant in Michigan. There is tremendous pressure to finalize all of these applications given the uncertainty of the upcoming elections.

SUMMIT CARBON

The ongoing effort by Summit Carbon Systems to get approvals for its planned carbon pipeline hit another hurdle in the South Dakota courts. The South Dakota Supreme Court ruled that Summit has not yet proven it should be allowed to take private land for public use through eminent domain. Summit needs to show that it is acting as a common carrier under South Dakota law.

The Court ruled Summit had not yet proven to lower courts that it’s “holding itself out to the general public as transporting a commodity for hire. It is thus premature to conclude that SCS is a common carrier, especially where the record before us suggests that CO2 is being shipped and sequestered underground with no apparent productive use.

The issue of common carrier status is at the heart of dispute between the company and landowners. The South Dakota legislature passed laws in 2023 that provide additional financial and legal protections for affected local governments and landowners while retaining the ability of pipeline companies to seek a state permit. The case is now returned to the lower state courts where Summit’s arguments in favor of eminent domain will be made.

The South Dakota court activities are being accompanied by growing legislative pressure in Iowa to provide protection from eminent domain. The issue of eminent domain for the Summit pipeline was a real issue in Iowa politics. The Iowa House has twice approved limits on eminent domain but they have been stymied in the Iowa Senate.

Now, a group of nearly 40 Iowa lawmakers comprising the Republican Legislative Intervenors for Justice announced their plan to sue in federal and state courts requesting them to rule that the Iowa Utilities Commission acted illegally and unconstitutionally in its approval of the Iowa portion of Summit’s proposed pipeline.

BUSY TIMES FOR JUDGE SWAIN

Presiding over the bankruptcy of a major governmental entity while overseeing litigation seeking the appointment of a federal receiver for the NYC jail system would be a daunting task for any jurist. Both of these cases have been going on for months with multiple efforts to settle them having been unsuccessful. As it works out, both of these cases may have reached tipping points. They have significance for not just the two issuers – NYC and PR – but for the municipal market as a whole.

Decisions on these two cases will be made by the same judge, Laura Taylor Swain.  She has encouraged efforts at settlement throughout and it has been frustrating to see both of them drag on for as long as they have. The decisions she makes will have significant financial impacts as well. In New York, a hearing is scheduled for Sept. 25 in which the Legal Aid Society attorneys – who represent people incarcerated at Rikers Island – will have an opportunity to argue the New York City Department of Correction should be held in contempt for failing to follow court orders to bring down jail violence. 

All of this has occurred in spite of oversight from a federal monitor.

Swain lifted a contempt order against the city and the Department of Correction on Feb. 27, saying the department has followed her directive to bolster cooperation and communication with the federal monitor. This month’s hearing will allow evidence of the judge’s prior rulings and will seek the appointment of a receiver to actually operate the facilities.

At essentially the same time, Swain extended for an additional 30 days the litigation stay through Oct. 8 which has been in effect as PREPA and its bond creditors continue to try to work out their issues. The mediation team appointed by Judge Swain to oversee the debt-restructuring negotiations requested the additional time.

A NEW RISK TO ASSESS

Over the years, various natural disaster types take their turns on center stage. When they do, they create new risks to assess which do not always have great sources of data to rely upon for their analysis. This year, landslides have been occurring frequently. In the face of warming temperatures, certain areas have become less anchored and as storms occur the resulting impacts create greater landslide frequency.

In March, a landslide closed a 40 mile stretch of Highway 1 near Big Sur. In June, a landslide wiped out part of one of the main routes into Grand Teton National Park. More local events are threatening communities along coastal California with collapse into the sea. The combination of visible locations and their impact on a more well heeled demographic have elevated attention. Until now, there has not been a lot of data for analysis of the risk of these events.

The US Geological Survey (USGS) has just released a new interactive map of potential risk from landslides. According to its data, 44% of the country is at risk from landslides. Some of the data will not be shocking. Mountainous areas are at more risk. Given the geological recency of the western ranges, those mountainous areas seem to be at the most risk. Conversely, there aren’t many landslides where the land is flat. And yes, Puerto Rico seems to be at the most risk in terms of the percentage of its land which is vulnerable.

TRAFFIC REALITIES

A combination of the congestion pricing argument in New York, a return to more normal travel post-pandemic, and the consumer preference for larger vehicles have brought debates over road use to a new level. The basic premise is that Americans are barreling around the highways and byways and being involved in lethal crashes at unprecedented levels. It makes the whole debate around transportation that much harder as the arguments don’t seem to reflect what is happening.

The National Highway Safety Board (NTSB) said an estimated 18,720 people died in motor vehicle traffic crashes over the first half of 2024, a decrease of about 3.2 percent as compared to 19,330 fatalities in the first half of 2023. NHTSA also estimated fatalities decreased in 31 states and Puerto Rico, remained unchanged in one state, and increased in 18 states and the District of Columbia.  

Preliminary data reported by the Federal Highway Administration indicates vehicle miles traveled or VMT in the first half of 2024 increased by about 13.1 billion miles, or roughly 0.8 percent more compared to the same time period in 2023. More miles driven combined with fewer traffic deaths resulted in a fatality rate of 1.17 fatalities per 100 million VMT, down from the rate of 1.21 fatalities per 100 million VMT in the first half of 2023.

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

TWO CITIES UNDER PRESSURE

Well summer is essentially over. School is back. The big winter sports are underway. It all comes with a sense of refreshment and that it’s time to get back to the normal rhythms of life return. It comes with a renewed sense of focus. In that spirit, we see two significant municipal credits facing significant issues which present risk.  

Chicago runs its finances on a calendar year basis, so big decisions are looming over the next couple of months. The Mayor is under immense pressure to balance the 2025 budget. The latest estimates see a $982.4 million shortfall for FY 2025 along with a new projection of a $223 million budget gap at the end of the current year. The Mayor is in a bind as the realities of the City’s budget become clear. The City can’t cut its way out of the problem. So that goes to property tax increases which would be politically fraught. The whole process will pose great political risks for the Mayor and if he is further weakened by the process, it will weigh negatively on the City’s credit.

Then there is New York City. If you’ve spent your life observing NYC politics, nothing about this week’s raids on multiple members of the Adams administration is a shock. It is breathtaking that the homes of the schools chancellor and the Police commissioner were raided on the first day of school. New York is being run by a close circle of individuals with long term ties to the Mayor who have long been the object of concern. They represent a 20^th century version of machine politics in a world where that no longer works.

Given the individuals involved, there are real concerns about the Mayor’s ability to run the City. He is also 15 months out from his own reelection bid and he will be challenged. His need to raise money for that (what is the source of his current troubles) and the many challenges facing the City already compete for the Mayor’s attention. The City Council seems to be based on opposition to the Mayor and any real limits on spending. 

In that environment, we reiterate our view that the City’s credit not stable and that the outlook in the near term is negative.

ELECTRIC VEHICLES

If you read enough of the hype some 8 or 10 years ago about electric and autonomous vehicles and believed it, you would be very disappointed today. Whether you are a dealer, buyer or producer, the demand has just not been there in line with estimates. The demand situation has begun to manifest itself in the form of some major decisions by the automakers regarding their production lineups. Those have implications not just for the firm’s stakeholders’ but the places counting on new or expanded manufacturing related to electrics.

General Motors and Samsung SDI announced an agreement operate a new factory in New Carlisle, Indiana to make electric vehicle batteries. The plant will open but production would not start until 2027. The plant had been expected to start making cells in 2026. The $3.5 billion plant is being built on a 680-acre site and is expected to employ 1,600 workers. It will make nickel-rich prismatic batteries that store more energy than other chemistries.

Georgia has been holding its breath over the outlook for the development of new production facilities for electric vehicles and batteries. The Army Corps of Engineers said it plans to reassess its environmental permit for Hyundai’s $7.6 billion electric vehicle plant in Georgia. It said that state and local government did not reveal water requirements for the plant eventually expected to employ 8,000 workers. The proposed water withdrawals are being challenged.

As that story unfolds, Hyundai announced that it was going to reorient the plant to increase the share of hybrid rather than fully electric vehicles. Hybrids have been emerging as a more popular short-term choice for climate minded buyers. Weaker than expected EV demand growth is leading some U.S. battery manufacturers and suppliers to delay or cancel planned capacity investments. One supplier delayed operations at a planned South Carolina facility from later this year until late 2025, while another suspended a planned Arizona facility and canceled a planned Michigan plant.

One event that has implications for the South is the successful unionization of an EV production facility at Spring Hill, TN. The region has not been easy on efforts to accomplish that. Elections have had varying results at manufacturing sites. This facility is a joint GM/LG venture which is expected to produce the Ultium. The Ultium is an electric vehicle battery and motor architecture developed by General Motors which would serve as the base platform of vehicles from the GMC electric Hummer and Cadillac Lyriq, as well as joint projects with Honda like the new electric Acura.

COAL LITIGATION

The Prairie States coal generation plant in Washington County, IL has been regularly cited as one of the largest single sources of carbon. It is one of if not the largest emitter in Illinois. The project’s two units produce a combined 1600 MW of electricity. The output of the plant is distributed through a group of primarily municipal electric utilities in Illinois in three neighboring states. As awareness about emissions has grown, the plant has come under increasing pressure.

The Sierra Club has sued the plant’s operating entity alleging the plant has been operating and emitting harmful air pollutants without necessary permits required by the federal Clean Air Act.The plant owners hoped to dismiss the lawsuit filed in the U.S. District Court in the Southern District of Illinois.Instead, the federal magistrate ruled that the allegations are sufficient to move forward with the case. She further noted that this effectively accepts the allegation that the plant has been operating for a decade without a permit “and that the state and federal governments have simply ignored the facility’s existence.”

That is astounding. At the same time the magistrate “further acknowledges that the ultimate relief sought by [the Sierra Club] — halting the operations of a power source for millions of people — is an extraordinary request, by any standard.” Legislation passed in 2021, requires Prairie State and other publicly owned plants to become 100% carbon free by 2045. 

The principal municipal utility exposure is that of the Illinois Municipal Energy Agency. It owns 15% of the plant or some 240 MW of capacity. That would also be its share of the financial risk of the plant’s operation. Last year’s climate legislation in Illinois tried to build in some protections for the project and its bondholders. Coal plants which are investor owned would be forced to shut down in 2030 while municipal utility owned Prairie States would be allowed to operate until 2045 or just after the majority of debt from the project is retired.

CARBON CAPTURE

The Iowa Utilities Commission has issued a construction permit for Summit Carbon Solutions’ proposed hazardous liquid pipeline across Iowa. The commission also required the company to secure and maintain a $100 million insurance policy, and agree to compensate landowners for any damages that result from the pipeline’s construction. Construction cannot commence without further approvals from other states.

The commission issued the permit without modifying the previously imposed conditions Summit Carbon must meet in order to begin construction – the most significant of which is that the project must be approved by regulators in North Dakota and South Dakota. Summit says it has signed voluntary easement agreements with 75% of the Iowa route’s landowners. The Iowa Utilities Commission has stated that Summit will be able to use eminent domain in Iowa to force the sale of land from property owners who are opposed to the use of the property for the project.

In Wyoming, a plan to develop one of the world’s largest direct air carbon dioxide capture and storage projects in the southwestern part of the state has been “paused”. The facility was designed to be powered by electricity from a modular nuclear reactor – the 345-megawatt Natrium nuclear reactor being built in Kemmerer, Wyoming, by the billionaire Bill Gates-backed TerraPower LLC. It turns out that the generation capacity of the reactor could only meet one-third of the capture facilities’ needs.

The capture facility makes little sense if it cannot be powered by clean energy. That is what is apparently driving the decision to pause and relocate. The company building the capture facility cited the uneconomic cost of power for the plant and cited a specific culprit – data centers and crypto miners. They are an increasing concern in many areas of the country. They often try to keep old fossil fuel plants running by buying them for themselves and they drive demand and price pressures facing utilities and their other customers.

COWBOY SURPRISE

The Wyoming Supreme Court ruled that the Wyoming Public Service Commission erred when it approved a request by High Plains Power to shift from an annual to a monthly compensation scheme with customers who intermittently contribute their excess solar-generated electricity back to the utility. The court rejected High Plains Power’s plan to compensate solar users for their excess power at a monthly wholesale rate rather than the higher retail rate.

It would have been a blow to solar development if the ruling had gutted net metering provisions. This year, net metering has been under attack in state legislatures as legacy power providers challenge the potential negative revenue and profit impacts on them from rooftop solar. In Wyoming, basic net-metering laws apply to residential and small business customers with 25-kilowatt or smaller solar arrays.

According to state statute, qualifying residential and small business net-metering customers must be credited for the excess power they generate, but don’t use, and supply back into the system. The statute was effectively reaffirmed through this decision. The compensation method struck down by the Wyoming Supreme Court allowed High Plains Power to bypass month-to-month kilowatt-hour credits at the retail rate and instead compensate customers each month at the wholesale rate. That resulted in a major reduction in overall compensation to net-metering customers.

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 RIVER WATER

The Bureau of Reclamation announced annual operational guidelines for the Colorado River basin and the seven states that comprise it. The guidelines were developed through a 24-month study of the Colorado River basin and will apply to the 2025 water year, which extends from October 1, 2024, through September 30, 2025.

Based on projections in the study, Lake Powell will operate in a Mid-Elevation Release Tier in water year 2025 and Lake Mead will operate in a Level 1 Shortage Condition with required shortages by Arizona and Nevada. Those “required water shortages” are the reductions in the amounts of water each state can withdraw from the system. The reductions in Arizona:  512,000 acre-feet of water, which is approximately 18% of the state’s annual apportionment. The reduction for Nevada:  21,000 acre-feet of water, which is 7% of the state’s annual apportionment.  

The important news is that there is no further reduction from last years’ levels required for those two states. The Colorado River System continues to face low reservoir storage with Lake Powell and Lake Mead at a combined storage of 37% of capacity. The guidelines stem from the Supplement to the 2007 Colorado River Interim Guidelines, in all Lake Mead operating conditions, the three lower division states will target a cumulative Reservoir Protection Conservation volume of 3 million acre-feet or more of additional conserved water in total for calendar years 2023 through 2026, with a minimum of 1.5 million acre-feet physically conserved by the end of calendar year 2024. This conservation volume of 1.5 million acre-feet has already been achieved.

CALIFORNIA WATER

We have regularly observed the cyclical nature of the weather and its impact on water supplies in California. Lake Oroville has been a symbolic center of the state’s ever changing water supply conditions. During the most recent drought years, levels at the Oroville Dam plunged to under 30% of capacity. This followed a year of damage at the dam as water supplies exceeded the capacity of the lake creating significant overflows and damage to the dam’s spillways.

At the beginning of the decade, Lake Oroville was far below its capacity of 900 feet mean sea level (MSL). In May 2020, the water level was at 800 feet. However, by the end of the year, it had gone down to 700 feet. By September 2021, it was near the bottom, sitting below 650 feet. sitting below 650 feet. The atmospheric river storms of early 2023 brought the Lake out of drought and Lake Oroville literally went from below 30% capacity in the winter of 2022 to 100% capacity by the Spring.

The State has announced that for the second consecutive year that Lake Oroville is at 100% capacity.

INSURANCE

The Texas Windstorm and Insurance Association’s nine-member board voted for a 10% rate increase after a staff analysis found that the insurer has for years been unable to cover expected costs, which include paying claims on damage from storms. TWIA is governed by Chapter 2210 of the Texas Insurance Code. TWIA provides a source of insurance used as a last resort for property owners that have been denied windstorm and hail property insurance coverage in the private (voluntary) market.

It insures Texas’ 14 coastal counties and a corner of Harris County. The number of TWIA policies has grown significantly by 38% since 2020. The increase in risk exposure has driven the need for reinsurance. The cost of reinsurance has also increased driving the need for a rate increase. Reducing TWIA’s reliance on reinsurance, either by using state reserves to fund the nonprofit’s catastrophic reserve fund or otherwise propping up a state-sponsored reinsurance fund, would help lower rates. 

The consideration of legislative fixes to the problem of rising rates and reduced availability reflects the inability of the state to limit these increases. Unlike many states where the insurance industry and its rates are regulated, Texas is a file-and-use state, which means that insurance companies need only to file their rate increases before they can go into effect. The regulatory structure which might enable some state insurance regulators simply does not exist in Texas.

COLORADO TAX INITIATIVES

Colorado is no stranger to long-term opposition to taxes from conservative taxpayers. Government has long functioned under the limits of the TABOR amendment which was enacted in 1992. TABOR requires voter approval for tax increases and limits the growth of government revenues and spending. Any revenue generated over the set limit, which is calculated each year based on inflation and state population growth, must be returned to taxpayers unless they vote to let the government keep it. 

Voters have loosened TABOR restrictions on most local governments in the state. Fifty-one of Colorado’s 64 counties have chosen to waive TABOR’s strict government spending limits along with 177 of Colorado’s 178 school districts and  over 200 municipalities . Notwithstanding, anti-tax advocates have managed to place two items on the ballot – Initiatives 108 and 50 – designed to significantly limit government revenues.

Initiative 50, which would amend the state constitution, might be the more consequential of the two. It would limit property tax revenue growth to 4% statewide, with no flexibility for local governments or their voters to opt out without a statewide referendum. Initiative 108 would limit assessments to 4% of value from 6.7%. That is estimated to reduce revenues statewide by some $2.4 billion.

Now the Colorado Legislature will hold a special session to consider a new proposal designed to address initiative sponsors concerns and motivate them to ask for the ballot initiatives to be off the ballot. The proposal under consideration includes: In the 2025 tax year for taxes owed in 2026, the residential assessment rate for local government taxes would drop an additional 0.15% to 6.25%. Today the rate is 6.7%, It is scheduled to fall to 6.4% in the 2025 tax year for taxes paid in 2026. This proposal Residential assessments for schools would remain separate from those of local governments, and would fall to 7.05% from 7.15%. 

In the 2026 tax year, the residential assessment rate for local governments would rise to 6.8%, but the increase is offset by a tax break that kicks in that year, exempting up to $70,000 of a home’s value from taxation. Under current law, it is scheduled to rise to 6.95%. The school assessment rate would remain at 7.05%. Local government revenue would be limited to 10.5% growth over two years, instead of 5.5% annually under Senate Bill 233. School districts would be limited to 12% growth over two years, a new cap.

If this all can be enacted, the initiatives are expected to be removed and the sponsors must agree not to try again for 10 years. The deal would have to be completed before Sept. 9, when the November ballot is required to be certified by the Colorado Secretary of State’s Office. 

ELECTRIC VEHICLES

According to a recent survey by AAA Northeast, just 14% of more than 1,700 respondents across Rhode Island, Massachusetts, Connecticut, New York and New Jersey “definitely” plan to buy or lease electric when looking at their next vehicle. By comparison, 42% are “not interested at all.” AAA found that leading causes of EV anxiety stem from fear of driving an electric vehicle, operational differences that create “a different feel” when driving, and concerns about public charging station locations, charging times and safety. The survey did not ask if cost was a concern.

Among those surveyed who don’t own and never plan to buy an electric vehicle, 65% said they had concerns about the availability of charging stations. Sixty-six percent of respondents in this group also said they were concerned about charging station reliability; 67% were concerned about price; 65% were concerned about safety; and 61% had concerns about charging station speeds.

CARBON CAPTURE

A recent federal court decision has at least temporarily delivered a setback to the carbon capture industry. The $18.4 billion Rio Grande LNG export terminal project is currently under construction near Brownsville, TX. In 2021, the company added a carbon capture facility onto the project. That was in response to a decision in the D.C. Circuit Court of Appeals which found that FERC had failed to properly consider the project’s climate impact.

Specifically, the D.C. Circuit found regulators failed to properly consider how that terminal and another proposed LNG project nearby would impact environmental justice communities in Cameron County, Texas. FERC also hadn’t properly reviewed the impacts of the carbon capture element of the project. In light of the renewed need for approvals and cancellations of contracts for LNG due to the carbon footprint of its production, the Company has decided not to pursue approval of the carbon capture for this project.

TAX CREDITS AND ALTERNATIVE ENERGY

The US Treasury marked the second anniversary of the enactment of the Inflation Reduction Act with some data regarding the use of tax credits associated with the law. More than 1.2 million American families have claimed over $6 billion in credits for residential clean energy investments – such as solar electricity generation, solar water heating, and battery storage, among other technologies – averaging $5 thousand per family. 2.3 million families have claimed more than $2 billion in credits for energy efficient home improvements – such as heat pumps, efficient air conditioners, insulation, windows, and doors – averaging $880 per family.

Solar electricity investments accounted for the largest number of residential clean energy credit claims. In total, more than 750,000 families reporting a total of more than $20.5 billion in qualified solar electric property costs in 2023. For reported investments in energy efficient home improvements, more than 250,000 families claimed investments in electric or natural gas heat pumps, more than 100,000 families claimed investments in heat pump water heaters, and almost 700,000 families claimed investments in insulation and air sealing.

SMALL COLLEGE BLUES

Centre College of Kentucky is a small, liberal arts college situated in Danville, Kentucky, approximately 35 miles south of Lexington. Established in 1819, Centre serves an entirely undergraduate student population of 1,346 full-time equivalent students and generated fiscal 2023 operating revenue of $68 million. This week, Moody’s downgraded the College’s rating from A3 to Baa1. The usual suspects were cited for the change in the ratings’ outlook to negative.

Operating deficit in fiscal 2023, the college’s financial projections reflect expectations of further significant operating deficits through fiscal 2025. The potential for further credit pressure as ongoing student market challenges will continue to limit net tuition revenue growth and could lead to weaker than expected operating results in fiscal 2025 and beyond. At the same time, the college’s revenue diversity, with nearly half of its operating revenue derived from investment income and philanthropy, provides it with relatively more flexibility than for other similarly sized institutions.

Manhattan College today announced that, effective immediately, it will change its name to Manhattan University in order to better recognize its more than 100 majors, minors, graduate programs, and advanced certificates and degrees, and attract a more globally diverse student body. It’s that last item – globally diverse – that as much as anything drives the move. Enrollment is down to 2,800 from a peak of 3,300 before the pandemic. Much of that is attributed to recruiting difficulties related to COVID 19 travel restrictions. Those restrictions hurt many institutions which counted on demand from international students.

As we have pointed out before, international students are a much sought after demand cohort. They typically pay full fare to attend. A university is seen as a more attractive option for those students. That accounts in part for why a 2022 study in the journal Economics of Education Review said that 122 four-year colleges morphed into universities between 2001 and 2016.

FOR PROFIT HOSPITAL SALE

Santa Clara County, CA has announced its intent to purchase Regional Medical Center from its for profit owner/operator. Over recent months, the hospital has been reducing the level and range of services it provides. Its status as a trauma center was downgraded from Level III to Level II. The overall decline in services created pressure for the County to find a way to preserve the facility and maintain/restore its prior service levels.

This is not the first time that the County has stepped in to add a facility to its overall health system. This will be the county’s fourth hospital purchase since 2019, when it bought O’Connor and St. Louise Regional hospitals and De Paul Health Center in Morgan Hill that were poised to close. In 2004, HCA closed San Jose Medical Center, the city’s only downtown hospital. In 2020, the corporation shut down the maternity ward at Regional, which had an immediate effect on East San Jose residents. In 2023, HCA ended its acute care psychiatrist services and neonatal intensive care unit at Good Samaritan Hospital in San Jose.

County officials announced their intent to buy the hospital from HCA Healthcare, the nation’s largest hospital corporation, for $175 million. The deal enables HCA to walk away from a population it does not want to serve and frees it to increase its facilities serving wealthier areas in the City of San Jose. The funding is coming from a one-time reimbursement of Federal Emergency Management Agency (FEMA). The county and HCA are aiming to complete the transaction in the first quarter of 2025. Once the deal goes through, the county intents to restore prior service cuts including the trauma center and maternity.

BACK TO THE FUTURE FOR TRANSIT FARES

The Transit system which serves the Seattle-Tacoma metropolitan area is dealing with many of the issues holding back full returns to pre-pandemic passenger levels. Now, Sound Transit is proposing returning to a fare structure which any New Yorker would recognize. Currently, fares are based on distance – which range from $2.25 to $3.50. New construction expanding the Link light rail system would create new lines out into the suburbs. This created a potential for those lines to require a $5 fare based on the current fare system.

Starting Friday, Aug. 30, the regular adult fare for Link light rail will be $3. The price for an Adult ORCA day pass will drop to $6 from the current $8 as part of a six-month promotional period. The price for a reduced- fare pass will drop from $4 to $2. Youth 18 and under continue to ride free.

The change to flat fares coincides with the opening of the Lynnwood Link Extension on Aug. 30. This extension to the 1 Line will add 8.5 miles and four new stations, including the first ones in Snohomish County. Link 2 Line service to Downtown Redmond is expected to open early next year, followed later in the year by the rest of the 2 Line. The Federal Way extension is set to open in early 2026.

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

CALIFORNIA BALLOT ISSUES

Last month, a ballot initiative was qualified for the November ballot in Richmond, CA. (MCN 7.29.24) In the wake of that announcement, Chevron announced that it was moving its headquarters from California to Texas citing the regulatory environment. The initiative is also being challenged in the courts. Initial hearings in the case indicate that at least some of the ballot challenge might not meet legal requirements.

While all of this plays out, the City and Chevron continue to talk. Those talks have yielded a proposed agreement which would see Chevron make annual payments to the City. If the agreement is approved, Chevron would pay $50 million annually to the general fund for the first five years, followed by $60 million annually the last five. The city would retain its right to impose new taxes on Chevron and other businesses, but the settlement payments would be credited toward what the refinery would owe.

The refinery tax ballot measure was estimated to have cost Chevron between $60 million and $90 million annually, depending on the amount of raw materials the plant processed. The council on Wednesday could accept the agreement, pull the measure from the ballot, or opt to keep the measure on the ballot for voters to decide. Another option would be to direct staff to continue negotiating with Chevron.

Another ballot initiative to deal with housing in the Bay Area was announced in July. Regional Measure 4 would “address housing affordability and reduce homelessness by: providing an estimated 70,000 affordable apartments/homes; creating homes near transit, jobs, and stores; converting vacant lots/ blighted properties into affordable housing; and providing first-time homebuyer assistance.

The proposal calls for the issuance of $20 billion in debt, supported by an estimated tax of $18.98 per $100,000 of a property’s assessed value to pay for the bond. A two-thirds (66.67%) vote is required for the approval of Regional Measure 4. The initiative has already faced challenges. It has had to be reworded as a result.

None of that seems to be helping. Currently, polling shows that 55% of voters support the measure. Now, the Bay Area Housing Finance Authority has decided to remove the bond measure in response and attempt another vote in the future.

WISCONSIN

This was primary week in Wisconsin which also allowed voters to decide on two ballot initiatives designed to limit the ability of the Governor to spend certain state revenues. One measure would have prevented the state Legislature from delegating its authority to appropriate funds which is permitted under existing law. The second would have prohibited the governor from spending federal funding that has not been earmarked for a specific purpose without legislative approval. 

The initiatives had to be viewed through the prism of the state’s highly and ever more partisan environment. The Legislature is Republican and the Governor is a Democrat. The Governor has been reelected once. The initiative’s reflected disputes between the Governor and the Legislature over how federal COVID-related funds were spent.

The limits on spending federal dollars were a concern. Supporters of the status quo framed it as something which could hobble the ability to use federal disaster monies. The need to go through the formal legislative process was seen as an impediment to assistance and recovery.

PORTS

Last summer, the Port of Los Angeles was facing labor problems and impacts on operations which lowered throughput at the Port. During the period before negotiations on a new contract were concluded in September, shippers began diverting cargo to east coast ports. There was concern that some of the movement might be permanent.

Those concerns have not been borne out one year later. The Port of Los Angeles handled a record-breaking 939,600 Twenty-Foot Equivalent Units (TEUs) in July, a 37% increase over the previous year. It was the best July in the Port’s 116-year history and the busiest month in more than two years. Seven months into 2024, the Port of Los Angeles is 18% ahead of its 2023 pace. July 2024 loaded imports landed at 501,281 TEUs, a 38% spike compared to the previous year. Loaded exports came in at 114,889 TEUs, an increase of 4% compared to last year. It was the 14th consecutive month of year-over-year export gains in Los Angeles.

Now the shoe is on the other foot. Some of the increase in tonnage at the Port of Los Angeles reflected early arriving holiday related cargo. That occurred in anticipation of potential labor actions at east coast ports. Union negotiations covering longshore workers on the East and Gulf Coasts have been stalled since June 10, bringing the union closer to a potential strike at the September 30 contract expiration. 

The five major ports facing a strike potential are New York/New Jersey, Savannah, Houston, Virginia, and Charleston. The last East-Coast-wide strike was in 1977, lasting seven weeks. 

WIND

The federal Bureau of Safety and Environmental Enforcement (BSEE) updated its suspension order for Vineyard Wind, allowing it to resume the installation of turbine towers and nacelles. The company is still prohibited from installing additional blades – all of which are in the process of being reinspected – or power production from the 24 turbines that have been completed since last October.

This incident has not diminished activity by potential providers to develop new wind generation. This week, the Department of the Interior held an offshore wind auction in the Central Atlantic for two lease areas; one 26 nautical miles from the mouth of Delaware Bay (Delaware and Maryland) and the other 35 nautical miles from the mouth of Chesapeake Bay (Virginia). Wind turbines off the coast of Delaware, Maryland, and Virginia could generate up to 6.3 GW of clean, renewable energy and provide power for up to 2.2 million homes.

ERNESTO

Once again, Puerto Rico and the US Virgin Islands had to contend with a hurricane. This one, Ernesto, left half of Puerto Rico without power. Luma Energy, which transmits and distributes electricity in the territory, was reporting that more than 718,000 customers were still without power there as of Wednesday. The emergency management director for the U.S. Virgin Islands said that as of Wednesday morning that the power was out across the entirety of St. John and St. Croix. There was some power being generated in St. Thomas.

This all served to remind people that the electric systems in both Puerto Rico and the USVI are embarrassingly unreliable. At the same time, the operations of the VI Water and Power Authority have been impacted by the replacement of the CEO by a more politically connected individual. The agency still faces all of its long standing issues as well as the cleanup from this storm.

As over half a million people went without power, the parties in the PREPA bankruptcy proceedings were reduced to arguing essentially over the meaning of words. The bondholders have been fighting efforts by the Oversight Board to restrict their rights to revenues only to those collected. The contention is that any future revenues are receivables not revenues and that the bondholders should only get revenues. It’s all over the meaning of the word account.

FIRES AND INSURANCE

With every new wildfire igniting in California, you can almost hear one more commercial insurance carrier withdraw from the fire insurance market. With fires becoming larger, more frequent and location repetitive, the cost of available coverage rises and the number of providers shrinks. This parallels the issue of insurance in the southeastern US against damage from hurricanes. So do some of the responses/solutions undertaken by impacted states.

In California, the theory is the same as in the case of hurricane coverage.

The FAIR Plan was established more than 50 years ago as the state’s insurer of last resort. It was designed to serve as a source of insurance primarily to meet mortgage requirements. Considering the amount of growth as well as the expanded footprint resulting from that growth, one can see how much the demand for insurance has increased. Unfortunately, it paralleled the growth in the absolute risk of fire.

In the midst of one of the largest wildfires in the state’s history, California has adopted a plan to address near term shortfalls in the availability of fire insurance. The commercial insurers have sought more flexibility in their underwriting process and higher rates. In return, companies will be required to offer policies to 85% of homeowners in places categorized as wildfire-distressed areas. In those areas, localities would be encouraged to employ mitigation policies like clearance requirements for vegetation.

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

We are a bit more brief this week in deference to the weather. Here at the mothership, we are dodging falling trees while many of you will be bailing out, drying out or cleaning out. Be careful, especially travelling. And oh, yeah, this is what climate change looks like.

__________________________________________________________________

JOBS AND PERCEPTIONS

Some recent data points have produced some food for thought as people try to understand the clash between favorable macro data on the economy and less favorable perceptions on the ground. One example is in the oil and gas industry. Production is at record levels. This has not translated into higher job numbers. Oil production is up 5 percent since 2019, the last peak before the pandemic. The industry set a new record for crude production last week, according to the U.S. Energy Information Administration, pumping an average of 13.4 million barrels a day.

Employment in the industry has not followed along. In 2014, more than 600,000 people worked to produce oil and gas. Today, it’s more like 380,000, producing 45 percent more gas and 47 percent more oil. Gas production in Pennsylvania has settled in at about 630 billion cubic feet a month. Production had previously peaked at 670 billion in December 2021. The current level of production remains strong but 30 percent fewer people are working to produce it compared to before the pandemic. Bureau of Labor Statistics data shows that a little more than 12,000 people worked in the state’s gas industry in 2023.

In other industries, there is the issue of layoffs. One example is at John Deere, a major employer in the Quad Cities region of Illinois and Iowa. It has announced layoffs in two segments totaling nearly 1,000. In this case, the layoffs include white collar salaried jobs in addition to typical production layoffs. Some suppliers have also announced layoffs so you can see where life may not look so great in the Quad Cities. Then there is the auto industry which has seen layoffs at each of the Big Three automakers. Like the situation at Deere, they include both production positions as well as white collar jobs. While some of the layoffs were announced as temporary, the uncertainty is just as bad for voter psyches.

The tech industry is in its own bind. The race over AI has not produced the sort of profitability which was hoped for and now those outside of that area have become more vulnerable. Intel plans to lay off 15,000 employees, or more than 15% of its total workforce. This follows a clear 2024 trend as this year has already seen 60,000 job cuts across 254 companies, according to one industry analyst.  Companies like Tesla, Amazon, Google, Tik Tok, Snap and Microsoft have conducted sizable layoffs in the first months of 2024.

BAY AREA TOLLING

According to a recent report from the Bay Area Infrastructure Financing Authority, toll lanes across the region generated over $123 million in revenue last year. The largest amount, $50 million came from Interstate 880 express lanes and more than $22 million (first three quarters of FY 2024) from the Highway 101 corridor in San Mateo County. The different agencies that operate these express lanes say they’re generating more revenue than they originally projected. The revenue from these express lanes primarily funds operations, road maintenance, enforcement, and debt payments. In San Mateo County, a portion of the revenue from the 101 Express Lanes is used to support lower-income residents, including providing free toll lane trips or public transportation rides for those earning $80,000 a year or less.

NEW YORK OFFICES AND TAXES

NYS Comptroller DiNapoli released an analysis of the New York City office market in terms of property values and revenues. There has been great concern as headlines feature buildings being sold at deep discounts and investors worry about the potential impact on property tax revenues. Commercial real estate in New York City accounts for 21.9 percent of all property market values as of fiscal year (FY) 2025.

Office buildings comprise the largest share of Class IV billable values at 45.5 percent of the total in FY 2025, followed by retail properties (18.2 percent) and hotels (9.7 percent including condo hotels). The City did reassess office properties downward significantly after the first year of the pandemic, from which office properties have slowly recovered. The City first reflected the decline in assessment roll values beginning in FY 2022 to reflect changes in office buildings’ income-generating power. Total office market values declined by 16.6 percent between FY 2021 and FY 2022, a loss of approximately $33.6 billion in value. FY 2021 and FY 2022, a loss of approximately $33.6 billion in value.

Market values returned to growth the following fiscal year, increasing by 9.9 percent in FY 2023 and have continued to grow since then, though the rate of increase has been slow, with FY 2025 seeing a 3.1 percent growth year over year. Total office market values grew by about $8.7 billion between FY 2020 and FY 2025. While the overall office market has record high vacancies, the effect is significantly different when comparing submarkets and property types, with high-quality, amenity-rich office space still in demand. That growth has been concentrated as Hudson Yards has contributed an inordinate amount of the valuation increases. Older buildings are not faring nearly as well in terms of occupancy.

Many observers also do not understand the City’s property tax system. Valuation declines on a year by year basis don’t happen. The City uses a five year average valuation formula which has tended to reduce volatility in collections. For residential high rise buildings, co-ops and condominiums find their valuation which relies on rental data from comparable units to derive a value. Rents are one thing which continued to rise through the pandemic. There’s little indication that this trend will slow.

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

NUCLEAR START UP

An entity backed by several venture capital investors announced plans to develop a fleet of traditional nuclear generating plants. The Nuclear Company will initially target sites with active combined operating licenses (COL), early site permits (ESP) or limited work authorizations from the Nuclear Regulatory Commission. The Company is looking at locations in the southeastern U.S., the PJM Interconnection and the Midcontinent Independent System Operator territory.

One example – active COLs for Turkey Point units 6 and 7 in Florida and William States Lee III units 1 and 2 in South Carolina. They use the same basic technology which was used at Plant Votgle’s recent expansion. The idea is that lessons from previous plants will be applied to prevent significant delays and cost increases. As for new sites, the Company targets former coal-fired generation sites for potential conversion.

The development of generation at existing sites is also one way to overcome the issue of transmission capacity. Existing generation plant has the benefit of significant transmission connection capability. It might also make future plants more attractive to utilities which need to replace the coal power but would like to avoid the clear financial risks associated with nuclear construction. Repurposing also avoids transmission upgrades associated with new plants. The Company has also said that it is open to developing plants on a turn key basis.

We’ll see if this approach works any better than have prior efforts to learn from past mistakes to gain efficiency or cost savings.

COLLEGE TUITION

Michigan is the most recent of at least 30 states to offer a version of free community college. Those eligible for Michigan’s program must enroll in college full-time and fill out federal student aid forms. The program is not dependent on a student’s household income. The Whitmer administration estimated that its free community college program will save money for over 18,000 students, up to $4,800 per student each year.

The idea is gaining support across the country. In addition to Michigan, Minnesota and New Hampshire will begin free community college tuition programs in FY 2025. Colorado will begin its program in FY 2026. Ironically, it is some of the more populous states which do not have such programs. Those include Texas, Ohio, Pennsylvania, Illinois, Wisconsin and Florida.

A 2020 study produced by the Federal Trade Commission found free community college increases enrollment by 26 percent, welfare for all students, and degree completions by 20 percent. Programs that only cover tuition after accounting for other sources of grants increase enrollment by 10 percent and degree completions by 10 percent, but provide no benefit to low-income students. Need-based programs that make community college free for low-income students increase enrollment by 12 percent.  

OAKLAND CHILDRENS HOSPITAL

The Regents of the University of California recently approved a major expansion of one of Oakland’s primary medical facilities, the Oakland Children’s Hospital. The hospital is a level 1 trauma facility as well as a “safety net” hospital. That is reflected in the fact that the hospital derives 70% of its revenues from Medi-Cal. The hospital had struggled financially for years before it merged with UCSF Benioff Children’s Hospital in San Francisco in 2014 following a $100 million gift from billionaire Salesforce founder Marc Benioff.

UCSF plans to pay for the construction through a combination of $891 million in debt financing, $350 million in gifts, $163 million in hospital reserves and $87 million in grants, according to the plan approved by the regents. The project will double the safety net facility’s emergency department space and triple the number of single-patient hospital rooms. 

Parkview Health System is a regional hospital system, anchored by a tertiary facility in Fort Wayne, Indiana. In total, Parkview operates 14 acute and specialty service hospital campuses, several ambulatory sites, and numerous physician offices throughout its market in northeastern Indiana and northwestern Ohio. In fiscal 2023, the organization reported $2.8 billion in operating revenue and saw over 59,000 admissions.

This week, Moody’s changed its outlook on some $800 million of outstanding debt from Parkview to negative from stable. The Aa3 rating had benefitted from a more stable operating environment in terms of reimbursements from the states under Medicaid. Now, the system is facing reduced cash flow which is always key to a rating. Moody’s notes that “lower cash flow will keep debt to cash flow elevated at about 3.0x after years of measuring 2.0x – 2.5x, and the rising expense base will constrain days cash to under 250 days, down from over 300 days prior to current financial challenges.”

A RELIC

Simmons University is a private, nonsectarian university with an all-women’s undergraduate college and coeducational graduate programs. That single-sex tradition and orientation has been a financial stumbling block for many schools of that category. Simmons reflects that trend. Located in Boston’s historic Fenway district, Simmons currently serves around 5,103 FTE students and generated roughly about $172 million of operating revenue as of fiscal year end 2023. 

The university had approximately $264 million in debt outstanding as of fiscal year end 2023. Moody’s recently downgraded Simmons from Baa2 to Baa3. That move was not enough to stabilize the outlook which was held at negative. The downgrade to Baa3 also considers the university’s material debt burden, up 88% over the past five years, exacerbated by declining operating revenue, down 13% over the same period. 

The near-term answer from management is to rely on reserves but that can only be sustained for so long. The hope is that draws on reserves can continue through fiscal 2027. That is a red flag for the rating.

STADIUM DEAL

Pinellas County and the City of St. Petersburg have reached an agreement over how to fund the construction of a new baseball stadium for the Tampa Bay Rays. The stadium is expected to cost about $1.3 billion, of which the Rays will cover $700 million. This week, Pinellas County approved some $300 million of support for the facility. The key to that is based in the effort to tie the stadium to the revitalization of the surrounding community.

The concept of a stadium anchoring a larger real estate development scheme is increasingly the go to tactic employed by teams seeking new stadia. Successful examples are to be found in St. Louis and Atlanta. In this case, the Rays also envision year-round non-baseball events at the stadium, as well as a planned mixed-use development in the area that will include 5,400 residential units, 750 hotel rooms, 1.4 million square feet of office and medical space, 750,000 square feet of retail space, a new Woodson African American Museum of Florida, a concert/entertainment venue of 4,000 to 6,000 seats and 14 acres of green space.

BAY AREA TRANSIT

An initiative that would place a new tax on Uber, Lyft and Waymo to fund the San Francisco Municipal Transportation Agency has qualified for the November ballot. The Community Transit Act, the proposed ordinance would the revenues earned by these companies from their rideshare and robotaxi services in San Francisco. It would be levied at a graduated rate that would rise from 1% to 4.5% as that revenue increases.

The measure would use the money raised — which its authors estimate to be $20 million to $30 million annually — to maintain or expand Muni service and the agency’s discounted-fare programs. The ride share customers are already paying for transit as the result of the passage in 2019’s Proposition D, which placed a 1.5% to 3.25% tax on all ride-hailing fares in The City. Muni is facing a massive deficit as ridership and fares haven’t recovered to the levels they were at before the COVID-19 pandemic and also to the end of federal pandemic-related financial support.

In Santa Clara, the Santa Clara Valley Transportation Authority (VTA), the transit agency designing and building the BART extension to San Jose and Santa Clara, announced the federal government will contribute $5.1 billion to complete the long-awaited project. The award from the Federal Transit Administration (FTA) is the second largest transit-related grant from the agency in history and the largest amount of federal money ever given to a West Coast transportation project.

Phase I of the BART extension brought service into Santa Clara County from Alameda County, with stops in Milpitas and North San Jose opening in 2020. The grant is for a four-station BART extension that will run from the Berryessa Transit Center in North San Jose through downtown and up to Santa Clara. The estimated cost of the project was originally $4.4 billion and scheduled to begin service in 2026. The opening date for this segment of the extension has now been extended to 2037.

P3 GOES PUBLIC

The Texas Transportation Commission voted to authorize spending more than $1.73 billion to terminate a 52-year agreement with Blueridge Transportation Group, which began constructing the 10-mile stretch of toll lanes in 2016. That segment of State Highway 288 opened in 2020 and has since been managed by the private operator. The operator sets the fluctuating toll rates.

It is the only such public-private partnership for a toll road in Houston. The agreement calls for TxDOT to take ownership of the tollway in early October, after which point TxDOT will be able to set its own toll rates and use the revenue along the south Houston corridor and for other infrastructure projects in the region.

“The agency believes the cost of the ‘buyout’ provision in the contract is substantially below the value of future toll revenues on the corridor. It is expected that the ‘buyout’ payment would be repaid with future toll revenue bonds, but would allow future toll rates to be significantly less than what are allowed under the current concession agreement.” Drivers currently pay up to $29.23 round trip during peak commuter times on a weekday, which is more than double the cost when the toll lanes opened in 2020.

After the takeover, TxDOT would be able to expand the road without imposing tolls on the new lanes. Under the existing agreement, any expansion would require that tolls be imposed on those lanes.

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

CALIFORNIA FOREVER BUT NOT NOW

The sponsors behind the California Forever proposal have run into some obstacles in terms of public support. The entity had planned to qualify a measure for the upcoming November ballot to allow the project to advance outside of the usual development approval process. (see MCN 6.17.24) The hope was that the initiative would be approved for the ballot this week.

Now, California Forever has announced that it would instead be taking the normal route of going through an Environmental Impact Report and then seeking approval.  “…announcing last year that California Forever would seek a vote on the November 2024 ballot, without a full Environmental Impact Report and a fully negotiated Development Agreement, was a mistake.”

It is no longer seeking to place an item on the 2024 ballot. California Forever will now apply for a General Plan & Zoning Amendment, and proceed with preparation of a full Environmental Impact Report and the negotiation and execution of a Development Agreement. The project would still have to go before voters to win final approval.

AUTONOMOUS VEHICLES

General Motors said that it has restarted test operations in three Sun Belt cities, using self-driving cars (Cruise robotaxis) with human safety drivers. Cruise is now providing autonomous ride services in Dallas, Houston and Phoenix. Different vehicles are being used versus the models used in San Francisco. The stoppage of test operations in California was implemented after some well publicized incidents in San Francisco.

As a result of the suspension, there were major management changes at Cruise. Cruise booked a loss of $500 million before taking into account interest and taxes, an improvement from the $600 million it lost in the same period a year earlier.

CHICAGO PUBLIC SCHOOLS

Mayor Brandon Johnson suggested a plan for Chicago Public Schools to borrow up to $300 million to help pay for increased salary and some pension costs next year. CPS is in negotiations with the Chicago Teachers Union over a new contract. The Mayor has strong ties to CTU and there was always concern that negotiations would be a problem given that CTU is among the more militant unions in the country. Now, the Mayor’s idea is being exposed to significant scrutiny and support has been slow to coalesce.

An internal CPS memo outlines the risks of borrowing to pay for hypothetical 4% raises for teachers and principals and cover a $175 million pension payment that was shifted to the school district as part of the City of Chicago’s effort to stabilize its finances. If the district financed those raises and pension payments with debt, the district’s projected deficit would grow to $933 million for next fiscal year.

CPS has approved a $9.9 billion budget for 2025. The proposed budget does not include any new borrowing, or factor in the costs of new bargaining agreements that are being negotiated now, including with CTU. The proposal would close a $505 million shortfall — driven largely by the end of federal COVID money — through cuts at the district’s central office and staffing, as well through restructuring some existing debt and federal grants.

When the district faced deficits between the 2014 and 2017 fiscal years, CPS borrowed money to cover operating expenses since administrations at the time didn’t want to cut costs. The district owes $3.7 billion in principal and interest payments for that borrowing. The CPS credit will be mired in sub-investment grade territory for a long time.

BAY AREA WATER

The Bay Area’s five largest water agencies — the Contra Costa Water District (CCWD), the East Bay Municipal Utility District (EBMUD), the San Francisco Public Utilities Commission (SFPUC), the Santa Clara Valley Water District (SCVWD) and Zone 7 Water Agency (Zone 7) — are jointly exploring a regional desalination project that would provide an additional water source, diversify the area’s water supply, and foster long-term regional sustainability.

The project concept relies on available capacity in an extensive network of existing pipelines and interties that already connect the agencies, as well as existing wastewater outfalls and pump stations in the region. The only new infrastructure envisioned for the project would be a treatment plant and connections to the network of interconnections that would already be in place.

The goal is to provide a reliable water supply source available during contract delivery reductions, extended droughts, and emergencies such as earthquakes or levee failures. It would also allow other major facilities such as treatment plants, water pipelines, and pump stations, to be removed from service for maintenance or repairs.

The biggest issue facing this and any other desalinization project is the high cost per gallon of producing the water. Desalinization is the most expensive alternative by far producing a cost per gallon roughly double versus other ways to maintain and develop water supplies.

FOSSIL FUEL TAX ON THE BALLOT

An initiative placed on the Richmond, CA ballot in November would tax the Chevron refinery, one of the largest in the state, $1 for each barrel of oil processed within city limits. The City estimates that the tax would generate some $90 million and would be available to the City’s General Fund. As a general tax, the initiative would only require a majority of the vote not a supermajority.

Carson, California, enacted its own refinery tax in 2017 that helped move the city’s finances the city into surplus by adding tens of millions of dollars to its annual budget.

PUERTO RICO AND ELECTRIC RESILIENCE

The U.S. Department of Energy (DOE) has announced a $325 million funding opportunity for the new Programa de Comunidades Resilientes (Community Resilience Program). The funding is derived from DOE’s Puerto Rico Energy Resilience Fund (PR-ERF). It is designed to provide funding for solar and battery storage installations in community healthcare facilities and subsidized multi-family housing properties.

The plan calls for between $70 million and $140 million to be allocated to federally qualified health centers, dialysis centers, and diagnostic and treatment centers to improve their energy resilience. The loss of power for extended periods to facilities such as these had significant negative impacts on health on both long and short term bases.

Other funds of between $93 million and $185 million will be dedicated to enhancing energy resilience in community centers and common areas within public or privately owned multi-family housing properties subsidized by the U.S. Department of Housing and Urban Development. This includes powering shared building infrastructure and common spaces, such as elevators, in addition to community centers located on public housing properties in Puerto Rico.

That dedication of funds for public housing projects is a neat way to get around historical Congressional hostility to funding public housing on either a new construction or maintenance basis. In December 2022, a law providing $1 billion for the PR-ERF was signed. It is part of an overall effort to invest in renewable and resilient energy infrastructure in Puerto Rico. in February 2024, the DOE launched the Programa Acceso Solar on the island. It is designed to connect low-income Puerto Rican households with subsidized residential solar and battery storage systems.

NEW YORK STATE

The State Legislature ended its session in late June finally bringing an end to an extended budget cycle. The fiscal year started April 1. The ultimate stumbling block was not transportation or migrant related costs. Rather it was the issue of affordable housing. A long standing program known as 421-a had been the main tool used in NYC to generate new affordable housing.

421-a was created in 1971 as a 10-year as-of-right tax break (plus three years during construction) for new multi-family residential construction.  It went through many iterations during its half century of existence. They were all designed to enhance a program which many contend did not actually achieve its goals. One thing was certain – the cost to NYC in terms of lost tax revenue associated with the program was a larger amount than any other single New York City housing budget item.

The New York City Independent Budget Office (IBO) found that developments already under the 421-a program would receive $25.7 billion from fiscal year 2023 through fiscal year 2056, when the last of the 421-a exemptions would cease (all amounts are in 2022 dollars). In fiscal year 2024, the Department of Finance reported that the City provided almost $1.9 billion in tax breaks to 421-a properties. At the same time, the issue of affordable housing in the state became more difficult.

In 2022, there was a consensus that 421-1 a was no longer appropriate. In an atmosphere of upended Albany politics and poor City-State relations, the program was allowed to expire. This year’s budget was seen as a point of leverage by housing advocates and that came to pass. The Legislature and the Governor were able to agree on a new plan.

In the 2025 State Enacted Budget, the 421-a program was revised, renamed Affordable Neighborhoods for New Yorkers, and placed under a different part of the tax law, 485-x. The 485-x program was made retroactive back to June 15, 2022, when 421-a expired, and applies to all qualifying new construction residential housing with construction starting by June 15, 2034. There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 

There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 485-x limits affordable units to 100% Area Median Income (AMI) while 421-a allowed affordable units up to 130% AMI. Most rental buildings under 485-x will be required to set aside 25% of units as income-tested affordable units, compared with 25% to 30% of units under the 421-a.

485-x requires permanent rent stabilization for affordable rental units but does not require any rent stabilization for market-rate units. The prior 421-a program required both affordable and market-rate units to be rent stabilized for the duration of the compliance period, limiting how much rents could increase year-to-year for all units.

To help make office-to-residential conversions more financially feasible, the 2025 State Enacted Budget includes a new tax exemption for office-to-residential conversion projects, called the Affordable Housing from Commercial Conversions Program, housed in Section 467-m of the Real Property Tax Law. This is the first tax incentive program for office-to-housing conversions since the 421-g incentive program, which from 1995 through 2006 specifically benefited conversions in an area of lower Manhattan.

467-m offers a full property tax exemption during construction, and a partial property tax exemption for up to 35 years after completion. The exemption is more generous for projects located south of 96th Street in Manhattan (referred to in the legislation as the Manhattan Prime Development Area). To receive benefits, at least 25% of the rental units must be affordable, with the affordability levels of those units averaging at 80% AMI or lower.2 These units are subject to permanent rent stabilization.

NUCLEAR

Terra Power, the Bill Gates backed entity, announced groundbreaking in Kemmerer, Wyoming on the nation’s first advanced nuclear reactor. The company is building the nuclear facility at the site of an abandoned coal generating plant. The new technology uses liquid sodium as a coolant instead of water, which can absorb much more heat and doesn’t require pumps to circulate. 

The plant is a public-private partnership with the U.S. Department of Energy’s (DOE) Advanced Reactor Demonstration Program (ARDP). The plant will also include a molten salt energy storage system. This is designed to enable higher output and provide an ability to operate on a dispatchable rather than a base-load schedule. It is projected to commence commercial operation in 2030 reflecting an extended testing period and approval process.

On the traditional side, the restart of Michigan’s Palisades nuclear plant seems to be proceeding apace. This week, the outlook got a boost when the Chair of the Nuclear Regulatory Commission told Congress that the plant is on track to restart in August 2025. This assumes completion of the environmental review process by May, 2025.

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.