Joseph Krist

Publisher

FLORIDA AND CHARTER SCHOOLS

Broward County Public Schools (FL) claims to have more than 49,000 vacant classroom seats this year. That is almost equal to the number – 49,833 – of students attending charter schools in the area. The school district has been experiencing steady declines in enrollments since 2010. Over the period since. enrollment in charters increased by nearly 27,000 students since 2010, according to Broward school officials.

Private school enrollment across Florida rose by 47,000 students to 445,000 students from 2019-20 to 2022-23, according to the latest data available from the state. Enrollment declines for Broward, Duval and Miami accelerated during the Covid-19 pandemic, which sent parents seeking new education choices for their children. Homeschooling increased significantly as this population grew by nearly 50,000 students between 2019-20 and 2022-23, totaling 154,000 students in the latest Florida Department of Education data.

Traditional public schools in the area are projected to enroll some 10,000 less students in 2024-25, compared with five years ago, according to Duval County Public Schools. Enrollment in traditional public schools across the state decreased by 55,000 students from 2019-20 to this year, state data shows. This is leading to a growing inventory of unused space and facilities. This at the same time that Florida schools are at the center of many of the cultural war disputes one sees in many places.

MILLIONAIRE TAX

An additional 4% charge on any income over $1 million a year and was approved by Massachusetts voters in 2022. The Tufts University Center for State Policy Analysis, in January 2022, released a report that found the tax would apply to less than 1% of Massachusetts households in any given year. The approval generated the usual cries of doom and gloom about the likelihood of taxpayer flight among those who might be impacted. The argument is raised just about any time now that an effort is made to raise rates for the highest tax brackets.

That notion is being revisited in light of the first year of income tax collections including the new higher top bracket. The Commonwealth Department of Revenue said that Massachusetts is on a course to collect some $1.8 billion from the surtax on the state’s highest earners through the first nine months of the fiscal year. That is some $800 million above prior estimates. Surtax collections must be used on education and transportation needs under the constitutional amendment that voters approved in 2022.

The fiscal 2024 state budget included agreements that any surtax revenues above the budgeted threshold would be placed into one of two accounts established as part of the tax approval. Fifteen percent of the overage is deposited into a savings account, set aside to maintain investments if surtax collections decline in future years. The other 85 percent goes into an “Education and Transportation Innovation and Capital Fund.”

Those funds are directed to several purposes “including, but not limited to, pay-go capital” or one-time projects “related to quality public education and affordable public colleges and universities and for the repair and maintenance of roads, bridges and public transportation,” 

SAN FRANCISCO SCHOOLS

Over the last few years, the San Francisco Unified School District has been best known for its role in the school renaming debate that was a part of the country’s post- George Floyd reckoning. Arguments over historical inaccuracies, name removals, and a host of other social concerns seemed to the main points of contention. They led to resignations and change to the school board. Given this and the other pandemic related problems which took such a toll on the City as a whole, it was inevitable that something would fall through the cracks.

On September 15, 2021, Fiscal Experts were assigned to the SFUSD by the California Department of Education. Recently, these CDE overseers drew attention to the SFUSD and its continuing financial decline. The State Superintendent noted that the SFUSD is projecting deficit spending in the unrestricted general fund for the current and two subsequent fiscal years. Without budget adjustments to bring the expenditures in line with revenues, the SFUSD will be unable to meet its financial obligations in the 2024–25 fiscal year. That creates a negative finding which supports state supervision.

In December 2023, the SFUSD adopted a Budget Balancing Solution Plan with the 2023–24 First Interim Report that included unrestricted general fund one-time reductions, $103.1 million of ongoing reductions for 2024–25, and an additional $88.8 million of unidentified ongoing reductions for 2025–26.

As a component of the oversight process, a Second Interim Report was issued which reflects that of the $103.1 million in expenditure reductions identified at First Interim for 2024–25, $28.3 million were not achieved and were added back to the unrestricted general fund for 2024–25. At the First Interim Report, the SFUSD projected estimated ongoing savings of $40 million from eliminating vacant positions in the 2023–24 fiscal year. As of the Second Interim Report, $15.8 million of the vacant positions were eliminated.

The SFUSD plans to achieve $29 million of savings in 2024–25 through changes to their staffing model for elementary, middle, and high schools. The SFUSD stated that these reductions would be achieved through layoffs and attrition. The SFUSD Board of Education adopted a resolution to issue layoff notices that included $14 million in estimated savings for certificated staff. The CDE has been informed that the SFUSD will no longer pursue these layoffs.

Statutory restrictions on debt issuance for school districts that have qualified or negative interim report certifications have their debt issuance limited. SFUSD may not issue, for the 2023–24 and 2024–25 fiscal years, certificates of participation, tax anticipation notes, revenue bonds, or any other debt instruments not requiring the approval of the voters, unless the State Superintendent of Public Instruction (SSPI) determines that repayment of that indebtedness is probable.

In spite of the report, SFUSD is expected to approve a ballot initiative for this November’s ballot to approve an $800 million bond sale.

MORE HOSPITAL BAD NEWS

Massachusetts-based Tufts Medicine confirmed plans to lay off 174 of its employees. Persistent capacity issues, high contract labor expenses and rising supply chain costs were the primary items cited by management. Tufts Medicine recorded a $171 million operating loss and 71 days of cash on hand at the close of its most recent fiscal year, which ended Sept. 30, 2023. This was an improvement over the prior year, when it recorded a $399 million operating loss. In February Fitch Ratings downgraded Tufts Medicine from “BBB” to “BBB-.

Pittsburgh-based UPMC is an integrated health system and one of Pennsylvania’s largest employers. Its provider, insurance and other business arms logged $27.7 billion of revenue across 2023 as volumes rose and insurance membership grew. In spite of the increases in utilization, the nonprofit reported a $198.3 million operating loss (-0.7% operating margin) last year as insurance claims expenses jumped 13.6% and labor costs rose 6.4%. It had posted a $162 million operating gain (0.6% operating margin) the year before.

Now it has brought in McKinsey as a consultant to help manage its “transformation”. If you’ve ever been in a McKinsey reimagination, you’re not shocked to see 1,000 layoffs announced. (1% of its 100,000-person workforce) It is after all what they do. UPMC is a $27 billion annual operation with operating revenues roughly split between its 40 hospital health services division, and its 4.2 million-member insurance services group. A third segment runs a division supporting development of commercial venture enterprises and an investment portfolio.

The system’s operations have been losing money. For the 2023 fiscal year, ended Dec. 31, the organization logged a $198.3 million operating loss (-0.7% operating margin) on revenue of $27.7 billion due in part to rising health plan utilization and insurance claims expenses. Its bottom line showed a $31 million loss, reflecting investment returns.

Relying on the investment portfolio and the risks which result were reflected when UPMC had recorded a $162 million operating gain across 2022 but a $1 billion net loss due to that year’s investment markets. It reported a $103 million operating loss (-1.4% operating margin) for its first quarter of 2024 and 103 days of cash on hand as of March 31.

Last week we documented the cyberattack on Ascension Health. Going into its fourth week, IT operations have been minimally restored but there remains no estimate as to full restoration. Systems that are currently unavailable include some electronic health records systems, some patient portals (which enables patients to view their medical records and communicate with their providers), some phone systems and various systems utilized to order certain tests, procedures and medications.

The cyberattack comes as the system faces an exodus of providers as the result of changes to Ascension’s structure which includes an investment vehicle and ownership of for-profit entities to provide for staffing and other services. It is a phenomenon that is increasingly shaping the industry as private equity takes an increasingly large position in the ownership of physician practices and other providers. These takeovers often lead to significant disruption to the provider base with expected negative impacts on service.

HIGHER EDUCATION MERGER

Marymount Manhattan began as a two-year women’s college in 1936, became a four-year school 12 years later and awarded degrees to its first male graduates in 1973. The college had about 1,450 students last fall, down from 1,915 in 2017. MMC has run annual deficits of more than $1 million a year since 2020 after posting a surplus of roughly $900,000 the year before. The board has cited declining enrollments and rising operating costs for an outlook that was “not sustainable”. The school has a $28 million endowment. 

Northeastern University (NU or NEU) is a private research university with its main campus in Boston. Established in 1898, it was founded by the Boston Young Men’s Christian Association as an all-male institute before being incorporated as Northeastern College in 1916, gaining university status in 1922. With more than 38,000 students, Northeastern is the largest university in Massachusetts by enrollment. Management has been pursuing a policy of expansion across the country through the absorption of smaller local institutions. It currently has “satellite” campuses in six U.S. cities and one each in Toronto and London.

Rather than close Marymount, that school decided that a merger represented the best chance of keeping it open. “Recognizing the significant headwinds facing small liberal arts colleges, MMC’s Board decided to pursue this path to ensure the continuation of MMC’s student-centered approach to education for generations to come,”.  The “path” is a merger with Northeastern.

Students enrolled and in good standing at the time of the merger will be eligible for automatic enrollment at Northeastern and can continue working toward completion of their intended degree program. MMC’s full-time faculty members at the time of the merger will become Northeastern faculty, receive one-year contracts, and be considered for available tenured, tenure-track and non-tenure-track positions. All staff employed by MMC upon the effective date of the merger will become Northeastern employees.

In 2022, Northeastern merged with Mills College in Oakland, California, providing the university with a comprehensive campus in the Bay Area.

PUBLIC TRANSIT’S CHALLENGE

Public transportation agencies kept many buses and trains running during the height of the pandemic, especially to support the travel of “essential workers,” but ridership and fare revenues plummeted. Public transportation agency budgets, particularly operating expenses, were supported by federal supplemental appropriations in FY2020 and FY2021 totaling $69.5 billion. This amount was about five times the annual federal public transportation support of $12 billion in 2019, the final full year before the pandemic, and more than three times the $19 billion coming from fares and other operating revenue.

In a survey of its members, the American Public Transit Association (APTA) found that about half of transit agencies and more than two-thirds of large agencies said they would experience severe budget problems (a so-called “fiscal cliff”) in the next five fiscal years (FY2024-FY2028). After declining through the late 1990s, the average operating cost per vehicle mile increased slightly from a low in 1999 through 2019. The operating cost per passenger trip (a measure of service consumed), however, has more than quintupled over this 50- year period.

Ridership rebounded to 79 percent of pre-pandemic levels in March 2024, according to the latest data from the American Public Transit Association (APTA). Public transit ridership was 7.1 billion total trips in 2023, a 16 percent increase from 2022 to 2023. Current data remains limited, but indicators in several metro regions point to transit recovery being led by trips to and from residential and commercial areas as opposed to office/work centers. According to the Federal Highway Administration, travel on U.S. roads and streets in 2023 was higher than 2019 levels by one tenth of one percent.

CARBON CAPTURE LEGISLATION

Illinois has enacted legislation regulating carbon capture pipelines. The final bill would establish a moratorium on new pipeline construction until July of 2026. The moratorium would expire on July 1, 2026, if the U.S. Pipeline and Hazardous Materials Safety Administration doesn’t finalize safety rules by then. The bill requires monitoring of injection wells for at least 30 years after they close, a process that must be approved by the state and federal government. It also grants the Illinois Commerce Commission expanded authority to impose fees and require certain safety models to be used during permitting for carbon sequestration and transportation projects.

The Illinois Farm Bureau, an interest group representing farmers and other large landowners, and the Illinois Soybean Association opposed the final bill, largely because of how it handles eminent domain. Under the proposal, the state’s Department of Natural Resources can issue a binding order on “nonconsenting” landowners to force them to let carbon sequestration companies use their land – specifically, the “pore space” thousands of feet underground – to store carbon dioxide. Companies would be required to give “just compensation” in exchange.

BATTERIES ON THE BALLOT

It’s pretty well agreed that a future electric grid which depends on renewables depends on storage. Storage requires batteries. Therein lies the rub. A series of incidents involving battery fires – large batteries for grid storage and small lithium ion batteries for electric bikes – has stoked fear over battery storage. This has sparked significant community opposition to efforts to site these facilities. It is a debate being played out in communities large and small.

The latest example is in California. Vistra Corp. has proposed a 600-megawatt battery storage project on a portion of the former generation site in Morro Bay, CA. It is already an industrial site even if it is on the coast including its three large smokestacks still standing at the generation plant. All of that would be removed and replaced by the battery storage. Project opponents say they’re concerned about its impacts on tourism and the potential for fires at the facility.

The project is currently in the draft environmental impact report stage, with that document open for public comments through this week. The project is awaiting consideration by the city’s planning commission and city council. Opponents want to take that approval power away. A ballot initiative on this November’s ballot would do just that.

It could all be for nought. Recent legislation that allows large battery storage facilities to opt in to an approval process from the California Energy Commission (CEC), instead of going through a local process, could provide a backup pathway to Vistra. 

In 2021, the city changed the land-use designation of the site of the power plant from “Industrial” to “Visitor Serving/Commercial”. The energy storage project is considered industrial so the city council would need to vote to change the designation to again allow industrial uses. The ballot measure proposes to freeze the current land-use designation of the property and a few others in the area. It would then require a majority of voters to approve another change in the land-use designation. 

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

Joseph Krist

Publisher

PUERTO RICO POWER PLAY

The U.S. government is spending over a billion dollars to accelerate renewable-energy adoption in Puerto Rico, including a $156.1 million grant through the Solar for All initiative that focuses on small-scale solar. Since the disastrous storms of the last decade exposed all of the weaknesses in Puerto Rico’s electric infrastructure. One of the easiest fixes available to address issues of both resilience and sustainability, has been rooftop and small scale solar (microgrids). As we have pointed out before, the island has both wind and solar resources in abundance.

In January, Governor Pedro Pierluisi signed a bill extending the island’s existing net-metering policy through 2031. Those rates have supported significant development of solar across the island especially in more isolated and usually poorer communities. As those resources come on line, it doesn’t help Puerto Rico Electric Power Authority (PREPA) to generate enough revenue to meet the demands of its creditors. Especially, creditors in the PREPA bankruptcy.

It is not any different from the situation many mainland utilities face as customers facing increasing rate demands gravitate to solar as a more reliable and often more economical choice. LUMA, the private entity which manages PREPA, estimates that some 117,000 homes and businesses in Puerto Rico were enrolled in net metering as of March 31, 2024, with systems totaling over 810 megawatts in capacity. 15,000 net-metered systems totaling over 150 MW in capacity were installed as of 2019 — the year Puerto Rico adopted its 100 percent renewables goal under Act 17.

Net metering was going to be evaluated under the terms of the January legislation but not until 2030. In April, the Financial Oversight and Management Board urged the governor and legislature to undo Act 10 to allow regulators to study net metering sooner. When that didn’t happen, the board made another appeal in a letter dated May 2, threatening litigation to have the law nullified. They want repeal to occur in the current legislative session ending June 30.

A two-year study overseen by the U.S. Department of Energy, known as PR100, which analyzed how the island could meet its clean energy targets. The study suggests that net metering isn’t likely to start driving up electricity rates for utility customers until after 2030, the year the Energy Bureau is slated to revisit the current rules. 

CARBON CAPTURE

The Department of Energy (DOE) obligated almost $1.4 billion across 654 research and development projects to support carbon capture, utilization, and storage (CCUS) and direct air capture (DAC) technologies from fiscal years 2018 through 2023. Nevertheless, according to the Congressional Budget Office, as of September 2023, only 15 facilities were capturing and transporting CO2 for permanent storage as part of an ongoing commercial operation.

The significant majority of DOE’s carbon capture funding. Specifically, FECM obligated almost $950 million, or 69 percent of DOE funding, to support 410 projects from fiscal years 2018 through 2023. 392 projects (about 96 percent) focused on technologies related to reducing emissions from coal and 18 (about 4 percent) from oil and gas.

Now the federal government is increasing its support for carbon capture. The Infrastructure Investment and Jobs Act provides approximately $12 billion for CCUS and DAC projects. This week, the third-largest “direct air capture” plant operating in the United States came on line. This one adjacent to a Google facility in Oregon is smaller than the other two projects – Global Thermostat’s plant in Commerce City, Colorado, and Heirloom’s plant in Tracy, California.

PORTLAND

I-5 Bridge – When construction starts on a new Interstate 5 bridge across the Columbia River in early 2026, drivers will begin paying tolls on the existing span between Washington and Oregon. Funding for the replacement has been a very contentious issue. Tolls are counted on to raise $1.2 billion for construction plus provide an ongoing stream of revenue for bridge maintenance and operations. Several possible rate scenarios are under review. These have one-way rates ranging from $1.50 to $3.55 with higher prices during peak travel times.

The Oregon Legislature will consider a possible appropriation of some $40 million to help the Port of Portland keep its container loading components open. (See 4.22.24 MCN) The Governor has included $35 million in her budget and proposes to request the remaining $5 million from the legislative Emergency Board at a meeting in September. Each would require approval from lawmakers. Earlier this year, Port leaders asked the Oregon Legislature for $8 million to support operations and were turned down.

Portland voters approved the extension of a local gas tax. The 10-cent-per-gallon tax funds street and sidewalk maintenance and safety projects across Portland. The city estimated the tax will cost the average Portland driver who uses gas-powered vehicles about $2.50 per month. The city’s gas tax was introduced in 2016, and renewed by voters in 2020. It has generated nearly $150 million for the transportation bureau over eight years.

MILEAGE FEES

The Mineta Transportation Institute (MTI) has released the results from its 15th annual survey in a series that explores public support for raising transportation revenue through higher federal gas taxes or a new mileage fee. The headline may be that for the first time a majority of respondents supported some form of mileage fee. In reality, the poll results indicated that support was soft in many ways.

A majority of respondents (51%) supported replacing the federal gas tax with a mileage fee where the rate would vary according to the vehicle’s pollution emissions.  “More than half of respondents supported not only the pollution-rate mileage fee but also a new ‘Business Road-Use Fee’ that would be charged to delivery and freight trucks (58%) or to taxis and ride-hailing vehicles (53%).

The problem comes from the fact that the least popular mileage fee option was a flat-rate fee on all travel. Support for this option was only 39%.” The trend line is positive. “Support for the flat-rate mileage fee grew from just 22% in 2010 to 39% in 2024. Similarly, support for the pollution-rate version grew from 33% in 2010 to 51% in 2024.” 

Other data indicated how uninformed people are about the realities of taxes and road funding. The survey also assessed public knowledge about federal gas taxes and support for the idea of raising the federal gas tax rate by 10 cents per gallon. Only 2% of respondents knew that the federal gas tax rate has not been raised in more than 20 years. Support for raising the federal gas tax has risen since 2010. 

Almost three-quarters of respondents supported raising the gas tax rate if the revenue would be dedicated to maintaining streets and highways (74% support). In contrast, far fewer respondents supported the same gas tax increase if the revenue were spent for undefined “transportation” purposes. 70% supported raising the rate if the revenue were dedicated for safety improvements. In contrast, only 35% supported the rate increase if the money were spent more generically “for transportation.” The majority also supported the concept of using some gas tax revenue to support public transit (71%).

NEW YORK ECONOMY AND BUDGET

Earlier this year City employment reached 100% of its pre-pandemic level. Following a gain of more than 77,000 jobs last year from the final quarter of 2022 to the final quarter of 2023 (Q4 to Q4), the Independent Budget Office (IBO) projects that the City will gain over 91,000 jobs in 2024. The mix of new jobs however, is not following trends seen pre-pandemic. This has implications for the lower end of the City’s economy. Certain lower-wage industries that provide key entry level positions, such as leisure and hospitality and retail trade, remain well below their pre-pandemic employment totals.

IBO does not expect the retail sector to reach its pre-pandemic employment in the foreseeable future, in part resulting from shifts in consumer spending away from brick-and-mortar retail to greater proportions of online purchases. At the same time, The stability of high-wage jobs during the pandemic, in conjunction with a stable outlook for Wall Street, indicates stability for the City’s tax collections and finances in the short run. The largest shares of IBO’s total tax forecast estimate are Real Property (44%), Personal Income (21%), General Sales (14%), and Corporate Taxes (9%), while the remaining taxes and audit revenue together reflect the remaining 12%.

So how does all of this impact the outlook for the pending FY 2025 budget? IBO anticipates budget surpluses exceeding the Administration’s Projections in 2024 and 2025 The higher 2024 surplus results from IBO’s forecast of approximately $129 million more in anticipated tax revenues and about $1.0 billion less in City spending than presented in the Executive Budget financial plan. With similar net tax and spending estimates as the Administration for 2025, using the 2024 surplus to pre-pay 2025 expenditures, IBO anticipates 2025 to also end with a surplus of around $1.1 billion.

IBO estimates larger gaps than the Administration. Starting in 2026 IBO’s projected gaps for 2026 ($6.2 billion) and 2028 ($6.0 billion) are well within the range that the City has closed in the past. IBO estimates a slightly larger gap of $7.9 billion in 2027 in part due to the Administration’s budgeted $1.0 billion in State funding for asylum seekers that the State has yet to commit to, which IBO estimates will be covered by City funds.

IBO anticipates substantially more funding will be needed, more than $605 million (all City funds) in 2025 for personnel costs across the uniformed agencies of Police, Sanitation, and Correction, largely to cover overtime costs. IBO estimates an additional $651 million will be needed from 2025 through 2027 to fully fund the current spending levels for the City Fighting Homeless and Eviction Prevention Supplement (City FHEPS) housing rental voucher program. To fund DOE programs previously funded by Federal Covid-19 aid, IBO estimates an additional $187 million will be needed in 2025 and $505 million in each of the following years.

NATURAL GAS AND CLIMATE

The Government Accounting Office (GAO) was asked to examine pollution from peakers across the nation. Those are plants designed to supply power during spikes in demand. There were 999 peakers in the U.S. in 2021, according to GAO’s analysis of the most recent Environmental Protection Agency (EPA) data. In 2021, peakers accounted for 3.1 percent of annual net electricity generation and 19 percent of total designed full-load sustained output for all power plants. The expansion of this generating source is being challenged across the country.

One reason is that GAO found that when operating, peakers emit pollutants like those from other power plants that use fossil fuels, such as nitrogen oxides and sulfur dioxide. According to EPA data, peakers operate less frequently overall than non-peakers, but when they do operate, they emit more pollution. A second reason is that GAO found that historically disadvantaged communities (i.e., census tracts with higher percentages of historically disadvantaged racial or ethnic populations) are associated with being closer to peakers. 

TRANSIT’S DILEMMA

A new report from a conservative research organization highlights a phenomenon plaguing many transit systems serving multiple jurisdictions. Coming out of the pandemic, these systems were confronted with a landscape that they did not design. The declines in ridership due to limits on economic activity were one thing. The move to remote work and the impact on ridership is making it’s true impact harder to emerge. There are signs.

There is a disconnect between ridership and funding sources in many metropolitan area transit grids. The ratio of operating fares to operating expenses has always varied and New York (at some 50%) was always an outlier in terms of how much of its revenue was supported by fares. The more typical setup was a funding source – often a sales tax – collected across multi-jurisdiction service areas. It worked well until the pandemic.

Now that sort of funding structure is being questioned in many areas in terms of both maintenance of existing systems as well as expansion of new systems. Suburban residents who have become less reliant on mass transit for basic commuting seem to be taking a different view. It is seen as harder to justify support for a system which holds down fares through other revenues.

Colorado just enacted a new tax on the fossil fuel industry that is projected to produce $285 million to fund mass transit expansion. That led to the release of the report. The report stated ridership decreased 46% and the operating budget increased 3% between 2019 and 2022. The system’s operating budget increased from $477 million in 2014 to $856 million in 2023 and its proposed budget for 2024 is $1 billion. Only 4.4% of the district’s operating costs were covered by fares as of Jan. 31, 2024.

From 2020 through 2022, 66% of the system’s revenue came from sales and use taxes in participating counties. Federal grants provide approximately 25% of its operating costs.

ASCENSION HEALTH

The issue of cybersecurity is back in the spotlight as the result of ransomware attacks on healthcare facilities, providers and insurers. The biggest current situation involves Ascension Health and its 140 national hospital system. An ongoing ransomware attack against Ascension has moved basic patient care to pre-computer conditions. The attack has slowed It’s an ongoing debate operations, limited utilization and revenues.

This is the second major ransomware attack against a healthcare entity. Earlier this year there was a successful attack on United Health Care’s Change Healthcare. Change handles one-third of the nation’s patient records. The threat of the release and/or misuse of that data has been an often effective cudgel to be wielded by attackers.

One has to ask if United Health Care’s decision to pay a $22 million ransom encouraged future efforts. It is an ongoing debate with arguments on both sides. Ascension was hit as it was in the midst of an improving financial trend. Ascension reported income from recurring operations of $15 million for the nine months ended March 31, 2024 as compared to a $1.1 billion loss from recurring operations for the comparable prior year period.

Additionally, Ascension’s recurring operating performance for the three months ended March 31, 2024 improved $622 million over the comparable quarter in the prior year. For Q3 FY24 YTD, Ascension experienced an increase in overall same facility volume over the comparable period in the prior year, most notably driven by total inpatient admissions, emergency visits and total surgery visits.

Ascension’s net income for the three months ended March 31, 2024, including both operating and nonoperating items, was $581 million which represents a $1.3 billion turnaround from the same period in the prior year. For the nine months ended March 31, 2024, Ascension’s net income improved $2.2 billion over the prior year. It remains to be seen when systems will be restored and how much of an ultimate cost the system winds up bearing.

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 TAX GIMMICK

The average single family New York City homeowner pays $1,088 a year for water. Landlords pay for water, but pass along the costs to tenants. The increase, if it goes through, would amount to another $93 a year on water bills, according to a proposal acquired by The New York Times. We do not see this increase by the city as being a real credit issue. Rather, it is an indicator of the policy gap between the Mayor and the City Council. Neither want to raise taxes reflecting the sway of outer borough homeowners and the large commercial real estate interests which are heavy sources of campaign money.

It is a sign of the Mayor’s weakening political outlook and the fact that he is up for reelection in 18 months. He did get control of the schools from the legislature in an unexpected win for the Mayor. The period between now and the 2025 mayoral election will be a difficult one as COVID money will be effectively gone and the impact of migrants, homelessness and crime will continue to drive spending.

While the Mayor is proposing new taxes (no matter what he calls it), the NYC Independent Budget Office (IBO) has released data indicating that the City may have more money than it thinks. IBO estimates the City will spend $800 million less on Citywide staffing costs over the rest of FY 2024. This is the largest contributor to IBO’s $1.1 billion surplus projection. IBO’s estimates costs associated with asylum seeker services to be $3.3 billion less than what the Administration is projecting.

We are not arguing about whether the sky is falling. We just don’t see a stable current outlook for the city’s credit.

ILLINOIS BUDGET

The Civic Federation of Chicago has taken a look at the Governor of Illinois’ proposed budget. It notes that the proposed FY2025 budget represents the first year the State has had an initial budget deficit to close since the start of the pandemic. Based on current projections, the State’s revenues are expected to come in lower than projected expenditures in FY2025, resulting in a deficit of $970 million. The Governor’s proposal introduces a number of tax changes and enhancements that would close the budget deficit if approved by the General Assembly, thereby bringing the budget into technical balance. 

It is far from certain that the Legislature will support some new taxes. The Governor has asked agency leadership teams to prepare for a budget scenario with $800 million less in revenue. The $52.7 billion proposed General Funds operating budget is a 4.5% increase from estimated year-end FY2024 spending of approximately $50.4 billion—excluding FY2024 supplemental appropriations of $1.2 billion. Agency spending (excluding pension contributions and transfers out of the General Funds for debt service and other purposes) will increase by $1.9 billion, or 4.9%, from the FY2024 year-end estimate to $40.4 billion.

General Fund revenues are proposed at approximately $53.0 billion for FY2025, an increase of $779 million, or 1.5%, from the FY2024 year-end estimate of $52.2 billion. The State is projected to end FY2025 with a $128 million surplus after a proposed $170 million contribution to the rainy day fund. The Governor’s proposed budget fully meets the State’s 50-year pension funding plan by making the statutorily required General Funds pension contribution of $10.1 billion in FY2025. It also proposes increasing the 50-year funded ratio goal from 90% to 100%, which will add three additional years to the funding payment plan and extend its end date from FY2045 to FY2048. 

MISSISSIPPI MEDICAID

In February, the Mississippi House passed a bill that would offer coverage to people with incomes up to 138 percent of the federal poverty level, or just over $20,000 a year for a single person. The bill included a work requirement, but it also contained a provision ensuring that the expansion could move forward if the federal government rejected the work requirement. When the bill moved to the Senate, only a scaled back measure was approved.  The Senate version limit eligibility to people below the federal poverty line. The Senate version would have taken effect only if the Biden administration allowed the work requirement.

Early last week, an agreement between the chambers was released: Coverage would be extended to people with incomes up to 138 percent of the federal poverty level, as called for under the Affordable Care Act, but new recipients would be required to work at least 25 hours a week to get benefits. The work rule would likely have been a non-starter as has been the case in courts throughout the country. Nevertheless, it was clear that nothing would get through the Senate without work rules. This moved the House Speaker to announce that he wanted to put the question directly to voters. “It became apparent that opinions still differed on the best way to address our health care crisis,” he said in a statement.

He proposed a two-part ballot initiative that would ask residents if they supported Medicaid expansion, and if so, whether it should include a work requirement. But the suggestion was dismissed by state senators.

COLLEGES

As is often the case in the wild, it’s the smaller members of the herd who become prey. This is becoming increasingly true in the small private college sector.

On April 25, the University of Saint Katherine, an Orthodox Christian college in San Marcos, California will close at the end of the spring 2024 semester. Founded in 2010, its narrow focus limited demand. Those limits were amplified by the pandemic. Now, the institution was no longer able to meet its financial obligations due to “a steep shortfall in operating cash.”

And on April 29, Wells College in Aurora, New York revealed it would be closing at the end of the current semester, after 156 years of operation. Wells was for much of its history a women’s college. Enrollment had fallen from about 500 students several years ago to 357 in fall 2022, it lost money in five of the last 10 available fiscal years.

The cost pressures continue at institutions of all sizes. Pennsylvania State University is offering buyouts to employees at its Commonwealth Campuses. Staff that are eligible for the program include tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. The primary reason for the offer is that “enrollment has declined significantly at the Commonwealth Campuses, in aggregate, over the past 10 or so years while the number of faculty and staff at the campuses has remained relatively flat.”  

CALIFORNIA WATER

The 2023 Water Year (WY) — which spanned from Oct. 1, 2022, through Sept. 30, 2023 — brought 4.1 million acre-feet of managed groundwater recharge and a total rise in groundwater storage of 8.7 million acre-feet, according to the California Department of Water Resources. The 4.1 million acre-feet recharge volume was equivalent to the entire storage capacity of Shasta Lake, the largest above-ground reservoir in California. Of the total recharge amount, 93 percent — or 3.8 million acre-feet — occurred in the agricultural center of the state – San Joaquin Valley.

Although WY 2023 ranked as the 8th wettest year in the last 50 years, with nearly 100 percent recovery of surface water reservoir levels, long-term groundwater storage in aquifers remains in a deficit due to decades of pumping that often exceeded the replenishment. In WY 2023, increased surface water supply led to a significant reduction in statewide groundwater extraction, amounting to a total annual extraction of 9.5 million acre-feet, a stark contrast to the 17 million acre-feet extracted in WY 2022.

CALIFORNIA TAX INITIATIVE

A ballot initiative, championed by the California Business Roundtable and funded largely by real estate interests, would require voters to approve taxes passed by the Legislature and would raise the voter-approval threshold for some local taxes to two-thirds. It would also dictate that the Legislature must approve fees that the administration can currently impose and could invalidate some already-passed taxes unless they are re-approved under new rules. The deadline to remove qualified measures is about seven weeks away.

CALIFORNIA BUDGET

Governor Gavin Newsom released his May Revision proposal. The Governor’s revised budget proposal closes both this year’s remaining $27.6 billion budget shortfall and next year’s projected $28.4 billion deficit. The revised balanced state budget cuts one-time spending by $19.1 billion and ongoing spending by $13.7 billion through 2025-26. This includes a nearly 8% cut to state operations and a targeted elimination of 10,000 unfilled state positions.

The Governor points to two primary factors pressuring the budget. First, the state’s revenue, heavily reliant on personal income taxes including capital gains, surged in 2021 due to a robust stock market but plummeted in 2022 following a market downturn. While the market bounced back by late 2023, the state continued to collect less tax revenue than projected in part due to something called “capital loss carryover,” which allows losses from previous years to reduce how much an individual is taxed.

Second, the IRS extended the tax filing deadline for most California taxpayers in 2023 following severe winter storms, delaying the revelation of reduced tax receipts. When these receipts were able to eventually be processed, they were 22% below expectations. Without the filing delay, the revenue drop would have been incorporated into last year’s budget and the shortfall this year would be significantly smaller.

The structure of the state’s tax scheme which depends on a few large earners and their capital gains has played a role in the deficit calculations. Capital gains tax revenues that exceed eight percent of total general fund revenues are deposited into its Budget Stabilization Account (BSA). In 2021 capital gains realizations hit an all-time high of $349 billion. Conversely, the May Revision forecast projects that capital gains realizations fell to approximately $156 billion in 2022 and $137 billion in 2023.

The May Revision maintains the Governor’s Budget withdrawal of approximately $12.2 billion from the BSA, as well as $900 million from the Safety Net Reserve. However, the May Revision spreads the use of the BSA withdrawal over two fiscal years, utilizing $3.3 billion in the 2024-25 fiscal year and $8.9 billion in the 2025-26 fiscal year. This will leave a balance of $22 billion in the BSA. Nonetheless, the Revision includes some $8.2 billion of spending cuts. They will generate negative responses especially for their impact on education

The Revision includes a reduction of $510 million in ongoing General Fund support for the Middle Class Scholarship program; reduction of one-time $72.3 million General Fund in 2023-24, $348.6 million General Fund in 2024-25, and $5 million General Fund in 2025-26 for school-linked health partnerships; an ongoing reduction of $80.6 million General Fund to reflect the deactivation of 46 housing units across 13 prisons, totaling approximately 4,600 beds. The May Revision includes additional and adjusted support from revenue sources and borrows internally from special funds.

ESG IN COURT

An Oklahoma County District Court Judge Sheila Stinson issued a temporary injunction blocking an Oklahoma state law which would prohibit state agencies from investing with financial firms that boycott energy companies for no “ordinary business purpose,” because the companies engage in “fossil-fuel-based energy” and do not intend to meet environmental standards.

NEW YORK STATE CANNABIS

It has been evident merely from empirical evidence that the rollout of the legalization of cannabis in New York State has been a “disaster”. A new report from the State Office of General Services documents exactly how much of a disaster it is. Some 90 percent of applicants for cannabis businesses had failed to secure licenses. There is a waiting list includes 1,200 business that submitted applications last fall.

Here’s where the process made things worse. In order to have an application reviewed, an applicant had to spend thousands of dollars to secure properties where they intended to set up shop. That 1,200 applicant waiting list was a huge hurdle as the cannabis agency had the capacity to vet only 75 applications at a time. The execution of the approval process was inept as the regulators also denied an additional 309 applications without telling the applicants, some of whom have waited almost two years for a decision.

The agency itself is a bureaucratic nightmare. The responsibility for vetting license applicants is spread across four units of the agency, each with its own spreadsheet for tracking applications. Most other agencies that deal with licensing have a single person assigned to each license. At least nine staff members touch each cannabis application. But no one is responsible for seeing them through to completion. There are eight senior officials who report directly to the executive director but enforcement and licensing, fall to just two of them.

It was announced that the current head of the agency would not have his appointment renewed.

CALIFORNIA AND FIXED ELECTRIC CHARGES

The California Public Utilities Commission approved a plan which will apply to the rates charged by investor-owned utilities. Starting next year, most customers of those companies will be required to pay a $24.15 monthly charge. Low-income customers will pay $6 to $12 a month. The revenue from the fixed charge would be paired with a roughly 20 percent reduction in rates.

The change comes in the wake of seriously reduced net metering payments which have negatively impacted growth of residential solar. The lowering of net billing and the imposition of fixed rates reflect the reality that the investor-owned utilities are transferring more financial risk to ratepayers and away from stockholders. It also coincides with an increasing number of findings of fault by the IUOs in association with wildfires.

DALLAS TRANSIT AND THE CITY’S BUDGET

Dallas Area Rapid Transit (DART) collects a 1% sales tax in all 13 of its member cities. The transit agency collected over $400 million in Dallas annually for the last two years, sales tax data shows. Now some Dallas City Council members are looking at that revenue stream and asking why it should not be used to fund general pension funding requirements.

The city faces a $3 billion shortfall in its police and fire fund, which administers the pension program for over 10,000 current and retired officers. The pension fund for civilian employees also suffers a $1 billion shortfall, according to city officials. In the past, city officials have considered liquidating more of its real estate portfolio to put more cash into the funds. They have also recommended seeking voter approval to change contribution rates for the employees’ retirement fund.

Pressure to address the pension problem stems from the fact that the City must present a plan to the State to fund the pension shortfalls over a thirty year period. The state legislation requiring the plan was passed in direct response to funding pressures which potentially would impact pension payments. Holding taxes down won’t fund the pension problem.

POPULATION

Large cities in the Northeast and Midwest grew in 2023, reversing earlier population declines, according to data released by the U.S. Census Bureau. Cities with populations of 50,000 or more grew by an average of 0.2% in the Northeast and 0.1% in the Midwest after declining an average of 0.3% and 0.2%, respectively, in 2022. Those in the West went up by an average of 0.2% from 2022 to 2023. Cities in the South grew the fastest – by an average 1.0%.

San Antonio, Texas, added more people (roughly 22,000) than any other city in 2023, reclaiming its No. 1 spot on the list of gainers and pushing it close to the 1.5 million population milestone. Detroit gained some 2,000 residents and while the absolute number is nit large, the breaking of a multi-decade trend is. In Chicago, losses continue but at a slowing rate. It remains the nation’s third largest city. New York, New York, remained the nation’s largest city as of July 1, 2023, with almost 8.3 million people, followed by Los Angeles, California, which reached nearly 4 million people.

The nation’s housing stock grew by about 1.6 million units between July 1, 2022, and July 1, 2023, reaching a total of 145.3 million. The 1.1% increase was nearly the same as the 1.2% increase between 2021 and 2022. California had the largest number of housing units (14.8 million), followed by Texas (12.4 million) and Florida (10.5 million). Falls Church, Virginia, was the fastest-growing county; its housing stock increased by 13.5% between July 1, 2022, and July 1, 2023, followed by Rich County, Utah (8.5%), and Jasper County, South Carolina (7.1%). Wasatch County, Utah, and Billings County, North Dakota, were tied for fourth place with 6.1%.

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

TRI STATE LOSES LARGEST PARTICIPANT

This week, the electric cooperative United Power will officially end its 7 decade relationship with Tri-State Generation and Transmission. United Power must make a net payment of $627 million to end its contract early. That number was the result of a court-mandated recalculation of the exit fee required by Tri State. The Federal Energy Regulatory Commission that came up with a formula for calculating the exit fees of Tri-State members who want to break their contracts. Initially, Tri State asked United for $1.2 billion. A major sore spot for United Power and the La Plata Electric Association in Durango is a cap of 5% on the amount of energy that cooperatives can generate on their own. 

The changes are being driven by the cooperative’s larger customer as much as anything. “We have industrial and commercial members who want a different fuel mix in a quicker time frame,” according to Tri State management. Tri-State has been working with its member cooperatives on a contract change that would allow them to get more of their electricity from other sources. Plans filed with state regulators call for Tri-State to get 50% of its power from clean-energy sources in 2025 and 70% by 2030. In addition, the company expects to cut its greenhouse gas emissions in Colorado by 2030 by 89% from 2005 levels.

United Power will still be paying to use Tri-State transmission lines and will buy roughly 30% of its power from the utility. Gabriel said United Power has signed four contracts with Tri-State, one of which will run for 20 years. United Power provides electricity to about 300,000 people with demand growing from 8% to 9% a year.

KENTUCKY COAL VS. JOBS?

For decades, northern Kentucky has had a significant aluminum smelting industry. It benefitted from an availability of locations for plants as well as access to coal for low-cost power and the Ohio River for transportation. It comes as no surprise then that Century Aluminium would like to build its plant in Northeast Kentucky. Century is the largest producer of primary aluminum in the United States. Like other entities in energy intensive industries, Century is under pressure to reduce the carbon footprint associated with its smelter operations.

Century already operates a smelter in Sebree, KY and has an idle smelter in Hawesville, KY. The new plant was selected for a cost share of up to $500 million, pending award negotiations, from the U.S. Department of Energy to support the proposed project as part of the Biden administration’s efforts to decarbonize key U.S. industries. There are only four operating primary aluminum smelters left in the U.S., and Century’s proposed plant would be the first built in 45 years.

According to the Department of Energy, Century’s new smelter would lower emissions by 75% relative to a traditional smelter due to “energy-efficient design and use of carbon-free energy.” It is the term carbon-free energy that is causing concern that the company might not be able to obtain sufficient clean power to allow the proposed plant to meet those emissions benchmarks. It will create 1,000 permanent jobs represented by the United Steelworkers union, and 5,500 additional construction jobs. Salary and benefits packages for workers at the smelter are expected to be over $100,000 annually, according to the company.

The issue comes up after coal advocates in the Kentucky legislature passed several bills aimed at federal environmental regulatory actions and slowing down the process of closing coal fired generation.  Bills creating a new review board to analyze fossil-fuel power plant retirement decisions became law after the legislature overrode a gubernatorial veto. A second bill giving $3 million to the State Attorney General office from the state’s Budget Reserve Trust Fund or “rainy day” fund to create an “electric reliability defense program” also made it past the veto process. The money is intended to fund litigation challenging the recently published rules on coal fired power generation from the EPA.

While this is all unfolding, Louisville Gas and Electric Co. and Kentucky Utilities Co. (LG&E and KU) announced that they will replace two aging coal generation units at Mill Creek Generating Station in Kentucky—a combined 600 MW—with a 645-MW GE Vernova hydrogen-ready 7HA.03 gas turbine. The utilities have made it clear that they are making market based rather than ideology based decisions as to how to develop their generation base.

NUCLEAR

Georgia Power announced that Votgle 4 is in full commercial operation, seven years later than initially forecast. Their total price tag also blew past the original cost estimate of $14 billion to around $35 billion. Georgia Power owns the largest share in the Vogtle expansion with 45.7%, followed by Oglethorpe Power (30%), the Municipal Electric Authority of Georgia (22.7%) and Dalton Utilities (1.6%). The milestone allows the Votgle assets to be fully absorbed into customer rates. Estimates put the additional residential cost at about $14 per month for 1,000 kwh of power.

A federal appellate court has rejected environmentalists’ challenges under the National Environmental Policy Act (NEPA) and other laws to a decision by the Nuclear Regulatory Commission (NRC) to provide an exemption to a license renewal application deadline for the continued operation of California’s Diablo Canyon nuclear power plant, finding the agency did not act arbitrarily or capriciously. 

CHICAGO TRANSIT

Legislation has been introduced by two Illinois legislators which would merge the Regional Transit Authority (RTA), the Chicago Transit Authority (CTA), Metra and Pace. The idea is to reduce administration, competition for funding and an unwieldy governance structure. It comes in the wake of recent estimates of a $750 million deficit to result from the end of COVID related federal aid.

Governance of the new body would be in the form of nearly 20 voting members, down from the nearly /50 split between the current agencies. Three members would be appointed by the governor. The mayor of Chicago and president of the Cook County Board would appoint five each. One member would be appointed by each of the county executives of DuPage, Kane, Lake, McHenry and Will counties. 

Six non-voting members would also join the board: the secretary of the Illinois Department of Transportation, the chair of the Illinois Tollway, an organized labor representative chosen by the governor, the chair of the agency’s citizen advisory board and a representative each for the business and disabled communities, chosen by the board. This is considered streamlining by Chicago standards.

It is not clear what the impact of these proposed changes would be on the credit supporting debt issued by the agencies.

TRANSIT FUNDING CHALLENGES

In 2020, voters in Austin, TX approved the Austin Transit Partnership (ATP) — a local government corporation created to finance and oversee the development of a light rail system in the city. The vote also included approval of local taxes to support the plan. With that support, the ATP thought it would be prudent to go to the Texas courts to preemptively obtain validation for bonds it proposed to issue.

That process is now being challenged by Texas’ ideological firebrand, Ken Paxton. The Attorney General’s Office has to sign off on all bonds issued by local jurisdictions like cities, counties and local government corporations like ATP. He has assembled a group of plaintiffs to object to the validation of the bonds. The issues seem to come down to the meaning of words with the parties taking opposite views of what the law would require.

Property taxes in Austin are comprised of two components – maintenance and operations (M&O) rate and a levy for debt service. Raising the debt related rate requires an election and can only be done for a fixed dollar amount. The city argues by transferring M&O property tax revenue to a local government corporation like ATP effectively allows ATP to decide what the money can legally be used for. Once ATP receives the cash, it is “contract revenue,” not tax revenue, and can be used to pay down debts.

The City also argues that language in a resolution passed by the Austin City Council before the 2020 election called a “Contract with the Voters“, which says any changes to Project Connect require approval of the council, CapMetro and ATP board. All three bodies voted to approve the significant changes to the plan in 2023.

In 2021, the Colorado legislature enacted bills to[JK1]  implement Proposition 117 to fund transportation projects throughout the state. Just like in Austin, conservative opponents are relying on interpretations of the law to halt funding. In this case, the restrictions in question are seen as violating the state’s TABOR restrictions which limit taxes.

The law created separate fees for a number of transportation-related activities like Uber and Lyft rides, food delivery and fuel. The revenue from each fee was then directed to separate government-owned businesses known as enterprises, each of which was individually projected to take in less than the $100 million limit over five years set out in Proposition 117. At issue is whether the law requires the fees to be evaluated for compliance as a whole or whether each fee is valuated individually.

In ruling against those challenging the fees, a district court judge found that each enterprise and fee had “differing purposes” and thus did not need to be combined. The bill’s sponsors are clear that they created separate fees and enterprises specifically to conform to Proposition 117. 

COLORADO BALLOT INITIATIVE

Protect Colorado, is an advocacy group funded with millions from Chevron Energy, Occidental Petroleum Company and other smaller oil and gas companies operating in Colorado. It has submitted a ballot initiative to be voted on in November designed to make it harder for voter initiatives to make it to the ballot. To that end, it developed Initiative 77.

If approved, Proposed Initiative 77 would require all future ballot measures to appear below an extensive economic impact statement, which must include the estimated effect on jobs, state and local tax revenue and the overall state gross domestic product. The Colorado Secretary of State’s Office announced the backers had collected enough signatures to qualify for the ballot.

The measure would require the legislature’s chief economists to review potential economic impact statements submitted by “any interested party.” Within five days, the economist must write a summary with a range of all the qualifying statements. Protect Colorado is currently collecting signatures for another initiative to ban state and local governments from restricting “energy choice,” which could block policies to cut climate-warming emissions by limiting natural gas access in new buildings. 

CALIFORNIA POPULATION

A rebound in legal immigration and drop in Covid-19 deaths drove an increase of 67,000, or 0.2 percent, in 2023 in California’s population. The data provides a contrast to the popular notion that folks are pouring out of California as fast as they can. California still lost more residents to other states than it gained from them — as has been the case for two decades — but the number of people leaving for other parts of the country fell to pre-pandemic levels. The net loss of California residents to other states fell from a peak of 356,000 in 2021 to 91,000 in 2023.

One of the things lost in much of the commentary on California’s population is that the phenomenon of residents leaving for other states is common to immigration centers like California and New York. Those places are the first stop for immigrants who often move through to other destinations. The housing situation would likely accelerate that movement of new immigrants inland. California added 116,000 units, or 0.8 percent of the state’s inventory. Around half of those were single-family homes, while most of the rest were multi-family homes.

CLIMATE AND THE MILITARY

It’s not the first thing that comes to mind when one thinks about things military but it turns out that the US DOD has been out front in many ways on the issue of climate change. The location of many facilities often puts them at risk of things like rising sea levels and flooding. To that end, DOD has been assessing the resilience of many of its installation for a decade.

The Air Force Research Laboratory is the primary scientific research and development center for the Department of the Air Force. AFRL officially launched in 1997 to consolidate the four former Air Force laboratories and the Air Force Office of Scientific Research. Its primary focus is on weapons development but its total scope includes some 40 areas of technology.

Now the DOD is looking at potential climate mitigation efforts from the adoption of new technologies. AFRL has signed a two-year subcontract to develop a hydrogen fuel cell microgrid (H2MG) that could be replicated by the US Department of Defense. The H2MG project will see gaseous and liquid hydrogen production, storage and utilization technologies integrated into an existing 1.5MW solar microgrid system at the Joint Base Pearl Harbor Hickman (JBPHH) in Hawaii.

That solar microgrid which would support the project has been in operation for eight years at the base.

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.

---

 [JK1]plement

Joseph Krist

Publisher

NYS BUDGET

It took two extra weeks and lots of negotiations but New York State finally has a budget. It maintains effectively the status quo on taxes for individuals and corporations. It also replaces the complicated potency tax on cannabis. It will be replaced with a flat tax of 9 percent. Efforts to reduce school funding came up short. The state put aside $2.4 billion to help manage the ongoing migrant crisis in New York City.  Mayor Adams’s initial request was for $4.6 billion. The biggest win for the Mayor maybe the two-year extension of mayoral control over the city’s schools.

This budget was as much about what did not make the final cut as it was about significant policy changes. Environmental issues did not get the boost they have gotten in other years. The NY HEAT Act would have slowed the expansion of gas infrastructure by not automatically providing gas to all new customers who request it. The Climate Change Superfund Act would have required companies that contributed to the buildup of greenhouse gases to contribute to the cost of infrastructure upgrades so that the state could adapt to the various challenges brought on by climate change.

Tax increases did not have support. Another effort to impose some form of “millionaire’s tax” failed. The Assembly and the Senate were asked to support raising personal income taxes by half a percent for those who earn over $5 million until 2027. They said that such a move would increase revenue by nearly a billion dollars per year. This and another Legislature-supported bill to increase the state’s corporate tax were not included.

The far left had fought for a measure known as “good cause eviction,” which was intended to greatly limit annual rent hikes and aggressively restrict the reasons for which landlords could evict tenants. It passed in the final budget, but in a largely diluted form. There were a number of exemptions from good cause, including luxury buildings and landlords with 10 units or fewer. Outside New York City, localities may opt in to good cause instead of being required to do so.

NYC BUDGET – LOOK WHAT I FOUND

The Mayor released an updated budget proposal which is doing nothing to dispel the idea that the Mayor is not interested in meaningful financial disclosure. At the start of the year, the Mayor painted a fairly dire picture of the City’s finances. A disrupted office market, a still recovering economy and the ongoing migrant problem led the Mayor to propose a budget cutting the types of services which were sure to generate pushback from the electorate.

Throughout the first quarter of the year, the Mayor’s estimates of the City’s financial position have been questioned. The Citizens Budget Commission (CBC), the State and City Comptrollers, and the City Council have each published reports that estimate the City’s financial plan for fiscal year 2025 understates the cost of continuing current programs between $3.0 billion and $3.9 billion.

CBC found the Fiscal Year 2025 Preliminary Budget was $3.6 billion short of what would be needed to continue current services. The State Comptroller and City Comptroller reported the underbudgeting as $3.2 billion and $3.9 billion, respectively. The City Council, in its response to the Preliminary Budget, recommended setting aside $3.0 billion next year for this shortfall.

In the wake of those observations, Mr. Adams proposed a revised $111.6 billion budget, identifying an additional $2.3 billion of revenues. He cited better than expected tax revenue and his administration’s fiscal management. The varying revenue numbers reflect varying perceptions of the City’s financial outlook. In January, the City was in danger of being fiscally overwhelmed by the migrant crisis and a slow return to the office.

Now, the Mayor says “we made smart choices, trimmed agency and asylum seeker budgets and made conservative revenue forecasts. This, combined with better than expected revenues and a booming economy, resulted in a balanced budget.” So, which is it – boom or bust. The fact is that many city service levels have been slowed significantly by the fact that many departments remain understaffed. The budget “savings” are often derived simply from not filling positions.

BOEING AND AIRPORTS

The impact of ongoing safety issues with Boeing 737 aircraft is now beginning to flow through to operators and the airports they rely on. Southwest Airlines flies nothing but 737 aircraft. That has hurt demand from passengers and has also reduced Southwest’s ability to maintain and expand its fleet. This has driven the airline to announce service cuts.

Those cuts will result in eliminated service at four U.S. airports: Bellingham International Airport in Washington State, Cozumel International Airport, George Bush Intercontinental Airport in Houston and Syracuse Hancock International Airport. Reductions in service at Chicago-O’Hare and Hartfield Jackson Airport in Atlanta were also announced.

Southwest said it expected to get 20 new Boeing jets this year, down from the 46 it previously anticipated. The timing of the deliveries depends on the Federal Aviation Administration, which has limited Boeing’s production while it gets quality issues under control. The changes will reduce the airline’s personnel needs. The airline said it would limit hiring and end the year with 2,000 fewer employees.  It comes at a time when demand for travel has rebounded but increased costs and factors like the 737 Max grounding have not led to profitability for the airlines. Delta Air Lines was the only major airline to report a profit in the first quarter.

RURAL BROADBAND

Through the Bipartisan Infrastructure Law, the Federal Communications Commission (FCC) was tasked to develop and maintain the Affordable Connectivity Program (ACP) – a federal program that offers eligible households a discount on their monthly internet bill and a one-time discount off the purchase of a laptop, desktop computer, or tablet. Over 23 million eligible households are currently enrolled and receiving the monthly discount.

The $14.2 billion Congress initially made available for the ACP is running out. Due to the lack of additional funding for the ACP, the Commission has announced that April 2024 will be the last month that the ACP households will receive the full ACP discount, as they have received in prior months. ACP households may receive a partial discount in May 2024. After May 2024, unless Congress provides additional funding, ACP households will no longer receive the ACP benefit and the ACP will end.

BRIGHTLINE

Florida’s Brightline high speed rail service has progressed to the point where the credit was finally deemed ready for its ratings’ closeup. Unsurprisingly, investment grade ratings were assigned albeit at the lowest level. The credit would not have sought a rating if an investment grade rating was not expected. Several factors still weigh on the ratings. S&P noted that it believes that revenue will be less than Brightline projects; 38% to 55% in the best-case scenario and 52% to 71% in the worst.

S&P believes that ridership will take longer to stabilize than Brightline projects; by 2028, not 2026. Brightline may attract 11% of the long-distance travelers between Miami and Orlando, and 0.5% of short-distance travelers between the five South Florida stations. After the Miami-Orlando service stabilizes, it will account for over 80% of total ridership and 87% of total revenue. Long-distance ridership was 51% in January and February, with 236,577 riders.

Prices will increase throughout 2024 as promotional introductory offers are phased out. Long-distance ridership was 3.4% less than S&P forecast for the last three months of 2023, but 24.7% more than it forecast for January. Revenue was 19.3% and 9.8% less, respectively. Short-distance revenue was higher than S&P forecast, with lower ridership and higher ticket prices being “consistent with Brightline’s strategy as it rolls out long-distance service.” Total daily bookings increased 50% from 2,819 in October to 4,224 in January. Repeat customers doubled from 715 in October to 1,437 in January.

Against this backdrop, the refinancing of the debt issued for the existing Brightline service began this week. In addition to the aforementioned investment grade debt insured debt was also issued. One tranche of debt was issued for the expansion of Brightline to Tampa from Orlando. That debt was sold on an unrated basis at yields of 12% on 29 year paper. That’s not a typo.

ROAD FUNDING

On the May 21, 2024 ballot, voters in Portland, OR will vote on whether to renew a 10 cent-per-gallon gas tax for road repairs next month. The gas tax was first approved by voters in 2016 with a 53% majority and renewed in 2020 with a 77% majority.  According to the City if the measure passes, the average driver would continue to pay roughly $5 per month for the tax. This figure is based on driving 12,000 miles a year in a vehicle with a fuel efficiency of 20 miles per gallon, with all fuel purchased within the city of Portland. If passed it is estimated the $0.10 gas tax would generate $70.5 million over four years for street maintenance and safety projects.

ARIZONA HOMELESSNESS ON THE BALLOT

The Arizona Property Tax Refund for Non-Enforcement of Public Nuisance Laws Measure is on the ballot in Arizona as a legislatively referred state statute on November 5, 2024. A “yes” vote supports allowing for property owners to apply for a property tax refund if the city or locality in which the property is located does not enforce laws or ordinances regarding illegal camping, loitering, obstructing public thoroughfares, panhandling, public urination or defecation, public consumption of alcoholic beverages, and possession or use of illegal substances.

A property owner can apply for this refund once every tax year. The amount of the refund under this measure would be equal to the documented expenses incurred by the property owner, but cannot exceed the amount the property owner paid in property taxes in the prior tax year. If the total refund is more than this amount, the refund will be equal to the amount the property owner paid in property taxes in the prior tax year. The property owner can apply to the department for the remaining portion of the refund in following tax years.

Under this measure, after the property owner applies for a refund, the town, city, or county has 30 days to accept or reject the refund. If the refund is accepted, the refund will be paid to the property owner. If the refund is rejected, the property owner can file a cause of action in the superior court of the county to challenge the rejection of the refund. If the town, city, or county does not respond after 30 days, the property owner will receive a refund. This measure provides that if the city, county, or town continues to not enforce existing public nuisance laws in the following tax year, a property owner is entitled to another refund.

ELECTRIC VEHICLES

Workers at a Volkswagen plant in Chattanooga, Tennessee made history last week when 73% of its workers voted to join the United Auto Workers. The expansion of the auto industry into the Southeastern US was aided in many ways by the fact that the region is much less supportive of unions. Over that approximately half century of gradual movement to the South, a number of factors changed which provided workers to revisit the issue of unionization.

When the auto industry continued to decline, job security trumped wage growth. Over time, auto workers saw plants closed, jobs reduced and a steadily weakening economy away from autos. The financial crisis in 2008 and the financial collapse of legacy US automakers changed the dynamic. The auto rescue was a product of all stakeholders making sacrifices. For the workers those sacrifices involved wages and benefits.

Since that time, many of the dynamics of the industry have shifted. The return to financial health and the shift to the production of electric cars created a new set of circumstances. The successful strikes against the legacy manufacturers in the Fall of 2023, provided for the first time in years an example of the benefits of unionization. That success came at the same time that the development of new manufacturing capacity is creating demand for workers. Much of the new plant is being built for non-US producers. Those companies have significant experience with organized labor in their home countries. It is not a surprise that a company like Volkswagen was targeted for organizing given the role of unions in company management in Germany.

Japanese automakers announced new manufacturing capacity to support electric vehicle production in the US. Toyota announced that it would expand a factory in Princeton, Ind., to produce a large electric S.U.V. The company, the world’s largest automaker, will spend $1.4 billion on the Indiana project and create as many as 340 new jobs. Honda announced plans to retool its flagship factory in Marysville, Ohio, near Columbus, to produce electric vehicles in 2026. Honda is investing $4.4 billion in a new battery factory in Jeffersonville, Ohio Along with LG Energy Solution, a South Korean company.

WIND HEADWINDS

Last fall, the New York Public Service Commission rejected a request for higher prices from several offshore wind developers. The PSC decision is seen as having served as an effective limit that likely constrained the New York State Energy and Research Development Authority’s (NYSERDA) negotiations because it said no price increases for competitively awarded projects.

Now NYSERDA announced that no final agreements could be reached with three projects that received provisional awards in October of last year. The projects that were negotiating contracts are the 1,404 MW Attentive Energy One project being developed by TotalEnergies, Rise Light and Power and Corio Generation; the 1,314 MW Community Offshore Wind project developed by RWE Offshore Renewables and National Grid Ventures; and the 1,314 MW Excelsior Wind developed by Vineyard Offshore with backing from Copenhagen Infrastructure Partners.

Those projects all had in common the fact that they depended on major supply chain investments by General Electric including a larger turbine it planned to build. In February, it was reported that GE had decided not to proceed with development of an 18 megawatt turbine. A smaller turbine means a project would need more individual turbine locations to deliver the same power — and the costs would have been higher. NYSERDA confirmed that was the main reason no final awards were made.

NYSERDA had also tentatively awarded $300 million to GE Vernova and LM Wind Power for investments in nacelle and blade manufacturing at new facilities along the Hudson River near Albany. That money will be made available through a new competitive solicitation. New York also has pending contracts still in the works for the two early projects that were the subject of contract renegotiations which resulted in significantly higher costs. The two projects are the 810 MW Empire Wind 1 developed by Equinor that is south of New York City and the 924 MW Sunrise Wind developed by Orsted and Eversource off the northeast tip of Long Island.

NYSERDA’s schedule calls for those contracts to be finalized by the end of June. Those projects are expected to be online by late 2026.

COAL REGULATION

The US EPA has released long awaited regulations for the continued operation of coal fired generating plants. The regulation from the Environmental Protection Agency requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. Three additional regulations include stricter limits on emissions of mercury from plants that burn lignite coal, more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants.

There are about 200 coal-burning power plants still operating in the US. In 2023, coal-fired power plants generated 16.2 percent of the nation’s electricity. EPA estimates that the rule would cost industries $19 billion to comply between now and 2047. Under the plan, coal plants that are slated to operate through or beyond 2039 must reduce their greenhouse emissions 90 percent by 2032. Plants that are scheduled to close by 2039 would have to reduce their emissions 16 percent by 2030. Plants that retire before 2032 would not be subject to the rules.

NORTH AMERICAN TRADE

The US Department of Transportation Bureau of Transportation Statistics recently reported Total Transborder Freight by Border in February 2024, Compared to February 2023.  Total transborder freight: $128.9 billion of transborder freight moved by all modes of transportation, up 7.5% compared to February 2023. Freight between the U.S. and Canada: $61.9 billion, up 4.4% from February 2023. Freight between the U.S. and Mexico: $67.0 billion, up 10.6% from February 2023.

Trucks moved $83.4 billion of freight, up 9.9% compared to February 2023. Railways moved $17.1 billion of freight, up 2.8% compared to February 2023. Vessels moved $10.0 billion of freight, up 15.7% compared to February 2023. Pipelines moved $8.1 billion of freight, down 15.2% compared to February 2023. Air moved $4.6 billion of freight, up 16.1% compared to February 2023

So, which are the localities which benefit from cross border activity? Detroit and Port Huron MI, and Buffalo are the top truck ports for U.S. freight flows with Canada. Laredo and El Paso TX and Otay Mesa, CA are the top truck ports with Mexico. Detroit, Port Huron, and International Falls, MN are the top rail connection ports for U.S. freight flows with Canada, while Laredo, Eagle Pass, and El Paso in Texas are the top rail connection ports with Mexico.

Chicago, Port Huron, and Minneapolis are the top pipeline connection regions for U.S. energy freight flows with Canada. El Paso, Hidalgo, and Laredo, TX are the top pipeline connection regions with Mexico. Port of Boston, Arthur, and Portland are the top water port connections for U.S. energy flows with Canada. Port of Houston, Arthur, and Texas City are the top water port connections for U.S. energy flows on the Southern border.

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

Joseph Krist

Publisher

ILLINOIS PUBLIC POWER CHALLENGE

A legislative proposal would require Illinois’ municipal power agencies to regularly conduct transparent energy planning. It specifically requires that municipal utilities file integrated resource plans with the state every three years. The process would involve assessing demand and supply resources to meet electricity needs at the lowest cost, while meeting reliability requirements, evaluating how energy markets and prices are going to evolve and managing that risk moving forward. 

Illinois does not currently require electric cooperatives, municipal power agencies or municipal utilities to have these plans. It is driven primarily by greater Chicagoland local municipal providers. The dependence of these utilities on a predominantly coal based provider (Illinois Municipal Power is the main owner of the Prairie States generation facility) is generating customer challenges to their local asset mix.

CALIFORNIA NET METERING

This week was the one year anniversary of the California Public Utility Commission’s (CPUC) decision to revise the state’s net metering scheme in ways highly unfavorable to rooftop solar. Those rules are seen as the primary culprit contributing to a huge slowdown is sales of rooftop solar. Now, two pieces of legislation are making their way through the California legislature to address the impact of last year’s rulemaking.

AB 2256 would require that the CPUC consider a number of values these groups say were left out of its net-metering analysis, including improved local air and water quality, avoided land use impacts and other ​“non-economic” benefits.  AB 2619 is designed to ​“ensure that incentives are restored for residents who generate clean power for the grid,” according to a statement from Assemblymember Damon Connolly (D), the bill’s author. It would repeal the ​“damaging” decision — commonly known as ​“NEM 3.0” to distinguish it from the state’s two previous net energy metering (NEM) regimes — and force the CPUC to create new rules aimed at keeping rooftop solar growth on the trajectory needed to meet California’s long-range climate goals.

California’s three investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, are the primary opponents of these bills.

NEW YORK STATE BUDGET

New York State leaders have agreed on the outline of a $237 billion state budget. If it is approved by the Legislature, the budget represents an $8 billion increase from last year’s spending plan. The plan includes $2.4 billion to help New York City address its migrant crisis.  A token portion of that funding includes $500,000 of which is drawn from state reserves. The plan, however, includes provisions for the state to have increased its reserves by more than 10 percent from when Ms. Hochul took office.

The state’s botched rollout of legal recreational cannabis received some attention. For the first time, localities will have the authority to act against illegal cannabis vendor which have been a source of contention especially in NYC since the state legalized recreational marijuana in 2019. The taxation scheme used in the program will be significantly altered. It relied on taxing based on its potency. Instead, taxes will now shift to a flat percentage tax.

Local smaller and rural school districts had been facing significant state aid reductions to many of those districts. The Governor had proposed to repeal a provision called “hold harmless” that ensures all schools receive as much in funding each year as they did the year before. The governor has argued that the provision leads the state to spend too much in districts with falling enrollment, even as other districts are growing. As we went to press, the issue of the renewal of mayoral control of the NYC school system was still unsettled.

The issue of housing development was at the center of the over two week delay beyond the start of Fiscal year 2025 in the enactment of a budget. The trends in housing across all sectors of the state have all been negative from both supply and affordability points of view. The legislature has agreed to a plan which would make the process of increasing rents more difficult for landlords. Landlords of many market-rate units will be forced to justify rent increases beyond certain thresholds. They would also be required to offer lease renewals in most cases.

WEST COAST PORTS

The Port of Portland says it cannot afford to keep the state’s only shipping container terminal open past September after negotiations with a third-party operator fell through. Despite more favorable utilization metrics, costs have gone up. This has driven operating results of the port’s container facility into negative territory. Portland will be the largest city on the West Coast without close proximity to container service.

Throughout much of the last decade, a labor feud coupled with the logistical challenges of navigating container ships some 100 miles upriver to a relatively small market have made Portland’s Terminal 6 less competitive as a transit point for container goods. Container operations have stopped at Terminal 6 in previous years due to labor issues. Most recently, in 2015 the then two main carriers representing more than 95% of the port’s container services announced they would no longer call on Portland. The carriers complained that labor issues made operations less efficient and mor costly.

In 2019, a jury found the International Longshore and Warehouse Union (ILWU) engaged in unfair labor practices. The private operator at the time was awarded $93 million. The award was reduced on appeal to $19 million. The union subsequently declared bankruptcy. The private operator of the terminal “reached a settlement of all legal claims” with ILWU in February for $20.6 million.

The Port has notified the governor and legislative leaders of the closure, in addition to carriers, dock workers and staff. Earlier this year, Port leaders had asked the Oregon Legislature for $8 million in state support, but the legislature did not make an appropriation. The next closest shipping container terminal is in Tacoma, Washington. The overall Port credit is rated AA-. Marine operations accounted for about 25% of overall revenues which are driven by the City’s airport. The rating should be fine.

The Port of Los Angeles is on an entirely different path. Like Portland but to a lesser degree, labor relations have been problematic. Since a new contract was reached last year, the Port has been able to focus on operations. The Port of Los Angeles handled 743,417 container units in March, a 19% increase over the previous year. It was the eighth consecutive month of year-over-year growth. For the first quarter ending March 31, local dockworkers moved 2,380,503 Twenty-Foot Equivalent Units (TEUs) across Los Angeles marine terminals––nearly 30% more than 2023. It was among the Port’s best first quarter starts, behind only the pandemic import surge in 2021 and 2022. 

CARBON CAPTURE

The Illinois State Legislature is considering several bills designed to strengthen the State’s regulatory abilities over carbon capture, both pipelines and sequestration. The proposals come in the wake of efforts by two pipeline developers to secure local permits to develop projects. Other efforts are expected from sequestration providers. Companion bills are in front of each house. Separate bills (HB 4835, SB 3441) would place a moratorium on carbon dioxide pipelines for four years or until new federal safety regulations are adopted by the Pipeline and Hazardous Materials Safety Administration (PHMSA).

Two other bills would create a regulatory framework for the sequestration industry. Overall, the newly proposed legislation is intended to cover issues including: “pipeline setbacks for safe evacuation, limits on eminent domain, expanded monitoring at carbon sequestration sites, provisions for long-term liability in the event of disaster, a ban on the use of captured carbon dioxide for enhanced oil recovery.”

It would also mandate that when sequestration sites are proposed, regulatory agencies review life-cycle greenhouse gas emissions and consider alternatives to carbon sequestration. The legislation bans injecting carbon dioxide through the Mahomet Aquifer, labeled by the U.S. EPA as the area’s only sole-source aquifer. And it would mandate halts in sequestration if certain magnitudes of seismic activity are detected.

There have been other efforts to deal with these issues. As it becomes clear that proposed federal tax credits are driving project developments, the State finds itself in the position of not having an established regulatory framework for the evaluation of projects in the carbon pipeline and sequestration spaces. One example is that currently there are no requirements that companies create or release models showing how a carbon dioxide plume would likely spread in case of a rupture. The new bill would require such modeling for a necessary Illinois EPA permit. And it would mandate companies put up funds for future cleanup and maintenance of sequestration sites.

Another bill (SB 2860), backed by the Illinois Farm Bureau, would prohibit the use of eminent domain to secure carbon dioxide pipeline rights of way. One bill (HB 0569) in support of the industry would allow sequestration operators to use underground pore space even if landowners are opposed, while setting procedures for land access and compensation for damage to land. Pore space is a concern particular to Illinois and its unique geology.

In Florida, Hillsborough County (Tampa) approved a pilot project at its waste-to-energy facility in Brandon, FL. The facility currently produces some 600 tons of carbon dioxide a day. A South Korean company wants to install equipment which would remove 1 ton per day carbon and convert it to calcium carbonate. That byproduct could be sold to the concrete and construction industries. The company is required to sell the calcium carbonate and give the records (but not the proceeds) to the county so it can assess how valuable the product is.

A permanent facility was proposed by the company, LowCarbon. It was initially rejected by county staff. It would have cost nearly $25 million and captured 40 tons of carbon dioxide. In a revised proposal submitted on March 28, the company offered to build a permanent facility that could capture 100 to 400 tons of carbon. The pilot project would provide 60 days’ worth of data for the county to evaluate.

CALIFORNIA AND UNEMPLOYMENT

The emphasis on issues like homelessness, the environment and natural disasters in California has allowed some significant issues to be overlooked. As is the case in many states, the current budget cycle is the first to force states to fully absorb the cost of programs funded in response to the pandemic. In some cases, it was direct federal funding that covered recurring expenses. In others, it was substantial borrowing undertaken to respond to the economic impact of the pandemic limits on economic activity.

One of those issues is the funding of unemployment payments to individuals. California is now coping with an accumulated debt to the Federal government of $21 billion from borrowing to fund unemployment. Since the end of the pandemic, the tech industry has also undertaken significant layoffs. Payroll taxes paid by employers cover payouts to unemployed workers but also a state surcharge and a gradually increasing federal surtax to help pay off the principal on the debt. 

There are also certain things about the California unemployment situation which are state specific. The state currently accounts for about 20% of the nation’s jobless claims, far in excess of its 11% share of the labor force population. Unemployed workers in California tend to remain on unemployment significantly longer than the national average. California’s employers added 28,300 nonfarm payroll jobs in March 2024 and the unemployment rate held steady at 5.3 percent.

California’s unemployment insurance fund became insolvent during 2020. The federal government via the CARES Act and the American Rescue Plan Act waived interest through September 6, 2021. Therefore, no interest was due on September 30, 2020. However, interest started accruing on September 7, 2021, and the first interest payment of $29.2 million was paid on September 30, 2021. California paid a second interest payment of $333.5 million on September 30, 2022, a third interest payment of $301.6 million on September 30, 2023, and a $550 million payment on September 30, 2024.

The state had hoped to devote $1 billion to loan repayment but the unexpectedly weak fiscal position of the state has taken that option off the table. The state’s unemployment insurance program will instead would rely on increased federal taxes on employers to pay down the debt. Currently California employers pay a federal unemployment insurance tax of 1.2% on the first $7,000 of wages per employee, but that will rise incrementally every year so long as California is in debt, to more than 3.5% after 10 years. 

The state collects an unemployment insurance tax on the first $7,000 of wages per employee per year. Many states have a much higher wage threshold — New York at $12,500; New Mexico at $31,700; and Washington state, at $68,500. Changes in the rate and/or wage threshold are being looked at in the ongoing state budget process in CA.

WHAT WAS THE LESSON?

The South Carolina legislature is considering legislation designed to facilitate the construction of a gas fired generation plant to be owned by Dominion Energy and state-owned utility Santee Cooper. It would allow the utilities to build a natural-gas fired power plant in the Lowcountry. It would provide for faster approval of pipelines needed for the project. The bill also includes items like reducing the Public Service Commission which oversees utilities from seven members. It attempts to influence regulation by requiring regulators to consider the health of utilities as well as the needs for ratepayers as they make decisions and allowing utilities to release less information about some projects from the public before they are approved.

The issue the legislation seeks to address is arguably how the State managed to take a strong asset like South Carolina Public Service Authority (Santee Cooper). Customers who are now shouldering the bills for the failed effort to expand nuclear capacity would likely say that eased oversight and less disclosure are not the answer to their problem.

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

RECONDUCTORING

It is a word which you are likely to hear more about. Transmission access and capacity are increasingly viewed as obstacles to the adoption of renewable energy generation. The development of new transmission infrastructure faces extended regulatory processes. This motivates electrification advocates to seek answers which can provide some relief from existing infrastructure. One technological advance which is receiving a lot of media attention is reconductoring.

Reconductoring is the process of replacing conventional aluminum conductor steel reinforced cables with advanced conductors. It does not expand the footprint of the wiring infrastructure. This reduces the relative cost versus the construction of new transmission lines. The suggestion comes as the already lowering costs of clean energy.

GridLab is a Berkeley, CA based clean energy technology advisory entity. It does research and provides access to individuals with expertise in the many issues associated with clean energy. A new report from GridLab highlights the potential of reconductoring to provide a significant capacity addition to the nation’s transmission system within the existing corridors.

The report found that the declining costs of clean energy and growing power demand from electrification, manufacturing, and data processing have made grid capacity one of the primary constraints in the energy transition. Transmission capacity across the U.S. has grown only 1%/year over the past decade. Over 2 terrawatts (TW) of available generation and storage resources today remain untapped, awaiting grid access in interconnection queues. When advanced conductors are used, reconductoring in existing rights-of-way (ROW) can substantially increase transmission capacity in the current grid.

Among the conclusions the report reflects: not only can advanced conductors increase power density by up to 100% along existing ROW, but also that these technologies are being widely and successfully deployed in many nations around the globe. considering the challenges of building new lines, reconductoring can increase interzonal transmission capacity by nearly four times (+280%) by 2035 versus greenfield expansion only, with only 20% higher transmission expenditures over the same period. Second, reconductoring projects typically cost less than half the price of new lines for similar capacity increases.

The discussion coincides with estimates from providers of power of their transmission needs. ISO New England the regional grid provider, released its 2050 Transmission Study. It is the first the regional grid operator has undertaken examining the region’s transmission system in detail beyond the traditional 10-year planning horizon. The study estimates the region will need to invest between $16 billion and $26 billion on transmission infrastructure over the next 26 years to ensure a reliable clean energy transition.

MICHIGAN EV PLANT

The electric vehicle industry is going through a period of retrenchment as profitability has so far eluded the manufacturers. Rivian is delaying the development of a manufacturing facility in Georgia and consolidating production in Illinois. Ford and GM have experienced disappointing sales growth and profitability. Tesla sales are slowing. This has raised fears that massive support provided by states to EV manufacturers is not generating the expected returns on investment.

Ford had originally announced the development of an electric vehicle battery production facility in Michigan. The state offered some $2 billion in tax and other incentives including a local tax break worth about $772 million, $330 million for road upgrades, and a $210,000 job-creation grant that would go directly to Ford once it hires at the facility. When announced in February, 2023 the projection was for the creation of 2,500 permanent jobs. That was reduced to 1,700 in the Fall.

Ford originally expected to build a 2.3 million-square-foot production facility for lithium iron phosphate (LFP) batteries. The automaker’s footprint in Marshall is just over 500 acres, the site plan shows, compared to the 730 acres originally planned. Today’s construction reflects a 1.2 million-square-foot production building, a reduction of nearly one-half. Ford added a 600,000-square-foot packing plant to the west of the production building. 

Given the lower amount of Ford’s investment, the pressure is on to recalculate the proper level of incentives from state and local government. If the expected economic impact from the tax incentives declines by 25%, many believe that the state’s subsidies should be reduced by a similar amount.

SMALL COLLEGE CLOSURE

The Goddard College Board of Trustees announced on April 9 that the institution will close at the end of the current semester. The Board came up with several attempts by Goddard to become financially viable which all proved unsuccessful. It had sought out educational partners and laid off staff. In January, it shifted its course offerings to on line only in what was described at the time as a temporary move. But, in the end, that strategy was not sufficient to save the college. the number of Goddard students plummeting from more than 1,900 in the 1970s to only 220 currently.

The Plainfield, VT institution joins Poultney’s Green Mountain College, Bennington’s Southern Vermont College, The College of St. Joseph in Rutland, and Marlboro College in Marlboro in ending operations over recent years. Goddard was one of the quirkier colleges whose reputation and demand were based on its unique structure. The decline in demand for that sort of curriculum and approach decimated its ability to fund from tuition.

Combine the looming demographic trends which are projected to lower demand across the board for higher education and the outlook for Goddard was bleak. The Trustees have now decided to close and the campus is reported to be up for sale.

DETROIT

Detroit has made the long trek back to an investment grade rating from the major rating agencies with S&P following Moody’s last month in moving the credit to investment grade. It culminates a decade long process which began with the City’s bankruptcy. S&P noted Detroit’s flexibility from operating reserves, the Retiree Protection Fund and stimulus funds and its “commitment to maintaining balanced operations.”

“The city has shown continuous operational and financial improvements that have allowed it to make significant strides to solidify its financial and economic position to a point that supports a BBB rating,” The rating agency also nodded to Detroit’s “achievable” pensions strategy, strong pipeline of economic development and the “disciplined planning and budget oversight” of the city’s management team.

A change in Detroit’s pension funding policy this year was reflected as the city changed its funding to a level principal amortization instead of a level dollar policy thereby leading to higher pension contributions. These were funded with increased draws on the Retiree Protection Fund rather than the operating budget. S&P notes that that the city has met all the requirements of its post-bankruptcy Plan of Adjustment, and has often “exceeded expectations.” The rating is limited despite these improvements as the City faces significant budget pressures not unlike those of many other older northern cities.

CRYPTO AND POWER

The U.S. Energy Information Administration estimates that mining for bitcoin and other digital currencies accounts for 0.6 to 2.3 percent of the nation’s electricity use. It is admittedly an educated guess at best. Recent growth is largely due to cryptocurrency mining operations relocating to the United States from China after that country cracked down on digital currency mining in 2021. The demand being generated by crypto currency activities is in the center of the issue of supply adequacy.

Assuming the share of global activity in the United States remains approximately 38%, USEIA estimates electricity usage from Bitcoin mining based in the United States to range from 25 TWh to 91 TWh. That estimate represents 0.6% to 2.3% of all United States electricity demand in 2023, which was 3,900 TWh. This estimate of U.S. electricity demand supporting cryptocurrency mining would equal annual demand ranging from more than three million to more than six million homes. USEIA identified a total of 137 facilities to date; there are only 52 facilities of those for which there is location and capacity data. Those sites are located in 21 states, with most in Texas, Georgia, and New York.

In Arkansas, the Legislature is revisiting legislation passed last year to support the growth of crypto mining in the state. The Arkansas Data Centers Act of 2023, or Act 851, which prevents local governments from passing noise and zoning ordinances specifically aimed at crypto mines. The Senate sponsor of the bill cites the increasing number of “bad actors” in the industry and increasing complaints from residents of host locations.

Several other proposed bills are being considered. They deal with who should regulate the industry, the establishment of new fees associated with crypto mining operations, siting issues, notice requirements before the start of operations at sites, and limits on foreign ownership.

NUCLEAR AND CLIMATE CHANGE THREATS

The GAO just released a study commissioned by Congress to review the climate resilience of energy infrastructure. The report examines (1) how climate change is expected to affect nuclear power plants and (2) NRC actions to address risks to nuclear power plants from climate change. The study notes that all operating and shutdown nuclear power plants are located in areas where climate change is projected to increase measures of heat, including daily and average maximum temperature.

The effects of climate change on maximum temperatures are projected to be most severe in the South, where one-third of the plants are located. The plants in the South are projected to experience an annual average of from 21 to 31 days with higher maximum temperatures than historical high temperatures. About 20 percent of nuclear power plants (16 of 75) are located in areas with a high or very high potential for wildfire. More specifically, more than one-third of nuclear power plants in the South (nine of 25) and West (three of eight) are located in areas with a high or very high potential for wildfire.

About 63 percent of nuclear power plants (47 of 75) are located in areas with exposure to either Category 4 or 5 hurricane storm surge or high flood hazard, and nine are located on a coastline, where NOAA projects a range of sea level increases. In addition, 20 percent of nuclear power plants (15 of 75) are located in areas with exposure to both Category 4 or Category 5 hurricane storm surge and high flood hazard.

Some 60 of the 75 nuclear power plants in the United States are located in areas with high flood hazard and two are in areas with moderate flood hazard. Just over one-third of the plants (21 of 60) located in areas with high flood hazard are in the South. About 23 percent of nuclear power plants (17 of 75) are located in areas that may be inundated by storm surge from Category 4 or Category 5 hurricanes. All 17 of these plants are in the East and South, and the six plants with exposure to Category 5 hurricanes are located in the South

About 23 percent of nuclear power plants (17 of 75) are located in areas that may be inundated by storm surge from Category 4 or Category 5 hurricanes. All 17 of these plants are in the East and South, and the six plants with exposure to Category 5 hurricanes are located in the South.

JEA MANAGEMENT UPHEAVAL

The attempt to privatize the City of Jacksonville, FL electric system four years ago led to federal criminal investigations and charges against members of management including the CEO and CFO. The potential for individuals to profit from the proposed sale led to increased scrutiny from the public and city government. Now, the former CEO of JEA has been found guilty of conspiracy and wire fraud in connection with a scheme that would have resulted in the CEO and other JEA executives making millions in bonuses if the utility was sold to a private buyer.

Now, the CEO appointed to replace the now convicted CEO is under pressure to resign. It turns out that the utility owned by the City is being run by managers operating remotely as they don’t live in Jacksonville. Questions have been raised over spending by JEA on a variety of events usually associated with private entities which focused attention on management. Many of the actions under question are not unusual in a private sector setting but the expectation for a municipally owned entity is to operate in a more cost conscious way. The point of a public utility is to provide a service on a cost of service basis, not to enrich management.

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

Can we pick a week to take off or what? It never fails. New York doesn’t have a budget and its all to do with housing. While most magnified in NYC, housing is increasingly a statewide issue. Even in the rural counties. Its going to take a complex deal to settle things and then the budget will move forward. The project to clear the shipping channel in Baltimore is underway and funding for that is not a problem. The replacement bridge – who knows in the current Congressional environment. Opening Day in MLB sees in the official departure from Oakland. Voters in Jackson County, MO sent a message to the ownership of both the NFL and MLB by a huge margin. D.C. will keep its teams.

PORT OF BALTIMORE

The port handled more than 444,000 passengers and 52.3 million tons of foreign cargo valued at $80 billion in 2023 – including 750,000 automobiles. Over 30,000 vehicles cross the Francis Scott Key Bridge on a daily basis. The port accounted for 28% of coal exports in the United States in 2023, according to census data, second only to Norfolk, Virginia.

According to the U.S. Energy Information Administration, there are two full-service terminals that receive, store, and load coal onto oceangoing vessels at the port: the Curtis Bay Coal Piers served by the CSX Railroad, and the CONSOL Energy Baltimore Marine terminal, served by both the CSX and Norfolk Southern Railroads. Baltimore primarily exports coal from the northern Appalachia coal fields in western Pennsylvania and northern West Virginia.

About half of the 28 million short tons of coal exported from the port in 2023 went to India, according to the administration. Baltimore primarily exports coal from the northern Appalachia coal fields in western Pennsylvania and northern West Virginia. About half of the 28 million short tons of coal exported from the port in 2023 went to India, according to the administration.

The beneficiaries: the Port of New York/New Jersey and the Virginia ports. CSX has already announced that it is rerouting coal to New York given its rail track ownership in that area.

D.C. KEEPS ITS TEAMS

Ted Leonsis, the principal owner of the NBA Wizards and NHL Capitals signed a letter of intent formalizing an agreement between his parent company, Monumental Sports and Entertainment, and the District of Columbia. The deal would keep the two franchises at their current downtown location through 2050. The teams had tried to reach an agreement with the Commonwealth of Virgina and the City of Alexandria for an arena/real estate deal. That plan required approval from the Virginia legislature.

That was the rub. The Governor was a huge backer of the plan but it did not have the broad political support that was needed in the Commonwealth. Local government in D.C. was much quicker to coalesce around a plan in response which supported local opposition to moving the teams. There was no disagreement about the role of the arena in development in the District’s Chinatown. Nevertheless, the agreement does not come cheaply.

Monumental would receive $500 million in cash from the city to renovate twenty seven year old Capital One Arena; another $15 million would go to improve a street connection that connects the arena to the adjacent Gallery Place building. The team will also get control of scheduling at the arena and a guaranteed police presence from the City. 

Now the question is whether the City is willing and able to put a package together to support a new stadium for the Washington Redskins. That remains to be seen.

The move to Virginia ran into significant opposition. The owner admits that he completely misread local sentiment. He based his move on the idea that the metro area was one big entity and found to his surprise that “a large share of residents of the District, Virginia and Maryland consider those areas different entities.”

K.C. STADIUM VOTE

The owners of the K.C. Royals and the Chiefs are going back to the drawing board after Jackson County, MO voters delivered a stunning rebuke to their threats to move out of Missouri across the river to Kansas. A ballot initiative to extend an existing 3/8 of one cent sales tax for twenty five years was defeated by a 16 point margin. In the current environment, a 16 point loss is a landslide. Now the owners are left to either act on their threats to move or come up with financing with a much smaller share of government funding.

The vote was driven by the potential for the Royals to move from their suburban location to a downtown site. There was a case to be made for a new baseball stadium to be a redevelopment driver. Ownership however, could not come up with a firm plan and could not even articulate a preferred location. On the Chiefs side, ownership saw an opportunity to piggyback on the baseball project to get fun ding for renovations to Arrowhead Stadium

It did not help that the Chiefs’ owner undertook a tone-deaf campaign that undermined his case. He is seen as a classic case of second generation wealth. He also wasn’t helped by the release of an NFL Players Association poll which sought player attitudes towards the stadium itself but also of Mr. Hunt as an owner. The stadium was rated as among the league’s worst and the owner was cited for underinvestment in facilities. He came off looking like a cheapskate who was now looking for a government handout.

OAKLAND

Construction has not yet begun on the Oakland A’s new stadium in Las Vegas. It is not expected to be complete until the 2028 season. The A’s lease at the Oakland Coliseum is set to expire after the 2024. This week, the City of Oakland offered a five year extension to the lease. It would have provided for an opt-out clause after three seasons and requires the team to pay $97 million as part of an extension fee.

The offer came as the city has dropped previous requirements that called for MLB to keep the A’s name and colors in Oakland, as well as a demand that MLB guarantee the city a future expansion team. Staying in Oakland, or playing in Sacramento, would enable the team to retain their rights to their local broadcasting money. 

That is a major factor behind the latest announcement that the A’s have reached an agreement to play in Sacramento while a new home is constructed in Las Vegas.

This week, the Tropicana Las Vegas closed its casino for the last time along with its hotel. The demolition will open up a 35 acre site for which 9 acres will be dedicated to a new ballpark for the A’s. The current season will be the last for the A’s in Oakland.

TRI STATE LOSES ANOTHER

Tri-State Generation and Transmission Association is set to lose another participating distribution customer. La Plata Electric Association (LPEA) is obligated to purchase at least 95% of its power from Tri-State through 2050. Its customers want more electricity from renewable sources. The situation mirrors that of the other participants who have withdrawn from Tri-State. The formal decision by LPEA triggers a two-year exit period.

The move occurs pursuant to an agreement between the Federal Energy Regulatory Commission, Tri-State and LPEA. LPEA wants out of its contract with Tri-State because it has been unable to have direct control over its own rates or ability to seek clean energy opportunities. As has been the case with other withdrawn participants, the size of the exit fee required is a point of major contention. Tri-State’s initial price of exit: $209.7 million.

COAL REVERSAL

One year ago, Rocky Mountain Power announced the planned early closure of two coal fired power plants in Utah. The plan was to employ modular nuclear generators to replace the coal based power. Since then, a number of developments have impacted that decision. One has been the difficulty of getting modular nuclear started. The other is the impact of federal court decisions on the ability of the U.S. EPA to enforce regulations which limit the operations of coal plants to reduce or eliminate air pollution impacts on neighboring states.

The courts have significantly hindered the ability of the EPA to limit coal plants based on their generation of pollution into other states. Now, in light of the limits on EPA regulation, Rocky Mountain Power has decided to abandon its efforts to close the plants early. A new integrated resource plan submitted by Rocky Mountain Power reverses plans to greatly increase renewables and develop new nuclear. The changes are significant.

The plan being replaced called for 17 gigawatts of solar and wind power and more than eight gigawatts of battery storage over the next two decades. The updated plan reduces by more than 13 gigawatts the amount of renewable energy the company had planned to add by 2034. That includes cutting more than four gigawatts of solar power and another four gigawatts of battery storage. The coal plants being held open produce 2.5 gigawatts.

The Warren Buffet owned generator has benefitted greatly from newly enacted legislation in Utah designed to skew regulation in favor of coal. That legislation makes the coal plants the state’s “preferred” energy source. It provides for a self-insurance fund for Rocky Mountain. Under the bill, every Utah customer will pay a surcharge on their bill that will go to a Rocky Mountain fund that can be used to pay wildfire claims in the state. 

That is a direct reaction to PacifiCorp’s potential exposure in states like Oregon where it has significant wildfire-related risk exposure. Buffet has complained about this risk and regulation and now characterized his investment in generation to be “a costly mistake”. Recently, he even suggested that the electric generation, transmission and distribution utility may not actually be suited for investor ownership. Public power advocates have long agreed with those sentiments. It is a view which advocates would be wise to seize upon in their efforts to build the case for public power.

NUCLEAR LOAN

The timing around the holiday for a resurrection story could not be made up but just before Easter we were provided with one. The U.S. Department of Energy announced that it would loan $1.5 billion to the owners of the closed Palisades nuclear plant in MI. If the plant is successfully restarted, it would be the first nuclear plant to do so in the U.S. The Diablo Canyon nuclear plant in CA received federal assistance but that was to extend operations at a functioning plant.

The state had previously pledged $300 million toward the Palisades restart, contingent on the federal investment. It was all part of legislative actions which requires all state electricity to be from carbon-free sources by 2040. Nuclear was classified as “clean” but not a renewable but as a no-carbon resource it fits the goals of the legislation. This is just the start of the process.

The repowering plan must be approved by the Nuclear Regulatory Commission, which will require approval of multiple pending licensing requests for the project. The hope is to extend the life of Palisades through 2051 providing 800 megawatts to the electrical grid. The loan will serve as a bridge financing until operations activate long-term power purchase agreements are already in place with two rural electric cooperatives with customers in Michigan, Illinois, and Indiana.

ANOTHER ONE BITES THE DUST

Birmingham-Southern College, a private liberal arts school in Birmingham, Ala., is set to close at the end of May. The decision comes after it failed to secure a multimillion-dollar loan from the state. Alabama lawmakers last year approved a new loan program that could lend Birmingham-Southern as much as $30 million. The state treasurer twice denied the loan last year, citing concerns about the school’s ability to pay its debts.

The legislature sought to change the loan program this year to move the responsibility of approving loans from the state treasurer to the Alabama Commission on Higher Education and further specified the terms of the loan. That legislation could not make it through the Alabama house so the school decided to cease operations. It has a long history of financial weakness and mismanagement which has not helped its cause.

MANSION TAXES

The concept of a tax on the sale of homes above a certain price (usually a minimum of $1 million) is not new. Attempts to create one in NY state were unable to make it through the legislature. Earlier this year the voters in Chicago defeated a ballot item which would have created such a tax. These votes transpired in the wake of the establishment of a mansion tax in Los Angeles via a vote in November of 2022. We now have a year’s worth of data from Los Angeles to analyze to see if such a tax has the desired effect.

Measure ULA, levies a 4% charge on all property sales above $5 million and a 5.5% charge on sales above $10 million, with proceeds funding affordable housing and homelessness initiatives. It is more expansive than other proposals in that not just luxury home sales, but also multifamily developments and commercial properties, since the tax applies to all property sales above $5 million.

Initially, proponents of Measure ULA estimated the tax would raise some $900 million per year. Last March, a report from the City Administrative Office lowered that number to $672 million. According to the L.A. Housing Department, Measure ULA has raised roughly $215 million in its first year. In the first three months of Measure ULA, the tax raised $15 million, only $5 million per month. The trend of collections has more recently been positive.

But from July 2023 to February 2024, the tax raised roughly $200 million, or $25 million per month. Projections for the city’s fiscal year, which starts on July 1 and ends on June 30, would be around $300 million. This has not slowed efforts to overturn the tax. Opponents focus in on data showing that from April 2022 to March 2023, the year before Measure ULA hit, L.A. had 366 single-family home sales of $5 million or more. In the 12 months since, there were just 166 — a drop of roughly 68%. They cite much lower rates of sales slowdowns in neighboring cities which have not imposed a mansion tax.

In November, Californians will vote on a statewide ballot initiative called the “Taxpayer Protection Act.” If passed, the act would require special taxes to be approved by two-thirds of the vote instead of a simple majority, applying to all measures adopted after Jan. 1, 2022. Since Measure ULA was adopted in 2023 and only received 57% approval, it could require another vote or potentially be repealed.

RECREATIONAL CANNABIS AND THE SUNSHINE STATE

Medical marijuana was approved in 2016 to become legal in Florida. Since then, efforts have been ongoing to get recreational marijuana approved. They have been stymied by court decisions which kept earlier efforts off the ballot. Now, the Florida Supreme Court has approved a ballot initiative to legalize recreational use which will appear on the November ballot.

Amendment 3 will legalize the “non-medical personal use of marijuana products and marijuana accessories by an adult” 21 or older if approved by 60% or more of statewide voters. It would take effect six months after the election. Prior efforts in 2021 to advance such an initiative failed to pass muster with the Court. Observers note that the decision represents a clear reversal of positions on the Court as both decisions were issued under significant majorities. Medical marijuana got a 71% vote in 2016.

SMALL POTATOES

The Idaho Legislature is taking up the battle against ESG investment management that is regularly occurring in so-called “red states”. House Bill 669 would ban the largest banks and credit card companies from financial “discrimination” against any person or entity on the basis of “social credit scores” that consider their views on religion, climate targets or gun regulation. The bill would only apply to banks with more than $100 billion in assets and to payment processing companies that handle over $100 billion annually. The Idaho attorney general would have authority to investigate and enforce the law and to allow private lawsuits.

What is useful about this particular exercise is the fact that the sponsors of the legislation have been very open about the fact that they did not write the law. It was written for them by a group of conservative thinktanks. In this case it was written by a Christian nationalist organization. After all, we’re talking about Idaho.

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 breaking for the Easter holiday. The Muni Credit News will next publish on April 8. We think that it is even money at best that the NYS budget will be done by then.

__________________________________________________________________

MIGRANTS

The two cities most prominently impacted by the influx of migrants – Chicago and New York – have announced changes in their shelter policies to reflect the ongoing pressures resulting from the problem. Chicago has received more than 37,000 migrants since August 2022. Nearly 11,000 migrants are living in 23 homeless shelters. The city began an eviction process for longer term residents. It is anticipated that some 2000 individuals will be moved out of city provided shelter by May 1.

Case reviews will provide exemptions for pregnant women, people with certain medical issues and migrants who are already in the process of securing housing. Families with children can receive renewable 30-day extensions. Chicago is a sanctuary city but it is not a right to shelter jurisdiction so these sorts of changes do not have to overcome legal hurdles that right to shelter provides.

In New York, an agreement has been announced that will grant the city some relief from court-imposed requirements that there is a right to shelter. It is this concept that has left NYC particularly vulnerable to the types of tactics used by the governors of Texas and Florida to “export” immigrants. Under the new plan, adult migrants will be allowed to stay in shelters for only 30 days under the agreement, city officials said. Some would be allowed to stay longer if they met certain conditions, including having a medical disability or an “extenuating circumstance”.  

The city would have liked to have done this earlier but it operates under a consent decree (won in 1985) requiring the city to satisfy the right to shelter. The new plan is the result of months of negotiations. Under the agreement, adult migrants ages 18 to 23 would have at least 60 days in the shelter system before having to move out, unless they meet the exceptions. Migrant families with children would not be affected. The settlement also does not apply to people who are not migrants and staying in city shelters.

The situation is still critical. There are 65,000 migrants still under the city’s care, 22 percent of whom are single adults or adult families without children, according to city officials. 

HOUSTON PENSION SETTLEMENT

The City of Houston has announced an agreement with its firefighters union over issues related to back pay and pensions. The firefighters and the City had been unable to negotiate a labor agreement and some firefighters had been working for eight years without a contract. The $650 million settlement to finally resolve the city’s looming liability addresses longstanding pay issues dating back to 2017.

Under the terms of the agreement, all current firefighters, retired firefighters, and the families of firefighters who have died since 2017 will receive lump sum payments for the wages owed back to 2017. In addition to the back pay, the agreement makes permanent the temporary 18% pay increases awarded to firefighters in 2021 and mandates additional raises of 10% on July 1, 2024. With the subsequent pay hikes specified through 2029, total firefighter pay will increase by up to 34% over the life of the contract.

The costs of the settlement will be financed with the issuance of judgment bonds. This is tax backed debt issued by an entity to fund a large near term payment while spreading its costs over a long period. It’s not an uncommon municipal bond practice but this case creates a much larger than usual amount to be funded and financed.

NEW YORK CANNABIS

This week NY Governor Kathy Hochul made it official – the rollout of the recreational cannabis regulatory mechanism in New York is officially a “disaster”. She ordered a full review of review of the state’s licensing bureaucracy. The main goal of the review is to shorten the time it takes to process applications and get businesses open. Disaster is one of the kinder words used by all sides of the industry – doctors, retailers, medical dispensaries. Some of the problem is blamed on the equity provisions of the rollout. The reality is more complex.

For whatever reason, the social and political goals of the program were allowed to overtake the nuts and bolts work of establishing and implementing a regulatory program. The state Office of Cannabis Management, which recommends applicants to the board for final approval, received 7,000 applications for licenses last fall from businesses seeking to open dispensaries, grow cannabis and manufacture products. But regulators have awarded just 109 so far this year. 

The agency has been plagued by staff as well as management turnover. It is led by a well meaning attorney who doesn’t have executive experience. The head of the equity side of the program had to resign over accusations of favoritism. This has all gotten in the way of a structured plan to award licenses. This had led to proliferation of illegal unlicensed retail sites including an estimated 1500 in New York City alone.

The emphasis has been on the social and economic equity goals enshrined in the legalization law. Its goal is to have half of all licenses go to people harmed by anti-cannabis policies; women; racial and ethnic minorities; distressed farmers; and disabled veterans. Much of the criticism of the office has been rooted in the role of equity concerns as an impediment to licensing. Along with a lack of enforcement in NYC, the botched rollout is actually increasing illegal activity.

BALLOT RESULTS

It took some two weeks to find out but in California Proposition 1 was approved by the voters with a razor thin majority. With just 50.2 percent of voters approving, the gap was less than 30,000 votes out of more than 7 million cast in the race. Only about a third of registered voters cast ballots in the California primary. There was a clear divide between the urban areas and the rest of the state. The vote authorizes over $6 billion of debt issuance capacity to address the issues of homelessness and mental health.

In Chicago, a referendum that would change the city’s real estate transfer tax and raise rates on high-value properties to fund homelessness programs appeared to be failing in the tabulated vote. Only 20 percent of registered voters in Chicago cast ballots. The vote is a huge political defeat for the Mayor as neither the voters nor the Council have provided support for higher taxes. The result puts the Mayor and the City in a weakened position as they confront the need to reach a contract agreement with the Chicago Public Schools teachers union.

TEXAS AND ESG

The Texas Association of Business Chambers of Commerce Foundation (TABCCF) released a new economic impact study illustrating the financial impact of Texas’ Fair Access law, passed in 2021. In the 87th Session of the Texas Legislature in 2021, lawmakers passed Senate Bills 13 & 19, barring any Texas municipality from contracting with banks if they are found to be restricting funding to oil & gas companies or discriminating against firearms companies based on their line of business.

In a 2023 study entitled Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies, Dr. Dan Garrett of the University of Pennsylvania and Dr. Ivan Ivanoff of the Federal Reserve Bank of Chicago examined the consequences. Their study found that competition in the public finance market was indeed reduced due to these laws, and that interest costs were 0.144 percent higher as a result. This new study builds on that work. Further examination of transaction costs associated with issuing debt, specifically the underwriters spread, shows a sharp increase in the fiscal years 2022-23 in the wake of the laws’ implementation. Applying the historic average from fiscal years 2015-21 implies excess costs of $270.4 million.

The real issue is at what level of government is the cost of anti-ESG policies borne. The move in Texas has been primarily driven at the state level. That isn’t where the cost is being borne. There is little sign of any external impact on underwriters spread at the State level post-2021. The situation appears to change locally, however, as the underwriters spread more than doubled from fiscal year 2021 (the last year before the anti-ESG laws were implemented) to fiscal 2023.

The study sums it up well. “In simple terms, when government attempts to mandate values (no matter what kind) to business, the market loses, and taxpayers bear the consequences.”

COAL

A joint resolution that passed the Kentucky House natural resources committee this week would direct the state’s environmental authority to defy federal rules for fossil fuel power plants. House Joint Resolution 121 says the U.S. Environmental Protection Agency is “overreaching” its regulatory power. It would also prohibit the state’s environmental cabinet from enforcing federal air quality standards related to power plants. The lead sponsor of the resolution stated that “actually enacting the measure could lead to a federal government takeover.” It’s not clear quite what he meant.

The legislation is designed to plan for Kentucky’s energy needs into the future through the creation of an “independent” energy commission that would review all requests to shut down existing power plants. That would be an added step on top of the existing Public Service Commission approval process. The bill is opposed by the state’s investor owned utilities Louisville Gas & Electric and Kentucky Utilities, and Duke Energy.

The sponsors want the state to declare itself a “sanctuary state” for fossil fueled electric generation. The IOUs believe that it would lead to higher energy costs and could force them to keep open ineffective and uneconomical plants. The irony is that the party of free markets is the one hoping to legislate against efforts to respond to market forces. This comes as Utah’s Governor signed legislation designed to keep the Intermountain Power Project alive as a coal fired generation plant.

It’s part of an effort to “nullify” federal laws and regulations governing the operation of generating facilities. Kentucky still gets about 68% of its electricity generation from coal and another 23% from natural gas, according to the resolution. Less than 1% comes from wind and solar power. The other side of the argument was best expressed by one legislator – “I’m not comfortable with going down the road of nullifying federal laws that we don’t like. It sets a dangerous precedent. It didn’t work out well 170 years ago.”

STILL MICKEY MOUSE TIME IN FLORIDA

Attorneys for the Central Florida Tourism Oversight District filed a motion for a protective order that would stop the board members of the District from having to give videotaped depositions to Disney attorneys. District attorneys cite the “apex doctrine,” to support a view that high-level government officers shouldn’t be subject to depositions unless opposing parties have exhausted all other means of obtaining information. Florida is one of a minority of states which recognize that doctrine.

The board members who claim that being forced to give depositions would “impede” their ability to fulfill their duties and divert resources and attention away from overseeing the district. Depositions are a basic part of the discovery process in almost any civil litigation. If you’ve ever been deposed you know the process is annoying at best. That does not do anything to mitigate how poor a look for the District this all is from a governance point of view. The good news is that debt service payments of the District’s debt continue to meet made smoothly.

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

INTERMOUNTAIN POWER

Utah lawmakers passed a measure Thursday that allows the state to purchase a coal-fired power plant operating in Delta that now serves California customers and some local cities.  Of particular angst to some lawmakers is the fact that California receives 98% of the power but Intermountain Power Authority (IPA) is using Utah water and stopped using Utah coal to run its 1,900-megawatt plant. When it transitions to natural gas as mandated by California’s clean energy standards, it also plans to purchase that fuel from Wyoming, not Utah.

The situation is driven by two concerns. One is the desire of many Utah legislators to find a way to save a coal plant. The move is being positioned as one of concern over access to water rights. The sponsors claim that the law is not intended to interfere with the Intermountain Power Agency’s transition to natural gas and potentially hydrogen in the next few years. It is being pitched as an issue of state and local control.

The second is that the plant is operated by the agency via the Los Angeles Department of Water and Power. It pays local taxes but it does so after doing what many other entities of its type do – the plant has appealed its county tax assessment 26 of 38 years. The real issue is that the bill’s sponsors feel that the plant operated with little Utah government oversight, despite being set up decades ago as a political subdivision of the state. They believe that a “California controlled” entity should not have control over the IPA budget.

PURPLE LINE BLUES

The Maryland Transit Administration will seek approval next month for as much as $425 million in “relief payments” related to delays in the Purple Line light rail project. The extra payments are the result of a roughly 234-day delay that will push the line’s completion back from spring of 2027 to December of that year. The Maryland Transit Administration took over the utility related work in 2020 as the original contractor began to exit from the project.

The Administration did complete the utility work in October. In December, operations and maintenance facility work was complete. The project is now 65% complete, with 13 of 21 stations in active construction. Additionally, nearly 17,000 linear feet of track has been laid. That gets the Administration out of direct construction activities.

Now construction is in the hands of Purple Line Transit Partners, the private consortium building the line. Partners will receive an initial $60 million from the state. Additional payments will be made as the company hits certain milestones such as the delivery of rail cars. The utility work payment is on top of $449 million in payments spread out over the next several years that is part of an increase already in the proposed Consolidated Transportation Program.

Seven months ago, the Board of Public Works approved an additional $148 million in payments to Purple Line Transit Partners. The money covered cost overruns and delays that pushed the project to spring of 2027. The additional funding being sought pushes the cost of the project to about $4 billion. Including financing over the 36-year life of the project, the cost is $10 billion.

NY HOSPITAL MERGER

Northwell Health (A3 stable) and Nuvance Health (Baa3 negative) signed a definitive agreement to merge later this year. The parties expect to close toward the end of 2024. It is a positive development for the Nuvance credit which is teetering around investment grade at Baa3 with a negative outlook. Northwell is a much larger entity generating some $16 billion in annual revenue compared to Nuvance Health’s $2.6 billion.

Nuvance Health’s weaker financial performance would be modestly dilutive to Northwell Health.  If the affiliation closed today, Northwell Health’s operating cash flow margin would decline by 30 – 60 basis points and days cash position would decline by a modest three days.

SMALL COLLEGE DOWNGRADES

Moody’s downgraded Hartwick College’s (NY) issuer and revenue bond ratings to Caa1 from B2. As of June 30, 2023, the college has approximately $35 million in outstanding debt. The outlook was revised to stable from negative. Ongoing deep operating deficits and a high reliance on large supplemental endowment draws is weakening already thin liquidity through at least fiscal 2024. 

S&P revised its outlook to negative from stable and affirmed its ‘BBB-‘ long-term rating on Champlain College in Vermont. The school has a debt service coverage covenant of 1.10x, which was not met in fiscal 2023 with debt service coverage of negative 0.43x. Based on the legal documents, the remedy for this covenant violation was to hire an independent consultant, which was fulfilled. “The negative outlook reflects our opinion that the college’s enrollment could continue to decline in the near term, leading to ongoing operating pressures. This could further pressure financial resources and weaken them to a level commensurate with a lower rating.” 

S&P lowered its long-term rating to ‘BBB’ from ‘BBB+’ on the Albany College of Pharmacy and Health Sciences (ACPHS).  “The downgrade reflects our view of the effects of ongoing demand challenges on the college’s enrollment and financial operations, as well as its weakened financial resources over the last two years relative to historical performance”. ACPHS’ operations are generally reliant on student-derived revenues that may likewise remain pressured.  

EMINENT DOMAIN

In 2022, NV Energy filed a court complaint to use the power of eminent domain in building a gas pipeline crossing property owned by an entity called Mass Land Acquisition (MLA). MLA’s parent is a company called Blockchains which hopes to develop a “cryptocurrency city”. MLA contested the eminent domain request all the way to the Nevada Supreme Court. The landowners argue that NV Energy’s use of eminent domain violates the state Constitution, which “expressly prohibits a private party from using the power of eminent domain to transfer interests in property from one private party to another.”

NV’s position is that state law and the Nevada Constitution actually clearly allows them to use eminent domain because they provide a “public use,” which specifically includes utilities and pipelines for petroleum or natural gas. The municipal bond angle – the Las Vegas Valley Water District and Southern Nevada Water Authority filed amicus briefs supporting the NV position.

The South Dakota Legislature passed three bills intended to strengthen landowner protections while maintaining a regulatory path forward for the Summit Carbon project. Carbon capture pipeline operators will have to pay $500 for access to survey land. Counties through which the pipelines run could collect a surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion.

The bills restrict easement durations, terminating them if a pipeline does not secure a Public Utilities Commission permit within five years or if the easement goes unused for the same period. Additionally, easements cannot extend beyond 99 years and must be documented in writing and recorded in a county register of deeds office. Current law says the Public Utilities Commission may overrule counties’ pipeline setbacks. The legislation establishes that the commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. 

PIPELINE PLANS EXPAND

Summit Carbon Solutions plans to expand its carbon dioxide pipeline footprint in Iowa by about 50% — or about 340 miles according to a new regulatory filing in Iowa. That is in addition to the existing proposal for 690 miles of pipe through Iowa. Summit has more than doubled its number of ethanol plant partners in Iowa to a total of 30 out of 42 in the state. Two large ethanol producers — POET and Valero — that had initially agreed to be part of Navigator CO2’s competing pipeline have since signed with Summit.

The project now includes 57 ethanol producers in five states and is expected to transport more than 16 million metric tons of carbon dioxide each year. The system has a total capacity of about 18 million metric tons. More than half of the corn Iowa farmers produce is used to make ethanol. Summit filed requests with the IUB to schedule public meetings in 22 counties for its expansion plans. The company proposed the first meeting for Adams County on April 22. The rest would be held over the course of about three weeks, ending May 9.

NUCLEAR

The Nuclear Regulatory Commission released a long-awaited proposal – “Part 53” – aimed at speeding up licensing for advanced reactors. Part 53 is meant to offer a “voluntary” alternative to advanced nuclear applicants under a framework that would be applicable to all reactor technologies; use information from risk assessments to focus safety analyses on important issues; and ensure plants are regulated based on how they perform and not just how they are designed.

Advanced nuclear reactors are being developed under the existing Part 50 program which is designed for traditional large scale reactors. The uncertainty associated with this process has likely slowed development. The rulemaking process is likely to make implementation of Part 53 delayed until 2027. Recent setbacks in the industry have likely bought regulators some time to effectively catch up in terms of new regs.

SOLAR

The US solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, a 51% increase over 2022. This is the first year where new solar exceed 30 GWdc of capacity for the first time. Residential solar grew 12%, adding 6.8 GWdc of capacity as installations in California were accelerated as customers rushed to take advantage of more favorable net metering rules before the switch to net billing in April. Commercial solar saw a similar increase in California, leading to national growth of 19% over 2022. Community solar grew just 3% compared to 2022. Nationally, utility-scale installations spiked to 22.5 GWdc of capacity, a 77% increase over 2022. 

The result – Overall, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time.

Nevertheless, the California Public Utilities Commission issued a proposed decision that found that the Net Value Billing Tariff (NVBT) policy supported by solar advocates ​“conflicts with federal law and does not meet the requirements” of AB 2316, the 2022 state law that ordered the CPUC to create an affordable and equitable community-solar program.

The California investor-owned utilities argued that the community-solar and battery projects envisioned for NVBT fall under federal law that governs larger-scale generators operating in wholesale energy markets. What are the points of interpretation driving the arguments? AB 2316’s requirement that any new program must not increase costs for nonparticipating customers? An interpretation of the Public Utility Regulatory Policies Act (PURPA), a 1978 law that requires utilities to purchase power from certain non-utility-owned generators under structures governed by the Federal Energy Regulatory Commission.

BOSTON

The Boston Policy Institute (BPI) is a newly launched non-profit focused on analysis about the Commonwealth of Massachusetts and the City of Boston. Among its first efforts is a recent report on the impact of office building values on city revenues after the pandemic. The Fiscal Fallout of Boston’s Empty Offices raises several issues which put the City of Boston under more fiscal pressure than some other major cities.

The reports premises are based on the role of office buildings in the City’s tax base. More than one-third of Boston tax revenue comes from commercial

property taxes, by far the highest proportion among major U.S. cities.

This leaves Boston especially vulnerable to falling real estate values. The value of office space is projected by the BPI expected to decline 20–30 percent by

2029, and overall commercial real estate prices by 12–18 percent.

A second estimate is that Boston will face a cumulative revenue shortfall of $1.2

billion to $1.5 billion over the next five years. Boston will have few ways to compensate for this lost tax revenue. Massachusetts precludes cities from introducing local sales and income taxes; and fully offsetting the decline in commercial real estate would require a 25 percent to 30 percent increase in residential property taxes.

Whereas property taxes comprised roughly 55 percent of city revenues in 2002, today they account for 75 percent. Current estimates suggest that more than 20 percent of all office space in Boston is vacant. As is the case in other cities like New York and Chicago, remote and/or hybrid work is poised to be a long term drag on valuations for office real estate.

It remains a situation worth watching as the budget season unfolds.

NEW JERSEY GAS TAX

Funding for New Jersey’s Transportation Fund has been a major concern during the FY 2025 budget process. Now a plan has been advanced which would raise the state’s gas tax by some 10 cents per gallon over a period of ten years. It would also impose a fee ranging from $250 to $290 a year on electric vehicles over that period. Electric vehicles would be charged a $250 fee in the first fiscal year. That would increase by $10 a year after that, capped at $290 by the end of the five-year period.

Currently, the state collects 42.3 cents for each gallon of gasoline sold and 49.3 cents on every gallon of diesel — the seventh-highest rate in the nation. The level of the tax is determined annually through a formula established through a deal with the State Legislature in 2016 for the gas tax to be adjusted each October to ensure it generates about $2 billion a year in revenue to support the TTF.

The new tax is proposed to be in addition to rates derived from the formula. The higher gas tax and new electric car fee would take effect in July if approved by the Legislature and signed into law. The Governor has also proposed eliminating a sales tax exemption on electric car sales.

MISSISSIPPI

S&P Global Ratings revised the outlook to negative from stable and affirmed its ‘AA’ long-term rating on Mississippi’s general obligation (GO) debt. Elevated credit risks stemming partly from persistently weak economic and demographic trends, which could result in an increasingly challenging budget environment as the state manages through its phased-in income tax reductions…The risk of future budgetary pressure is further elevated due to pension contributions falling short of their actuarially determined contribution amounts in each of the past three years and a relatively high level of unfunded pension liabilities.”

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.