Joseph Krist

Publisher

UPDATES

In our January 29, 2024 issue we discussed one Colorado River water users plans to retain water allotments even though they were not likely to use them. Now, the owner has announced that it had filed a motion to dismiss its diligence application for conditional water rights that date to 1966 and are associated with the construction of a 23,983-acre-foot reservoir on Thompson Creek. The motion was granted and the claim on water rights is now legally considered to be abandoned.

The Maricopa County Superior Court on Jan. 22 upheld the Arizona Corporation Commission’s approval for SRP to add capacity using natural-gas generators at the Coolidge Generating Station. The plant lies just east of the lower-income, historically Black community of Randolph. After an initial rejection of SRP’s plans, they reapplied and agreed to a modified plan under which SRP will reduce the number of new generators from 16 to 12, won’t add any more units there, and agreed to locate the new generators farther from the community and limit annual capacity to 30% averaged across the new units.

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DRUG COSTS

The North Carolina State Health Plan state funds to pay most prescription drug costs for 740,000 public workers, teachers, retirees and their family members. That puts the Plan in the position of having to fund the costs of an ever expanding portfolio of drugs prescribed to its members. The combination of demographic trends and drug development and marketing has increased demand for drugs. This is especially true of drugs now being offered for their weight loss inducing effect.

One class of drugs prominent in this emerging trend is that of drugs developed for diabetics which help weight loss. Much of the current demand for the drugs like Wegovy. This well advertised drug is used strictly for weight loss only on an off label basis. In June 2021, the insurance plan for North Carolina state employees was paying for 2,800 people to take weight-loss drugs. Last year, it paid for nearly 25,000. The Plan attributes some 10% of its prescription drug costs to weight loss drugs. Now the Plan will no longer cover these drugs.

It may seem a bit political but a truly diverse combination of private health providers is taking steps to limit payment for weight loss drugs for their covered employees. According to press reports, Ascension Health employs about 139,000 people and operates 139 hospitals in 19 states. Its employees must now pay out-of-pocket for GLP-1s such as Wegovy and Saxenda, which are FDA-approved for weight-loss, along with Adipex, Alli, Benzphetamine, Contrave, Diethylpropion, Imcivree, Lomaira, Orlistat, Phendimetrazine, Phentermine, Plenity, Qsymia, Resveratrol, and Xenical. The coverage exclusion will also apply to new weight loss drugs that become available in the future.

Even the Mayo Clinic will now provide a lifetime benefit of only $20,000 for the drugs for its employees. The University of Texas System Office of Employee Benefits stopped coverage of the drugs in September at the start of the fiscal year. Coverage of the medications for weight loss will end on April 1 in North Carolina.

LITHIUM

It is somewhat predictable that projects to derive lithium from California’s Salton Sea would be challenged by environmentalists. Last week ground was broken on a $1.85 billion construction project. By extracting boiling, mineral-rich brine from underground, the plant will create about 40 megawatts of steam power, then separate raw lithium out of the waste stream, and produce an expected 25,000 metric tons of commercial-grade lithium hydroxide each year. That’s enough for approximately 415,000 electric vehicle batteries. 

Now a coalition of environmental and “economic justice” advocates are threatening a lawsuit to halt construction. In this case the contention is that these mining activities will generate pollution which might be harmful to residents. Keep in mind that the existing situation at the Salton Sea is an environmental nightmare. The Salton Sea has been fed by pesticide- and fertilizer-laden runoff from area farms for more than a century as well as a sewage-polluted river from northern Mexico.

Under the current set of conditions, the dry lake bed of the Salton Sea generates huge amounts of dust which pollute the air with a variety of chemicals in the soil dating back to the formation of the Salton Sea. This would continue with or without the plant. The economic base which supported local residents is long gone.

An independent fiscal analyst hired by the county noted the project would generate nearly half a billion dollars over several decades in lithium production fees and property and sales tax revenues. An estimated 250 construction jobs and about 75 full-time jobs, with an average estimated annual salary of $85,000, are also projected to be created. Imperial County’s average income per capita in 2022 was $21,216.

There are more than a dozen existing geothermal steam plants at the Salton Sea. Steam is released from a boiling hot brine pool that sits as deep as 2 miles underground there, and which contains raw lithium and other minerals.

PARTISAN UTILITY MANAGEMENT

Nebraska is the only state with a one house legislature and the only state without an investor-owned electric utility. For many years, the elections for seats on the board of the state’s electric utilities were conducted on a non-partisan basis. From the perspective of the long-term investor, this was one of many factors which made the credits of the public power entities in Nebraska attractive.

Like so many utilities with aging generation stock, the public power agencies in Nebraska face some significant decisions. They were difficult enough given the many entrenched interests which might be impacted from increases in renewable power. More emphasis on ideology is not exactly what these agencies need in the current environment.

Now, partisan elections are being encouraged by sponsors a new bill which received a 29-16 vote in the Legislature which gave first-round approval to LB541 that would make elections for the Nebraska Public Power District and Omaha Public Power District boards partisan. The motivation is a belief that out of state “East coast money” is driving the election of people with a climate change agenda.

NPPD and OPPD have been holding public hearings dealing with proposals to increase the share of renewables in their respective generation bases. This has generated opposition. The utilities also depend on coal and nuclear for their baseload supplies. Both sides of the issue have seen increasing sums spent on power district board elections.

The bill is actually a softened version. Originally, a bill would have made all public power and irrigation district elections in the state partisan.

MENTAL HEALTH ON THE BALLOT

The ongoing dilemma as to how best to deal with homelessness and its companion issues of substance abuse and mental illness will be on the California ballot this March. In 2004, California voters approved Proposition 63, also known as the Mental Health Services Act (MHSA). The act taxes people with incomes over $1 million per year and requires that the money collected from the tax be used for mental health services. The tax typically raises between $2 billion and $3.5 billion each year. It is clearly not succeeding in its efforts to deal with homelessness.

Nearly all the money from the tax—at least 95 percent—goes directly to counties, which use it for mental health services. The rest of the money goes to the state to support mental health programs. Counties can only spend the MHSA money on certain types of services, but have flexibility in how to provide those services. The services include treatment for people with mental illness and prevention programs for people who may develop a mental illness. While counties can spend MHSA money on treatment for drugs and alcohol, the people receiving treatment must also have a mental illness.

Proposition 1 increases the share of the MHSA tax that the state gets for mental health programs from 5% to 10%. The proposition also requires the state to spend a dedicated amount of its MHSA money on increasing the number of mental health care workers and preventing mental illness and drug or alcohol addiction across communities. The increased state share will reduce the counties pool of funds to 90% of the tax.

Proposition 1 requires that counties spend more of their MHSA money on housing and personalized support services like employment assistance and education. While counties currently can use MHSA money to pay for these types of services, they are not required under MHSA to spend a particular amount on them now. Counties would continue to provide other mental health services under the proposition, but less MHSA money would be available to them for these other mental health services.

Proposition 1 would give up to $4.4 billion to the state program that builds more places for mental health care and drug or alcohol treatment. It would give $2 billion to the state program that gives money to local governments to turn hotels, motels, and other buildings into housing and construct new housing. The state government estimates that the bond would build places for 6,800 people to receive mental health care and drug or alcohol treatment at any one time. It also estimates that estimates the bond would build up to 4,350 housing units, with 2,350 set aside for veterans. The bond would provide housing to over 20 percent of veterans experiencing homelessness.

A November poll found that two-thirds of respondents support the plan.

REGULATION

In Iowa,  House Study Bill 608 would give the Legislature the power to intervene to halt eminent domain proceedings in the state. The bill would allow 21 members of the Iowa House or 11 Iowa senators to file a petition to halt an eminent domain process, stopping all associated hearings, trials or other proceedings. It would take a vote of at least 60% of the House and 60% of the Senate to resume the eminent domain proceeding. The eminent domain process could also continue if 60% of each chamber sign a letter attesting that they believe the use of eminent domain is constitutional in that case.

The target of the law, Summit has delayed its planned operation date for the pipeline, citing regulatory difficulties in several states. It now does not expect it to become operational until 2026, two years later than initially projected.

Two companion bills under consideration in the Virginia legislature would “Establishes a procedure under which an electric utility or independent power provider (applicant) is able to obtain approval for a certificate from the State Corporation Commission for the siting of an energy facility rather than from the governing body of a locality.” The legislation comes as some shore communities are attempting to regulate the siting of transmission lines related to wind generation. The primary opposition is from Virginia Beach.

P3 REVERSAL

In October, the Louisiana legislature approved a public-private partnership to build a $2.1 billion toll bridge over the Calcasieu River after officials renegotiated an initial deal rejected in October. The new structure would replace a 71 year old bridge which is well beyond its useful life. The renegotiated agreement would expand a 25-cent toll with a vehicle size limit for locals to all noncommercial vehicles in a 5-parish area. It would reduce the toll for large trucks from $12.50 with a transponder to $8.25. Large trucks without transponders would pay $12.36 instead of $18.73.

The new deal also returns 15% of any toll profits to the state, rather than no equity distributions included in the agreement presented in October. It also reduces LA DOTD retained costs from $415 million to $280 million, contingent on approval of design changes that would eliminate the need to relocate railroad and pipeline infrastructure. The state’s funding for the project remains essentially the same as proposed in October, with $800 million in public funds from federal grants, $250 million in vehicle sales taxes, $85 million in State General Obligation Bonds, and $150 million from the State General Fund.

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

GOVERNMENT

CHICAGO CREDIT CURVE CONTINUES UPWARD

Another Chicago issuer got some good ratings news this week following on the improvement in the Chicago Public Schools credit. This time it was the City of Chicago itself. Moody’s Investors Service has revised Chicago (City of), IL’s outlook to positive from stable and affirmed the Baa3 issuer and the Baa3 rating on the city’s general obligation unlimited tax (GOULT) debt.

Moody’s based the outlook revision to positive on the basis of what they see as strengthened pension contribution practices and positive trends in the city’s financial position. A new pension funding policy was adopted in the fiscal 2023 budget under the prior administration. The reduction in uncertainty over whether a new Mayor and administration would continue those practices has been addressed. Those practices are continued in the fiscal 2024 budget which calls for pension contributions designed to keep the net pension liability (GASB NPL) from growing.

Moody’s also has affirmed the Baa1 rating on the city’s water revenue bonds, the Baa1 rating on senior lien sewer revenue bonds, and the Baa2 rating on the junior lien sewer revenue bonds. It is clear from Moody’s that the exposure of the sewer and water revenue bonds to the city’s credit challenges is the primary factor constraining the ratings despite otherwise strong attributes of the systems.

WEALTH TAXES

So far in 2024, lawmakers in 10 states – California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington – have proposed new taxes on “wealth”.  They are all variations on a concept driven primarily by Senator Elizabeth Warren. Each year an individual taxpayer would be assessed income taxes on increases in the value of assets they own. If their net worth exceeds a certain amount, the year over year increase would be treated as income for tax purposes.

One of the main sticking points holding back any effort to tax wealth is that the tax would be imposed merely because of a change in asset value. It would not be based on whether the change in value had actually been realized. No states currently assess any taxes on a living individual’s net worth or unrealized capital gains. 

Texas voters approved an amendment to their state constitution in 2023 which would effectively prevent taxes based on wealth or net worth. A campaign is underway which is expected to get an initiative on that state’s ballot in November which would eliminate the state’s capital gains tax. The Connecticut legislature is expected to consider a wealth tax which would eliminate the carried interest tax loophole.

WHAT ARE THEY THINKING?

One of the hallmarks of the U.S. securities markets is the respect in the U.S. for the rule of law. It has always been a significant factor driving the location and growth of the U.S. economy. Now, some are so ideologically driven that they seriously propose steps which would allow governments to ignore the rule of law. The most egregious one which we have seen has begun making its way through the Utah legislature.

The Utah Constitutional Sovereignty Act, or SB57, would allow lawmakers to reject any action from the federal government they view as unconstitutional, unless a court rules otherwise. Lawmakers could “prohibit the enforcement of a federal directive within the state by government officers if the legislature determines the federal directive violates the principles of state sovereignty”.

It is another attempt to limit the regulatory power of the federal government based on the 10^th Amendment to the U.S. Constitution. It argues that only federal actions specifically authorized in the Constitution are legal. Many fear the legislation could be applied to any federal action which two thirds of the Utah Legislature does not like. Its sponsor claims that “we simply want to look at a process whereby we can vet, very carefully, any of those situations” “where we feel like the federal government steps over and reaches in and does some harmful things to our citizens, our state, our businesses. 

That is a pretty broad field of play and that is the concern. The claim is that it would rarely be invoked but that is always the claim of legislative sponsors of legislation designed to fight policies in court which they cannot win at the ballot box. The votes come as Utah’s fossil fuel industry has been fighting regulations limiting its ability to export its products from their landlocked locations. Some of those are federal but state permit issues are what has killed proposed shipment infrastructure for the export of Utah fossil fuel products.

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ENVIRONMENT

SOLAR

Recently we noted the role of Arizona’s public power entity as a hindrance to the use of residential solar power. Other municipal utilities are moving the other way. The latest example is CPS Energy, San Antonio’s municipally owned electric and natural gas utility. It announced the acquisition of the capacity of a 150 MW solar generation project in rural Texas. The utility currently has 551 megawatts of operating solar capacity and solar energy makes up roughly 7% of CPS Energy’s current power generation portfolio.

WATER

Here’s one example of why the current negotiations over the redistribution of water from the Colorado River and its surrounding region are so fraught. A private oil shale development company is seeking approval for the development of a reservoir on land under the supervision of the Bureau of Land Management. The particular tract for which the company is seeking a permit is within the boundaries of an area that the U.S. Forest Service and BLM are proposing to withdraw from eligibility for new oil and gas leases.

Conditional water rights are a unique provision of Colorado law which allow a would-be water user to reserve their place in the priority system based on when they applied for the right — not when they put water to use — while they work toward developing the water. Older waters rights get first use of the river.  An applicant must file what’s known as a diligence application with the water court every six years, proving that they still have a need for the water, that they have taken substantial steps toward putting the water to use and that they “can and will” eventually use the water. 

When the holders of conditional rights with older priority dates finally begin diverting water they have not used in decades, they may force junior rights holders to stop using water. That could potentially curtail users that have been receiving that water in some cases for decades. It has been estimated that there were conditional water rights associated with oil shale development on impacting 736,770 acre feet of water to be stored in 27 reservoirs in the mainstem of the Colorado River basin. 

WIND

The New Jersey Board of Public Utilities has awarded two new contracts for electricity from offshore wind farms. The projects are being undertaken in the wake of the decision by a previous developer to abandon its efforts to produce power from offshore windmills. At the time, the developer cited increases in costs due to general inflation, supply chain issues and interest rates.

The new contracts reflect those factors. The Board of Public Utilities estimates that under the contracts New Jersey awarded the monthly, the monthly bill of the typical residential customer in New Jersey would go up by $6.84. The two projects together would be capable of producing about 3,470 megawatts of electricity. New Jersey remains contracted with another offshore project, Atlantic Shores, for 1,510 megawatts. Combined, the three projects could produce more than one-third of the state’s 2040 target. 

On the West Coast, the Humboldt (CA) Bay Harbor District was awarded $426.7 billion dollars in federal grant funds to construct its offshore wind terminal in far Northern California. The District is constructing a terminal to serve the offshore wind generation industry. It plans to partner with an existing private terminal operator which is supplying $422 million of its own funds for the project.

Humboldt Bay is situated to be the first site to build a terminal for the construction and deployment of commercial offshore wind turbines on the West Coast. It will include a 1,200 foot wharf. The total cost is projected at $853 million. The target operation date is 2028. The Bureau of Ocean Energy Management auctioned off rights for the first offshore wind farms on the West Coast in December of 2022, and additional auctions are planned off the coast of Southern Oregon.

COAL

In 2020, the Wyoming legislature passed a bill intended to compel utilities to retrofit coal plants with carbon capture technologies rather than retire the facilities. It was portrayed as an effort to ensure reliability in a state where the coal industry is under attack. What was not clear to many was that costs associated with carbon capture adaptation could be passed through to customers. Now the potential cost to consumers is beginning to be assessed against utility ratepayers.

State regulators this month approved a $1.1 million annual “low-carbon” surcharge for Black Hills Energy. According to preliminary filings with the state, if the utilities move forward on a state-imposed mandate to retrofit coal-fired power plants with carbon capture technology the state’s ratepayers, it could mean up to $1 billion in additional costs for Black Hills Energy’s 145,000 customers in the state, and more than $2 billion for Rocky Mountain Power’s customers.

Black Hills Energy operates two units while Rocky Mountain Power operates three coal-burning units in the state that are subject to the law. The reality is that the real hope held by supporters is that federal funding would limit the impact on ratepayers. They believe that the recently expanded federal “45-Q” tax credit program for carbon capture facilities, along with technological developments could reduce the ratepayer burden.

The one common thread to the debate between “green interests” and the legacy fossil fuel interests is the hope that someone else will pay the bill. Electric cars, solar, wind, heat pumps all currently cost money and remain out of reach to many. A “surcharge” to keep the coal industry alive in Wyoming would likely deter potential large customers. Corporate customers are in a position to resist the surcharge effort especially if they have power supply agreements for power generated at non-fossil fueled plants.

It’s a prime example of the challenges facing climate activists, ratepayers and suppliers during the energy transition.

DALLAS FACES ENVIRONMENTAL REFUND OBLIGATION

In 2007, a gas company paid the City of Dallas $19 million for the right to drill for natural gas on city park land. In 2013, the Dallas City Council voted to stop renewing leases on land amid new restrictions on drilling within the city. That move led to a 2014 lawsuit filed by Fort Worth-based Trinity East Energy, LLC. A Dallas County jury in February 2020 agreed with Trinity East Energy that Dallas had improperly denied its permits to drill on city-owned park land and nearby private land in 2013.

The state Supreme Court rejected the city’s petition for review of those decisions in September 2023 and also declined another city motion for a rehearing of its petition to review the case on Dec. 29.  Now, the Council has is scheduled to vote Wednesday whether to approve up to $55 million in bond money to cover the total costs of the judgment. It would be the use of an old tool, the judgment bond which was designed for the occasional unfavorable legal judgment.

CHICAGO NATURAL GAS BAN

The new mayoral administration in Chicago has introduced the Clean and Affordable Buildings Ordinance (CABO). It would eliminate harmful natural gas emissions by setting an indoor emissions limit banning the combustion of fuels that emit more than 25 kg/btu – effectively requiring all new construction to switch to clean power sources like electric or other high efficiency systems. That is the same standard New York City set in a law enacted in 2021.

The following are exempted from the proposed emissions standard: commercial cooking, emergency backup power, crematoriums, wood fireplaces, industrial production, commercial laundry and labs and hospitals. The ordinance is not designed to force anyone to “give up their gas stove”. It is only targeted at new construction (including new additions to existing buildings). By amending building codes, the ordinance is designed to be immune to legal challenges to other “gas bans” imposed across the country. It would go into effect one year after passing City Council, in line with Chicago’s three-year building code cycle.

CAT BONDS

Since Hurricane Ian in 2022, the Florida Hurricane Catastrophe Fund has issued $1.9 billion in reimbursements to insurers and anticipates additional payments amounting to $8.1 billion by 2028. The fund also continues to make payments related to Hurricanes Irma and Michael, which struck in 2017 and 2018, respectively.

Now, the Fund plans to issue debt to provide between $1.5 million and $3 billion of new funding. According to the State, the bonds can be fit into the program’s existing debt structure which means that assessments to support bond repayment do not have to increase.

According to the Insurance Information Institute, the average insurance premium for homeowners in Florida has spiked by 42% year-over-year, to an average of $6,000 in 2023. At least a dozen insurance companies have stopped issuing new policies in Florida since January 2022 and three companies have announced their intentions to withdraw from the state in the past year.

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TRANSPORTATION

The U.S. Department of Transportation (DOT) today announced the approval of $2.5 billion in private activity bonds authority allocated for the Brightline West High-Speed Intercity Passenger Rail project connecting Las Vegas, Nevada, and Southern California. The 218-mile, high-speed rail line will primarily run along the I-15 median with trains capable of reaching 186 mph or more, cutting the trip to two hours – half the time to travel by car. 

DOT previously approved a private activity bond allocation of $1 billion for Brightline West in 2020, bringing the total allocation for this project to $3.5 billion. In December, DOT also awarded a $3 billion grant from President Biden’s infrastructure law to the Nevada Department of Transportation for this project. In June, DOT awarded a $25 million grant to San Bernardino County Transportation Authority (SBCTA) through the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) Program that will be used for the construction of the Brightline West stations in Hesperia and Victor Valley, California. 

We continue to note that high speed rail in the US continues to need public funding support. Both this project and its Florida counterpart were advertised as projects which were private which could serve as models for the future expansion if high speed rail. The reality has been that neither project would have happened without significant support from the Federal government.

MILEAGE FEES

Members of the far-right Arizona Freedom Caucus (in the state legislature) have offered a bill which would ban state, city, town and county governments from creating any tax based on miles traveled in a vehicle. The bill also would ban any of those government entities from tracking the number of miles a driver has traveled through odometer readings, traffic cameras or using phone tracking data.  It also includes provisions aimed at barring policies that reduce how much people drive.

The sponsor believes that mileage fees are part of a conspiracy to take away people’s freedom of movement. They believe that it is part of a plan to “force” people to use public transit and ban personal vehicles. A concurrent resolution being floated with the bill would put the issue of mileage fees to a ballot in November. 

PURPLE LINE

The ongoing saga of the effort to complete a light rail system in suburban Maryland known as the Purple Line continues. The latest turn of events is the news that Fitch Ratings had placed its ratings on debt issued to finance the project on negative outlook. The Negative Outlook reflects the project’s complex construction works that have led to delays approaching the design build (DB) and lenders’ longstop dates for a second time in the short two-year span since financial close on the first “renegotiation” of the P3 agreements behind the project.

The outlook change is an indication of the desire to see this impending second “renegotiation” concluded and executed. The removal of this source of uncertainty would alleviate the pressure on the project’s ratings. Fitch Ratings has affirmed the ‘BBB’ rating on approximately $100 million of private activity revenue bonds (PABs) series 2022A (green bonds) and $543.5 million of series 2022B PABs (green bonds) issued by Maryland Economic Development Corporation on behalf of Purple Line Transit Partners LLC (PLTP; limited liability company) for the Purple Line light rail transit (LRT) project (the project).

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

Joseph Krist

Publisher

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RATINGS

CHICAGO PUBLIC SCHOOLS

Moody’s Investors Service has upgraded the Chicago Board of Education, IL’s (CPS) issuer rating and debt ratings to Ba1 from Ba2. It has long been a troubled credit but never lost market access. That is reflected by the district having approximately $7.8 billion of general obligation unlimited tax (GOULT) debt outstanding in total. Moody’s based the upgrade on improvements in the CPS operating fund net cash and improved cash flows as reflected in part by reduced cash flow borrowing.

Moody’s also cited material increases in operating fund net cash, which is estimated to have reached about 13% in fiscal 2023 from under 5% five years prior. Enrollments are always a concern in aid-dependent urban school districts. This year, the actually increased by 1,000. It is a modest increase for sure but a welcome interruption to long-term trends. This will generate a small aid increase but also provides a higher base for adjustments if enrollments drop again.

The positive news doesn’t stop there. Moody’s maintained its positive outlook as a reflection of a trend of strengthening fund balance and net cash. At the same time, it’s less than investment grade current rating is weighed down by the fact that the district’s operating fund net cash remains the lowest of large school districts. Its limited available liquidity with a general fund net cash balance of less than 5%, and a high leverage ratio of nearly 500% of revenues are significant hurdles.

WMATA

The last few years have not been kind to the Washington Metropolitan Area Transportation Authority. Maintenance issues as well as issues with service and safety had put the Authority in a difficult spot. The pandemic led to extended stay at home provisions for many Federal government workers who mad up a good portion of ridership. Ridership and passenger revenues remain well below the pre-pandemic peak. Average daily rail and bus ridership experienced annual gains in 2023 but remain at approximately 60% of 2019 levels. Passenger fare revenues have also been negatively affected by a higher proportion of shorter-distance flat fare trips.

At the core of the problem is the fact that there is no predominant established reliable revenue stream to support operations. Farebox revenues cover only about 20% of expenses. This makes the system reliant on funding from state and local governments served by it. The District of Columbia, Montgomery and Prince George’s counties in Maryland, and in Virginia the cities of Alexandria, Fairfax, Falls Church and the counties of Arlington, Fairfax and Loudoun) are legally obligated (subject to certain restrictions) to cover the operating and capital costs of the transit system from their respective legally available funds, subject to annual appropriation.

WMATA has put up a budget for FY 2025 which covers a $750 million budget gap. Without additional funding subsidies from those governments, WMATA projects service cuts, which include the elimination of rail service after 10pm, the closure of 10 rail stations, increasing rail headway on all lines (ranging from 17% to 67%), and a one-third reduction in bus service. Subsidy increases from participating jurisdictions are subject to a 3.0% annual statutory cap under the terms of a 2018 dedicated capital funding agreement.

All of this contributed to Fitch Ratings’ move to put the Authority’s AA and AA- ratings for its two credits on negative outlook. It comes in the midst of the budget processes of all of the relevant governments including the States of Maryland and Virginia. Cutting service and raising fares is a recipe for trouble.

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SOCIAL

CHILD FOOD BENEFITS

The U.S. Department of Agriculture (USDA) administers a new program which provides funds to families with children who are enrolled in school breakfast and lunch programs will begin this summer. Summer EBT provides grocery-buying benefits to low-income families with school-aged children when schools are closed for the summer. Through this new program Summer EBT, states will provide families with $120 per eligible child for the summer to buy food at grocery stores, farmers markets or other authorized retailers – similar to how SNAP benefits are used. Native American tribes will utilize the WIC program.

Funding in the form of grants was authorized by Congress in 2023. An initial “test” for the current proposal was deemed a success leading to the rollout of the plan nationwide. Yet another time, a veritable list of usual suspects among the states has declined to participate in the program. They are essentially the same states who are ideologically opposed to any expansion of health or social services spending. Even when the Feds are covering costs with free money. Which states said no? AL, MS, ID, IA, GA, TX, SD, NE, WY, VT, AR, LA, FL, OK. They all have conservative Republican governors.

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GOVERMENT

NYC BUDGET

Mayor Eric Adams proposed a $109 billion budget for fiscal 2025. The mayor announced that the city would be receiving $2.9 billion more in expected tax revenues over the 2024 and 2025 fiscal years than initially expected. The City Council had projected some $1.5 billion of unanticipated tax revenues. The new number is good news but the Mayor’s handling of the issue of migrants and the budget is creating a whole other range of problems.

Since the first of the year, the Mayor has been announcing proposed draconian cuts in services in an effort to garner support for state and federal assistance. In the recent run-up to the budget, he has backpedaled on several of those proposed cuts to education, sanitation, and police and fire services. The Mayor’s lessening credibility on the City’s financial position and outlook will make his budget process much more difficult.

It has become clear that there will be no federal windfall for the city. This puts Albany center stage in the Mayor’s efforts to get the State to cover more of the costs of the migrants. He does not have a lot of credibility with the State Legislature already and this budget will not enhance his position. After the efforts to export the migrant problem to upstate communities, his “discovery” of new money will create a higher hurdle to overcome.

The proposed city budget comes on the heels of Gov. Kathy Hochul’s budget proposal for the State that included $2.4 billion to help New York City manage its migrant crisis — a $500 million increase over last year’s allotment. Nevertheless, the Mayor is holding out for more. Mr. Adams said that if the city received enough funding from the state, he would cancel further budget cuts that were planned for April. In the meantime, city agencies have reduced management and planning flexibility until the funding level is established. It is leading to worsening provisions of public services.

The Mayor comes into this budget cycle with lower credibility and an increasingly problematic federal investigation into his campaign financing practices. His relationship with an increasingly assertive City Council is poor and his budget plan is not helping his credibility with that body. It also does not help to find that the City has been providing inaccurate data regarding migrants and homelessness to make the situation look more favorable.

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ELECTRIFICATION

CHARGING INFRASTRUCTURE

So far only New York and Ohio have opened charging stations using bipartisan infrastructure law funding, and a handful of other states have broken ground on their EV projects. Now, the U.S. Department of Transportation announced the selection of 47 EV charging projects to receive nearly $623 million in funding under the 2021 bipartisan infrastructure law. As of last January, there were only about 20,000 publicly accessible, high-speed Level 3 chargers across the country.

The National Renewable Energy Lab estimates the country will have another 40 million EVs on the road over the next 25 years. It estimates that there would be a need for at least 182,000 Level 3 chargers across the country by 2050 to accommodate them. The issue gains greater currency as EV purchases grow and the pool of driving and operating issue increases. Currently, the press is full of reports from unhappy EV owners who forgot that batteries of any kind do not do well in sub-freezing conditions. That will increase the demand for charging at less distances between them.  

GENERATION

The U.S. Energy Information Administration released its most recent Short Term Energy Outlook. EIA projects solar power to be the leading source of growth in electricity generation in both 2024 and 2025 as 36 gigawatts (GW) and 43 GW of new solar capacity come on line, respectively. the solar share of total generation is expected to rise to 6% in 2024 and 7% in 2025, up from 4% in 2023. This will occur as overall U.S. electricity generation will grow by 3% in 2024 and be unchanged in 2025. 

EIA expects that electricity generation from coal will decline by 9% in 2024 and by 10% in 2025, due to a combination of higher costs compared with renewables and another 12 GW of coal-fired capacity retiring over the next two years. U.S. coal production will decline by more than 90 million short tons (MMst) to less than 490 MMst in 2024 and then fall below 430 MMst in 2025, the least coal produced in the United States since the early 1960s.

Electricity generation from natural gas will be unchanged in 2024 and 2025 compared with 2023. U.S. production of dry natural gas is estimated to increase between 1% and 2%, or about 1.5 billion cubic feet per day (Bcf/d) in 2024 and 1.3 Bcf/d in 2025, down from growth of 4.0 Bcf/d in 2023. The slowing growth reflects a drop in natural gas production associated with oil drilling in the Permian Basin.

Something to think about is after all of the efforts and ink spilled on the changing climate and the role of fossil fuel, EIA forecasts crude oil production in the United States reaching 13.2 million barrels per day (b/d) in 2024 and more than 13.4 million b/d in 2025, both of which would be new records.

SALT RIVER PROJECT VS. ROOFTOP SOLAR

Arizona’s Salt River Project is a public utility which has been less than enthusiastic about the adoption of rooftop residential solar. The use of solar in the Valley of the Sun has seemed to be a no-brainer but utilities have done all they can to make rooftop solar less economically attractive to its retail customers. The key to the situation lies in the methodology SRP has adopted to determine how much it pays for solar generated power.

Now, two customers and an advocacy group are challenging SRP’s current rate structure. They claim that the current scheme violates regulations because customers who buy some power from SRP but have rooftop solar are charged a different price for SRP generated power than those customers who do not have rooftop solar. They are asking the Federal Energy Regulatory Commission (FERC) to find that SRP’s current rate structure violates the Public Utility Regulatory Policies Act (PURPA).

The challengers contend that through the fixed charges, SRP’s solar customers with service at 200 amps or less pay $12.44 more a month than non-solar customers for the same amount of SRP-provided electricity. The challengers also claim that PURPA requires SRP to buy electricity from qualifying facilities at the utility’s system-wide marginal cost. Instead, the contention is that the price established by SRP is based on one particular low-cost generator.

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ENVIRONMENTAL

CLIMATE ON THE BALLOT

Washington voters will have the chance to repeal or uphold the Climate Commitment Act. The climate law requires the state’s biggest polluters, such as power companies and oil refineries, to start paying for their greenhouse gas emissions through buying allowances in auctions. So far, the auctions have raised roughly $1.8 billion. Organizers of an effort to repeal the 2-year-old climate act collected more than 400,000 signatures to put an initiative on the ballot.

Revenue from the program is earmarked to go back into green state programs such as buying electric school buses and making public transit free for children. Opponents blame the state’s cap and trade scheme for rises in gasoline and food. The initiative is technically an initiative to the Legislature. This means that the legislature can adopt the initiative as written, reject it or refuse to act on it. Voters will get a chance to vote on the initiative if the Legislature rejects it and refuses to act on it.

PREEMPTION CUTS BOTH WAYS

A lot of the efforts at preemption have been directed at overriding local ordinances and regulatory processes which have limited the use of fossil fuels. In those instances, legislation has generally been directed at localities and zoning and siting regulations which fossil fuel supporters feel limit their ability to extract their various substances and produce fuels and other products. Those efforts were always decried by environmentalists.

Now, the shoe is on the other foot. This time it is green energy advocates who are upset over efforts to move the regulation of renewable generation assets to the state level. The efforts reflect the perceived need to develop renewables to meet promised deadlines for carbon neutrality which have been made at the state level. The latest example is in Michigan where the legislature is considering bills which would put the authority for siting renewable energy projects with the State.

This would enable the State to effectively override local zoning ordinances which have been used to slow the adoption of solar and wind. In many cases, willing sellers or lessors who hope to retain their farm land are facing local limits on energy development. Michigan has adopted a plan committing to carbon neutrality by 2050. They won’t get there without solar and wind power.

INSURANCE

The Florida Senate Banking & Insurance Committee unanimously passed two bills that would allow pricier homes to be covered by Citizens Property Insurance, a state-run company, and to provide $100 million for a grant program to improve homes’ protection against windstorm damage.  SB 1106, raises the cap on homes that can be covered by Citizens from $700,000 to $1 million. The bill would place a surcharge of up to $2,500 on homes above $700,000 to keep Citizens from competing with private carriers. 

SB 7028, puts $100 million toward the My Safe Florida Home Program. That program offers up to $10,000 in matching grant funds to homeowners who make windstorm mitigation improvements, such as roof, windows and door upgrades. It’s clear that the insurance market continues to reflect a worsening perception of risk and the continuing withdrawal of major private insurers from the Florida market.

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 BUDGET

Governor Newsome released his proposed budget for fiscal 2025. The 2024-25 Governor’s Budget proposes spending of $291.5 billion in total state funds, consisting of approximately $208.7 billion from the General Fund, $80.8 billion from special funds, and $2 billion from bond funds. Revenues for the General Fund include a transfer from the Budget Stabilization Account/Rainy Day Fund of $12,026 billion. Some 53% of GF revenues are projected to come from the personal income tax.

The budget shortfall facing lawmakers in 2024—estimated at $37.9 billion—is rooted in two separate but related developments during the past two years according to the Governor. They are the substantial decline in the stock market that drove down revenues in 2022 and the unprecedented delay in critical income tax collections.  The State pushed back its filing deadline until this past October as the State dealt with a number of natural disasters in the normal tax season.

The new estimate is significantly lower than the $68 billion gap estimated by the State Legislative Analyst in the fall. Last year, due to federal tax deadline delays and California’s subsequent conformity, the majority of the state’s revenues did not arrive until October and November. That means the correction that would have come as part of last year’s May Revision is instead being made in this January budget.

Had the filing delay not been in place, most of the revenue drop would have been reflected in lower tax receipts before the May Revision and incorporated into the 2023 Budget Act projections. This would have resulted in a larger budget gap in 2023, additional solutions to close it, and a smaller shortfall for 2024 than what is now faced. 

The governor proposed funding nearly $19 billion of the gap with drawdowns of the State’s reserves. The remainder of the gap would be addressed by reducing $12 billion from planned spending and delaying a little more than $7 billion in spending commitments into fiscal year 2026. The reductions are concentrated in cuts to spending on education, housing, and climate. In the smoke and mirrors category, using Prop 2 Debt Repayment Funding ($1.3 billion) to fund pension payments and delays in the distributions of funds to transit systems and to the state university system ae employed. 

NYC PROPERTY TAXES

The real property tax (RPT) is New York City’s largest source of tax revenue, comprising 44 percent of the City’s tax revenue collections in fiscal year 2023. Covid-19 pandemic’s effect on city property values led to swings in RPT revenue in 2022 and 2023, and RPT current forecasts through 2027 anticipate slower growth in tax collections. Property tax collections increased relatively steadily by an average of 6.4 percent per year from 2012 through 2021.

In anticipation of major declines in rental income for commercial properties and residential apartment buildings, the Department of Finance (DOF) sharply reduced the assessment of property values that were used to calculate the 2022 tax bills, which led to a 6.0 percent decrease in property tax collections that year. Annual RPT revenues rebounded in 2023, rising by 7.0 percent to a level just above 2021 revenues. Some of the rebound reflected adjustments to the prior year’s assessment adjustments.

In the current 2024 fiscal year, IBO forecasts a 3.6 percent increase in property tax revenue, followed by average annual growth of 3.2 percent from 2025 through 2027. This is about half of the annual growth seen in the decade prior to the pandemic. The bulk of revenue growth in IBO’s forecast comes from apartment buildings and commercial and industrial properties, which account for, respectively, 38 percent and 34 percent of aggregate gross levy growth from 2024 through 2027.

The IBO addressed the issue of office attendance declines and IBO’s baseline forecast accounts for some office market softening by projecting 2 percent annual growth in Manhattan office values throughout the forecast period, rather than the 5 to 6 percent growth seen before the pandemic. To address concerns about the issue, IBO tested by incorporating a 6 percent annual decline in the Manhattan office gross levy—rather than a 2 percent annual increase—calling this the “office doomsday” scenario. This substantially reduces IBO’s RPT forecast: IBO had baseline forecasted about $35.9 billion in revenues in 2027, and 3.2 percent annual growth from 2024 through 2027. But with this more pessimistic office outlook, IBO forecasts $1.3 billion lower revenues in 2027, and only 1.9 percent annual growth.

TAXES ON THE 2024 BALLOT

San Diego County voters will have the opportunity to vote on a proposal to raise local sales taxes to fund transportation improvements. The initiative hopes to provide funding for shoring up the coastal railroad route that is the only connection for freight and passenger trains between San Diego and Los Angeles. Previous efforts to get voter approval for taxes for transit failed. One lost at the polls by missing a two-thirds vote requirement. The other failed to get enough signatures to make the ballot.

This initiative is a “citizens initiative” which under California law requires only a simple majority vote – 50%+1 – in order to be enacted. The failed vote actually got a 57% majority so there is a real likelihood of passage.

NUCLEAR

The recent halt to plans for a demonstration small modular reactor in Idaho may have fallen through but proponents of the technology soldier on. The U.S. Nuclear Regulatory Commission (NRC) has voted to issue a construction permit to a private concern to develop a demonstration reactor to be built at the Heritage Center Industrial Park in Oak Ridge, TN. The project is the first non-water-cooled reactor to be approved for construction in the U.S. in over 50 years. 

The planned reactor will instead be a fluoride salt-cooled, high-temperature reactor (KP-FHR) technology. A separate application for an operating license and subsequent NRC approval will be required before operations can commence. Oak Ridge is no stranger to the development of new nuclear power technology. The funding is provided in part from a Department of Energy Advanced Reactor Demonstration Program (ARDP) award and will involve assistance from Oak Ridge National Laboratory and Idaho National Laboratory.

ESG, IDEOLOGY AND BACKLASH

We saw recent comments made by local municipal borrowers in Oklahoma after they had to delay bond issues and change underwriters due to anti-ESG legislation enacted in Oklahoma. The State Treasurer had released a list of financial institutions prohibited from doing business with governments in the state due to his determination that the companies violated the state’s 2022 Energy Discrimination Elimination Act by boycotting energy companies. The Texas Attorney General began maintaining his own list in 2021. There are similar stories of delayed issues there as well.

The Oklahoma localities are lobbying for changes to the law. At the time of enactment, it did not appear that the issue of local bond issuance was a paramount concern. Now there is sentiment being expressed that the State could do what they want with their resources but that the law was not intended to raise costs for local issuers and taxpayers.

Even at the state level, the policy has created issues. The Oklahoma Public Employees Retirement System voted 9-1 in August to retain BlackRock Inc. and State Street Corp. as investment advisers even though those banks were on the treasurer’s blacklist. A retiree and former president of the Oklahoma Public Employees Association in November filed a lawsuit against the state and its treasurer, calling the state’s anti-ESG legislation “government overreach” and a violation of free speech. The ERS cited a potential negative impact from the policy.

CLIMATE LITIGATION

The latest attempt to move lawsuits filed by states and localities against the fossil fuel industry into federal courts has failed. The U.S. Supreme Court declined to take up a challenge to a lawsuit brought by Minnesota Attorney General Keith Ellison against six fossil fuel companies. The industry has pretty consistently failed in its attempts to have suits dismissed at the state level. The case that has gone the furthest was filed by the city and county of Honolulu. That state’s Supreme Court recently ruled that oil companies did not have the arguments necessary to dismiss the case.

Proponents of sweeping bans on the use of natural gas appliances suffered another defeat in court. The 9th U.S. Circuit Court of Appeals declined to conduct an en banc hearing on a review an initial circuit court decision which invalidated a ban on gas appliances in new buildings enacted by the City of Berkeley, CA. Unless the city of Berkeley chooses to appeal the case to the Supreme Court, the 9th Circuit’s judgment is now final. It will apply to the eleven Western states within its territory.

The decision does not leave local government unable to regulate the appliances. Other approaches which have not been struck down include the use of building code requirements and overall limits on emissions designed to effectively diminish the use of gas, especially for cooking.  

WOOD

A producer of wood pellets for use in wood stoves is facing financial issues imperiling its ability to operate.  The situation threatens the credit supporting industrial development bonds issued in Alabama and Mississippi for manufacturing facilities operated by Enviva. The Alabama issue totaled $250 million while the Mississippi issue totals $100 million. The outstanding bonds are rated CC by Standard and Poor’s. In addition to the bonds, the company received significant economic aid from the State of North Carolina.

Enviva supplies European and Asian utilities with wood pellets as an alternative to burning coal.  After dismal third quarter 2023 results, Enviva announced it would delay completion of a new pellet plant in Mississippi. More concerningly, the company’s auditors issued a going concern letter. In November, Moody’s, S&P, Fitch all lowered ratings to the lowest levels above default.

According to Enviva, the company supports more than 1,800 jobs in mostly rural North Carolina at its four wood pellet production plants and Port of Wilmington facility and has invested more than $675 million in the state. That facility enables the export of the pellets to European and Japanese markets. In those markets, the choice is posed as wood or coal. On that basis, wood is less polluting and trees can be planted as trees are harvested. That results in wood pellets considered to be renewable biomass overseas.

The company cites collapsing prices for wood pellets, long-term contracts that lock Enviva into deals with customers at low prices, high interest rates that makes its loans more expensive to service, and operational issues at some of its plants. Enviva also faces significant litigation issues as the use of wood pellets as a “renewable” source of energy is highly controversial. The US takes a different approach to wood pellets than do European countries and Japan.

WESTERN HYDRO

The difficulty in long-term water use planning comes from the volatility of data relating to weather and water. A quick review of data from recent years provides a window into that volatility. Federal data shows that 2021 and 2022 were two of the three lowest years for hydropower generation nationwide since 2010. Much attention was paid to the impact of multiple atmospheric rivers in California and California increased its hydropower generation by 72 percent in federal FY 2023. At the same time, hydropower generation in Washington State—the national leader in hydropower—was down 23 percent compared to the previous 12-month period.

The latest water level data for Lake Powell, the reservoir in Arizona and Utah that feeds the Glen Canyon hydropower plant showed the surface of the lake level this week was 3,568 feet above sea level, according to the Bureau of Reclamation. On the same day last year, the water was at 3,525 feet—some 43 feet lower. That was close to the reservoir’s lowest level since it was initially being filled in the 1960s. It is at 35% of capacity.

If the level falls to 3,490 feet—78 feet below the current level—water will be too low to drive the turbines that generate electricity. If the level falls to 3,370 feet—198 feet below this week’s reading—it would reach “dead pool” status, when the water is too low to flow downstream from the dam. In October of this year, the Bureau of Reclamation reported that between October 2023 and September 2024, an estimated 9.4 million acre-feet of water would flow into Lake Powell. That estimate was cut to 7.6 million acre-feet just before the latest measurements.

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 highlight several of the sectors which we think will be of significant interest to municipal bond investors in the coming year. The pandemic may be “over” but its effects linger on. Whether it is the impact of remote work, the pressure on demand in sectors like senior living and hospitals, school enrollments, retail commerce or mass transit – the footprints of the pandemic continue to be trackable. The impact of inflation continues. The budget season will be more difficult as intergovernmental aid for the pandemic is effectively over.

So, with that backdrop, we’re off and running for 2024.

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ALTERNATIVE TRANSIT HITS POTHOLES

Just before Christmas, Electric scooter maker Bird Global filed for bankruptcy protection. The company operates a short-term scooter rental business in more than 350 cities. Its operations in the US are the subject of the filing. The increasing incidences of injuries through operation as well as restrictions on and concerns with the batteries powering scooters and bicycles have reduced demand.

This followed the November announcement that Revel would pull its mopeds out of New York and shut down the moped service in San Francisco after previously ending it in other cities. While the company had faced claims related to injuries and complaints about inadequately trained users. During the pandemic it was a way to avoid public transit especially for remote workers. Revel’s monthly ridership soared to a high of 582,159 rides in July 2020.

Revel’s moped ridership in New York fell to 136,802 rides in July, a 30 percent drop from 194,278 rides in July 2022. The drop coincided with a more popular e bike program through Citi Bikes and e bike ownership has grown significantly. In New York, there were five deaths involving Revel mopeds — four were Revel riders and one was a pedestrian struck by a Revel rider — between 2019 and 2021, according to city records.

KAISER PERMANENTE LAYOFFS JUST A SIGN

In October, employees at Kaiser Permanente facilities struck to achieve a new contract. The primary issue was wages especially in the wake of the pandemic. An agreement was reached but its impact has cut both ways. Now Kaiser has announced administrative layoffs in a move which mimics those being undertaken currently across the country.

The impact is subtle. Individual check-in sites have been replaced by central check-ins which effectively reduce that administrative headcount. The cuts are going on at facilities and systems large and small. The slower than expected recovery of utilization levels on both an inpatient and outpatient utilization continues to pressure operating results.

A glaring example is the projected closing of the last acute care hospital below 23^rd Street in Manhattan. Mount Sinai (NY) announced the closing of the facility to take place this July. Various interests are trying to bring pressure on the money-losing facility to stay open. The facility’s increasing reliance on government payors has stressed operations for some time. Plans for a replacement with a heavy emphasis on outpatient care have not come to fruition.

The other way to deal with these pressures is further consolidation. Whether proposed mergers like that between Henry Ford Health and Ascension Health in Michigan will pass muster with an activist Federal Trade Commission is yet to be seen. Concerns about rural facility closings will continue and generate pressure in an election year. The Biden Administration continues to pressure small rural facilities to reduce themselves to clinics to feed distant acute care facilities.

RURAL HOSPITAL RECOVERY

The trend in recent years in the small rural healthcare sector has been towards downsizing and actual closures. The same pressures which drove those decisions have also made it hard to find viable financial recovery solutions. One facility in California however is showing that it is possible for these facilities to maintain themselves and survive.

A private operator had run Watsonville Community Hospital in California for years. The facility saw multiple management teams, declining results, and the apparently the theft of funds under the private management. The trends were so negative that a bankruptcy seemed like the option. In this case, the community seemed better prepared than most to deal with the issues.

In 2021, the Pajaro Valley Health Care District was created in anticipation of a Chapter 11 filing by the hospital. The District currently leases the facility. New management has succeeded in improving operating results. Now, the District hopes to get voter approval on March 5 for a $116 million bond issue. Proceeds would finance the purchase of the hospital and fund capital improvements. The district needs more than two-thirds of its voters to vote yes.

CALIFORNIA – NET METERING; WATER; GOVERNORS BUDGET

California regulators approved new rules to let water agencies recycle wastewater. California has been using recycled wastewater for decades. The prior uses were commercial. The Ontario Reign minor league hockey team has used it to make ice for its rink in Southern California. Soda Springs Ski Resort near Lake Tahoe has used it to make snow. And farmers in the Central Valley, where much of the nation’s vegetables, fruits and nuts are grown, use it to water their crops. 

Orange County operates a large water purification system that recycles wastewater and then uses it to refill underground aquifers. The Metropolitan Water District of Southern California, which serves 19 million people, aims to produce up to 150 million gallons (nearly 570 million liters) per day of both direct and indirect recycled water. A project in San Diego is aiming to account for nearly half of the city’s water by 2035.

The new rules require the wastewater be treated for all pathogens and viruses, even if the pathogens and viruses aren’t in the wastewater. That’s different from regular water treatment rules, which only require treatment for known pathogens. In San Jose, the Santa Clara Valley Water District recycles water and uses it irrigating parks and playing fields. 

These sorts of efforts may once again get support as the volatile nature of California’s water supplies become apparent again. After a winter of multiple precipitation rivers and record high snowpack, a level of muted optimism about the short-term water outlook arose. Now, just a year later, the headlines are about record low snowpack and probable diminishment of hydropower capacity.

The first snow survey of the season found the snowpack at 30% of average for the date, and 12% of the average for April 1, when snowpack is typically at its deepest. Data from electronic readings from 130 stations across California indicate the snow water content statewide is just 2.5 inches, or 25% of average for the date, compared with 185% at the same time last year.

Rainfall directly on reservoirs has offset a bit of the loss. California’s two largest reservoirs, Lake Shasta and Lake Oroville, are at 69% and 68% capacity, respectively. California’s water year runs from Oct. 1 through Sept. 30, with the majority of the state’s precipitation typically falling in January, February and March.

California’s NEM 3.0 net billing tariff was approved by state regulators at the end of 2022, and came into effect for distributed solar interconnection applications submitted on or after April 15. A survey from the California Solar and Storage Association reported that rooftop solar sales were down between 66% and 83% compared to the same time in 2022.  Industry analysts are predicting a 40% decrease in new residential solar in the state.

Efforts to get the new net metering regime overturned in the courts were dismissed at year end.

This week, the Governor will deliver his preliminary budget proposals. The backdrop is the recent Legislative Analyst Office estimate that the budget gap facing the State could be as high as $68 billion.

CARBON CAPTURE – DECISIONS LOOM

The ongoing efforts by Summit Carbon Solutions to construct a multi-state pipeline to take carbon produced at ethanol plants and inject it underground continue. The main battleground is in Iowa where a decision of whether to permit the project or not is pending before the Iowa Utilities Board (IUB). Two other companies have either abandoned their projects or withdrawn approval applications.

While that process unfolds, Summit continues its legal effort to eliminate local control over the regulation of its project. It recently filed suit against a fourth county in Iowa over the enactment of zoning regulations which would make it harder to build pipelines close to population centers. In other litigation by Summit, permanent injunctions against Shelby and Story counties that bar them from enforcing their ordinances were handed down by a federal District Court judge. Those counties recently appealed the judge’s decisions.

A third suit is pending. Summit also filed suit against a fourth county this week to overturn adopted County ordinances.

The Iowa House of Representatives approved a bill last year that would restrict the companies’ ability to use eminent domain to gain land easements until they obtained voluntary easements for 90% of their routes. The Iowa Senate did not consider the bill, but it could during the upcoming legislative session, which starts next week.

COMMERCIAL VALUATIONS

One of the concerns arising from the pandemic is the potential impact of WFH on the office real estate market. A couple of office building transactions in large cities have been sold at significant discounts to purchase price. The fear is that this is the start of a trend. The third-tallest tower in Los Angeles, has sold for $147.8 million — about 45% less than its last purchase price in 2014. One estimate says that 30% of downtown LA office space was available for lease or sublease in the third quarter. In Chicago, a smaller older building sold at an 89% discount to its last purchase price. With vacancies high and rents being discounted, newer stock is much more attractive than so-called Class B buildings.

WIND

The Vineyard Wind project off the island of Nantucket was one of the first approved for the New England coast. It had been anticipated that it would be the first to operate but that was not to be. Vineyard Wind instead is the nation’s second utility-scale offshore wind farm to start generating electricity having been beaten to the punch by the South Fork Wind off the Long Island coast. At present, Vineyard supplies 5 MW from one turbine. Ultimately, the project is designed for 62 turbines.

The short-term outlook for ocean wind power at scale is weak. A contract with New York to sell the state electricity from Empire Wind 2, a proposed 1,260-megawatt offshore wind farm that would be located southeast of Long Island was terminated. The same factors impacting this project are reflected throughout the industry – interest rates, inflation, supply shortages.

These pressures are changing the approach of some utilities to a wind based future. Vineyard is sponsored by Avingrid, a Spanish utility which owns CMP in Maine and NYSEG in New York. Avingrid had hoped to own significant distribution capability to use power from wind projects. Those efforts distracted from basic power supply and created widespread animosity towards Avingrid from both its Maine and New York customers.

That experience generated significant opposition to Avingrid’s acquisition of Public Service of New Mexico. After an intense and drawn out regulatory process, Avingrid threw in the towel on its efforts to acquire PSNM.

SENIOR LIVING

The facilities are in Michigan and Ohio. The management of the facilities is based in Louisiana. The conduit bond issuer is in Arizona. What could possibly go wrong? We are about to find out as the Great Lakes Senior Living Communities LLC is poised to default on its debt. Some $376.2 million of bonds were issued in 2019 and were outstanding as of Dec. 31, 2022, plus $19.5 million in fourth- and fifth-tier parity bonds issued in 2021 to fund additional capital needs on the project. The timing could not have been worse. With nursing homes at the center of the pandemic, it was effectively impossible for the projects to t projections.

The debt was downgraded in 2020 and results continued to be significantly below budget. The trend has continued and debt service reserves had to be tapped to cover debt service. Now, S&P has lowered its ratings to CCC and expects that a debt service payment may be missed. The project is already operating under forbearance agreements and debtholder control over its budget. Given the rise in interest rates, a refinancing would be more difficult given the operating position of the facilities.

The deal is just another example of the pitfalls of conduit financings. Like its counterpart agency in Wisconsin, the Arizona issuer has been involved in several other default situations. We have long considered the participation of conduits in already speculative credits to be problematic. It won’t be the last issue like this to run into problems in 2024.

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 marks our last issue for 2023. We will return with the January 8, 2024 issue. Have a Merry Christmas and a happy and prosperous New Year.

As we look ahead, some clear themes emerge for 2024. The end of pandemic funding from the federal government will create a much different atmosphere for the budget process. The fiscal 2025 budget season will let the market see which entities have constructed sustainable spending plans in the absence of those funds. It is already clear that some spending supported by those funds may have to be adjusted. The most obvious example is New York City. Chicago and California will also be under pressure.

Expected troubled sectors? Higher education, especially small private colleges, will continue to have problems. The combination of demographic trends and a reliance on enrollments and tuition to support credits. The smaller the niche filled by small colleges, the more vulnerable the credit is.

Senior living remains plagued by staffing issues, higher costs and uncertainties reflecting the realities of the current housing market. At many facilities, the mix of product may not reflect current demand realities after the pandemic. Some have more flexibility in terms of reconfiguring facilities to reflect those changes. Look for balance sheets with the resources to manage reconfiguration and its potential revenue impacts.

We have been down of the rural hospital sector for a long time. There is nothing out there to change our view. Now, larger systems everywhere are facing cost pressures as well. It is a subtle impact. Staff cuts have been concentrated on administration costs. Fewer people to check one in for an appointment, cuts in billing departments, longer wait times. This is going on in the face of a slower recovery of demand and utilization rates.

On the utility side, carbon capture will continue to be a dominant theme. The Biden administration clearly is looking to carbon capture as a way to placate the utility industry. The Infrastructure Investment and Jobs Act, provides $8.2 billion in advance appropriations for CCS programs over the 2022–2026 period. According to the Congressional Budget Office, 15 CCS facilities are currently operating in the U.S. Together, they have the capacity to capture 0.4 percent of the nation’s total annual CO2 emissions. The report notes an additional 121 CCS facilities are under construction or in development. If all were completed, they would increase the nation’s CCS capacity to 3 percent of current annual CO2 emissions.

DOE estimates that reaching the current administration’s plan for a net-zero emissions economy would require capturing and storing between 400 million and 1.8 billion metric tons of CO2 annually by 2050. All of this points to the importance of the regulatory process in Iowa and the Dakotas. Pipelines are so important to the carbon capture process so the proceedings are key to the survival of both fossil fueled electric generation and the ethanol industry.

Vehicles – autonomous and/or electric – are at an important inflection point. It is becoming clearer that electric vehicle adoption will not proceed at a pace predicted by advocates. The experience of Cruise in San Francisco has done much to dampen support for the vehicles. Manufacturing will continue to increase but at a slower pace. That will dampen calls for more investment in AV related road technologies. At the same time, charging infrastructure will continue to be in demand. Most of the action on the government side seems to be based in regulation with the private sector providing the actual chargers.

The big spectator sport issue will be the implementation of congestion pricing in Manhattan. One sector of the city economy we will watch is the impact of pricing on the performing arts and dining sectors. With the exception of Lincoln Center, the major performing arts venues are within the proposed congestion district. If the fees are seen as a weight on attendance and demand, support for the fees will wane. The fees will also generate enormous pressure on the MTA to perform. History does not provide a lot of confidence as decades old issues of bureaucracy, overruns, and delays continue to plague its projects.

Water will be in the spotlight as the Colorado River negotiations continue. The issues which have shaped the water market for decades are being negotiated and there are hopes that a more practical sharing of the water can be found. They take place as some large scale water transfer and delivery projects are contemplated by public and private development interests. Long distance water pipelines are being proposed which have implications for those at either end of the pipe.

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NYC BUDGET

The latest NYC Financial Plan update was released by the Mayor. It came in the midst of the uneven effort to find additional outside funding to cover the costs of asylum seekers. The City’s Independent Budget Office has taken a look at the plan and released its analysis. IBO projects that the city will end 2024 with an additional $3.6 billion in surplus above the Mayor’s Office of Management and Budget (OMB) estimate.

If the surplus prepays 2025 expenses, IBO projects a $1.8 billion shortfall next year, this is $5.3 billion lower than OMB’s ($7.1 billion). IBO’s gap projections for 2026 and 2027 ($7.2 billion and $6.6 billion, respectively), are higher than OMB’s ($6.5 billion and $6.4 billion, respectively).

The Mayor has reached a point of declining credibility even allowing for the magnitude of the issues facing his administration. The differences between the city’s estimates and the IBO estimates highlight the problem. No one argues that the City’s budget is under pressure while asylum seekers keep arriving in volume. The issue of how the response is being managed and funded is a different story.

The IBO has explained the basis for its estimates of future asylum costs and their impact on the overall budget outlook. The IBO produced three asylum seeker cost scenarios based on policies and procedures announced and data provided by the Adams administration. IBO’s analysis focuses on anticipated expenditures, not actual spend-to-date. IBO continues to estimate costs the City has and is projected to incur due to the influx of asylum-seeking individuals and families based upon three different scenarios to project total spending over 2024 and 2025 (all years are city fiscal years).

All three of IBO’s scenarios yield substantially lower spending than the November Plan which: 1) maintains daily per-household spending at very high emergency rates; 2) assumes straight linear population growth through 2024; and 3) projects a stable population in 2025. IBO noted that only days after releasing the November Plan—which included significant Program to Eliminate the Gap (PEG) reductions—the Mayor’s Office of Management and Budget (OMB) directed agencies to further reduce asylum seeker spending by 20%.

In the November plan, OMB raised its 2024 revenue forecast by $592 million to reflect stronger recent tax receipts. In the November plan, OMB raised its 2024 revenue forecast by $592 million to reflect stronger recent tax receipts. IBO also noted one of our major concerns regarding the end of pandemic aid. NYC received 13.5B in Federal Pandemic Funding, which is ending.

Some of these funds were used for programs that are on-going. In the Department of Education and DYCD, alone, IBO estimates that the Administration will need to add over $700 million in each year from 2025 through 2027 to replace this expiring federal Covid-era funding.

WHICH WAY IS THE WIND BLOWING

The last couple of weeks have generated mixed news about the outlook for wind generation. The first utility-scale wind farm in federal waters to be brought into operation began operations of the eastern Long Island coast. The project has a capacity of 130 megawatts, enough to power 70,000 homes. It was built by the same Danish firm which recently pulled out of projects off the New Jersey shore.

The offtake for the power is the Long Island Power Authority. LIPA initially approved the project in 2017. In November, New York launched a new offshore wind solicitation to help support the development of 9,000 megawatts (MW) of offshore wind by 2035, enough to power up to six million homes. The power up of South Fork accompanied Avangrid’s announcement that it completed installation of the first five turbines on its 806 MW Vineyard Wind 1 offshore wind project off Massachusetts as it prepares to deliver first power in coming weeks.

The company behind Icebreaker Wind announced the indefinite suspension of what was once set to be the first offshore wind farm built in the Great Lakes. The decision by the Lake Erie Energy Development Corporation (LEEDCo) followed the withdrawal of federal funding for the project. Icebreaker Wind was intended to be a demonstration project. It began in 2009.

About all of the different potential types of opposition to the project and its location befell this project. Permits were hard to acquire over concerns about pollution, birds, funding for opposition from coal and other legacy generation interests. And you could see it from the shore!!

HIGH SPEED RAIL BOOST

The Biden Administration will provide some $3 billion of funding to each of two high speed rail projects. The first is California’s high speed rail project which has been the subject of in terminable delays and cost overruns to $128 billion from an initial estimate of $30 billion. The DOT grant will be used to continue work along the initial Central Valley segment, including the purchase of six electric trains for testing and use. The second is the Brightline West project. The U.S. Department of Transportation will also give $3 billion to Brightline West’s planned bullet train to connect Los Angeles and Las Vegas, which has a price tag of $12 billion. The privately operated project, which had requested a $3.75 billion grant.

The grants were authorized under the 2021 Infrastructure and Investment Jobs Act’s Federal-State Partnership for Intercity Passenger Rail program. Some $36 billion in advance appropriations through 2026 were established. The program previously announced some $16 billion of grants to the Northeast Corridor. The competitive grants can be used to upgrade existing rail systems, including privately run lines.

SPORTS

Oklahoma City voters overwhelmingly approved a six-year, 1% sales tax to help fund construction of a new arena for the city’s NBA franchise, the Oklahoma City Thunder. or risk the same fate as Seattle: losing the team to another market. But some residents and experts who have studied public-private partnerships say the deal is much better for the wealthy team owners than the average resident.

Under the plan, the new arena would cost at least $900 million, with Thunder owners providing 5%, or $50 million, and another $70 million coming from a previously approved sales tax currently for improvements to the current arena. The team also would agree to stay in the city for 25 years in the new arena, targeted for opening before the 2029-2030 season.

A group of more than 20 Oklahoma-based economists and finance professors recently pointed out that for the 12 new arenas and 12 new stadiums built across the U.S. since 2010, the average public expenditure was about 42% and that since 2020, three arenas have been built with no public money. It definitely goes against the current tide. Then again, arena issues led to the purchase of the Seattle Sonics and their move to – you guessed it, Oklahoma City.

In Maryland, the “agreement” between the State and the Baltimore Orioles to secure the team’s tenancy long term has run into snags. Ownership wants the deal to include provisions allowing for the development of what is state owned land by Camden Yards. Objections in the Legislature have been raised over the plan which is seen by some as a giveaway to a team which has been hard to cooperate with.

Virginia Gov. Glenn Youngkin has reached a tentative agreement with the parent company of the NBA’s Washington Wizards and NHL’s Washington Capitals to move those teams from the District of Columbia to a proposed 9 million square foot development in Alexandria, VA. The project would include not only an arena for the basketball and hockey teams but also a new Wizards practice facility, a separate performing arts center, a media studio, new hotels, a convention center, housing and shopping.

To finance the arena, Younkin will ask the Virginia General Assembly in the 2024 session to approve the creation of a Virginia Sports and Entertainment Authority. The Authority would be authorized to issue debt backed by taxes generated from the project. The project would break ground in 2025 and open in late 2028.

While that process plays out, D.C. Mayor Muriel Bowser unveiled a counterproposal aimed at keeping the teams. The legislation that Mayor Bowser submitted to the Council outlines the parameters of the agreement, including receiving the authority to enter into a lease extension to 2052 and provide financing of $500 million toward the $800 million renovation project over a period of three years beginning in 2024.

The existing Capital One Arena would remain open under the team’s plan even if they move. The question is how much can the District do to keep two big draws and tax generators within its boundaries. If the Caps and Wizards move it would represent a hat trick for the franchises in terms of having located at some point in each of Va., Md. And D.C. It would also swim against the tide of locating professional sports arenas in downtown areas.

TRANSMISSION

The U.S. Supreme Court refused a request from the State of Texas to review a decision from the U.S. District Court for the Western District of Texas which found against Texas’ “right of first refusal,” or ROFR, law that gave preference for certain utilities to build new power lines across state borders. S.B. 1938 only allowed utilities that already had an in-state presence to build new transmission lines.

This law and some one dozen in other states were enacted in the wake of a decision by the Federal Energy Regulatory Commission to approve Order 1000, requiring competitive development for public transmission providers. The case will revolve around the “dormant commerce clause”. The legal doctrine infers that the Constitution’s commerce clause bars passage of state laws that harm interstate commerce, but allows states to pass discriminatory measures when it can show it is for a “legitimate local purpose.”

Another ROFR was passed in Iowa. Recently, an Iowa judge ruled that the legislative process for passing the state’s 2020 ROFR law was unconstitutional. The decision did not reflect the substance of the statute. The Iowa Supreme Court had already blocked enforcement of the law earlier this year, labeling it “anti-competitive.”

While these cases sort themselves out, the FERC is in the process of rulemaking over proposed changes to Order 1000. In a notice of proposed rulemaking last year, the agency said it could condition the use of right of first refusal for large regional projects if the incumbent transmission provider or utility co-owns it with another party.  NextEra Energy (an out of state provider) brought Texas to court after passage of the law prevented the company from building the Hartburg-Sabine transmission project in the state. The project was later canceled due to the ongoing litigation.

CALIFORNIA ROAD FUNDING

The State’s Legislative Analyst Office (LAO) released its estimates of the impact of increasing zero emission vehicles (ZEV) on revenues derived under the State’s current taxing policies. California’s transportation system is supported by state, local, and federal sources. State sources—which historically have accounted for roughly one-third of total transportation funding, including $14.2 billion in 2023-24—consist of various fuel taxes and vehicle fees.

The California Air Resources Board is required to complete a Scoping Plan that identifies a strategy for achieving the state’s GHG reduction goals, incorporating both existing state efforts and any additional changes that will be needed across various sectors. The most recent Scoping Plan, adopted in 2022 included transitioning all new vehicle sales to ZEVs (by 2035 for light-duty vehicles and by 2040 for medium- and heavy-duty vehicles) and reducing VMT statewide. 

The LAO estimates that under the GHG reduction pathway envisioned by the Scoping Plan that compared to current levels, notable revenue declines over the next decade from the state’s gasoline excise tax ($5 billion or 64 percent), diesel excise tax ($290 million or 20 percent), and diesel sales tax ($420 million or 20 percent) over the next decade.

Under the current scheme, the California Department of Transportation’s highway maintenance and rehabilitation programs are funded primarily by state fuel taxes and therefore will face significant funding declines. The State Transit Assistance program, which is solely supported by diesel sales tax revenues, will experience funding declines of about $300 million by 2034-35, which represents about one-third of its total funding.

The transportation sector is the largest source of state GHG emissions, accounting for about 40 percent of total emissions in 2019. Transportation-related emissions mostly result from light-duty vehicles (passenger cars and smaller pickup trucks), with a smaller amount coming from medium-duty vehicles (larger pickup trucks and delivery vans) and heavy-duty vehicles (buses and long-haul trucks). The plan assumes the overall fleet of vehicles driven in the state will transition from 97 percent conventional vehicles in 2022 to 85 percent ZEVs in 2045. The plan assumes this transition will be phased in at a steady and aggressive pace, with the majority of the fleet consisting of ZEVs by 2037.

NUCLEAR

The California Public Utilities Commission voted to allow the Diablo Canyon nuclear plant to operate for an additional five years. This would extend the shutdown date through 2030 instead of closing it in 2025 as previously agreed. It can produce 9% of the state’s electricity each day. The State approval sets the stage for the federal Nuclear Regulatory Commission will consider whether to extend the plant’s operating licenses.

In August, a state judge rejected a lawsuit filed by Friends of the Earth that sought to block Pacific Gas & Electric, which operates the plant, from seeking to extend its operating life. In October, the Nuclear Regulatory Commission rejected a request from environmental groups to immediately shut down one of two reactors.

TRI-STATE GENERATION

Tri-State is a generation cooperative serving 42 local distribution coops. It’s reliance on coal as its primary generation fuel source has unsurprisingly led to unrest among the members. The desire of its customers to distribute “greener” power has led to several member withdrawals from the Tri-State system. The withdrawal process has been contentious as Tri-State does everything it can to make a withdrawal as difficult as possible.

Now, another member is taking Tri-State to court over its perceived unwillingness to negotiate terms of exit for members. La Plata Electric filed suit on Nov. 10 asking that LPEA be exempt from its obligations set out in Tri-State’s bylaws and contract, receive damages stemming from that breach of contract and receive compensation for other accrued fees and expenses. The claim, as has been the case with other proposed withdrawals, is that Tri-State acts in bad faith by refusing to come up with a cost of exit.

The negotiations have dragged on since 2019. In 2021, Tri-State gave LPEA a $449 million price tag for a full withdrawal. While these and other negotiations continued, Tri-State took steps which would enable its operations to be subject to federal rather than state oversight. This forced proposed withdrawal agreements to be reviewed and subject to FERC approval. Tri-State and several member co-ops pursuing a partial buyout continued negotiations but the FERC rejected a set of partial buyout agreement terms submitted in 2022, concluding that certain provisions were not reasonable and just.

Tri-State has recently submitted plans to close Unit 3 of a coal-fired facility in Craig by early 2028 – two years earlier than planned. The utility would also close a coal-powered unit in Springerville, Arizona by 2031 contingent upon an award of federal funding. That funding – estimated at $730 million – is highly uncertain. Tri-State hopes to create 1,250 megawatts of renewable energy creation and storage.

The plan is subject to review by the Colorado Public Utilities Commission. Tri-State expects to hear a decision on whether the resource plan is approved by mid-2024. Phase II of the plan will include more specific plans on where the green energy sources will be built. Approval of Phase II would come in mid-2025. The co-op plan relies heavily on the receipt of funding under the IRA which provides for the US Department of Agriculture to review applications in a competitive process.

There is one cost hanging over the debate. Tri-State is still under a contractual obligation to purchase nearly $136 million worth of coal between 2024 and 2041.

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 BUDGET GAP

The Legislative Analysts Office in California has released its Fiscal Outlook prepared for the upcoming budget season. This along with the Governor’s budget and the May revision are the three key dates in the budget process. The report identified three key areas of concern. Largely as a result of a severe revenue decline in 2022‑23, the state faces a serious budget deficit. Specifically, under the state’s current law and policy, the LAO estimates the Legislature will need to solve a budget problem of $68 billion in the coming budget process.

Typically, the budget process does not involve large changes in revenue in the prior year (in this case, 2022‑23). This is because prior‑year taxes usually have been filed and associated revenues collected. Due to the state conforming to federal tax filing extensions, however, the Legislature is only gaining a complete picture of 2022‑23 tax collections after the fiscal year has already ended. Specifically, the LAO estimates that 2022‑23 revenue will be $26 billion below budget act estimates.

One positive takeaway notes that while addressing a deficit of this scope will be challenging, the Legislature has a number of options available to do so. In particular, the Legislature has reserves to withdraw, one‑time spending to pull back, and alternative approaches for school funding to consider. 

Budget gap drivers include the finding that the state’s economy is in a downturn. The number of unemployed workers in California has risen nearly 200,000 since the summer of 2022. This has resulted in a jump in the state’s unemployment rate from 3.8 percent to 4.8 percent the state’s economy into a downturn. The number of unemployed workers in California has risen nearly 200,000 since the summer of 2022. This has resulted in a jump in the state’s unemployment rate from 3.8 percent to 4.8 percent. Inflation‑adjusted incomes posted five straight quarters of year‑over‑year declines from the first quarter of 2022 to the first quarter 2023.

The portion of income taxes collected directly from workers’ paychecks was down 2 percent over the last twelve months compared to the preceding year. Collections data now show a severe revenue decline, with total income tax collections down 25 percent in 2022‑23. Reflecting the risk of continued weakness, the LAO revenue outlook shown anticipates collections will be nearly flat in 2023‑24, after falling 20 percent in 2022‑23. The LAO outlook then has revenue growth returning in 2024‑25 and beyond. Based on this trajectory, the LAO revenue outlook expects collections to come in $58 billion below budget act assumptions across 2022‑23 through 2024‑25, with about half of this difference ($26 billion) attributable to 2022‑23. 

What can be done? The state has $23 billion in the Budget Stabilization Account under LAO estimates, plus about $1 billion in the Safety Net Reserve. Over a three‑year period, the state could reduce General Fund costs by $16.7 billion if it were to lower school spending to the constitutional minimum allowed under Proposition 98. The state has at least $8 billion in one‑time and temporary spending in 2024‑25 that could be pulled back to help address the budget problem.

This ride on the downside of the roller coaster which is California’s credit is a bit out of the norm. The unique situation which extended the tax payment deadline into the fall is a one off. The strikes in the entertainment industry likely had a bigger impact than anticipated. The timing of these two factors accompanied the fact that the number of California companies that went public in 2022 and 2023 is down over 80 percent from 2021. Capital gains have an outsized impact on the State’s finances given the overall structure of its income tax base.

MEDICAID EXPANDS IN ONE MORE STATE

On December1, nearly 600,000 North Carolinians will be eligible for Medicaid. They qualify under the terms of the Affordable Care Act. Half of these people will be automatically enrolled. Single adults aged 19-64 who earn up to $20,120 per year are now eligible, and a family of three who earns a little more than $34,300 is now eligible. The state’s prior Medicaid structure covered parents earning only about $8,000 per year combined for a family of three. Childless adults had no coverage.

As with the case with the many other states, the federal government will pay 90 percent of the costs of expansion. Under another piece of the legislation the initial costs will be covered at an even higher rate. A provision in the 2021 American Rescue Plan provides an additional 5 percent “bonus” to previous holdout states to help offset the first two years of expansion. In North Carolina, that amounts to almost $1.8 billion. 

There are now only 10 holdout states remaining. They share the common trait of having a Republican governor, a GOP-majority legislature or both. Six are in the Southeast. The two largest by population are Texas and Florida (no shock there). Kansas, Georgia, Wyoming and Wisconsin rely on legislative action. In Florida, a ballot initiative effort from 2020 stalled out.

MUSEUMS AND THE POST-PANDEMIC WORLD

This week, New York’s Guggenheim Museum announced staff layoffs. While tourism has been recovering in the city, lower number of visitors are patronizing museums. After long closures, museums have sought to revive both attendance as well as revenue and many have raised the price to enter in their effort to shore up their finances. The price of admission to the Guggenheim was increased from $25 to $30. Nevertheless,

In November, the San Francisco Museum of Modern Art announced the elimination of 20 staff positions, citing a 35 percent drop in attendance from 2019. Like the Guggenheim, it raised its prices by 20%. A month earlier, the Dallas Museum of Art also reduced headcount by 20 and said it would no longer be open to the public on Tuesdays to save money.

TAX REALITIES IN NEW YORK

One of the enduring features of the political debates in blue states over taxes is the constant specter of mass migrations out of a state driven by marginal tax rates. This is especially true of California and New York. The significant impact of COVID in those states brought the issues to light as the pandemic drove migration to other areas. Those issues were recently revived during the debate between the Governors of Florida and California. A variety of statistics were cited by both to buttress their arguments over taxes. It has become harder to find objective analysis of the issue.

There was much focus on the movement of people from California and New York to Texas and Florida respectively. The lack of an income tax in Texas and California and fewer COVID restrictions were cited as driving factors. Now, a new report from the Fiscal Policy Institute seeks to separate myth from reality. The findings are not what many expected. Here are the main findings.

High earner migration out of New York during Covid was temporary, and primarily driven by work-from-home and flight from New York City. In 2022 — after two years of elevated, pandemic-induced out-migration — high earners’ migration rates returned to pre-Covid levels. While New York lost 2,400 millionaire households over the past three years (2020- 2022), New York gained 17,500 millionaire households in the same period due to a strong economy and rising wages.

There is no statistically significant evidence of tax migration in New York: High earning New Yorkers move out of New York State at one-quarter the rate of the rest of the population during typical, non-Covid years. High earners do not move in response to tax increases: Out-migration for those most impacted by recent effective tax increases (in 2017 and 2021) did not increase significantly in response to the tax increases. When New York’s high earners move, they are more likely to move to other relatively high tax states.

A huge driver of out migration was not tax policy but the work from home movement and concentration of lower wage earners in NYC. Prior to Covid, the city was already a source of disproportionate out-migration: 51.1 percent of New York State’s out-migrants from households with income in the bottom 95 percent (less than $354,000) originated from the city, as did 64.5 percent of households with income in the top five percent. This was greater than the city’s share of the state population — the city is home to 42.7 percent of those in the bottom 95 of incomes and 45.5 percent of those in the top five percent.

This drives the continuing hollowing out of the middle class in NYC. The people leaving New York at the fastest rate last year were families making between $32,000 and $65,000. A disproportionately high share of these movers was Black and Hispanic. They were followed by people earning $104,000 to $172,000 a year. More than three-quarters of rich people (the top 1 percent of income-earners, making more than $815,000 a year) who left during the pandemic moved to other high-tax states, including Connecticut, New Jersey and California. 

Over the same years that saw a rise in domestic out-migration by high earners, the overall number of high earner New York tax filers has increased. The only year since 2015 that saw an overall decrease in full-year residents making over $200,000 was 2020 — a year that also saw growth in the population making over $5 million in annual earnings. In 2021, New York State enacted higher personal income tax rates on incomes over $1 million, $5 million, and $25 million. In the same year, the only income group affected by this change — the top one percent — began out-migrating at a lower rate than they had in 2020, falling further in 2022.

MISSION ACCOMPLISHED?

The utility industry has been successfully lobbying for changes to net metering schemes which have long supported private home installations of solar energy panels. The best example is in California. The state’s three IOUs – PG&E, SoCal Edison, and SDG&E – are benefitting from a new payment scheme to solar customers who send excess generation to the companies.

Under the terms of the scheme which was replaced on April 15, utilities paid customers the full retail rate for solar power produced in excess of their own electricity consumption. The new rules significantly reduce that rate. The new policy doesn’t apply to the 1.5 million rooftop solar installations already in place. For installations post- April 15, 2023, the new scheme will reduce utility-bill savings from new solar systems and extend the amount of time it takes owners to recoup the cost of installing them. 

In March, the industry released a study which forecasted that new residential solar installations in California, after doubling in size from 2020 to 2022, were expected to decrease by nearly 40 percent through 2024. A subsequent report from the California Solar and Storage Association had data showing a 77 to 85 percent drop in rooftop solar projects since April. 

Two of the state’s three major investor-owned utilities subject to the CPUC’s net-metering rules. Those utilities have seen a 66 to 83 percent drop in residential rooftop-solar interconnection applications in the five months since the new structure took effect, compared to the same months in 2022. Solar installers in the state are forecasting that 17,000 jobs will disappear by the end of 2023, which amounts to roughly 22 percent of the state’s solar workforce. Most of those jobs are in installation, where workers earn an average of $70,000 per year.

This mirrors the experience of public utilities in California whose customers have already been subject to less favorable net metering payment schemes. Installations also declined by more than 50 percent in the California regions where public utilities reduced net-metering compensation between 2015 and 2017.  Arizona, Hawaii, Nevada, Utah are other states where rooftop solar installations have declined dramatically after regulators or utilities reduced the compensation value that customers can receive from them.

GETTING THE LEAD OUT

The Environmental Protection Agency (EPA) announced a proposal to strengthen its Lead and Copper Rule that would require all US water utilities to replace 100% of lead service lines within 10 years. The proposed requirement is considerably more ambitious than the existing rule, which requires that only utilities exceeding certain thresholds of lead concentrations replace 100% of lines in 30 years. The EPA estimates that replacing lead service lines would cost utilities about $20-$30 billion over the next decade, with additional costs for new monitoring and treatment requirements.

The estimated $20-$30 billion in costs to replace lead service lines nationally over the next decade are substantially higher than the $1-$3 billion estimated under the existing rule. The Infrastructure Investment and Jobs Act provides funding for lead pipe replacement (about $7.4 billion is allocated in grants and principal forgiveness, with another $7.6 billion in low-interest loans). The remainder will be funded out of rates. That will be especially challenging for utilities with significant proportions of lower income residents. Cities like Chicago, Milwaukee and Detroit are examples of the latter.

The EPA requires every utility to submit an inventory of lead service lines by October 2024, but existing data indicates that lead service lines tend to be more prevalent in Midwestern cities with older housing stock. The installation of lead service lines was banned by Congress in 1986. The proposed Lead and Copper Rule Improvement allows for extensions in limited circumstances. The proposed rule caps the number of required service line replacements at 10,000 annually.

Chicago’s water utility has one of the highest concentrations of lead service lines in the nation would likely qualify for a deferral. State of Illinois data shows that the city has approximately 410,000 lead service connections, comprising over 80% of total retail connections. The city would have approximately 41 years to complete the replacements, though the Illinois EPA could require a faster timeline if deemed feasible. Chicago recently closed on a low-interest WIFIA loan for $336 million to help fund the replacement of some 30,000 existing connections.

NYS THRUWAY P3 FAIL

It took a long time for the New York State legislature to authorize the use of public private partnerships for major infrastructure projects. Fortunately, the first few projects – multiple bridge replacements in the NYC metro area and projects at the airports went off well and the P3 concept was seen as a useful tool in overcoming historic difficulties in the State with infrastructure projects. Those successes built support for P3 projects so additional such projects were approved.

One of those projects is the refurbishment and modernization of service areas along the Turnpike. There are some 27 of them. I’ve been wondering for a while why the service area refurbishments on the New York State Thruway were taking so long. As a life long New Yorker it was easy to assume that each rest stop would be over built and designed and that traditional inefficiencies were plaguing this project.

Now the Authority has admitted that the projects are way behind schedule and facing serious cost overruns. An Irish firm Applegreen leads the private side of the partnership. The deal was for Applegreen to rebuild the weathered and outdated rest areas in exchange for a 33-year lease of the facilities and a share of revenues. Construction began almost two years ago, less than half of the work has been done, and it’s running well behind schedule.

The partners have cited increased costs due to inflation and supply chain issues related to the pandemic. There are no provisions in the agreement for increased funding from the State. Efforts were made in the State Legislature to generate support for funding part of an estimated $250 million funding shortfall. Those efforts were undertaken as part of the fiscal 2024 budget process and failed. The hope for the partners is that the issue will be reconsidered in the fiscal 2025 budget negotiations.

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

STORMWATER FEES

When rain falls, it either lands on a pervious or an impervious surface. Pervious surfaces—like lawns, gardens, and sand— can absorb and retain water (albeit at varying rates) during precipitation events and then gradually release it back into the water cycle. Conversely, impervious surfaces are hard surfaces that prevent water from soaking into the ground, such as roofs, pavement, metal, and wood. Since impervious surfaces cannot soak up water, they generate stormwater runoff. Stormwater runoff is water from precipitation that flows on impervious surfaces until it reaches a pervious surface or drains into a sewer system or waterway.

Currently, most jurisdictions in New York do not bill property owners separately for stormwater management. Instead, jurisdictions use revenues generated from metered water and sewer bills based on the amount of clean water consumed, property taxes, or both. Neither water consumption nor property values reflect a property’s contribution to stormwater runoff, creating a disconnect between the revenue being generated and stormwater management costs.

For instance, when metered water revenue is used to pay for stormwater management projects, properties like parking lots that have large impervious surfaces— which contribute to stormwater runoff—but use little or no metered water, pay almost nothing towards the cost of stormwater management. Similarly, when property taxes are used, parking lots may pay very little for stormwater management because they are less developed and therefore may have lower property taxes assessed.

At the request of New York State Assembly Member, Emily Gallagher, the Independent Budget Office (IBO) examined the fiscal impact of a potential stormwater fee in New York City by applying the stormwater fee rates of four peer cities—Baltimore, Philadelphia, Seattle, Washington, D.C.—to properties in New York City. The two most important elements of a rate structure are what the fee is assessed against (impervious land area versus total land area) and whether the fee is set as a flat, tiered, or variable rate.

Revenue potential greatly varies depending on how the stormwater fee is set. IBO’s revenue estimates range from $266 million (using Baltimore’s rates) to $892 million (using Washington, D.C.’s rates) per year. For most census tracts, the median fee per household would equal less than one percent of median household income under all peer city rate structures. Among residential properties, those located in boroughs outside of Manhattan would likely face a greater financial burden due to larger average property sizes, lower population density, and lower median incomes.

The City of Ithaca is the only municipality in New York State with a general stormwater fee, which it adopted in 2014. Since then, no other New York municipality or county has followed suit, despite interest and advocacy from various jurisdictions, including New York City. One concern a municipality may have in implementing a general stormwater fee is the ambiguity surrounding legal authority of localities to implement stormwater fees (Ithaca’s fee has not been challenged in court).

The 2023-2024 legislative session in Albany includes a proposal (A4019/S4169) to address this ambiguity by explicitly authorizing “local water and sewerage authorities to charge fees for surface runoff.”

CONGESTION PRICING DEBATE GETS REAL

The announcement of proposed pricing for the congestion pricing initiative in NYC has stimulated a robust debate. The proposal:  Passenger vehicles and passenger-type vehicles with commercial license plates should be charged a $15 toll for entering the CBD, no more than once per day. Trucks should be charged a $24 or $36 toll for entering the CBD, depending on their size, as defined below. Buses providing transit or commuter services should be exempted from the toll. Other buses should be charged a $24 or $36 toll for entering the CBD, depending on their type.

Motorcycles should be charged half the passenger vehicle toll, no more than once per day. Tolls should be charged to vehicles only as they enter the CBD – not if they remain in or leave the zone. Congestion toll rates should apply during the most congested times of the day – from 5am to 9pm on weekdays, and from 9am to 9pm on weekends. Toll rates should be 75% lower in the nighttime.

A credit against the daytime CBD toll rate should be provided to vehicles entering through the four tolled entries that lead directly into the CBD: the Queens-Midtown, Hugh L. Carey, Holland, and Lincoln Tunnels. The credit should be $5 for passenger vehicles, $2.50 for motorcycles, $12 for small trucks and intercity/charter buses, and $20 for large trucks and tour buses. No crossing credits should be in effect in the nighttime period when toll rates are 75% lower.

One issue we will note was the less than sensitive comments from the planning panel’s chair regarding access to medical facilities within the congestion zone. No, insurance companies do not cover the cost of driving and parking when you go to a doctor. Parking is not always at a favorable price even at hospital facilities. In many cases, the drivers and/or passengers are disabled which means that mass transit – under the current conditions – is not an accessible alternative. Full subway access is not expected for another 25 years.

New Jersey remains a primary source of opposition and proposed discounts for NJ drivers using the Lincoln and Holland Tunnels have done nothing to quell it. Some are positing that the fee will make office space in Jersey City, Hoboken, and Weehawken that much more attractive. Nevertheless, litigation is pending which challenges the fees. There is also a call for objective monitoring of changes in pollution in areas like the Bronx which are likely to attract more truck traffic.

The comment period is underway and the hope is that the scheme can take effect by May 1. In the interim, it will be a rough ride as many constituencies are seeking exemptions and many will have compelling cases to make. One last issue: data released by the Traffic Mobility Review Board shows that 85% of 1.5 million people commuting into Manhattan south of 60th Street already take the subway, the PATH, the three commuter railroads or a bus.

DROUGHT AND PORTS

When labor unrest led to fears of shutdowns at West Coast ports – Los Angeles being the major example – some shippers took to using the Panama Canal and unloading their cargos at East Coast ports. For a time, the cost of travelling further to the East Coast provided a reasonable alternative so long as the Panama Canal remained open and cost effective.

The finalization of contracts with the major unions representing Port employees resumed the attractiveness of West Coast ports. The Port of Los Angeles and Long Beach have seen steady increases in traffic since the labor settlement. That trend is only going to increase as the Panama Canal has become a much less efficient and cost effective alternative.

A drought has impacted water levels along the route of the Panama Canal. This has resulted in limitations on the size of ships permitted to pass through as well as on the number of daily transits. This has caused the operator of the Canal to resort to a reservation system for ships wishing to transit through the canal. It has also been steadily reducing the number of daily passages.

The Panama Canal Authority, which normally handles about 36 ships a day, announced on Oct. 30 that it will gradually reduce the number of vessels to 18 a day by Feb. 1 to conserve water heading into the dry season. There was a total of 55 vessels with booked slots waiting as of midday on November 27. The real problem is with ships without reservations. The operator began offering an additional slot in the Panamax Locks for auction two days prior to transit. This slot is being limited to supers (boats above a certain size) and regular vessels that have been waiting for at least 10 days before the auction and do not have a booking slot. It was estimated that the initial bid will be $55,000 in addition to the normal tariff.

It is therefore, no wonder that the Port of LA/Long Beach is seeing steady increases in cargo volumes. October was the driest moth recorded in the history of the Canal. Until water levels revive in the lake segments of the Canal, the limitations will persist.

AV REGULATION

Law enforcement in San Francisco has taken a view that “no citation for a moving violation can be issued if the [autonomous vehicle] is being operated in a driverless mode.” California law requires that a moving violation ticket must be issued to a “driver”. Speed camera laws specify that a violation is cited against the vehicle and is not assigned to a driver for purposes of license points. Texas changed its transportation laws in 2017. According to the Texas Transportation Code, the owner of a driverless car is “considered the operator” and can be cited for breaking traffic laws “regardless of whether the person is physically present in the vehicle.”

General Motors is slowing the expansion of its Cruise automated driving division and significantly cutting spending at the unit after suspending operations in the wake of its difficulties in San Francisco. “We must rebuild trust with regulators at the local, state and federal levels, as well as with the first responders and the communities in which Cruise will operate.” Cruise has been testing self-driving taxi services in San Francisco; Phoenix; Houston; and Austin, Texas; and it has tested its autonomous vehicles in six other cities, including Nashville and Seattle. 

ELECTRIFICATION

The Washington State Building Code Council approved new codes mandating the use of heat pumps in most new construction. Those regulations are scheduled to take effect on March 15, 2024 absent legal challenges. The new regulations follow challenges to previously established regs. What the council enacted Tuesday offers builders incentives in the permitting process for choosing electric heat pumps – which provide both heating and cooling in the same unit – instead of natural gas furnaces. 

The biggest changes removed language mandating heat pumps for heating water and rooms in homes. It revised how credits that builders need to comply with the state building code are awarded under a scoring system in hopes of spurring greater use of low-carbon building solutions. Under the new rules, a builder will need five credits for a home of less than 1,500 square feet. That’s double what they need today. For a home between 1,500 and 5,000 square feet, they will need eight credits, up from five.

Connecticut Governor Ned Lamont has withdrawn his proposal to end the sale of internal combustion cars in the state by 2035. He cited a lack of legislative support. The hope is that the issue will be reconsidered in the 2024 legislative session.

The City of Detroit has created the first stretch of road in the United States with the capability to charge electric vehicles as they drive on the road. The project is a public private partnership between The Michigan Department of Transportation works with an Israeli electronics firm which developed the technology. The use of the copper and rubber charging infrastructure is buried under conventional asphalt paving. The state is covering one-third of the cost while the private partner covers the rest.

NYC PENSION CHALLENGE

Four NYC employees, backed by Americans for Fair Treatment, a right-to-work group that provides assistance to public sector workers who want to leave a union filed a suit in the New York state courts challenging the divestment from fossil fuel investments in the three pension funds covering City employees. The suit is based on the theory that asset managers breached their fiduciary duties by including climate-related risks when assessing the financial liability of energy companies.

The plaintiffs believe that their pensions are threatened by the use of ESG criteria in the investment process. The City points out that the employees are beneficiaries of a fixed benefit pension plan. The City’s obligation to pay is not based on investment performance. The pension funds — the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York and the New York City Board of Education Retirement System pointed out that after the 2021 decision to stop investing in fossil fuels, the energy stocks lost more than 35 percent of their value, while the broader stock market increased in value by more than 50 percent.  

The suits are part of a coordinated effort. Texas’ attorney general lost his case in September which challenged a US Department of Labor rule that ESG considerations were appropriate factors to be considered in the investment process.

Judge Matthew Kacsmaryk of the U.S. District Court for the Northern District of Texas (the conservative go-to judge on a number of issues) however, rejected Texas’ challenge in September, writing that the Biden rollback was not “arbitrary and capricious” under the Administrative Procedure Act, nor did it run afoul of the federal law that sets standards for retirement plans. It did not however, rule on any issues related to fiduciary duty.

Kacsmaryk wrote that the Labor Department since at least 2015 had “posited that ESG factors ‘may have a direct relationship to the economic value of the plan’s investment.’” The case is being litigated by the son of Antonin Scalia who ran the Labor Department in the Trump administration. The politics of the case are obvious.

HOSPITALS

Moody’s announced that it had raised its rating on Catholic Health System’s (Buffalo, NY) rating to Caa1 from Caa2. The upgrade to Caa1 reflects a reduction in the risk of payment default because of recurring operating improvement and the likelihood of covenant compliance at fiscal year-end 2023 as well as approved state and federal grants that will stem further liquidity declines.

Like so many hospitals, the reductions in volumes during the pandemic along with the costs of labor and supplies had significantly strained the System’s balance sheets and liquidity. There were real concerns about default. Now, volumes are recovering which has benefitted the System’s cash position. While outpatient surgeries have rebounded, inpatient volumes still lag pre-pandemic levels. Liquidity will remain weak and reliant on one-time grants for near-term stability.

The outlook on the rating was raised from negative to stable as monthly declines in the operating loss excluding non-recurring grants continue, compliance with the fiscal yearend 2023 covenant, and maintenance of 30-40 days cash on hand.  Whatever funding is received from state and federal sources will be supportive of liquidity.

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

Happy Thanksgiving to you all. It may be the best holiday in that it is not based on political ideas or dare we say religion. It’s the one day when no matter who you are or what you like to eat, it is a day simply to be grateful for being. That is something that everyone – no matter their identity – can do in their own way. Safe travels to those who must. Enjoy the feast.

Our next issue will be the December 4 issue.

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NYC – IT BEGINS

We have long been of the view that the outlook for New York City’s budget is at best mixed and far from stable. We are aware that many disagree. That debate continues but the November Financial Plan Update released by Mayor Adams will add heat to the debate. The Update reflects operations of the City through its first fiscal 2024 quarter.

The FY24 budget has grown $3.4 billion since budget adoption in June, in recognition of $2.6 billion in grant funds and $776 million of better-than-expected revenue growth, primarily driven by income and sales tax collections. Outyear gaps are $7.1 billion in FY25, $6.5 billion in FY26, and $6.4 billion in FY27.  To meet costs associated with care for asylum seekers, the city added $6.2 billion over FY24 and FY25 in this plan, bringing total funds budgeted for migrant needs over the two fiscal years to $10.8 billion. The administration added the following on top of previously budgeted funding: city funds of $1.4 billion in FY24 and $4.8 billion in FY25, state grants of $447 million in FY24 and $272 million in FY25, and federal aid of $10 million in FY24.

As always it is a political document. The mayor continues to blame the federal government for the problem and insufficient aid. Away from the migrant issue, the Mayor cites sunsetting COVID-19 stimulus funding, slowing FY24 tax revenue growth, expenses from labor contracts this administration inherited after being unresolved for years, and a lack of significant state or federal government action on the asylum seeker crisis. The Mayor’s relation ship with Albany is poor and the notion that contracts his Administration settled were somehow “inherited” lay the politics on a bit thickly.

The Mayor correctly notes that the historically large $7.1 billion FY25 budget gap must by law, be closed in mid-January. The deliberations between the Mayor and the increasingly activist City Council will likely be contentious which will complicate the effort to balance the budget.

CLEAN ENERGY SETBACKS

The clean energy sector is beginning to hit some bumps in the road to development and production. The impact of higher interest rates and inflation has reduced the economic attractiveness of many projects, especially wind. The recent announcement by Ørsted that it is not going to build wind turbines off the New Jersey coast is just one example. Now, Siemens Gamesa confirmed the cancellation of the company’s proposed $200 million factory at the Port of Virginia in Portsmouth. It would have created more than 300 jobs.

In Georgia, SK Battery facilities in Jackson County supply batteries for Ford and Volkswagen EVs. The company announced that it would layoff some workers at the facility. Lower than projected demand for electric vehicles was cited. The news comes in the wake of announcements of reductions or pauses in investment at GM, Ford, and Tesla electric car facilities in the face of slower than hoped demand.

This all comes after a series of setbacks to wind development projects. In addition to the NJ cancellation, developers of wind generation off the New England coast have sought to renegotiate output sales agreements. Inflation has driven up the cost to build wind arrays just as several projects were preparing to execute contracts with suppliers. Manufacturing capacity in the U.S. for offshore wind towers, blades and rotors, or for building and operating the ships needed to install them at sea is inadequate to meet current demand.

Wind is still making progress amidst the upheaval. Vineyard Wind, a joint project of Avangrid and Copenhagen Infrastructure Partners off the coast of Massachusetts is under construction with full operations beginning by next year. South Fork Wind, an Ørsted project off the coast of Rhode Island that will power New York, may go live sooner. Dominion Energy said last week that its 176-turbine Coastal Virginia Offshore Wind project is on schedule.

Residential solar power is under attack again, this time in West Virginia. In a rate case filed with the West Virginia Public Service Commission, Monongahela Power and Potomac Edison are asking the commission to restructure the current net metering policy for future solar customers and change how much users are credited for selling back power generated through solar. Current regulations allow households and businesses to sell back their surplus solar energy to the electric grid at a fair market value — the same price the power companies charge other residential customers for that electricity.

Mon Power and Potomac Edison want to change the policy so that solar customers are credited at a “wholesale rate” of $0.0663 per kilowatt hour — roughly half of the rate charged by the companies — rather than the market rate. Solar customers already pay their utility company a base level fee which is supposed to cover the connection and other related costs. 

NEW MEXICO ENERGY BOOST

The Department of the Interior’s Office of Natural Resources Revenue (ONRR) announced the disbursement of $18.24 billion in revenues generated in fiscal year 2023 from energy production on federal and Tribal lands and federal offshore areas. The funds may be applied to irrigation and hydropower projects, historic preservation initiatives, conservation of public lands and waters, and investments in maintenance for critical facilities and infrastructure on public lands. 

ONRR disbursed $4.72 billion in fiscal year 2023 funds to 33 states. This revenue was collected from oil, gas, renewable energy, and mineral production on federal lands within the states’ borders and offshore oil and gas tracts in federal waters adjacent to four Gulf of Mexico states’ shores. The big winner in this round was New Mexico. It received $2.93 billion. That is about equal to the size of the state’s budget reserves coming into FY 2023. Wyoming was the only other state to receive over $200 million ($832.86 million).

PREEMPTION IN MICHIGAN

The issue of preemption by state governments to overcome local regulation of energy development has usually been used by those opposed to the expansion of wind and solar. Whether it is setback requirements or zoning obstacles, the move toward preemption has generally been to stymie the effort to decarbonize. As with many other things however, the door to preemption swings both ways. In Michigan, it is clean energy proponents who seek to override local control.

The legislature approved bills to shift permitting authority over wind, solar developments to the state. Thetwo-bill package would let state regulators override local decisions about where to allow large-scale wind and solar arrays. The state has cited local regulation as an impediment to adoption and pointed to difficulties the state’s IOUs have had in siting renewable energy. The bills make the Michigan Public Service Commission the ultimate permitting authority. The bills also set criteria governing how much noise and light the projects can emit, how far they must be from neighboring buildings, and other particulars.

The bills provide for local governments to keep permitting authority if they pass their own ordinance complying with the state’s requirements. But developers could bypass the local permitting process if a community lacks an approved ordinance, takes too long to review a proposal, or rejects a proposal that complies with state standards.

LOOKING TO THE STATES TO BE SAVED

PacifiCorp has asked the Oregon Public Utility Commission to limit future lawsuit awards against the company to “actual” damages for property and loss of life. The company also wants to be allowed to establish a condition of accepting electrical service with the utility. The company seeks to require customers to waive their right to other types of damages such as non-economic and punitive awards by juries.

The utility has filed the same request in five of the six states where it provides electricity service, including Washington, California, Idaho and Wyoming. PacifiCorp was successfully sued after a September 2020 fire resulting in $90 million in damages against it. The company cites the fact that all but some $4 million of that mount was for economic damages. That has helped drive up the company’s liability insurance costs.

The company faces another lawsuit from victims of the Archie Creek fire in southern Oregon that is slated to go to trial in 2024 and 2025. There will also be three hearings in 2024 to determine damages for 20 additional plaintiffs and a group of timber companies. PacifiCorp said in its most recent financial filings that “certain government entities” informed the company that they are contemplating legal actions. Total damages sought in lawsuits filed in Oregon related to the 2020 fires is about $8 billion.

Will it work? The Oregon Public Utility Commission said it had never previously addressed a waiver of liability in exchange for service as PacifiCorp has proposed. In addition, state regulators are planning to recommend the commission suspend a current pending rate filing for an investigation. The “remedies clause” of the Oregon Constitution, which guarantees that the remedies that exist in law remain available to every person would seem to stand in the way of PacifiCorp’s goal.

TRANSIT TAX IN KC

Kansas City, MO has levied a separate, half-cent sales tax to fund bus service since 1971 that is not subject to voter approval. An additional 3/8-cent tax was approved in 2004 through a public vote. The tax was supposed to phase out after five years and be replaced by a bi-state transit tax, but that never happened. Instead, Kansas City voters overwhelmingly renewed the tax in the fall of 2008 for 15 years. A vote this month was to extend the term of the tax by ten years.

Some 73% of Kansas City voters approved extending the 3/8-cent sales tax that supports bus service within Kansas City’s boundaries. The sales tax provides about 30% of the Kansas City Area Transportation Authority’s budget. If the voters had rejected the extension, KCATA would have had to cut its budget by 25% by eliminating eight bus routes, reducing service on 19 others and cutting service on Sunday and Saturday night.

The vote came against the backdrop of local transit funding policies. KC is a jurisdiction conducting its own experiment with free fare programs. If the vote had failed, the KCATA board of commissioners had instructed KCATA management to find new funding sources for the zero-fare program and complete a feasibility study by December on “the possible re-institution” of bus fares.

DESERT WATER PROJECT

The agency which manages the aquifer providing water to the City of Ridgecrest, CA has been facing declines in available supplies as the result of California’s long term drought. The city competes for water with area farm and mineral interests as well as the US Navy’s China Lake Weapons base. The pressure on the aquifer has led the Authority to propose new sources of water.

The latest and largest is a $200 million, 50-mile-long pipeline system that would move water from the California Aqueduct in California City—over arid desert mountains—to a storage tank in the urban center of Ridgecrest.

The Authority believes that it can look to the federal government and it would pay $150 million of the cost. The remaining $50 million of cost would be passed on to ratepayers. The plan comes as substantial water users like pistachio growers and mining operations are subject to an effective surcharge with a special “groundwater replenishment fee” of up to $6 million a year.

It’s the latest example of the ongoing water shortages in the West. State law requires that local agencies bring groundwater aquifers into balanced levels of pumping and recharge. The Indian Wells situation can only achieve that through reduced groundwater withdrawals. The amount of water currently flowing into the valley’s underground basin is 7,650 acre-feet a year. Annual usage is about 28,000 acre-feet. 

The Authority and the local water distributor the Indian Wells Valley Water District are caught in the middle of disputes between the Authority and large ag and mining interests. The District is making full payments of all charges and assessments to the Authority but is doing so “under protest”. The large water user and employer – China Lake – is ironically exempt from the groundwater fee as a federal entity.

In reality, the plan faces several significant hurdles. Its route would run from a starting point at the Antelope Valley-East Kern Water Agency feeder pipeline in California City through historical habitat for wildlife including mountain lions, state and federally threatened desert tortoises and state threatened Mojave ground squirrels.

AUSTIN, TECH, AND KEEPING IT WEIRD

At the end of 2022, some 6.6 million square feet of office space was expected to be occupied over the next few years primarily by tech companies. The narrative has been that the more favorable income tax situation in Texas and Austin’s history as a tech center would drive mass migration from California to Texas. The reality is that the plans of the tech companies have significantly changed.

Upon completion, an under construction office tower was poised to become Austin’s tallest building. Its occupancy would be anchored by Meta which had committed to leasing nineteen floors in the building. In another building, Google planned to occupy 35 floors. They are paying for the space but not occupying it. Facebook, Tik Tok, and Indeed are all stepping back from office space commitments.

It does not look like a temporary trend. The airlines have noticed. Virgin Atlantic says it will discontinue flights from Austin to London early next year, and American Airlines is cutting 21 Austin routes, mainly to domestic destinations such as Cincinnati and Nashville. Virgin’s rationale: “demand in the Tech sector is not set to improve in the near term, with corporate demand at 70 percent of 2019 levels.” Austin’s commercial vacancy rate hit 30% in the third quarter, near its peak during the Great Recession.

The most interesting aspect of this is that many in Austin won’t miss those companies. The city’s real estate market has been on hyperdrive and locals hope that it will relieve pressure on home prices. They are already seeing rent declines. The city can take a bit more measured approach to infrastructure if demand in the near term remains constrained. All in all, the effort to “keep Austin weird” would seem under a bit less pressure.

BATTER UP IN VEGAS

Major League Baseball owners approved relocation of the Oakland A’s to Las Vegas in a unanimous vote. Ownership intends to move the team into a new stadium in the city ahead of the 2028 season. The team’s current stadium lease at the Oakland Coliseum expires after next season. Where the A’s will play for the 2025-27 seasons is not yet clear. Nevada’s legislature and governor have approved $380 million in funding, but a political action committee backed by teachers in the state is attempting to get the funding on a public ballot next November. 

In Las Vegas, the team would likely be a perpetual recipient of revenue-sharing dollars from other team owners. It would be MLB’s smallest television market. However, the league projects that local revenues will be higher in Las Vegas than they’ve been in Oakland in recent years. The stadium will be located on the Strip on the site of Caesars Palace.

UTAH UTILITY TAKEOVER

A bill has been submitted to the Utah legislature which would provide for what would effectively be a legislative takeover of the management of the Intermountain Power Project. The bill would give lawmakers four of the seven seats on a new governing board for the Intermountain Power Authority, replacing a current board made up of representatives of the 23 Utah cities that can draw power from the plant. Two other seats would come from the cities, and the last would be appointed by the governor.

The legislature commissioned an audit which found that IPA was managing the plant with too much deference to its largest customer, the Los Angeles Department of Water and Power. The sponsor wants the Authority to employ carbon capture and enhanced pollution control equipment to facilitate the use of coal. IPA is undertaking plans to convert the plant to natural gas and produce hydrogen.

IPA is responding to the fact that the customers for 95% of its power are under mandates to stop supporting coal plants.  Efforts by Utah coal producers to export coal have hit hurdles as West Coast jurisdictions will not approve coal handling equipment at ports. Efforts to export oil by train are running into even more regulatory hurdles. The reality is that California customers have built up more renewable sources and need less from the plant. This means that the project has employed fewer people and paid fewer taxes in the state than was originally anticipated.

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

Joseph Krist

Publisher

WE WORK, REMOTE WORK, DOWNTOWN WORK

A combination of events and releases of data this week has shone a brighter spotlight on the current state of office real estate. The glaring symbol of the change in where people work is WeWork. The bankruptcy, unlike many failures, has several fathers. Nevertheless, the decline of office space utilization and the rise of remote work wreaked too much damage on the company’s business plan. It puts the debate over remote work back on the front burner.

The data part comes from a recent release from the University of Toronto. Researchers there have been using data from cell phones to track the changes in foot traffic in North America’s largest cities. The latest data showed the level of traffic in the March to May time period in 2019 versus that in 2023. It covers 66 cities in the U.S. and Canada. It does not paint a particularly favorable picture even if it does support what the eye sees.

Only Las Vegas has returned to the same level of foot traffic. It is currently at 103% of the 2019 level. Given the increasing number of large scale events (to say nothing of an upcoming Super Bowl, this weekend’s inaugural F1 race) both newly occurring and recurring, this is not a surprise. Following Las Vegas was a group of eight Sun Belt cities of which Miami and Phoenix fared the best with recovery rates in the 90%+ range.

It is the lower rated cities that are concerning. The bottom 10 cities in terms of recovery rates include Minneapolis, Portland OR, Chicago and Houston which all had rates of 64% or less. The next 10 with recovery rates between 60 and 70% include NY, D.C., Baltimore, S.F., Denver and Philadelphia.

ELECTION DAY

Cincinnati voters approved a ballot initiative which allows the Cincinnati Southern Railway board to sell the railroad to Norfolk Southern for $1.6 billion. The railroad was the last municipally-owned railway in the U.S. Sale proceeds will be used to create a trust which is designed to generate interest earnings which will be used to improve city infrastructure. The Cincinnati Southern Railway has long been leased to Norfolk Southern, but in April of 2022 during negotiations to renew the lease, Norfolk Southern offered to buy the railroad. The current lease brings in roughly $25 million a year.

In Maine, voters decisively rejected an initiative to create a public power utility to take over the operations of two investor owned utilities. Despite widespread dissatisfaction with the state’s largest electric provider, the Governor and several labor unions opposed the measure. In Ohio, despite being overshadowed by the presence of an abortion initiative, voters approved the legalization of recreational marijuana. The vote marks the first time that a majority of Americans will live in states with legal cannabis.

Coloradans rejected an initiative which would have weakened the impact of the TABOR amendment which requires funds above certain levels to be returned to taxpayers. Texans voted to increase the homestead exemption for local property taxes from $40,000 to $100,000. They also voted to create a fund for the development of broadband in the state. They rejected the concept of a wealth tax. The most impactful may be the approval of the creation of an energy fund designed to provide low interest financing for new generation. The down side of the vote is that the proposition was explicitly designed to support new natural gas generation.

TRANSPORTATION OPINIONS

The Mineta Institute founded by the former US Transportation Secretary has recently announced the results of its 14^th annual survey of attitudes towards transit issues. The findings highlight the disconnect between what people think and what lawmakers seem to believe. Findings related to gas taxes include that only 2% of respondents knew that the federal gas tax rate had not been raised in more than 20 years, and 70% of respondents supported increasing the federal gas tax by 10 cents per gallon if the revenue would be dedicated to maintenance or safety.

With respect to mileage fees, around half of respondents supported some form of mileage fee, whether that was assessed on all travel or just on commercial travel. The majority of respondents supported variable rate structure options that included 62% who supported charging low-income drivers a reduced mileage fee rate and 52% who thought electric vehicles should pay a lower rate than gas and diesel vehicles.

From here, the conclusion to draw is that mileage fees can’t come fast enough. Set them by class of vehicle and set it at an amount that most closely parallels the revenue stream from gas taxes. This way registration fees do not have to be set differently depending on the source of power for the vehicle. Currently, fee differentials provide fuel to complaints from EV owners about the higher fees they pay even though they arguably are a net cost to transportation funding relative to gas powered cars.

NUCLEAR HAS A MIXED WEEK

The hopes of those seeking to develop small scale nuclear generation technology took a big hit this week. NuScale Power announced that it was cancelling its development of a six unit modular generation facility in Idaho. The project was being undertaken with the participation of a public power agency – the Utah Associated Municipal Power Systems, which supplies electricity to public power providers in seven Western states.

UAMPS management was enthusiastic about the project but not all of its member utilities were. That put the project in the position of needing additional capacity purchases in order to justify moving ahead with the project. The cost of building the reactors had increased significantly to $9.3 billion from $5.3 billion because of rising interest rates and inflation. This left the project with insufficient commitments to allow financing to move forward.

In Illinois, Governor Pritzker said he will sign a bill into law to lift a 36-year-old moratorium on nuclear construction. He had vetoed a previous bill enacted earlier in the legislative session. This bill limits the nameplate capacity of such reactors to 300 megawatts. The law requires the state to develop regulatory proposals for regulators at the Illinois Emergency Management Agency to approve by January 2026.  

PARKING REQUIREMENTS

A long standing practice for local planning and zoning boards has been to require off-street parking associated with a new development. As climate change grows as an issue, many have pushed for changes in local development regulations to reduce the need for parking at new developments. There is also the idea that remote work will reduce auto use and the need for parking at current scale.

This week, the Austin TX City Council voted to eliminate minimum parking requirements for virtually every kind of property citywide including single-family homes, apartment buildings, offices and shopping malls. Portland, OR, Minneapolis and San Jose are prior adopters of the policy. Austin now becomes the largest population city to take the step. The city will still require properties to comply with federal law and build accessible parking spaces for people living with disabilities.

Now, does Austin take the next step and address overall zoning regulation reform? Like many other places, housing is an issue in the city and there is a push to use zoning to address the issue. There is a push to allow up to three housing units in most places where single-family homes are allowed and reducing the required amount of land those homes have to sit upon.

OLD SCHOOL AIRPORT FINANCE

Normally it would not be an especially big deal to see voters in a municipality approve debt for revenue based assets. So, it was not a particularly noticeable headline to see that cited the approval of bonds for airport projects by voters in Des Moines, IA. What was noticeable was that the bond authorization will not be backed by a direct pledge of airport revenues to secure the bonds.

The voters approved a $350 million general obligation bond issue for the project. Tax backed full faith and credit bonds. The project will modernize and expand the city’s airport. Here’s where it gets interesting. Construction of the terminal is planned to begin in April 2024. A study is projected to start in January, to assure the airport is prepared to pay back the debt. Estimates are that it will take two to three months to complete.

Ultimately, the city will execute a loan agreement with the Des Moines Airport Authority that expects to capture airport revenues. The rationale for doing such an old school financing is based on cost and ownership. The use of general obligation debt is to secure a lower borrowing cost than would be achieved on a stand alone revenue bond. The city also explored but ruled out a P3 attributing that decision to a desire to maintain ownership of other airport assets.

NYC ECONOMY AND THE PANDEMIC

The NYC Independent Budget Office released some interesting data on incomes for the year 2021. The study used tax return data. About 3.9 million full-year New York City residents filed tax returns in 2021, a return to normal from the unusually high 4.1 million number of filers in 2020. Total AGI in 2021 was $457 billion, up from $391 billion in 2020 (or $410 billion, adjusted for inflation), despite the lower total number of filers in 2021.

One data point leaps out as a source of concern. The top 1 percent of filers represented 44 percent of New York City’s AGI in 2021, up from 39 percent in 2020 and 35 percent in 2019. At the other end of the spectrum, total unemployment compensation diminished to $15.4 billion in 2021, from $22.9 billion in 2020, it remained far above 2018 and 2019 levels of $514 million and $545 million, respectively. The concern is that these changes just further cement the issues of inequality which continue to grow in the city.

NYC WARNING

The NYS Comptroller raised concerns about New York City’s finances as it deals with the recovery from the pandemic at the same time it is overwhelmed by asylum seekers. He warned this week that the fiscal year 2024-2025 budget gap for the city could reach as high as $13.8 billion unless Mayor Eric Adams quickly implements cuts to city programs and curbs new spending. The most alarming number was that some 42% of the estimated gap is attributable to the costs associated with the asylum migrants. The city estimates these costs may grow next year to equal what it spends to run the sanitation and parks departments combined.

He also highlighted an issue we have been worried about for some time. They are not all attributable to the Adams administration. The DeBlasio administration started the city down the road of funding recurring expenses with non-recurring revenues. “City-funded spending has increased more than 50% over the past decade while recurring revenues have not kept pace,” according to the Comptroller.

The other major worry concerns school funding. The Department of Education accounts for 36% of citywide expenditures and faces several issues — including low enrollment and the state-enforced class size mandate. Much state aid is tied to attendance. Public school enrollment fell nearly 9.2% between 2019 and this school year, with some projections expecting it to decline further.

The Mayor will be releasing the November update to the City’s long term fiscal plan.

PUERTO RICO SOLAR

We have long advocated for the development of solar power infrastructure in Puerto Rico in the wake of the 2017 hurricanes. Now, the U.S. Department of Energy (DOE) has announced which solar companies and nonprofits had been selected to install rooftop solar and battery storage systems for vulnerable households in Puerto Rico.  

Eligible beneficiaries of the systems to be installed will include very low-income, single-family households that are either: located in areas that have a high percentage of very low-income households and experience frequent and prolonged power outages; or include a resident with an energy-dependent disability, such as an electric wheelchair user or individual who uses at-home dialysis machines.

This marks the first round of selections from the 2023 PR-ERF Funding Opportunity Announcement, which was announced in Puerto Rico in July 2023.  The Fiscal Year 2023 Consolidated Appropriations Act included $1 billion to establish the Fund. Three qualified solar companies with an existing workforce in Puerto Rico as well as five qualified nonprofits and cooperatives across the region were selected to negotiate the implementation of the program.

CARBON CAPTURE

The evidentiary hearing for Summit Carbon Solutions’ pipeline permit in Iowa concluded this week. Now the process will involve development of a transcript, a period of time for written comments about the transcript, and a period of time for rebuttal comments. The company had sought an IUB decision by the end of the year. Summit had initially planned to have its pipeline system in operation sometime in 2024.

While it waits for the Iowa process to unfold, North Dakota is in the process of reconsidering the company’s new modified application, but there is no deadline for that process to complete. Summit has indicated it will reapply for a permit to build its pipeline through South Dakota, but it has declined to say when that will happen. Operation has already been pushed back into 2026.

In the meantime, the first commercial plant in the United States to use direct air capture began operations in Tracy, CA. The process takes the carbon dioxide it pulls from the air and have the gas sealed permanently in concrete, where it can’t heat the planet. To earn revenue, the company is selling carbon removal credits to companies paying a premium to offset their own emissions. The project is much smaller than two other projects planned for Texas and Louisiana. Previous attempts at scale have not been successful.

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