Joseph Krist

Publisher

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

__________________________________________________________________

JOBS AND PERCEPTIONS

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

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

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

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

BAY AREA TOLLING

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

NEW YORK OFFICES AND TAXES

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

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

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

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

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

Joseph Krist

Publisher

NUCLEAR START UP

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

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

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

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

COLLEGE TUITION

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

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

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

OAKLAND CHILDRENS HOSPITAL

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

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

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

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

A RELIC

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

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

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

STADIUM DEAL

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

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

BAY AREA TRANSIT

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

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

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

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

P3 GOES PUBLIC

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

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

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

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

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

Joseph Krist

Publisher

CALIFORNIA FOREVER BUT NOT NOW

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

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

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

AUTONOMOUS VEHICLES

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

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

CHICAGO PUBLIC SCHOOLS

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

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

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

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

BAY AREA WATER

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

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

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

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

FOSSIL FUEL TAX ON THE BALLOT

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

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

PUERTO RICO AND ELECTRIC RESILIENCE

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

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

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

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

NEW YORK STATE

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

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

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

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

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

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

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

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

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

NUCLEAR

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

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

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

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

Joseph Krist

Publisher

FEDERAL INFRASTRUCTURE GRANTS

Since 2017, the idea that there was a new and better way to finance infrastructure seemed to always be just around the corner. As infrastructure day dragged into infrastructure week and month through the Trump administration, those ideas languished. Or maybe they never existed. Yet recent months have shown that good old fashioned federal funding for these large projects is emerging as the main catalyst for execution of some of these projects.

The biggest example is the federal grant funding for the Gateway Tunnel project in the NY metropolitan area. While initially stalled by New Jersey state action, the project received no support from the Trump administration. Once new administrations took over in NY and NJ, federal funding emerged.

Alabama Gov. Kay Ivey announced the U.S. Department of Transportation has awarded a $550 million grant to the Mobile River Bridge and Bayway Project. Initially conceived in the late 1990’s, the project had previously suffered from local objections to user-based funding. According to a 2019 public hearing survey conducted by U.S. Department of Transportation and ALDOT, 86% of people said they did not believe there is a need for this project, mainly because of a proposed toll.

The money comes from the Bridge Investment Program, which Congress created in 2021. It is a discretionary program of the U.S. Department of Transportation allowing states to compete for projects of national importance.  The Alabama Department of Transportation has acquired all of the land and completed preliminary steps, such as environmental impact statements and archaeological reviews. That put the project in a favorable competitive position.

The cost is now estimated at between $3.3 and $3.5 billion. The state already has $125 million from a grant awarded in 2019 under that Nationally Significant Multimodal Freight & Highway Projects program. The state has pledged at least $250 million, which is on top of $200 million already spent on preliminary measures. The latest federal grant brings the committed funding total to $1.075 billion. The state will apply for a TIFIA loan from the federal government as well.

The federal money does not mean that there will not be tolls on the new bridge. There is however, a pledge from the state that tolls will be limited to $2.50 for “frequent users”. The toll revenue will pay off any TIFIA loan as well as any additional borrowing undertaken by the State.

The Mobile project is the fifth such to be a grant recipient since the enactment of the IRA. It joins grants of $1.35 billion to the Brent Spence Bridge project to rehabilitate and reconfigure the existing span between Kentucky and Ohio over the Ohio River; $400 million to increase the Golden Gate Bridge’s resiliency against earthquakes; $158 million to for the Gold Star Memorial Bridge, which is part of the Interstate 95 corridor over the Thames River between New London and Groton in Connecticut and $144 million to rehabilitate four bridges over the Calumet River in Chicago.

Another grant will benefit two states with one project. The Tennessee Department of Transportation announced in May of this year that they were studying plans for a new bridge to replace the current 75-year-old bridge that connects Memphis and Arkansas. The current I-55 bridge is “not designed for modern interstate standards.”

The Tennessee and Arkansas Departments of Transportation have now been granted over $393 million by the federal government for the new I-55 bridge. It will be combined along with the Tennessee Department of Transportation, and the Arkansas Department of Transportation which have each committed up to $250 million to the project.

CLIMATE LITIGATION

A Baltimore Circuit Court Judge dismissed the City of Baltimore’s lawsuit against the big oil companies saying that the case belongs in federal rather than state court. The decision is at odds with how other courts have ruled in similar cases, including a Maryland state court that allowed climate deception lawsuits that the city of Annapolis and Anne Arundel County separately brought against fossil fuel companies to proceed to trial. 

The U.S. Court of Appeals for the Second Circuit issued a similar ruling in a case called City of New York v. Chevron. Courts in Hawaii, Massachusetts, Colorado ruled the opposite and said that the cases could move forward. The US Supreme Court declined to hear in January of this year an appeal of a decision by the St. Louis-based 8th U.S. Circuit Court of Appeals. That court found that Minnesota’s lawsuit accusing the energy industry of engaging in decades of deceptive marketing to undermine climate science and the public’s understanding of the dangers of burning fossil fuels belonged in state court, where it was originally filed.

Eight U.S. appeals courts have affirmed lower court decisions remanding similar climate cases to state courts, finding generally that the lawsuits exclusively raise state law claims and thus federal courts do not have jurisdiction.

HOUSTON CLIMATE TROUBLES

The last decade has been tough on the City of Houston. There was Hurricane Harvey in 2017. The state’s electrical grid failure during the winter of 2021. Nearly one week without power in May of this year. Now, over a week without power from Hurricane Beryl. More than 2.2 million customers of the local utility, CenterPoint Energy, were without power at the peak of the outages last week.

Before the storms, Harris County, which includes Houston, had been experiencing net negative migration from other parts of the country.  Since 2016, according to U.S. census data, more people have left Harris County for other counties than have moved in from elsewhere. That trend continued after 2017 when Hurricane Harvey flooded large areas of the city.

STATE BUDGETS

In June, Hawaii Governor Josh Green (D) signed into law the largest income tax cut in that state’s history—totaling $5.6 billion in lost revenue by 2031. Meanwhile, the Kansas Legislature went into a special session to decide on tax relief, ultimately passing property and income tax cuts totaling $2 billion over five years. Nebraska is headed into a special session later this month to debate property tax cuts. Arkansas passed its third income tax cut in less than two years, lowering top corporate and personal rates by half a percentage point each and making the cut retroactive to the beginning of 2024.

FY 2024 is the last to see any more fiscal help related to the pandemic. Now, the impacts of policy decisions made during the pandemic when there was a lot of extra money sloshing around government budgets are becoming clear. Revenue growth is slowing but so are expenditures. One area receiving attention is employee compensation. It has been markedly harder for governments to adequately meet their staffing needs both through recruitment and retention.

Thirty-one states, the District of Columbia (DC), and Puerto Rico reported proposed across-the-board (ATB) pay increases for at least some employee categories in fiscal 2025. Additionally, 14 states, DC and the U.S. Virgin Islands proposed at least some merit increases. These moves come as thirty-three states reported that general fund collections for fiscal 2024 from all revenue sources (including sales, personal income, corporate income, and other revenues) were coming in higher than original estimates used in enacted budgets.

Collections were on target with original estimates in seven states and lower than projected in ten states. Compared to fiscal 2024 current estimates, fiscal 2025 revenue forecasts in governors’ budgets project 2.4 percent growth in sales and use taxes, 2.9 percent growth in personal income taxes, a 0.8 percent decrease in corporate income taxes, and 2.0 percent decrease in all other general fund revenue.

DATA CENTERS AND POWER

According to the Energy Information Administration, U.S. commercial sector electricity use grew 1% last year from 2019 levels. That is the headline. The reality is that the growth in commercial demand for electricity is concentrated in a handful of states experiencing rapid development of large-scale computing facilities such as data centers. Electricity demand has grown the most in Virginia, which added 14 BkWh (billion kilowatt hours), and Texas, which added 13 BkWh.

Commercial electricity demand in the 10 states with the most electricity demand growth increased by a combined 42 BkWh between 2019 and 2023, representing growth of 10% in those states over that four-year period. By contrast, demand in the forty other states decreased by 28 BkWh over the same period, a 3% decline.

Virginia has become a major hub for data centers, with 94 new facilities connected since 2019 given the access to a densely packed fiber backbone and to four subsea fiber cables. Demand for electricity by the commercial sector in some large states such as New York, Illinois, and California has been flat or has declined compared with 2019.

Nationally, EIA projects that U.S. sales of electricity to the commercial sector will grow by 3% in 2024 and by 1% in 2025.  The South Atlantic and West South Central census divisions together account for 40% of U.S. commercial electricity demand. EIA now expects that commercial consumption in the South Atlantic will increase by 5% in 2024 and 2% in 2025 and in West South Central by 3% this year and 1% next year. 

The U.S. electric power sector generated 5% more electricity in 1H24 than 1H23 because of a hotter-than-normal start to summer and increasing power demand from the commercial sector. EIA expects a 2% increase in U.S. generation in 2H24 compared with 2H23, with solar power, the fastest growing U.S. source, generating 36 billion kilowatt hours (BkWh) more electricity in 2H24 than in 2H23 (an increase of 42%).

Solar power is the fastest growing source of electricity in the United States. We expect 36 billion kilowatt hours (BkWh) more electricity to be generated in the United States from solar in 2H24 than in 2H23, an increase of 42%. We forecast 6% more U.S. wind generation during 2H24–12 BkWh more than in 2H23—driven by more wind turbines coming on line, and we forecast 4% (5 BkWh) more hydropower, as a result of slightly improved water supply conditions this year.

ELECTRIC VEHICLES

Electric vehicles, including plug-in hybrid vehicles are taken into dealerships at a rate three times higher than that of gas-powered cars. That comes from the J.D. Power 2024 Initial Quality Survey. According to the study, battery electric vehicles averaged 266 problems per 100 vehicles, about 48% more than gas- and diesel-powered vehicles, which averaged 180 problems per 100 vehicles. The good news is that the issues do not reflect electric cars breaking down as much as they reflect issues with the technology inside the vehicle.

The failures tended to involve things like issues with infotainment systems, which was the most problematic area in the study. Issues with in-vehicle features and controls like windshield wiper or turn signal display buttons, false warnings from advanced driver assistance systems, difficulty connecting to the vehicle with popular apps like Apple CarPlay and Android Auto drove negative ratings.

These findings won’t help to reverse current sales trends in the electric vehicle space. General Motors said it now expected to make 200,000 to 250,000 battery-powered cars and trucks this year, about 50,000 fewer than it had previously forecast. In Oakville, Ontario, a production facility recently stopped making the gasoline-powered Ford Edge S.U.V.

It was slated to shift to new electric versions of the Ford Explorer and Lincoln Aviator, both three-row S.U.V.s. Instead, Ford will turn the factory in Oakville into a third production location for its Super Duty pickup trucks, which are among its most profitable models. It also positions Ford and the others to mitigate against likely Trump administration moves to eliminate tax breaks currently benefitting EV sales. It would seem to increase concerns (if not doubts) about projects announced but as yet undeveloped.

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

Joseph Krist

Publisher

CALIFORNIA URBAN WATER REGULATION

The California State Water Resources Control Board approved regulations that will set long-term limits on the amounts of water the state’s urban utilities can use on an annual basis. The goal is to generate about 500,000 acre-feet in water savings each year by 2040. The new rules arose as the result of legislation from 2018. The regulation is expected to apply to 405 urban suppliers, which collectively provide water to about 95 percent of California’s population, according to the Water Board.

Each year a water utility will be required to generate an “urban water use objectives” plan and will require compliance beginning in 2027. The limits will be phased in over the ensuing 13 years. The expectation is that ultimately annual water savings will approximate 500,000 acre feet. The mechanics of how each regulated utility achieve these goals – legal, regulatory, education, enforcement – are left to each utility. What will apply across the board is that in the event that a water utility exceeds its usage limits, it will be fined $10,000 a day until usage returns to required levels.

According to the board’s estimates, cuts greater than 30 percent will only affect six suppliers (two percent of all suppliers in the state affected by the regulation) by 2025 and 46 (12 percent) by 2040; this means that 118,370 people will be affected by the largest cuts by next year, and 1,733,569 in 15 years. The regions where water suppliers will be asked to make the biggest cuts to water delivery (greater than 30 percent) by 2040, are South Coast, San Joaquin Valley, and Tulare Lake.

The reductions needed to meet the objective based on 2040 standards, relative to the subset of urban uses subject to standards, will be of 92 percent for the City of Vernon; 58 percent for City of Atwater; 50 percent for Oildale Mutual Water Company; 45 percent for the West Kern Water District; and 43 percent for the City of Glendora.

Sixty-five percent of suppliers serving 29,157,064 people will initially be unaffected as of next year. By 2040, 31 percent of suppliers serving 12,459,736 residents would have avoided a reduction in water delivery entirely. Eight percent will see a reduction of less than 5 percent; 13 percent will have to cut water delivery between 5 and 10 percent; 21 percent between 10 and 20 percent; and 15 percent between 20 and 30 percent.

The new rules must still receive the final approval of the Office of Administrative Law. If approved, the regulation will come into effect by January 1, 2025. 

KEY BRIDGE COLLAPSE IMPACT

The financial impact of the Key Bridge in Baltimore was always going to be about more than the cost of replacement. It is expected that the Federal government would pick up much of the cost of that project. In the meantime, the impact on operating revenues is a different story. The Maryland Transportation Authority operates 7 other facilities – three bridges, two tunnels and two turnpikes – funded by tolls covering operations and maintenance and debt service.

The Authority’s Board was recently advised that a $153 million decline in toll revenues throughout the 2024 through 2030 forecast period is expected. While mostly attributed to the Key Bridge, the forecast sees a decline of usage across the entire Authority portfolio. That will likely cause tolls to rise sooner than initially planned.

It is noted that the Authority emphasized its need to not only meet operating needs but also to respect its various bond covenants.   “Beginning in fiscal year 2028, a systemwide total increase will be necessary to maintain two-times debt service coverage throughout the remainder of the forecast period.”

PENSION FUNDING

Earlier this year, the City of Houston reached a long sought labor agreement with its firefighters. The hurdle that proved the highest to climb was the issue of funding levels. It was important to the unions that pension funds be adequately funded. The high levels of underfunding and the increasing cost of funding had been a long time negative weight on the City’s credit. Now, the City has turned to the capital markets to help it meet obligations it incurred in reaching the labor agreement.

The key component is the provision of some $650 million to increase the fun ding level of the pension funds. The plan is to issue debt to fund the expenditure. The wrinkle is that many municipalities have turned to pension funding bonds (pension obligation bonds or POB) to increase funding. The usual mechanism however is to issue POB which are not backed by the taxing power of the issuing municipality.

Houston is choosing to use debt but is also issuing that debt in the form of general obligation debt. That is a pledge of taxing power in support of this debt for an operating cost. In this case, the bond issue would provide the $650 million to be turned over to the pension fund. It also comes as the City seeks to fund the cost of salary increases agreed to as a part of the overall contract package.

The plan has earned pressure on the City’s ratings.  S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. “The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases.” 

The City also faces increasingly frequent flood and hurricane events generating increased expenses. It also faces legal issues from an April Texas court ruling in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. The Court found that the amount subject to transfer is limited under state property tax laws. The estimated revenue hit if that survives all the way through the state court system is $110-120 million annually.

The City of East St. Louis has long been a depressed credit. It has often underfunded its pension funds as a way of maintaining current budget balance. Under state law, pension boards which oversee the funds can request that the State Comptroller intercept state aid to a city and direct those funds to the pension funds. For months, the City and its pension boards have been negotiating over how much the City needs to put in during its current fiscal year. The Police Pension Fund has now decided to request that the State Comptroller intercept some $3.5 million to be deposited into that fund.

Now the City has chosen to challenge the intercept provisions in court. The City is suing the Police Pension Board and the Comptroller claiming that the intercept program is unconstitutional. The city is asking the court for a permanent injunction that would block the comptroller’s office. “The enforcement of this statue exacerbates existing inequalities by reducing the City’s ability to provide essential services that these communities rely on. The reduction in state funds due to the intercept will lead to decreased public safety, health services, and other vital municipal functions, disproportionately affecting minority residents.

The City stopped making monthly payments to the Police and Fire pension funds after September of last year. The Funds indicated in January that they would seek impoundment without funding. Since then, the Fire and Police Funds have taken slightly different approaches. The Fire pension fund negotiated an agreement with the city in March. Under that deal, the city government agreed to put $4.5 million into the fire pension fund by the end of May.

The East St. Louis Police Pension Board says the city owes $3.5 million to the fund, covering fiscal years 2016, 2019 and 2021. The city says it received less than that – about $3.3 million – from the state during the first quarter of this year. It takes some 60 days to process an intercept request which would put a decision into August. A local judge has issued a temporary restraining order that stops the intercept from proceeding, for now. A hearing will be held on August 5 which is six days before an intercept could occur.

MUNICIPAL FINANCE AND HOMELESSNESS

One of the more intractable problems which is also the most visible is that of homelessness and its intersection with mental illness. The lack of facilities, the reluctance to fund or locate needed facilities and current politics have all stood in the way of dealing with the issue. Now a recent financing and a project groundbreaking are showing what can be accomplished through the municipal market.

The Mead Valley Wellness Village is a 450,000 sq. ft. behavioral health campus with five main buildings: a Community Wellness and Education Center, a Children’s and Youth Services building, Urgent Care Services, Supportive Transitional Housing, and Extended Residential Care. It includes residential as well as outpatient facilities. There are provisions for families as well. They reflect the state of the art in terms of holistic treatment of the overarching problem.

The facilities will be operated by Riverside University Health System–Behavioral Health (RUHS-BH), a county agency.  The County owns the land – an 18 acre site near Perris, CA – and created an entity specific to this project to act as landlord. Through this structure, the County has affected a P3 with the developer and builder/designer at risk through construction. Upon acceptance of the facility, the County’s obligation to make lease payments kicks in.

The location of the facility isn’t exactly a garden spot off I-215. That reflects the difficulty in siting projects like this. There isn’t much around to object to it. The facility is anticipated to open in 2026 and is estimated to have an annual impact of more than $78 million and will lead to more than 800 jobs.

PIPELINES ON THE BALLOT

The South Dakota Secretary of State has certified a ballot item which could repeal legislation seen as supportive of the Summit Carbon Systems proposed pipelines. Senate Bill 201 was enacted in 2023. Pipeline opponents were able to gather signatures in numbers well above the requirement. This puts the law in the classification of a “referred law.” It’s uncommon, The last referred law vote was in 2016.

Senate Bill 201 allows counties to collect a pipeline 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. It provides that commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. That means local rulemaking still exists, and the decision to make a carbon pipeline company comply with those setbacks still rests with the Public Utilities Commission.

FEMA FLOOD RULES

Since August 2021, FEMA has partially implemented the Federal Flood Risk Management Standard (FFRMS). Prior to the FFRMS, FEMA required non-critical projects to be protected to the 1% annual chance (100-year) flood to minimize flood risk. Critical projects, like the construction of fire and police stations, hospitals and facilities that store hazardous materials, had to be protected to the 0.2% annual chance (500-year) flood. This standard reflected only current flood risk.

The FFRMS will increase the flood elevation — how high — and floodplain — how wide — to reflect future, as well as current, flood risk. Until now, implementation relied on existing regulations to reduce flood risk, increasing minimum flood elevation requirements for structures in areas already subject to flood risk minimization requirements, but not horizontally expanding those areas (widening of a flood plain). That was a problem exposed when prior storms revealed that much development was occurring in flood plains in Harris County, TX.

One of the major distinctions between partial and full implementation are the expansion of the floodplain to reflect both current and future flood risk and the requirement to consider natural features and nature-based solutions.  Less reliance on sea walls and the like and more on softer more absorptive natural areas with greater spacing between development on the shore or the riverbank.

Given the last 10 days or so of weather up here in the NYS woods, the argument over climate change is pretty much over. So, it’s only rational to face reality and mitigate risk. No reason for the government not to apply at least some insurance industry common sense. In this case, it’s at least based on some evidence. The efforts at flood mitigation in the Rockaways for housing and other smaller areas on Staten Island and in New Jersey in the wake of Superstorm Sandy provided that. It does hit values no doubt but we haven’t seen evidence of real fiscal problems.

It’s appropriate that the release came as a spate of storms has been brewing. The predictions have been for a more dangerous than normal storm season. It’s clear that the issue of managed retreat is going to gain prominence. Just this week the situation in Houston has been pretty severe so this is becoming almost a regular occurrence there. There was already a realization that planning maps needed to be adjusted in Harris County. The same is true in rural Vermont where it’s two years in a row for one town.

Eventually, the insurance market will tighten and the pressure against building back will increase.

PREPA BANKRUPTCY

The never ending process we know as The Puerto Rico Electric Authority bankruptcy may be closer to an ending but not a solution. The bankruptcy court has given the Oversight Board, PREPA and its creditors some 60 days to come up with a workable Plan of Adjustment. The parties have been negotiating but to no avail. Now, the judge has raised the potential for the bankruptcy to be dismissed if a solution cannot be found.

Mediation efforts have come up short with the mediator expressing a pessimistic view. “I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.” The judge noted that a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”

Both sides in the process were admonished for taking unrealistic positions in their negotiations. Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available. The judge noted that none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit on appeal.

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

Joseph Krist

Publisher

This week we celebrate the nation’s 248^th birthday. Enjoy whether you’re off for the week, long weekend, or just the day. We will take a mid-year break next week. The next issue will be dated July 15.

__________________________________________________________________

CARBON PIPELINES

The Iowa Utilities Board gave its approval for the controversial Summit Carbon Solutions pipeline and for the company to use eminent domain to acquire landowners’ property. In giving its approval to the project, the Iowa Utilities Board ruled that Summit cannot begin construction in Iowa until the necessary permits are secured in South Dakota and North Dakota. 

The Iowa House approved legislation the past two sessions that would have given landowners more leverage over pipeline negotiations. In 2023, the House passed a bill requiring pipeline companies to obtain voluntary easements for 90% of their routes before they could use eminent domain for the rest. This year, the House voted to allow landowners who are subject to eminent domain requests by carbon dioxide pipeline companies to challenge the legitimacy of those requests in court earlier in the permit proceedings. Neither bill advanced in the Senate.

COAL REGULATION

The Supreme Court temporarily put on hold an Environmental Protection Agency plan to limit air pollution that drifts across state lines. The “good neighbor” plan would require factories and power plants in Western and Midwestern states must cut ozone pollution that drifts into Eastern ones. Under the Clean Air Act, states are allowed to devise their own plans, subject to approval by the E.P.A. In February 2023, the agency concluded that 23 states had not produced adequate plans to comply with its revised ozone standards. The agency then issued its own.

Resulting litigation ultimately left 11 states subject to the new rules. Ohio, Indiana and West Virginia, along with energy companies and trade groups — challenged the federal plan directly in the United States Court of Appeals for the District of Columbia. When a three-judge panel of that court refused to suspend the rule while the litigation moved forward, the challengers asked the Supreme Court to step in.

That is the basis of the suspension of the rules. It comes as a larger case is due to be decided on the larger issue of whether courts must defer to the reasonable interpretations by agencies like the E.P.A. of ambiguous statutes enacted by Congress. It was a true split decision with the liberal wing aligning with Justice Barrett in a strong dissent. “The court today enjoins the enforcement of a major Environmental Protection Agency rule based on an underdeveloped theory that is unlikely to succeed on the merits.” She notes that the plans “have been temporarily stayed,” and, “no court yet has invalidated one.”

TAXES AND TRANSIT

The decision to stop the implementation of congestion pricing in Manhattan drove quick consideration of replacing the revenue to be generated with taxes on business. That alternative was just as quickly rejected. Now, the MTA is left with threatening projects designed to comply with the ADA and other projects. The idea that those benefitting from the transit system should help pay for it has fallen on deaf ears in Albany.

In the meantime, New Jersey is showing New York how to do it. An agreement has been reached with the 600 corporations in the state that make at least $10 million a year in profits. Those firms will pay a 2.5% tax on all earnings for five years. The state in turn will not pursue restoring the sales tax to 7% from to 6.625%.

The announcement comes after a difficult couple of weeks for NJ Transit commuters who come into NYC through Penn Station. Power was lost on tracks (owned by Amtrak) which forced thousands to be stranded in the excessively hot conditions plaguing the region last week.

CALIFORNIA BALLOT

The California Supreme Court issued a ruling to invalidate the Taxpayer Protection Act, which would have made it harder to pass or raise taxes in California. The Act was part of a proposed ballot initiative scheduled for November. The ruling comes as the deadline for removing ballot initiatives occurs this week. A second announcement concerned a 2004 law which allowed workers to sue their employers on behalf of the state and other employees.  An agreement between organized labor and business groups will remove the initiative to repeal the Act.

The Bay Area Housing Finance Authority (BAHFA) today adopted a resolution to place a general obligation bond measure on the November 5 general election ballot in each of the nine Bay Area counties to raise and distribute $20 billion for the production of new affordable housing and the preservation of existing affordable housing throughout the region. 

The proposed bond measure calls for 80 percent of the funds to go directly to the nine Bay Area counties (and to the cities of San Jose, Oakland, Santa Rosa and Napa, each of which carries more than 30 percent of their county’s low-income housing need), in proportion to each county’s tax contribution to the bond. The remaining 20 percent, or $4 billion, would be used by BAHFA to establish a new regional program to fund affordable housing construction and preservation projects throughout the Bay Area.

Most of this money (at least 52 percent) must be spent on new construction of affordable homes, but every city and county receiving a bond allocation must also spend at least 15 percent of the funds to preserve existing affordable housing. Almost one-third of funds may be used for the production or preservation of affordable housing, or for housing-related uses such as infrastructure needed to support new housing. 

The BAHFA bond measure currently would require approval by at least two-thirds of voters to pass. Voters throughout California this November will consider Assembly Constitutional Amendment 1 (ACA 1) — which would set the voter threshold at 55 percent for voter approval of bond measures for affordable housing and infrastructure. If a majority of California voters support ACA 1, the 55 percent threshold will apply to the BAHFA bond measure.

AUTONOMOUS AND ELECTRIC VEHICLES

When GM’s Cruise autonomous taxis were forced off the streets of San Francisco, it led to questions about the division’s management. Now, a new CEO has been appointed. Since the California AV operation was halted, Cruise has since laid off a quarter of its work force and removed nine executives. As much as there were issues with the technology, good old fashioned management execution failures shared at least equal blame.

In the interim, AV competitors have had more favorable if limited experiences. Waymo, a subsidiary of Alphabet, has had driverless taxis operating in the Phoenix area since 2020 and San Francisco since late 2022 without serious incidents. It recently began service in Los Angeles. Zoox, an Amazon subsidiary, has been testing a steering-wheel-free robot taxi in Las Vegas since last June.

Cruise currently conducts limited testing of its supervised autonomous testing, with two safety drivers per vehicle. Those tests are underway in Phoenix.

The electric car movement has had a rocky time lately. Slowdowns in new electric car sales and announcements of delays in the development of planned production facilities had raised concerns. One example of the phenomenon is Georgia. Rivian the electric truck maker planned to construct a new production facility with substantial state support including subsidies. Rivian already had a production facility in Illinois.

Earlier this year, Rivian announced a pause in the development of its Georgia plant. Because it reflected lower than expected sales, there was a concern that the delay might be a sign of greater problems which could threaten the existing plant space. Amazon is still a significant Rivian shareholder and is one of its biggest customers.in Normal, IL. This week, a deal was announced which served to dampen those fears.

Volkswagen announced that it would invest up to $5 billion in Rivian and that the companies would cooperate on software for electric vehicles. Volkswagen said it would initially invest $1 billion in Rivian, and over time increase that to as much as $5 billion. If regulators approve the transaction, Volkswagen could become a significant shareholder. Rivian said the cash from Volkswagen would help the launch of a midsize S.U.V. called the R2 that will sell for about $45,000, and to complete the factory in Georgia. 

This represents more big money coming into the electric vehicle space. Amazon retains a significant ownership piece in Rivian and is Rivian’s largest truck customer.

WIND

The Vineyard Wind 1 project is now delivering more than 136 megawatts (MW) to the electric grid in Massachusetts. (New York’s South Fork Wind, the US’s first complete utility-scale offshore wind farm, is 132 MW.) This makes Vineyard 1 the largest operating offshore wind farm in the U.S. In February 2024, Vineyard Wind delivered approximately 68 MW from five turbines to the grid.

Vineyard Wind 1 now has 10 turbines in operation, enough to power 64,000 homes and businesses. The installation of a 22nd turbine is underway. Once completed, the project will consist of 62 wind turbines. It began offshore construction in late 2022, achieved steel-in-the-water in June 2023, and completed the US’s first offshore substation in July 2023.

OPIOIDS

It took years of painstaking negotiations to achieve a settlement to resolve the bankruptcy of Purdue Pharma and its owners, the Sackler family. One of the main features of the bankruptcy proceedings was the agreement that the Sacklers themselves would be protected from personal liability related to opioids. That resulted in $6 billion being pledged to states, local governments, tribes and individuals.

This week, the Supreme Court decided that the federal bankruptcy code does not authorize a liability shield for third parties in bankruptcy agreements. As a result, members of the Sackler family, who controlled Purdue Pharma, the maker of the OxyContin, will no longer be subject to a condition of the deal that granted the Sackler family immunity from liability in opioid-related lawsuits, even as they had not declared bankruptcy.

The first opioid lawsuits were filed against Purdue Pharma a decade ago. In 2019, Purdue filed for bankruptcy restructuring, which ultimately paused the lawsuits. The ruling effectively prevents the release of billions of dollars to plaintiffs from that settlement. That hold up has generated division within the ranks of plaintiffs. Some believe that the immunity provisions were worth the availability of payments. Now, what was seen as the longstanding primary obstacle to a deal has been placed at the center of any negotiation.

HOSPITAL TAXES

The Denver City Council approved putting a 0.34% sales tax increase on the Nov. 5 ballot to aid Denver Health, Colorado’s sole safety net healthcare provider. Uncompensated care totaled $140 million last year. That was an increase from $120 million in 2022 and $87 million in 2021. Those costs coincide with the arrival of migrants shipped into Denver primarily by the State of Texas.

The tax increase is estimated to produce $70 million annually. Under an annual operating agreement with Denver, the health system was allocated $73 million in funding for fiscal 2024. Colorado lawmakers this year passed $5 million in one-time funding, the same supplemental payment provided to the health system last year.

STADIUMS ARE BACK

The City of Charlotte has decided to continue to apply hotel and restaurant generated sales taxes to support the home of the NFL Carolina Panthers. It approved some $650 million of financing supported by existing hotel and restaurant taxes. The normal controversies around stadium renovations were in play here. They centered around the Panthers’ eccentric and impetuous owner. A combination of some poor public conduct choices and a poor won/loss record during his ownership tenure pressured the approval process.

In the aftermath of a failed referendum item to support taxes in greater Kansas City, MO to fund a new baseball stadium and improved foot ball stadium, proponents are looking west across the Missouri River for alternatives. The Kansas Legislature held a quick session to debate a financing package to join the Kansas Speedway as major sports venues in the state.

STAR Bonds are used to assist the development of major entertainment or tourism destinations in Kansas. State and local sales tax revenue generated by the attraction and associated retail development are used to pay back the bonds. In metropolitan areas, STAR Bonds can be used only for projects with an anticipated capital investment of $75 million and with at least $75 million in projected gross annual sales.

The professional sports facilities STAR bonds, which could be issued by a city, county, or the Kansas Development Finance Authority, will be backed by the incremental increase in sales taxes collected in a district created for the project and up to 100% of liquor sales within that district. The law also includes the potential for shares of sports betting and state lottery revenue. Besides expanding STAR bond-financed project costs to 70% from the current 50%, the law extends the maturity of the debt to as much as 30 years, up from 20 years. 

The economic rivalry between the Kansas and Missouri sides of the KC metropolitan area is longstanding. Tax policy and business locations have been flexible to say the least over the years as taxpayers tried to keep up the with the best deals. The situation with the two pro sports franchises just highlights the phenomenon at a significantly larger scale.

No professional sports franchise in the U.S. should ever ‘need’ public money for their stadia. The incredible appreciation of value of sports franchises continues as evidenced by recent team sales. We again are about to embark on a new cycle of stadium finance. We are already seeing the irrationality of the whole process. One difference now as opposed to the last cycle is that the cost of sports attendance is out of control. Now, the public is being asked to pony up funds for facilities they will likely never attend due to cost.  

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

Joseph Krist

Publisher

CALIFORNIA HOUSING

One of the approaches to solving California’s affordable housing shortage has been the use of Accessory Dwelling Units (ADUs). As was the case after the post-war expansion in the second half of the 20^th century, many of California’s communities enacted restrictive zoning codes in the 1940s, 50s, and 60s to limit population density. Like the other jurisdictions across the country, the laws designated large areas for single-family residences and enforced minimum lot sizes, effectively controlling urban sprawl. 

A combination of demographic issues along with tax policy that discourages the transfer of homes over the generations have kept homes off the market. To address this, homeowners hoped to be able to create housing on oversize lots. The concept behind the move was historically reflected in “mother-daughter” houses, the conversion of space for an apartment (granny flats) and other structures converted to residences.

The well-known housing market issues were already driving some use of ADUs when legislation was enacted to support and advance the concept. Assembly Bill 68, passed in 2019, reduced ADU permit approval time from 120 days to 60 days and prevented municipalities from imposing lot size or parking requirements. Assembly Bill 881 further allowed property owners to build ADUs without living on the same property, enabling ADU investments.

In 2020, one in 10 new homes built in California was an ADU. ADUs accounted for 20% of new home construction 2023. That is likely to continue and increase as a trend supported by additional legislation. In October 2023, the Legislature addressed the issue of restrictions on the ability of ADU owners to rent the homes.  Assembly Bill 1033, allows Californians to buy and sell them as condominiums.

Property owners in participating cities will be able to construct an ADU on their land and sell it separately, following the same rules that apply to condominiums. A key provision of the law gives cities to opt out and continue to require rental. In terms of tax issues, ADUs will be treated as discreet units for purposes of taxes and utilities. A property will also have to form a homeowners association to assess dues to cover the cost of caring for the property’s exterior and shared spaces, such as the driveway, a pool or a common roof.

FLORIDA GAMING COMPACT STANDS

The Supreme Court rejected an appeal of a suit challenging the compact between the State of Florida and the Seminole Tribe. (see 11.6.23 MCN). The case has been making its way through the federal judicial system since the compact was executed. The plaintiffs – two competing betting companies – had failed to see the deal overturned through two appeals court panels including an en banc appeal. The companies in February filed a petition seeking review at the Supreme Court after the full appellate court refused to reconsider the panel’s decision.

Under the terms of the 30 year compact, the Seminoles agreed to pay Florida about $20 billion, including $2.5 billion over the first five years. The deal also authorized the Seminoles to offer craps and roulette at their casinos and to add three casinos on tribal property in Broward County. It also allowed pari-mutuels (like the plaintiffs) to contract with the Seminoles and share revenue from sports betting. In November the Tribe rolled out a sports-betting app and in December launched craps and roulette at its casinos.

The Seminoles began making payments to the state in January and have paid more than $357 million under the revenue-sharing agreement, including a payment made Monday. A rule was adopted by the U.S. Department of the Interior earlier this year that allows states to enter compacts similar to Florida’s with Indian tribes.

ELECTRIFICATION

The Pasadena (CA) Water and Power municipal utility announced the approval of two contracts for renewable power. A 10-year $47.1 million contract wind energy contract with CalWind Resources Inc., begins on May 1, 2025.  is for a 20-megawatt wind turbine facility named Wind Resource II Project located in Tehachapi, California.  A 15-year, $55.3 million contract with Glenarm BESS LLC, a special purpose entity created by EPC Energy Inc., is for a 25 MW battery energy storage system. Pasadena Water and Power’s 2023 Integrated Resource Plan which recommends installing substantial solar and battery resources within Pasadena.

This year’s budget/legislative season saw three fronts open up in the effort to restrict or eliminate gas stoves. California, Illinois, and New York considered bills which would have required warning labels on gas stoves. Legislative proposals in New York failed to gain support and the Illinois effort was equally unsuccessful. In New York, the originally proposed bill was based on U.S. EPA pronouncements that components of natural gas, nitrogen dioxide and carbon monoxide, are “poisonous” and could “lead to the development of asthma, especially in children.” 

California continues to look at a labeling requirement after the courts ruled that efforts by California municipalities to ban gas stoves were not legal. California’s proposed label originally cited the U.S. Environmental Protection Agency and a state environmental health agency saying stoves emit pollutants indoors at concentrations that exceed outdoor air quality standards. A pending bill was amended to remove those references.

COLLEGES

There has rightly been much focus on the operating difficulties plaguing smaller colleges. At the same time, many of the large state systems are under pressure as well. The University of California system has been dealing with a variety of job actions by faculty and staff. Now, Penn State is dealing with staffing and expense issues as well. In May of this year, it announced the University’s Voluntary Separation Incentive Program (VSIP).

It has announced that a total of 383 employees, or about 21% of those who were eligible, opted for the VSIP. Roughly 77% of the employees who took the offer were staff. The university said the dollar value of the salaries and fringe expenses associated with these 383 employees is $43 million. A budget deficit had climbed to $49 million. In exchange for their voluntary departure from the university, employees received a lump sum payment equal to a year’s salary.

Employees that were eligible for the program included tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. 

WATER

The Southwest Kansas Groundwater Management District was established by the State of Kansas to manage the use of groundwater pumped from the Ogallala aquifer. This massive underground water source has driven agriculture in the eight Ogallala states (Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming). It has long been recognized that groundwater is a finite resource and some areas have taken to concepts supporting reduced water use.

The District oversees groundwater usage and development in a 12 county area which is overwhelmingly agricultural. It has been a laggard in terms of encouraging conservation. Last year, Kansas lawmakers passed legislation squarely targeting the Southwest Kansas Groundwater Management District.

Crop irrigation accounts for 85% of all water use in Kansas—even more in western Kansas. Other districts have offered financial assistance to farmers investing in water-efficient irrigation systems and championed large-scale restrictions on pumping. GMD only spent 13% of its conservation-related budget between 2010 and 2022. This has raised concerns about District management.

Last year, in response to the criticisms, the district changed its financial statements, reporting fewer, broader categories. The new financial structure did not distinguish travel costs from other expenses. The travel is related to management efforts to build support for a pipeline to deliver Missouri River water from the east side of the state to its far west. The organization twice has trucked water 400 miles from the Missouri River to western Kansas in an effort to generate support for the idea.

As for conservation, Oklahoma allows farmers to use up to two feet of water each year on every acre they own. But usage is not monitored. Farmers report annual estimates of water usage. The state has not banned the drilling of new irrigation wells. Legislation passed this year that would require irrigators to meter their water use was vetoed by the Governor.

ROAD FUNDING AND DELIVERY FEES

In 2023, the Washington State Legislature enacted HB 1125, which included a budget proviso for a study on how a retail delivery fee could be implemented in Washington. The study must: Determine the annual revenue generation potential of a range of fee amounts; Examine options for revenue distributions to state and local governments based upon total deliveries, lane miles, or other factors; Estimate total implementation costs, including start-up and ongoing administrative costs; and Evaluate the potential impacts to consumers, including consideration of low-income households and vulnerable populations and potential impacts to businesses. The study should document and evaluate similar programs adopted in other states.

The study has now landed some two weeks before its deadline. Among other things the study found that the impacts will reflect the fact that households with an income above the statewide median tend to spend more on e-commerce than those below the statewide median, regardless of location. Generally, individuals from urban areas spend significantly more in the aggregate on e-retail purchases. Those who live in urban areas tend to spend more on online retail purchases than those from rural areas. New businesses or small businesses with gross revenues/sales less than $1 million in the previous calendar year will be exempt.

There are only two current comparables. Colorado, which enacted its fee in 2022, charges 28 cents on every delivery regardless of value. It generated $75.9 million in its first year for local and state uses, and clean transportation priorities. Businesses with $500,000 or less in sales are exempt. Minnesota enacted its fee in 2023 and it will be levied starting this July. The state will charge 50 cents only on deliveries of $100 or more. It will raise an estimated $59 million for cities and towns. The state exempts businesses with $1 million or less in annual sales.

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

WHERE CONGESTION PRICING DERAILED

In the wake of the decision to “pause” congestion pricing, it has been useful to look at how the MTA plan stacked up against the three large international examples. One of the most glaring issues is the fact that the level of revenue to be raised and the length of time in a day that the fees would be in effect had a real impact on perceptions.

It was recently noted that the example most relied on in New York is London. London does generate some $500 million of revenue each year. But it does so by collecting the fee only during the day – M-F 7am to 6 pm; Sa-Su Noon-6 pm. Much opposition was reflective of the fact that the MTA fee would be discounted but all day. The number of workers who worked shifts through public safety and hospital jobs and relied on vehicles as bus service is sporadic at night is significant.

Industries which see most if not all of their activity after 6 pm represented a significant block of opposition. Broadway has yet to return to pre-pandemic levels of attendance and tourist and restaurant areas like the Theater District, Little Italy, and Chinatown all saw the charges as a real hindrance to their businesses. At the same time, lower Manhattan has been transformed into an evermore residential district and those residents were not to be exempted.

Rightfully or not (beauty is in the eye of the beholder) Long Island commuters were wary of paying fees into a system which they believe shortchanges them. Any transit funding increase or change in its mechanics gets caught up in the city vs. suburb fight for money. That gets exacerbated by the lack of significant train service into the City from counties in the MTA service district west of the Hudson River. (Full disclosure: I live in one of those counties.)

Many of those who live in those counties are uniformed public servants and retirees who form a strong political block. They looked at the congestion fee as a $4,000 hit to their after tax income. As they say, the math is compelling. Add that to an extremely competitive set of elections to the U.S. House of Representatives and the fees became toxic.

In the end, the MTA has got to admit that it is often its own worst enemy. It wanted the $1 billion annual revenue requirement established by the Legislature. That left little if any room for negotiation. That shifted attention from the environmental reasons for the fee and created a perception that it was a money grab. It further alienated groups like the disabled. By effectively holding ADA compliance and full access (Full disclosure: I have a disabled family member) hostage to the imposition of the fee, it highlighted its abysmal record of providing that access.

If failure is an orphan, this one has a multigenerational genealogy.

PUERTO RICO

In a decision with implications for bondholders across the municipal bond market, a federal appeals panel found that PREPA bondholders have a non-recourse claim on PREPA’s estate for the principal amount of the bonds, plus matured interest. It also held that this claim is secured by PREPA’s Net Revenues — as that term is defined by the underlying bond agreement — and by liens on certain funds created by that bond agreement. The Bondholders were appealing the Title III court’s findings that they lacked a security interest in PREPA’s current or future Revenues or Net Revenues; that any such interest was potentially avoidable under; that they had failed to state a claim for breach of trust; and that they were not entitled to an “accounting” of misappropriated PREPA moneys.

In the Title III proceedings, the judge estimated the size of the potential claims. In the Oversight Board’s view, the Revenue Bonds were non-recourse, so the Bondholders could only recover from their collateral, i.e., the moneys in the Sinking and Subordinate Funds. In the alternative, the Board and its allies argued that the Title III court’s $2.4 billion estimation should be affirmed. Finally, the Board contended that if there were a lien on Net Revenues, it would be avoidable as unperfected.

PREPA’s Revenues and Net Revenues are “special revenues” under the Bankruptcy Code. The Court found that as security for the Revenue Bonds, PREPA pledged the Net Revenues and not just those moneys that made it into the Sinking and Subordinate Funds. The Court then asked does the lien on Net Revenues also apply to future Net Revenues, i.e., Net Revenues that PREPA has not yet acquired? The Court concluded that the answer is yes.

Several courts have also considered the scope of a municipal revenue lien like the one in this case. And all of them have concluded (or at least implied) that a revenue lien can extend to revenues to be acquired at a later date. Puerto Rico law, the Bankruptcy Code, and prior case law all indicate that the Net Revenues that PREPA acquires in the future will be subject to the pledge of Net Revenues made by PREPA in the Trust Agreement.

The Court found that the Bondholders had a legal “right to payment” rooted in the covenants outlined in the Trust Agreement. Because the Revenue Bonds specify the amount that PREPA legally owes the Bondholders, there was no need to estimate the Bondholders’ “right to payment” under section 502(c).

What is the amount of the Bondholders’ claim on PREPA’s estate? The Court concluded that the proper amount of the Bondholders’ claim is the face value (i.e., principal plus matured interest) of the Revenue Bonds. According to that Trust Agreement contract, the face value of the Revenue Bonds (i.e., the principal plus matured interest) is just under $8.5 billion. So, that is the amount of the Bondholder’s claim on the Net Revenues. The Court expressly declines to tell the Title III court — in the first instance and without adequate briefing — how it should deal with the Bondholders’ Net Revenue lien during plan confirmation.

ELECTRIC VEHICLES

The United Automobile Workers union announced a tentative contract agreement at an Ohio factory making batteries for electric vehicles. The accord covers 1,600 workers at a Lordstown plant operated by Ultium Cells, a joint venture between General Motors and a South Korean partner, LG Energy Solution. It produces batteries for G.M. electric vehicles. If you remember, closures of General Motors plants especially a Lordstown car production plant were a major topic in the 2016 presidential campaign.

This announcement is a product of UAW efforts regarding their national contracts. When the plant opened in 2022 it was a non-union shop. They were brought into the U.A.W. under the terms of the national contract the union negotiated with G.M. last fall. That process was followed by negotiations around wages and working conditions specific to this location.

G.M. started production this year at a battery plant in Spring Hill, Tenn., and has another under construction in Lansing, Mich. The union said it planned to use this contract as a template as it negotiated local agreements at other battery plants that G.M. and several other rivals are building. 

Ford Motor plans two battery plants in Kentucky, one in Tennessee and one in Michigan. Stellantis, the maker of Chrysler, Jeep, Dodge, and Ram vehicles, plans two battery plants in Indiana. With the exception of one of the Ford locations, those plants involve joint ventures that were brought under the U.A.W. umbrella under the national contracts the union signed with Ford and Stellantis last fall.

This new plant is located adjacent to the aforementioned Lordstown plant. The U.A.W. said about 200 workers who had once worked at the Lordstown plant and had taken jobs at other G.M. locations would soon transfer to the battery factory so they could return to the area.

CALIFORNIA FOREVER

California Forever is the entity which has purchased some 50,000 acres of farmland in Solano County for the purpose of starting a new city from scratch. The proposal is for a city of some 400,000 all living and working there in a walkable environment. The plan requires a vote by County residents to approve the zoning changes which would be necessary to permit development. 

California Forever has now qualified its utopian city initiative for the November ballot. Voters will be asked to allow urban development on 27 square miles  of land between Travis Air Force Base and the Sacramento River Delta city of Rio Vista currently zoned for agriculture. The project has been controversial from the start as the group of sponsors used “cover” buyers to allow the land to be accumulated. Farmers unwilling to sell have been threatened with legal action. Polls have shown significant opposition to the plan.

That is what is motivating the sponsors to offer a giant youth sports complex; $500,000 in grants to local organizations; a pledge to create at least 15,000 jobs averaging $88,000 in salary; $500 million to assist with down payments for housing, scholarships and other benefits for residents; and $200 million to revitalize the downtowns of such nearby cities as Rio Vista, Benicia and Dixon.

COLLEGES

Moody’s Ratings has revised Nazareth University’s (NY) outlook to negative from stable and affirmed its Baa2 issuer and revenue bond ratings. The outlook revision to a negative from stable was largely driven by a multi-year trend of softening enrollment and declining revenue, contributing to weaker operating performance relative to historical levels for the foreseeable future. The College faces a high reliance on student charges, a small operating scale, and a high age of plant.

Union College is a small private, not-for-profit college located in Schenectady, NY. In fiscal 2023, Union generated operating revenue of $141 million, and it enrolled 2,072 full-time equivalent (FTE) students as of fall 2023. The College’s A1 rating was maintained but the outlook is now negative. The school faces the common demographic risks confronting all small colleges but its debt structure and projected operating pressure are all weighing on the credit.

Marshall University is the second largest public university in West Virginia with approximately 76% in-state students. In fiscal 2023, Marshall generated operating revenue of $292 million and for fall 2023 had total FTE enrollment of 9,716. Its rating was lowered from A2 to A3 by Moody’s. The downgrade is driven by a structural deficit which is likely to persist through at least fiscal 2026.

A key contributing factor to the deficit is the declines in enrollment and student revenue in recent years driven by weak in-state demographics including a projected decline in the number of high school graduates, low higher education attainment rates and a price sensitive student population. 

HOSPITALS

Community Health System (CHS) is a not-for-profit, tertiary hospital system located in Fresno, California. It operates three acute care facilities: Community Regional Medical Center (CRMC), CHS’s flagship tertiary/quaternary facility with 864-beds; Clovis Community Medical Center (CCMC), a community hospital in the neighboring town of Clovis with 352 beds; and The Fresno Heart and Surgical Hospital (FHSH), which operates 57 beds.

Moody’s recently affirmed its A3 rating on CHS’ debt but it changed its outlook to negative. Revision of CHS’s outlook to negative reflects normalized financial performance (absent non-recurring items) that remains well below historical levels together with ongoing headwinds that may make targeted improvements difficult to achieve, including a new California state law to go into effect next month that will raise the minimum wage to $25 over the next couple of years for most healthcare employees.  

Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. The two Portland-based organizations would create a large regional system with over $7 billion in operating revenue, 12 hospitals, 100-plus locations and approximately 30,000 employees.  OHSU is the state’s only academic medical center and medical school while Legacy operates an extensive network of tertiary medical centers, community hospitals and distributive outpatient sites.

HYDROPOWER

The U.S. Energy Information Administration released data showing the least hydropower was generated in the western United States during the 2022–23 water year (October 1 through September 30) since at least 2001. Western region hydropower generation dropped by 11% from the previous water year. The western United States—Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming, California, Oregon, and Washington—produced most (60%) of the country’s hydroelectricity last water year (2022–23).

A combined 37% of total U.S. hydropower capacity is located in Washington and Oregon.  Water supply was below-average in the Northwest region for the rest of the water year, which reduced hydropower generation. In the 2022–23 water year, 23% less hydropower was generated in Washington than the water year before, totaling 62.3 million MWh. Hydropower generation in Oregon also fell by more than 20% in the 2022–23 water year.

In contrast, hydropower generation grew in California last year. From December 2022 to March 2023, a series of atmospheric rivers drenched parts of the western United States, especially California, with record rain and snow. In the Colorado River basin, hydropower generation at the Glen Canyon Dam increased by 27% during water year 2022–23 compared with the water year before. However, water conservation efforts downstream at Lake Mead reduced water releases. The Hoover Dam, which forms Lake Mead, generated 11% less electricity in the 2022–23 water year than it did in the previous water year.

UPDATES

This week it was announced that the Gateway Tunnel project would receive an additional $6.88 billion federal grant to fund the project. The federal grant — the most ever provided to a mass-transit infrastructure project in the country — was the final piece of the funding puzzle for the long-delayed tunnel between New Jersey and Pennsylvania Station in Manhattan. The grant would increase the federal funding for the Gateway project to about $12 billion, about 70 percent of its estimated total cost. That total includes about $1 billion from Amtrak, which owns the existing tunnels and Penn Station.

The balance, along with any overruns, will be supplied by New York and New Jersey. Last week, the two states and the Port Authority received approval to borrow their shares of the project’s cost from the federal government. The work could begin as soon as this year and is scheduled to be completed in 2035.

The Central Florida Tourism Oversight District announced an agreement with a locked-in, long-term plan for expanding Disney World. At least for the next 15 years, the length of the new agreement, Disney can develop the resort without worrying about interference. It gives Disney the ability to build a fifth theme park, add three small parks, expand retail and office space and build 14,000 hotel rooms, for a resort total of nearly 54,000. The district noted that, under the agreement, Disney is obligated to spend at least $8 billion. 

California AB5 was passed in 2019 to classify ride share drivers as full employees with a minimum wage, workplace protections and other benefits. The law was immediately challenged by Uber and struck down by an appeals court after years of deliberation.  In an en banc appeal, an 11-judge panel of the 9th Circuit of Appeals reversed the first appellate decision, determining the law does not illegally single out transportation gig workers, but merely changes regulations for all independent contractors. 

The 2019 law was impacted by the approval of a statewide ballot measure Prop 22 in 2020. That allowed companies like Uber to consider their employees to be contractors. That measure is also being challenged in court, with a labor union arguing last week that it unjustly hampers future legislation.

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.

Muni Credit News June 10, 2024

Joseph Krist

Publisher

CONGESTION PRICING CRASHES

With only four weeks until its expected commencement, Gov. Kathy Hochul is moving to delay the imposition of congestion pricing. The stated issue is concern over the impact on the revival of the Manhattan economy. There are still significant commercial and retail vacancies. Broadway has been slower to come back than was hoped. At the same time, a record number of shows are projected to open this fall. Restaurants, especially those in areas like Manhattan’s Korean and Chinese districts, have already been under pressure. They see a fair chunk of their demand tied to folks driving into Manhattan for dinner and/or a show.

A reversal would create a $1 billion yearly gap in MTA funding. Ms. Hochul suggested a tax on New York City businesses. Such a tax would require the approval of the Legislature. Procedurally, this would require either passage of new legislation this week or a summer special legislative session in Albany. It would also shift the burden of raising revenue to taxpayers in the City from a suburban and often out of state payor base.

Several pieces of litigation against the charge are making their way through the courts. Postponement of the charge may provide an opportunity for the litigation to be settled or adjudicated. It is clear that an opportunity exists to refine the plan and its implementation. And it provides a chance to reset the efforts at steering public opinion. The Governor also acknowledged that the approval of the scheme came before the pandemic in 2019. “Workers were in the office five days a week; crime was at record lows and tourism was at record highs. Circumstances have changed and we must respond to the facts on the ground.”

One first step might be putting a different face of the MTA forward. MTA head Jarod Lieber has been a poor front man with his bureaucratic demeanor and insistence that demands for exemptions should not be accommodated. An opportunity has been created for a complete rethink of the use of the city’s curb space. Things like delivery zones and delivery time limits can be revisited. Manhattan has always had traffic issues but the role of ride sharing services and the delivery economy in the current level of congestion cannot be ignored.

In the end, the MTA has to deal with the fact that it has no credibility with New Yorkers – historically corrupt, often inept, and opaque at best. At one point, it was estimated that the MTA loses as much to fare evasion as it would get in congestion pricing. The answer – spend more on fancier turnstiles but only explore remedies which don’t follow enforcement. Lost in all of this is that the facilities of the Triborough Bridge and Tunnel Authority have been subsidizing mass transit for years.

It comes down to the fact that the MTA is not trusted to execute the program or account for the money. It reflects the failure to explore alternatives. It reflects a lack of political will to create a tax structure that shifts the cost of the service. Now, MTA will use the pause to justify its dismal record of providing handicapped access (recent estimates put the achievement of full ADA access out until 2050), the ridiculous execution of the Second Avenue subway and a long history of delays and cost overruns.

BAY AREA TRANSIT FUNDING

Legislation dubbed the Connect Bay Area Act, would have authorized a November 2026 vote on a multicounty tax measure to raise as much as $1.5 billion a year to help pay for train, bus and ferry operations and for initiatives to help better integrate the 27 agencies that deliver those services. The bill would also pay for some street and highway work.

The proposal offered several alternatives: a half-cent sales tax, a parcel tax on property owners, a payroll tax to be paid by employers, or a future vehicle registration surcharge. The bill provided that tax proceeds would be funneled through the Metropolitan Transportation Commission. It guaranteed that during the proposed tax measure’s first five years, at least 70% of revenue generated in a county would be invested in projects and programs that benefited that county. That percentage would rise to 90% after the initial five years.

BART’s deficit in the fiscal year starting July 1, 2026, is currently projected at $385 million, with annual shortfalls of $350 million or more continuing into the foreseeable future. BART has said it may have to shut down two of its five lines, close some stations and run trains as much as 60 minutes apart. San Francisco’s Municipal Transportation Agency, which runs Muni transit service, expects its deficit to top $200 million during the same year. SFMTA chief Jeffrey Tumlin said earlier this week that major service cuts could begin next year.

The legislation was ultimately pulled from consideration in the current session. We are interested in the fact that Moody’s picked this week to announce a change in its sector outlook for the public transit sector. In the wake of the pandemic, the outlook had been negative. Now, the outlook has been upgraded to stable. Moody’s cites the overall recovery rate of 79% from the pandemic bottom. It also takes into consideration the impact of some funding increases in several jurisdictions.

Ultimately, it may be an issue of timing but the current period in the budget season is generating funding uncertainty. It seems a bit of a stretch to look at the “pause” of congestion pricing in New York and its impact on the nation’s largest transit system and see stability. We agree that there is a chance that some funding initiative will appear on the California ballot in November. Currently, BART and Muni will still be facing funding uncertainty. Chicago is dealing with operational issues and proposals to merge the city and commuter rail providers into a structure that looks more like the MTA in New York.

It is positive that there are funding initiatives making their way through legislatures in New Jersey and Pennsylvania. Our argument rests more on timing. All of this adds up to a fair amount of uncertainty for major issuers within the sector. Uncertain seems like a fairer assessment while these highly politicized situations play out.

Moody’s identified eight transit providers as being more fare-dependent pre-pandemic: New Jersey Transit, the New York MTA, The D.C.-area WMATA, Boston’s MBTA, the Chicago Transit Authority, the Southeastern Pennsylvania Transit Authority, the San Francisco Bay Area Rapid Transit District and the Bay Area’s Caltrain commuter rail line. Every one of them faces funding uncertainty. That’s a good chunk of the sector. A lot of that uncertainty will likely be resolved by the end of the budget process. A sector outlook change makes more sense then.

FUEL FOR THE NATURAL GAS DEBATE

Utilities and fuel producers continue to grapple with the need to reduce emissions while continuing to rely on some fossil fuels for generation. The most obvious cases are where large base load generators which run on coal are replaced with new base load generators. The debate stems from the proposed use of natural gas as a replacement. Gas has cost and relative emission production improvement over coal. This has not reduced opposition to new natural gas development and pipeline infrastructure.

Much of that opposition stems from the production of methane as a part of the process of extracting natural gas. After CO2 emissions, methane has been the next favorite target of environmentalists as a contributor to climate change. As large entities like the TVA and some municipal utilities consider the development of gas fired plants, the debate has increased. Some new data developed for and released by the US Environmental Protection Administration (EPA) will only fuel the debate.

The data shows that oil and gas extraction and refining emitted more greenhouse gases into the atmosphere than any other industrial subsector last year. At the same time, methane emissions from gas extraction fell by 37 percent. Overall greenhouse gas emissions, which count the industry’s considerable carbon dioxide releases, also fell, but by a more modest 14 percent.

The center of the gas extraction industry is the Permian Basin in Texas. Data specific to that area reflect Total hydrocarbon production in the Permian more than tripled from 2015 to 2022, and gas production rose by 163 percent. The overall emissions intensity of Permian energy production fell considerably. Methane intensity of gas extraction fell by 78 percent, and overall greenhouse gas intensity fell by 47 percent.

HOSPITAL PRESSURES CONTINUE

This was a rough week for hospital credits as they deal with the lingering impact of the pandemic on demand and utilization. A series of ratings actions showed that the pressures are across the board and not dependent upon location and/or size.

The DCH Health Care system in Alabama operates a 787 bed regional referral hospital in Tuscaloosa and two small facilities in the county. S&P announced that the Authority’s bond rating was lowered to BBB+ from A- and a negative outlook was maintained. The negative outlook reflects the continual operating losses and the expectation of weak operating performance over the outlook period, which could further negatively affect unrestricted reserves. The negative outlook also reflects DCH’s lower days’ cash on hand (DCOH) and reserves.

Mount Sinai in NY is a major provider which has been under continuing pressure as the result of the pandemic. In addition, it has been caught up in a regulatory problem over its decision to close one of its acute care facilities in Manhattan. These factors have combined to lead S&P to put the system’s low investment grade ratings on Credit Watch negative. “The CreditWatch placement reflects our view that there is at least a one-in-two likelihood of a downgrade within the next 90 days reflecting a trend of lower earnings at the flagship, MSH, and uncertainty around receiving necessary regulatory approvals to close Beth Israel Medical Center in July,”.

Baystate Medical Center in Springfield, MA is the major tertiary provider central and western Massachusetts. It’s has been long a highly rated credit. This week, S&P put a negative outlook on the system’s AA+ debt. “The outlook revision reflects our view of Baystate’s continued operating losses and thin maximum annual debt service coverage in fiscal 2023 that have continued into 2024. The outlook revision further reflects our view of lighter days’ cash on hand for the rating,”

COLLEGE CLOSING

The nearly 150-year-old University of the Arts in Philadelphia will close its doors as we go to press. “UArts has been in a fragile financial state, with many years of declining enrollments, declining revenues and increasing expenses.” Currently, it has 1,149 students and about 700 faculty and staff members.  The Middle States Commission on Higher Education, which accredited the institution, indicated on Friday that it had revoked the University’s accreditation immediately.

The closing was the result of a mix of cash flow constraints that are typical of schools like UArts, which depend on tuition dollars. In addition, UArts faced significant unanticipated costs, including major infrastructure repairs. The school was created by the 1985 merger of the Philadelphia College of Art and the Philadelphia College of the Performing Arts.

Tuition for the 2023-2024 year was $54,010. The pandemic was especially damaging for this and other institutions whose courses were much less viable online. Looking forward, UArts like the many other schools faces the looming demographic cliff which is clouding the outlook for reversing demand declines.

U.S. Census data based on the 2020 census shows project steady declines in the years ahead. In 2022, there were 17.4 million people in the U.S. aged 14-17. That number is already trending lower and is expected to decline annually through 2035. That would be an 11% decline in the number of prospective students from current levels.

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

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.