Joseph Krist

Publisher

EV TAX BREAKS UPHELD

The Georgia Supreme Court has declined to hear an appeal challenging the $5 billion project’s bond agreements with the state and the Joint Development Authority of Jasper, Morgan, Newton, and Walton counties (JDA). Rivian hopes to develop a $5 billion facility, expected to occupy 2,000 acres in the state, was announced in late 2021. The estimated production output the plant is 400,000 electric vehicles per year.

Construction on the site was originally set for 2022, which would have allowed operations to begin within two years, but due to a number of legal challenges, Rivian has moved the launch date back to 2026. The lawsuit before the Georgia Supreme Court claimed the state was not legally allowed to arrange the deal and challenged the validity of bonds tied to the offer.

A Michigan judge also declined to issue a preliminary injunction which would have suspend zoning ordinance changes supporting the Ford Motor Co. BlueOval Battery Park Michigan. The $3.5 billion, 2,000-acre plant will create about 2,500 jobs in the Marshall, MI area. Opponents filed a petition to call for a public vote on the matter but the city clerk deemed it insufficient.

That led the group to file the lawsuit on June 27, calling the clerk’s decision unconstitutional and arguing leaders violated the city charter when they tied an appropriation to the rezoning — which made it ineligible for a petition challenge. It asked for an injunction and for the court to order the city clerk to accept the petition.

NY TAX BREAK SCRUTINY

The Citizens Budget Commission (CBC) is a long-standing well-respected organization which analyzes the finances of New York City and State. Recently, it released the results of its analysis of economic development spending by the City and the State. The level of spending in the state has long been among the highest in the nation. The findings were not surprising but nonetheless disappointing.

CBC’s analysis of economic development spending in 2022 finds that: State economic development spending totaled nearly $4.4 billion, including $2.5 billion in foregone revenue from tax expenditures and $1.9 billion in direct spending; and local and county government spending cost $6.3 billion, including $3.1 billion in tax breaks, $2.1 billion in direct spending, and an additional $1.1 billion in foregone local sales tax revenue resulting from State sales tax exemption programs.

The cost of existing incentive programs is projected to increase by $500 million in 2023, a 22% increase from fiscal year 2022, and could increase by another $1 billion annually starting in 2024 as three new and expanded programs take effect: the expansion of the film tax credit increased the annual cap from $420 million to $700 million per year; the extension of the theatrical production increases the lifetime cap of the tax break by another $100 million to $300 million; Green CHIPS (a tax credit for the semiconductor industry) will increase expenditures as much as $500 million per year if fully utilized.

The biggest issue raised by the report is the lack of transparency which makes it very difficult to assess the effectiveness of the strategy overall and for discrete projects. This has created an environment where the State continues to expand existing incentives without evidence that they are necessary or cost-effective. In some cases, State officials have extended or expanded incentives despite independent evaluations showing that the credits are ineffective.

PA SEVERANCE TAXES

There have long been calls for Pennsylvania to adopt some form of severance taxes on the production of natural gas. The Commonwealth currently levies an “impact fee” which is levied on producers for each hole they drill. The fee has raised $2.5 billion since it was created in 2012. Many believe that use of the impact fee approach versus a severance tax has put the Commonwealth in the position of seeming to have left significant dollars on the table.

Now that debate is being revived in the Commonwealth legislature. The state House passed a resolution directing a nonpartisan committee to study severance tax structures in other major gas-producing states. The resolution directs the Legislative Budget and Finance Committee to conduct a study to compare impact fees and severance taxes in the largest natural gas producing states and examine the competitive business climate for the industry in those states.

In 2022, Pennsylvania accounted for 19% of marketed natural gas production in the United States; and Pennsylvania’s marketed natural gas production was at an annual high of 20.9 billion cubic feet per day (Bcf/d) in 2021 and averaged 20.5 Bcf/d in 2022. The amount of gas produced increased from 1,066 billion cubic feet in 2011 to an estimated 7,600 in 2022. The resulting revenue income to the Commonwealth remained essentially flat.

The study is also charged with producing estimates of how much revenue was foregone due to the failure to levy a severance tax. This was the original goal of the supporters of the study. The original resolution focused on that potential revenue loss. The finished product evolved into a study of other factors such as permitting and even climate and their impact on production. This makes the study much more complicated and dilutes the focus on the lack of severance taxes and the potential revenue loss.

URBAN RECOVERIES

Much has been made of the slow recovery of many downtown business areas across the country. There have not been too many studies to produce data to reflect those realities. A recent effort by the University of Toronto has been able to generate an index of urban core recoveries that puts some real data behind people’s estimates and impressions.

The study looked at data derived from mobile phone use an increasingly widespread method of researching mobility. They are computed by counting the number of unique mobile phones in a city’s downtown area in a specified time period, and then dividing it by the number of unique visitors during the equivalent time period in 2019. For example, the March 2023 – May 2023 time period is compared to the March 2019 – May 2019 time period.

A recovery metric greater than 100% means that for the selected inputs, the mobile device activity increased relative to the comparison period. A value less than 100% means the opposite, that the city’s downtown has not recovered to pre-COVID activity levels.

While San Francisco remains the focus of much attention on its problems with its downtown recovery, the data shows that several other big American cities are coping with slow recoveries. San Francisco was ranked last with a 36% recovery. Other cities with recovery rates at or below 50% include Seattle, Boston, Philadelphia, St. Louis, Portland.

That is not to say that recoveries in the major cities outside that group have been great. Recovery rates for many big cities remain below 60%. That group includes Chicago, Nashville, Atlanta, Denver and Houston. Los Angeles and Miami have identical recovery rates of 65%. New York has recovered at a 67% rate which is the same as San Antonio. Washington, D.C. has complained about remote policies for federal employees but the recovery rate there is actually 75%.

The survey found only four cities had reached a recovery rate of 100% or higher. The best large city recovery rate was found in Salt Lake City at 139%. El Paso showed a 107% recovery rate.

MORE PURPLE LINE DELAYS

The State of Maryland and Purple Line Transit Partners are seeking Board of Public Works approval of a modification to the Purple Line Public-Private Partnership Agreement that extends the contractual deadline for achieving Revenue Service Availability to Spring 2027. The schedule change reflects delays in completion of utility relocation activities. The project is more than 50% complete.

In addition to the extension of the project’s Revenue Service Availability deadline, the Maryland Transit Administration will provide net compensation to Purple Line Transit Partners of $148 million, including an increase of  $205 million paid during the construction period, less a $57 million reduction to payments made during the operations and maintenance period. The compensation amount reflects the additional cost of continuing construction activities during the extended period.

OH, CANADA

In November, voters in Maine will cast a ballot on a referendum question on whether to disenfranchise the state’s two largest privately-owned electric utilities to create a consumer-owned utility called Pine Tree Power. If Maine residents were to vote in favor of creating a consumer-based electricity utility, it would likely stimulate negotiation. An elected board of directors would also be formed to manage the Pine Tree Power Company.

One of those electricity companies which would be impacted by a vote in favor of the referendum is Versant Power. Here’s where things get tricky.  Versant is currently owned by Enmax after a deal valued at $1.8 billion was completed in 2020. Enmax is the electric utility serving and owned by the City of Calgary, Alberta. Yes, a publicly owned utility. That is what makes its position on the referendum a bit of a tangle. To date, it has spent some $7.5 million opposing the referendum.

What is it that this municipal utility in Canada dislikes about the deal? “A government-controlled utility company is a risk Mainers can’t afford.”  So says the Enmax funded advocacy group. It’s turning into a bit of a “through the looking glass” experience. It will also highlight the role in several areas of foreign-owned transmission and distribution utilities which have acquired these systems as outlets for their own sources of power.

Those efforts have accompanied a pattern of poor service and underinvestment in the physical grid components those forms maintain. While that underinvestment continues, dividends continue to be upstreamed to foreign parents. Opponents of the operations of Enmax estimate that since Enmax’s acquisition of Versant Power in 2020, it has sent Enmax a yearly dividend which then is revenue to the City of Calgary. It is estimated that Calgary received $82 million from Enmax.

MTA FARE INCREASE

The potential imposition of congestion fees on drivers coming into Manhattan has dominated much of the discussion about the need for increased revenues at New York’s MTA. The focus on that topic has allowed the Authority to consider a fare increase even though the return to pre-pandemic utilization levels has not occurred. Now, the M.T.A.’s board voted to raise the base fare for subway and bus trips for the first time in eight years, to $2.90 from $2.75, by late August.

Weekday ridership has rebounded significantly but still hovers at about 70 percent of pre-pandemic levels. The $2.75 base fare has been in place since 2015. The most recent fare increase came in 2019, when the price of unlimited weekly and monthly MetroCards rose. The board also voted to increase tolls on bridges and tunnels next month by 6 percent for drivers paying through the E-ZPass system and by 10 percent for those who pay by mail.

The increases come after the NYS budget was adopted which granted increased state revenue to the MTA. The state’s funding package includes a $65 million payment earmarked to prevent an even larger fare increase to help make up for the one that was skipped in 2021. The additional aid also creates an environment where discounts and/or exemptions can be considered by the Commission generating toll recommendations.

MORE HOSPITAL PRESSURE

Nuvance Health (Nuvance) operates seven hospital campuses: Vassar Brothers Hospital, Putnam Hospital, Northern Dutchess, Danbury Hospital, New Milford Hospital, Norwalk Hospital, Sharon Hospital and three Medical groups in Eastern New York and Western Connecticut. It reported $2.6 billion revenue in FY 2022. Like so many other systems, it faces higher labor costs while utilization has not fully returned to pre-pandemic levels.

This puts pressure on profitability as well as liquidity. Results have been poor enough so that Moody’s anticipates that Nuvance will breach its debt service coverage covenant at the end of fiscal year 2023. Given the current trends, Moody’s downgraded Nuvance Health’s revenue bond rating to Baa3 from Baa2. The rating outlook was maintained at negative.

The outlook reflects the fact that stabilization of the system’s finances will require the success of management at addressing the cost side of the problem. That will be hard as the trends driving costs are national rather than regional or site specific. The generation of a larger “customer” base through service expansions cannot be counted on to generate short term liquidity improvement.

MICHIGAN MUNI SOLAR POWER

Michigan’s state capitol, Lansing, has announced a significant bond-financed plan to expand its generation of renewable energy. The Lansing Board of Water & Light (BWL) has been at the front of the climate debate having closed its last coal-fired generating facility. Now, the Board said it plans broad-ranging investments in solar, wind and at least one new gas-fired electric generation plant in a $750 million plan over the next 10 years. The combined increase in new capacity would be 650 MW. The utility currently can generate around 735 megawatts of electricity.

BWL board members approved rate increases for water and electric last fall, raising electricity rates 9% and water prices more than 18% over a two-year period. About half of those increases took effect Nov. 1 and the other half will take effect this fall. Currently, the utility does own some of its own solar capacity but most of its solar power is purchased. The plan is specific about proposed investment in new solar and wind assets.

The plan provides for the possibility of an additional natural gas-fired peaking plant. BWL just added to its natural gas fleet in 2022. The lack of real specificity about the development of the natural gas capacity gives the Board time to evaluate the political climate for a gas plant and whether it would still be feasible.  

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

ANOTHER PATH TO GAS BANS

The City of Cambridge, MA has become the first known city in the country to mandate non-residential buildings to reduce their greenhouse gas emissions with a net zero requirement by 2035 for large buildings (larger than 100,000 square feet) and 2050 for mid-size buildings (100,000 square feet or smaller). The City is doing this through amendments to its building codes – the Building Energy Use Disclosure Ordinance (BEUDO) – first passed in 2014.

That established code requirements for energy and water reporting from commercial properties over 25,000 square feet and residential properties over 50 units. This ordinance regulates approximately 1,100 buildings in Cambridge. It has been suggested that the use of building codes to effect changes in use for things like gas stoves is a more effective way of withstanding legal challenges. The Berkeley, CA ordinance against natural gas appliances specifically has not fared well in court to date. That litigation has led to suspension or postponement of enforcement of similar ordinances in other municipalities.

This week, Eugene OR repealed its ban on new natural gas appliances that was enacted only this past February. The City Council cited opposition to the ban and the court decision invalidating Berkeley, CA ban on natural gas hookups.

CARBON CAPTURE AND LOCAL REGULATION

Summit Carbon Solutions and an owner of an ethanol plant in Shelby County, Iowa have obtained a preliminary injunction against the County to keep it from regulating the location of proposed carbon capture pipelines. The lawsuits seek declarations that the ordinances are preempted by federal and state regulations, permanent injunctions that prevent their enforcement and attorney fees.

The ruling in the federal Southern District of Iowa, said state law does not explicitly prohibit the Shelby County ordinance in western Iowa but that such a prohibition is implied. The judge found that the ordinance’s requirements for pipeline companies to submit safety plans to the county and to notify the county when use of a pipeline is discontinued conflict with federal rules. She noted that the County would have a role in land restoration under state law and the lack of explicit reference to the County’s right to regulate is evidence that “the Legislature did not envision a role for counties in regulating the location of pipelines,”.

In two other companion lawsuits against Emmet and Story counties, motions for preliminary injunctions remain under review.  The Iowa Utilities Board is poised to start a final evidentiary hearing for Summit’s project on August 22. 

GEORGIA TRANSIT FUNDING

Georgia voters in 2020 passed a constitutional amendment requiring all revenues that the state’s dedicated trust funds collect to remain inside those programs rather than be diverted into the general budget. To implement the will of the voters, nine trust funds were created by the Legislature in 2021. One is The Transit Trust Fund which gets its dedicated revenue from a per-ride tax on ride-sharing services like Uber and Lyft.

The Transit Trust Fund Program (TTFP) is administered by GDOT and uses a population-based formula, based on 2020 Census data, to distribute state funding to Georgia’s counties with existing transit service. The first full fiscal year of results indicate that Georgia public transit systems are getting about $27 million. Half of that is split between MARTA and ATL the main transit providers in Atlanta. The rest aids smaller systems throughout the state. The awards have to be spent on new services, instead of ongoing operations.

NUCLEAR AND TAXES

Back in 2021, the Byron Nuclear Power Station in Illinois was chosen for closure. The price of its power was not competitive in its market. As the closure date approached, the Illinois Legislature passed bills providing some $700 million in operating subsidies to keep the plants open. In terms of the climate, it was a positive development given the carbon-free nature of nuclear generations. In terms of policy and politics, positive is likely in the eyes of the beholder. 

Byron Generating Station’s two nuclear reactors can produce up to 2,347 megawatts (MW) of zero-emissions energy. Byron Generating Station Unit 1 is licensed through 2044, and Unit 2 is licensed through 2046. Now that the issue of operation is out of the way for the foreseeable future, the plant’s owners – Constellation Energy – have come to an agreement over the taxation of the plant for the next five tax years. Constellation will pay more than $33 million in property taxes, over half of which will go to the host school district.

The rest will be distributed to eleven other local municipalities and districts. The plant will retain an assessed value of $500 million through the term of the agreement.

CLEAN ENERGY JOBS

Clean energy jobs include jobs in the technologies related to renewable energy; grid technologies and storage; traditional electricity transmission and distribution for electricity; nuclear energy; a subset of energy efficiency that does not involve fossil fuel burning equipment; biofuels; and plug-in hybrid, battery electric, and hydrogen fuel cell vehicles and components.

The U.S. Energy and Employment Report (USEER) is a comprehensive summary of national and state-level energy jobs, reporting by industry, technology, and region with data on unionization rates, demographics, and employer perspectives on growth and hiring.  Recently, it published its 2023 USEER. It shows that the energy workforce added almost 300,000 jobs from 2021 to 2022 (+3.8% growth), outpacing the growth rate of the overall U.S. workforce, which grew by 3.1%. Clean energy jobs increased in every state and grew 3.9% nationally.

As of 2022, the energy sector has recovered 71% of the jobs lost in 2020.3 The energy sector has added back 596,000 of the 840,000 jobs lost during the first year of the pandemic. Nuclear electric power generation employment increased by 1,358 jobs in 2022, up 2.4% from 2021, whereas it had decreased the previous year. Employment increased and decreased across different categories of fossil energy for electric power generation. Coal electric power generation jobs decreased by 6,780 from 2021 to 2022, down 9.6%, while natural gas electric power generation jobs increased by 7,311, a growth rate of 6.6%. Oil electric power generation employment increased by 2.4%, adding 279 jobs in 2022.

Where are those jobs? Energy jobs grew in all 50 states and Washington, D.C., with the largest growth in Texas, California, and Pennsylvania. Clean energy jobs grew across all 50 states and D.C. Excluding traditional transmission and distribution, California added 13,116 jobs (+3.6%), followed by Texas, which added 5,198 (+5.5%), and New York, which added 5,054 (+3.0%). When including transmission and distribution jobs, California added 13,293 (+3.2%), followed by West Virginia, which added 6,975 (+19%), and Texas, which added 5,136 (+3.5%).

ESG – EXECUTIVE ACTIONS ARE A DOUBLE-EDGED SWORD

The idea of executive action when the legislative process and/or the judiciary system do not provide the answers one wants is gaining increased currency. The SCOTUS recent decisions on student loan debt and affirmative action have increased calls for executive action. It is good to remember that the use of executive action can easily be a two-edged sword.

The ESG space is the latest source of pressure to act via executive action. Those who oppose the concept have been hard at work in the most recent legislative sessions in efforts to legislate against the use ESG. The last two years have seen a spate of such legislation enacted. Fourteen states have enacted at least one law designed to limit the use of ESG principles in making investment decisions and/or awarding business. This year there were proposed some 165 pieces of legislation in 37 states to counter ESG investment practices, according to Pleiades Strategy, a climate-focused research and advisory firm. But of those 165 proposals, only 22 anti-ESG laws in 16 states were approved this year.

That is not fast enough to satisfy ideologues holding state office. The latest example is Missouri. Missouri is one of ten states which assign the regulation of the securities industry to the State secretary of State. Missouri’s Republican secretary of state, John “Jay” Ashcroft, issued a rule on June 1 that requires broker-dealers to obtain consent from customers to purchase or sell an investment product based on social or other nonfinancial objectives, such as combating climate change. (Yes, Mr. Ashcroft is the son of the man who ran for Senate and lost to a dead man).

Republican lawmakers failed to pass a similar measure during the state’s legislative session that ended on May 12. The Secretary is now going to try to accomplish through regulation what could not be accomplished legislatively. It is the first step in a process to rely on executive or administrative orders and attorney general opinions. In Wyoming, Secretary of State Chuck Gray has proposed ESG disclosure rules for investment advisers like Missouri’s. A public comment period is expected soon.

SENIOR LIVING BLUES

We were recently asked to look at current conditions in the senior living sector of the municipal market. The sector has been experiencing increasing defaults and it stands out as one of the weakest credit sectors in the market. We see several reasons for that.

COVID – The sector clearly came under attack during the pandemic especially in 2021. COVID clearly has impacted the view of senior living on the part of consumers and families alike. So now the attractiveness of one of these facilities will be diminished for some time. That is the first demand driver.

Interest Rates – Then there is the impact of inflation/higher interest rates. The stickiness being observed in the housing market generally is both a supply issue as well as an access to capital issue. Now that younger people are effectively priced out of housing ownership, the model of selling granny’s house to pay the entrance fee doesn’t work as well. If trends against traditional zoning laws continue, the attractiveness of turning the garage into an accessible living space for a senior will only increase.

Refinance Restrictions – The days of multiple refundings to adjust debt service schedules as problems arise is diminished. Only able to refund once and only on a current basis, a borrower has a much more limited menu of options to deal with cash shortfalls. This will show up in more defaults but supported by the willingness of lenders to hold back on covenant enforcement.

Inflation – Just like hospitals, they have gotten creamed by higher costs for supplies, utilities, and labor. Labor is especially hard to find so by definition becomes more costly.

Size matters – While hospitals face many of the same issues, the larger established facilities in that sector had more resources and larger revenue bases to rely on to tide them through. Those that were smaller did not do so well. Many of the senior living credits are site specific so the flexibility which one might hope to find is limited by the relatively smaller resource base supporting those credits.

GAINESVILLE UTILITIES TAKEOVER AND GOVERNANCE

A non-profit and a group of citizens has filed a lawsuit in the Florida courts challenging the State’s takeover of the local utilities authority in Gainesville. (MCN 7.10.23) The move by Governor DeSantis to politicize the operations of GRU should raise issues for investors who care about governance issues. The first issue reflects the fact that while the authority will be a unit of Gainesville city government, the City Commission will not control or direct it.

The plaintiffs in the litigation are actually suing on the basis of free speech grounds. The law says the authority “shall consider only pecuniary factors and utility industry best practices standards, which do not include consideration of the furtherance of social, political or ideological interests.” The plaintiffs note that members of the public in the past have petitioned the City Commission on issues such as “rates and services for low-income people and social issues such as environmental safety, racial fairness in infrastructure and living wages for GRU (Gainesville Regional Utilities) employees.”

The plaintiffs contend that the new ‘law eliminates plaintiffs’ and others’ rights to petition the board for redress of grievances pertaining to social, political, environmental, and ideological issues that are inherent in the operation of a utility system,” the lawsuit said. “Even if the authority allowed plaintiffs or others to address them with respect to ‘social, political, or ideological interests,’ the authority is legally prohibited from taking any action in response.”

CYBERSECURITY

A federal grand jury has indicted an individual, charging him with intentionally causing damage to a protected computer after he allegedly accessed the computer network for the Discovery Bay Water Treatment Facility, located in the Town of Discovery Bay, Calif., and intentionally uninstalled the main operational and monitoring system for the water treatment plant and then turned off the servers running those systems. The individual was an employee of a private company which operates the plant.

It was a serious breach. It is alleged that the individual installed software on his own personal computer and on his employers private internal network that allowed him to gain remote access to Discovery Bay’s Water Treatment facility computer network. Then, in January of 2021, after the individual had resigned from the private operator, he allegedly accessed the facility’s computer system remotely and transmitted a command to uninstall software that was the main hub of the facility’s computer network and that protected the entire water treatment system, including water pressure, filtration, and chemical levels.

MUNI BONDS FOR SOLAR

The Sandoval County, New Mexico Commission approved a resolution that would issue $275 million in Industrial Revenue Bonds that would go to building an 1,100-acre solar farm. The bonds would be paid from revenues derived under a Payment In Lieu of Taxes agreement from the owner. The power is expected to be sold to existing and projected data centers supporting companies like Intel and Facebook.

The use of PILOT payments continues to facilitate a wide range of development including sports facilities and projects like this. The County has issued PILOT debt before so it is a tested concept. The PILOTs will be divided by the County and the five school districts located in it. The five school districts receive a total of 38% and Sandoval County receives 62% of the PILOT payment. Rio Rancho would get 22.64% of the PILOT payments. Cuba would get 7.27%, Jemez Valley 4.64%, Bernalillo 3.20% and Corrales would get 0.11%.

SPORTS FACILITIES AND REALITY

This week, two situations involving sports facilities in New York and Oakland highlight the complicated relationship that cities have with sports teams. Over the years we have seen a variety of responses which serve to undermine the position of those who believe that subsidies for facilities for professional sports teams a bad investment. The two situations serve to highlight the idea that actions speak louder than words.

This week, the New York City Independent Budget Office (IBO) released an analysis of the cost/benefit of a tax exemption granted to the owners of Madison Square Garden (MSG). Madison Square Garden is the city’s oldest operating professional sports arena and the only major league sports facility located in Manhattan, sitting directly above Penn Station, the busiest transit hub in North America.

The MSG arena opened at its current location in 1968 and hosts two professional teams—the New York Knicks and the New York Rangers. As a private property, the arena paid property taxes until the 1982 New York State Legislature exempted MSG indefinitely.  Local Law 18 passed by the City Council in 2017, turned to IBO to issue periodic evaluations of the city’s economic development tax expenditure programs. The new report finds that since the property tax exemption took effect, MSG has been exempted from paying more than $946.7 million in property taxes, as measured in 2023 dollars.

IBO concludes that it is unlikely that the property tax exemption for MSG is the determining factor for the Knicks and Rangers maintaining their location in New York City. Potential relocation options for the Knicks and Rangers are limited by current market saturation within the leagues and the economic benefits of MSG’s current location (which affect ticket and broadcasting revenues for the stadium) are strong.

The first arena special permit was issued in 1963 for a term of 50 years, expiring in 2013. The City Council chose to renew the permit in 2013 but restricted it to a length of 10 years, leading to the current expiration in July 2023. One might expect a tough negotiation with MSG especially given the efforts to renovate and expand Penn Station. The City Planning Commission has proposed letting MSG have its permit renewed if the Garden cooperates with renovations to Penn Station. Those plans would replace a theater in one part of MSG. Now, the City Council may balk at the agreement but there seems to be no real threat to the Garden operating at its current location.

In Oakland, the City is making a last-ditch effort to prevent the Oakland A’s from moving to Las Vegas. The proposal comes after the A’s entered into a deal with Bally’s Corp. to build a stadium on part of the Tropicana Las Vegas resort site and received approval from the Nevada Legislature for about $380 million in public funding. Now after years of fighting the notion of subsidies for the City’s last remaining pro sports franchises, a proposal has been made.

The city said it secured more than $425 million in funding to cover offsite infrastructure costs, $65 million more than the A’s requested. The team would pay for onsite infrastructure and development, but the city would reimburse about $500 million of that cost through the creation of an infrastructure financing district.

The irony is that the City’s proposal would locate the stadium where the A’s wanted in the Howard Terminal industrial site. The new Mayor who took office in January is pursuing a different path than that of her predecessor. The depth of support for any public funding from the City has always been an issue. The combined expenditure of nearly $1 billion by the City runs against the mantra of scarce resources for public services being gobbled up by a for profit entity that has been put out there for many years.

So, one has to ask oneself exactly which view actually has currency – public funding or no public funding?

NEW YORK CITY HOUSING AUTHORITY

NYCHA has been in the news for its state of disrepair and overwhelming need for capital. A lack of federal funding support has not helped but the quality of management at the Authority has been a sore point for some time. The Authority’s chief executive is in turmoil. Multiple administrations have found funding needed repairs in amounts anywhere close enough to cover what was an estimated $41 billion capital need to properly maintain the existing stock have not materialized.

We say was because the Authority released a new estimate for the cost of funding repairs to NYCHA’s buildings. The new estimate released this week puts the price tag at $78 billion. NYCHA officials estimate that $60 billion relates to things that will need replacement in the next five years — including boilers and heating systems. The new estimate is the first developed while NYCHA operates under a federal monitor.

Eighteen months into the Adams administration, the Mayor’s plan to privatize management of the Authority creeps along. This would facilitate the provision of public housing through the private sector. Politically, the plan has many opponents including residents who would see their housing demolished to facilitate new housing. It is an idea first hatched in the Bloomberg administration and it did not get far under Mayor DeBlasio.

The sheer scale of NYCHA’s portfolio makes it matter. NYCHA’s developments are home to more than 330,000 people, disbursed through 2,100 buildings. Rents for public housing residents tend to be capped at 30 percent of their income, and the average rent is less than $560 per month. NYCHA estimates that 40% of the families living in NYCHA homes have at least one person who is working. Nearly 275,000 families were on the waiting list for a NYCHA apartment this year.

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

MEDICAID WORKRULE REDUX

Georgia has been one of the original holdouts against the expansion of Medicaid eligibility from the enactment of the ACA. This in spite of the fact that some 90% of the cost would be funded by the federal government. Previous efforts by states to impose work requirements on Medicaid recipients have been overturned in the federal courts. The Biden administration did not appeal, allowing the program to take effect. Now, one of the states which tried the tactic is trying again.

Beginning on July 1, Georgia’s Pathways to Coverage program will become the state’s mechanism for judging eligibility for Medicaid. The plan was approved very late in the Trump administration. Georgia was already known for having one of the strictest Medicaid requirements in the country. It will only cover parents earning up to about 30 percent of the federal poverty line (an annual income of no more than $8,000 for a family of three).

The changes in effect on July 1 will partially expand Medicaid coverage to people with incomes up to the federal poverty level: less than $25,000 per year for a family of three. Applicants will need to prove they already meet the 80-hour monthly work requirement in order to apply, and there is no grace period. The rules apply to new applicants. Existing recipients in Georgia are covered under the state’s traditional fee-for-service Medicaid program.

If the work requirements are not met, the state will not remove anyone for failing to comply. (When the federal courts blocked the previous program in 2019, it was estimated that some 18,000 people lost insurance in the first seven months of enforcement.) The state will instead move them from the private insurance used for Arkansas’s expansion to the traditional fee-for-service Medicaid program, which is less generous.

GAINESVILLE REGIONAL UTILITIES

Governor DeSantis signed a law creating a new board to take over the operations of the Gainesville Regional Utilities. GRU serves some 93,000 customers in the city of Gainesville and surrounding areas. Throughout its history, it has been governed by the City Commission, which appoints a general manager to handle the day-to-day operations. Recently, suburban customers of GRU who cannot vote in local Gainesville elections have been complaining about rates and the location of generation facilities.

Those complaints generated the legislation which was enacted this week. The bill takes away the city commission’s control of GRU and gives ultimate authority to an unpaid five-member board appointed by the governor. The board would have the ability to hire and fire GRU’s general manager. That sets up a legal conflict as the city’s charter still says that the role is a “charter officer” position that answers to the City Commission.

Now that a new board will be appointed by the Governor, it is believed that GRU is the next municipal utility in Florida which has been targeted for sale to a for-profit utility like Florida Power and Light. Gainesville voters soundly rejected appointing an independent authority to govern GRU in 2018.

The increasingly partisan approach to the state’s municipal utilities has already led to one colossal failure to privatize the Jacksonville Electric Authority. The moves to privatize JEA led to the indictment of JEA’s chief executive officer and finance chief, who were accused of trying to extract millions out of the city-owned utility before selling it off to a private operator. That process led to federal investigations amid charges of corruption. CEO Aaron Zahn and CFO Ryan Wannemacher are due for trial in October.

A citizen-led nonprofit group, Gainesville Residents United, has said it will file a federal lawsuit in the coming days in response to the bill. No surprise there. In June the city commission authorized the spending of $250,000 from the GRU utility system reserves fund for outside counsel to provide legal advice in connection with analyzing and potentially litigating the impact of the bill on the city. The move to take over GRU is a primarily political act.

ROAD FUNDING

While the debate over how to fund roads – gas taxes or mileage fees – continues, the immediate needs of transportation agencies cannot be ignored. That led to the enactment of a variety of gas tax increases across the country. It also led three states to impose new taxes on the use of charging stations. Here’s where the changes took effect on July 1.

California – The gas tax rises from 53.9 cents to 57.9 cents per gallon. The per-gallon tax on diesel goes from 33 cents to 34.5 cents; on Oct. 1 it will rise again to 50 cents.

Colorado – The existing gas tax includes fuel fees that increase July 1. The fee for a gallon of gas rises by 1 cent; the fee for diesel goes up by 2 cents.

Illinois – The gas tax goes up from 42.3 cents to 45.4 cents per gallon. The tax on diesel rises from 49.8 cents to 52.9 cents per gallon.

Indiana – The gas tax increases from 33 cents to 34 cents per gallon.

Iowa – The per-gallon tax on ethanol and ethanol-gas blends will rise from 24 cents to 24.5 cents per gallon. For higher-grade biodiesel, however, the tax will decrease from 30.1 cents to 29.8 cents per gallon.

Kentucky – The tax on gasoline increases from 26.6 cents to 28.7 cents per gallon.

Maryland – The gas tax goes from 42.7 cents to 47 cents per gallon; for diesel, the tax rises from 43.45 cents to 47.75 cents per gallon.

Missouri – The gas tax increases from 22 cents to 24.5 cents per gallon.

Virginia – The gas tax increases from 28 cents to 29.8 cents per gallon; the tax on diesel goes from 28.9 cents to 30.8 cents per gallon.

Iowa, Montana, and Utah included new electric vehicle taxes.

Iowa – At public and commercial charging stations, there is a new tax of 2.6 cents per kilowatt hour.

Montana – An electric current tax of 3 cents per kilowatt hour takes effect at new vehicle charging stations (those opened after July 1, 2023).

Utah – There is a new 12.5% tax at electric vehicle charging stations but the gas tax rate falls from 36.4 cents to 34.5 cents per gallon.

NUCLEAR RESTART FUNDING

The effort to restart the Palisades nuclear generating plant in Michigan received a boost from the State of Michigan. The budget for the FY beginning on October 1 was passed by the Michigan legislature. It includes some $150 million designated for a portion of the cost of restarting the privately owned plant.  Palisades owner Holtec is about $300 million short of what it needs to get the plant operating again. It’s also seeking funds from the U.S. Department of Energy loan office to get Palisades back online.

GATEWAY TUNNEL

The federal government will give $6.88 billion, the most ever awarded to a mass-transit project, for the construction of a second rail tunnel under the Hudson River to New York City. The Gateway Tunnel would relieve strain on the over a century old existing tunnel serving railroads into New York. It has been the subject of debate and has been slowed down by politics. Chris Christie refused to fund New Jersey’s share of the proposed tunnel.

The existing tunnels have been steadily deteriorating since Hurricane Sandy flooded them with salt water in 2012. The federal money will allow the project to formally begin the process of selecting contractors. The estimated $16 billion project is planned for completion in 2035. Amtrak, which owns the tunnels, plans to shut those tracks for repairs, one at a time, once the new tunnel is in use.

CARBON CAPTURE

The efforts by Summit Carbon Solutions to obtain approvals for its proposed pipeline for captured carbon have been controversial. Most of the opposition has been fueled by the potential use of eminent domain to obtain right of way for the pipeline. Those efforts are being litigated in the courts. Now, the effort is taking on a more aggressive turn.

In North Dakota, two counties have passed ordinances governing the establishment and operation of pipelines like the one proposed by Summit. Summit submitted paperwork in June asking the North Dakota PSC to declare the two county ordinances “superceded and preempted” by state and federal law. “Those ordinances, which contain setbacks and other safety-related measures, would frustrate if not outright halt investment in North Dakota’s carbon capture, utilization, and storage industry,” according to Summit.

What do the ordinances say? One of the county ordinances states that a hazardous liquids pipeline cannot be constructed within 10 miles of an electric power generating facility, an electric transmission line, an electric transmission substation, a public drinking water treatment plant, a public wastewater treatment plant or the extraterritorial line of an incorporated city.

Other limits would not allow the pipeline to be built within 4 miles of a church, school, nursing home, long-term care facility or hospital; within 2 miles of a public park, recreation area, occupied structure or animal feeding facility; and within 1 mile of a confined feeding facility or the ordinary high-water mark of the Missouri River. The challenge to a designated agency’s ability to regulate land use is a bold move with potential ramifications beyond those of the pipeline itself.

In South Dakota, the house passed with a two-thirds vote, HB 1133 which would have limited the ability of companies doing carbon sequestration to use eminent domain. The debate there focused on whether sequestered carbon was a commodity in the same way natural gas and electricity are treated for regulatory purposes. The answer will drive the definitions of how to treat captured carbon and then whether the project constitutes public use. The Senate, with its 31-4 Republican majority would not take up the bill.

Summit faces additional review in Iowa where the same property issues have been at the fore of pipeline opponents. They have applied for an extension of existing permits supporting a proposed 31-mile addition to a carbon dioxide pipeline. Summit has said it wants a decision on its first permit by the end of the year. A final evidentiary hearing, which initially was expected to start in October, will instead get underway in August. Summit filed its eminent domain list with the Iowa Utilities Board that shows it has not obtained voluntary land easements for 1,036 parcels. That represents about 30% of the route.

WISCONSIN BUDGET

Governor Tony Evans used his constitutional veto power to reduce an income tax cut included in the budget passed by the state’s Republican-controlled legislature. The veto reduces the total revenue loss to the state from $3.5 billion to $175 million. It eliminated tax cuts for the highest two income brackets entirely. The process using “partial vetoes” or what are line-item vetoes reflect the highly partisan environment which has grown in Wisconsin over the last 15-20 years.

The process can produce some interesting results and this biennium is no exception. The partisan divide is clear with the legislative budget cutting taxes for all income levels vs. the Governor’s plan; the Legislature cut funding for DEI at the University of Wisconsin and the Governor restored all 188 positions in his plan. The Governor’s plan includes provisions designed to provide in future biennia and effectively in perpetuity, school districts with additive per pupil revenue adjustments of $325 every year.

The State’s localities benefit from the budget. 2023 Wisconsin Act 12 created a funding structure that provides a $275 million boost to state aid to localities by funding the supplemental county and municipal aid program. This includes a $68 million increase in aid for counties and a $207 million increase in aid for municipalities in fiscal year 2024-25, representing a 36 percent increase over current county and municipal aid entitlements. The legislation provides additional aid to counties and municipalities in fiscal year 2025-26 and beyond by linking both current and supplemental county and municipal aid to the growth rate in the state sales tax.

SAN FRANCISCO

Moody’s Investors Service has revised the outlook on the City and County of San Francisco, CA’s long-term ratings to negative from stable. Concurrently, Moody’s affirmed the Aaa ratings on the city’s issuer rating and on approximately $2.6 billion in outstanding general obligation (GO) bonds. The revision of the outlook to negative primarily reflects the various near term financial and economic headwinds facing San Francisco. 

The city expects draws on reserves in fiscal 2023 and across budget years 2024 and 2025. Prolonged weakness in the city’s commercial real estate market, stubbornly slow to rebound office worker attendance, and low downtown utilization continue to weigh on the broad economic vitality of San Francisco’s core business, retail, and tourism districts. 

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

Joseph Krist

Publisher

PUERTO RICO GRID

The Army Corps of Engineers issued a notice that it is seeking a contractor to fix existing power plants, electric transformers and cables and build new natural gas- and oil-fired generating units in Puerto Rico. The work has been authorized by the Federal Emergency Management Agency and will be funded by disaster relief money approved by the Biden administration after Hurricane Fiona last year.

The Army Corps of Engineers plans to spend up to $5 billion on fossil fuel power plants and infrastructure repairs. Many (including ourselves) see this a troubling long-term development. The investment will be in fossil-fueled generation. The Corps cited the need for a short-term fix to the island’s power problems. To accommodate a shorter timeline, the Corps is seeking “land-based turbine-style generators” that can run on natural gas or diesel oil.

The argument is that the island needs new baseload generation quickly. To address environmental concerns, “FEMA funds the mission-assignment for Army Corps of Engineers to assist with temporary emergency power restoration related to Fiona recovery efforts. Questions regarding long-term power generation should be directed to the Government of Puerto Rico.” At the same time, the contracts are constructed in such a way that the proposed generation could easily become part of the long-term electric grid.

The plan is raising questions about inconsistent federal policy responses. The Corps is taking the view that traditional base load generation is the answer. In January,  a report issued by DOE’s national laboratories and FEMA said that the build-out of rooftop solar and storage could make the territory’s power system more resilient.

In February, the Department of Energy announced it was allocating $1 billion to an energy resilience fund to deploy more solar and storage projects and support other clean energy and grid modernization initiatives. Now, the challenge is to come up with a coherent long-term plan to address not only total power supply but the move to more resilient renewables-based generation.

NEW YORK’S BUSY WEEK

Several significant issues saw movement with real potential implications for state and city revenues. The first involves the approval by the Federal government of the plan to impose congestion pricing in Manhattan. Final approval was granted by the Federal Highway Administration. A local panel appointed by the Metropolitan Transportation Authority can now decide on final toll rates, including any discounts, exemptions and other allowances. It will be quite a battle. It is likely that litigation could arise either from the State of New Jersey or in response to environmental concerns in the Bronx due to increased truck traffic due to the charges.

As we go to press, the NYC Council is still working through budget approval for the FY beginning July 1. A number of issues have complicated this year’s process with housing moving to the fore as the deadline nears. The budget has also been complicated by the flood of asylum seekers into the City which has been a driver of the expense side of the budget. As we approach the end of the process, it looks like the housing issue (in terms of the budget) has been settled so timely budget enactment is expected.

The State finds itself in a dispute with the Seneca Nation in its negotiations to renew the compact between the State and the Nation which governs the Nation’s gaming activities. The Nation currently operates under one of the more unfavorable compacts which the Nation seeks to adjust. The risk in these negotiations is that it could interfere with the distribution of monies to host cities like Niagara Falls which have come to rely on these revenues in the budget and also as a source of employment.

CALIFORNIA BUDGET GOES TO THE LAST MINUTE

The California legislature has reached an agreement on the fiscal 2024 budget. The process this year reflected the realities of significant revenue shortfalls and the difficult winter season across the State. The competition for limited funding put a number of categories under pressure and created a contentious debate. The finished product reflected significant compromises.

One item with credit implications was the state of the major public transit agencies around the state. The final agreement reverses the governor’s call to cut $2 billion to public transit after a substantial lobbying effort by urban transit agencies and Democratic lawmakers in San Francisco and Los Angeles. The deal includes a total of $5.1 billion for transit over four years. Anticipating the potential for cuts in the future, Democratic lawmakers introduced a separate plan to increase tolls on seven state-owned bridges in the Bay Area by $1.50 to generate about $180 million annually from 2024 through 2028.

The Governor and the Legislature agreed to renew a tax on managed healthcare organizations, known as the MCO tax, to fund Medi-Cal at a time when the state is expanding the pool of eligibility. The tax is expected to generate $19.4 billion in state revenue from 2023 through 2027.  As is often the case, a controversial policy item holds up completion. This year, two issues were intertwined.

The first was amending the California Environmental Quality Act to provide for more limited review of proposed projects. The second was how those changes would impact the Sacramento-San Joaquin River Delta tunnel project designed to move water to Southern California. It has encountered significant opposition and support for the budget became tied to that opposition. In return for giving up the project (for now), the Governor is getting his proposed CEQA changes.

TEXAS GIVES ERCOT IMMUNITY

The winter storm which wreaked havoc on the Texas electric grid continues to be the subject of litigation as local utility purchasers sought to recover some of their financial losses related to the storm. Throughout the ensuing period, ERCOT – a private entity which operates the dispatch of power in the state’s closed transmission system on behalf of the state – has been insisting that it has sovereign immunity against litigation such as that brought by the individual utilities.

The debate over the issue has been litigated in the Texas state court system throughout the last two years. The State Supreme Court has already issued decisions which overturned certain Public Utility Commission decisions regarding the validity of charges incurred during the storm. The next decision to be made regarded the ability of ERCOT to be sued.

That decision came this week in a case brought by San Antonio’s municipal electric system (CPS). Following Winter Storm Uri, some wholesale market participants defaulted on their payment obligations to ERCOT. CPS alleges that ERCOT unlawfully short-paid CPS to offset those losses. It sued ERCOT for breach of contract and various other claims.

The Court concluded that ERCOT is a “governmental unit” entitled to an interlocutory appeal and the Court held that ERCOT is entitled to sovereign immunity. Specifically, the Court held that ERCOT is an “arm of the State” because, pursuant to the Utility Code, ERCOT operates under the direct control and oversight of the PUC, it performs the governmental function of utilities regulation, and it possesses the power to adopt and enforce rules.

The decision was made by a narrow majority. Four justices agreed that ERCOT is a governmental unit and that the PUC has exclusive jurisdiction, but they would have held that ERCOT is not entitled to sovereign immunity.

MORE ON ELECTRIC VEHICLES

BlueOval SK, which will supply batteries for electric Ford and Lincoln cars and trucks is a joint venture between Ford and SK, a battery maker. It intends to build its own batteries at plants in Tennessee and Kentucky. Both states are providing subsidies and incentives but the biggest boost is coming from the federal government.

The Department of Energy has announced loans for the three battery plants the venture is building. This produces a total of $9.2 billion of support for the plants which are expected to create 7,500 jobs. Of note, the two Kentucky plants are expected to employ more people than Kentucky’s coal industry. BlueOval SK will pay the same interest as the federal government pays to borrow.

In Georgia, the state’s 10^th new manufacturing facility to supply electric vehicle production was announced.

At the same time so much progress on EV production has been made, there have been bumps in the road. Lordstown Motors filed for Chapter 11 bankruptcy protection. The pickup truck producer was seen as a potential savior of the former GM production facility which had closed. The plant was at the center of President Trump’s efforts to point to an improved auto industry. The outlook for the plant’s production has always been cloudy with issues surrounding financing holding back production.

The plant was also hurt by one of President Trump’s favorite companies, Foxconn. Foxconn also agreed to handle the manufacturing of Lordstown’s Endurance electric pick-ups at the site, and to make further investments provided certain milestones were met. The parties have been arguing since the beginning of the year. For those who have watched Foxconn operate in the US, the failure to follow through on agreements and promises has become Foxconn’s MO. As of December, Lordstown Motors had 260 full-time employees versus the 1,600 employed there by GM.

ALTERNATIVE TRANSIT

The issue of electric scooters and bicycles was initially about their availability and that of protected lanes where they could be used. They have become increasingly ubiquitous in big cities and have become the lifeblood of the food delivery industry. They are also an increasingly popular vehicle for low-income riders. One problem has emerged which threatens the use of these vehicles.

To keep costs down for buyers, many of the scooters and e bikes are powered by imported (from China) batteries. They are manufactured under less than exacting standards and have an annoying tendency to catch fire. Initially, these have been fairly isolated instances but recently the role of batteries in some devastating fires has been highlighted.

Many of these vehicles are stored indoors, often in residences. This week, the City of New York recorded the 100^th fire this year that is attributable to e bike and scooter batteries. The latest resulted in four fatalities. It has been a continuing problem especially if vehicles are stored in residences. Regulation is expected. NYC has tried a program whereby owners of electric bikes and scooters can effectively trade in their existing battery for one which has been UL approved.

Many of the fires have occurred when vehicles are being charged indoors. Because of the attraction of scooters for lower income users, concerns have emerged about their safety in public housing projects. NYC has announced a plan to use $25 million in federal funds to set up 173 e-bike charging stations at 53 NYCHA sites. As of last week, 13 New Yorkers had been killed and an additional 71 injured in such blazes so far this year.

The issue is complicated by the fact that the dominant source of batteries for these vehicles is China. Nearly all of the fires have been attributed to foreign batteries which are not made to US standards.

As this situation unfolds, beginning this week Connecticut residents looking to get out of their cars and onto two battery-assisted wheels, will soon be able to apply for up to $1,500 in state-subsidized vouchers to help cover the costs of purchasing a new electric bicycle. The state’s program offers a $500 voucher to all Connecticut residents aged 18 years and up. It offers an additional $1,000 incentive to those who also reside in Environmental Justice communities or distressed municipalities, including New Haven.

Residents who participate in certain income-qualifying programs such as Medicaid or Head Start, or who have an income less than 300 percent of the federal poverty level, which currently translates to $90,000 for a family of four, can also apply for the extra $1,000.

NEW GENERATION TRENDS

The Federal Energy Regulatory Commission (FERC) released first quarter 0f 2023 data covering trends in new generation deployment. The news will disappoint the more hard core environmentalist as a fossil fuel remains the energy source of choice for new projects.

In 1Q 2023, 217 new and expanded generation plants added 10,162 MW of capacity. The fuel source of choice was natural gas with 44% of new capacity being gas fired. Solar continues to expand its share of new development with 3,400 MW or 33% of new generation. Wind contributed some 19% of new generation.

The most noteworthy item is that 2023 1Q new wind production represents a decline of some 60% from levels of new wind deployment in the comparable 2022 period. We note that this coincides with a period of increased opposition to proposed wind power sites. This is true for both land -based as well as offshore wind generation. FERC also updated total installed capacity data. Natural gas (44.13%), coal (16.89) and wind (11.55%) are the three primary sources of generation. Nuclear follows at 8.8%.

That follows another delay at the site of new nuclear capacity. Georgia Power has announced yet another delay for the in-service date for the first of the two nuclear generating plants under construction at the Plant Vogtle site. Testing has been underway in support of a planned June in-service date but a leak was discovered in the generating equipment at Unit 3. The expected repairs will cause the scheduled in-service date to slip for at least a month. The required testing of the units is 95% complete. Late last month, the reactor reached 100% power for the first time.

COLORADO RIVER LITIGATION

The Navajo Tribe has lived along the Colorado River for millennia. The 1868 treaty establishing the Navajo Reservation reserved necessary water to accomplish the purpose of the Navajo Reservation but did not require the United States to take affirmative steps to provide infrastructure to deliver water for the Tribe. As the years passed and the Colorado River’s water has become a scarce resource, the Tribe has looked to the federal government to develop and fund infrastructure to deliver water throughout the 17 million acre reservation.

After years of inaction and in the face of the impact of climate change, the Tribe sued the government to compel the development of water infrastructure on the reservation. The Tribe asserts a breach-of-trust claim based on its view that the 1868 treaty imposed a duty on the United States to take affirmative steps to secure water for the Navajos.

To maintain such a claim, the Tribe must have established, among other things, that the text of a treaty, statute, or regulation imposed certain duties on the United States. Last week, the Supreme Court delivered a 5-4 decision which found that there was no requirement that the federal government provide the infrastructure.

The case turned on the absence of specific language – the Court found that the 1868 treaty contains no language imposing a duty on the United States to take affirmative steps to secure water for the Tribe. Notably, the 1868 treaty did impose a number of specific duties on the United States, but the treaty said nothing about any affirmative duty for the United States to secure water.

SALT RIVER GAS EXPANSION

Arizona’s Salt River Project has been at the center of a dispute over environmental equity issues. SRP owns and operates a gas-powered generating plant in Coolidge, AZ. The site was clearly designed to accommodate expansion beyond the initial plant. Nevertheless, when SRP sought to double the size of its plant, residents of nearby Randolph, AZ intervened in the approval process.

Founded about 100 years ago to accommodate primarily Black agricultural workers mostly from Oklahoma, the town is considered a historically Black community. This issue gave rise to pressure to locate the planned generators to another location. The state regulators faced not only local but organized national pressure and decided to stop the expansion.

Now, SRP has announced an agreement with state regulators reflecting those concerns while allowing for expansion. The expansion will be for only twelve units versus the originally proposed 16. SRP also agreed to give Randolph more than $23 million to pave dirt roads, paying for scholarships and building a new community center. Critics and opponents see the deal as a bribe for allowing the expansion.

Others would see this outcome as similar to so many other development deals where concessions are made and impact fees funded. In this case, there was going to still be an operating natural gas generator there even without expansion. At the time of the first disapproval, we noted that the air quality issues originally cited by opponents would remain. This deal does nothing to address those air issues.

HOSPITAL CREDITS REMAIN UNDER PRESSURE

Palomar Health is the largest public health care district in the State of California, with over $900 million of revenues reported for fiscal 2022, and generating over 23,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. This week, the pressures facing the industry in general have placed pressure on the District’s credit.

Operating performance, through March 31, 2023 has moderated due to increased labor expense and a delay in the consolidation and expansion of NICU beds at PMC Escondido, as well as a delay in the reconversion of a number of beds to medical. Hospitals everywhere are facing issues of reconfiguration and consolidation in the aftermath of the pandemic. In spite of the support the system receives in the form of tax revenues, cash has declined and debt secured by operating rather than tax revenues is high.

The system has not been immune to the industry-wide trend of higher labor costs. Added to the operating trends, the system’s cash balances are low and it has minimal flexibility to meet its debt coverage covenants. This produced a negative outlook from Moody’s for its Aa2 rating.

OAKLAND ONE STEP CLOSER TO LAS VEGAS

The Nevada Legislature approved a financing plan for the Oakland A’s proposed $1.5 billion stadium on the Las Vegas Strip. The plan calls for $380 million in public funding, including $180 million in transferable tax credits and $120 million in county bonds to be paid off through a special tax district that includes the planned stadium site.

The next step for the A’s is to garner the approval of the owners of MLB’s teams. Should that be achieved, the A’s could wind up playing in temporary sites until the proposed ballpark is completed for the 2027 season. The team would be the third major league franchise to locate in Las Vegas. The NHL’s Vegas Golden Nights have been a success on and off the ice including winning this year’s Stanley Cup.

NET METERING IN UTAH

The Utah Supreme Court has ruled against a request that net metering rates in Utah be based on a variety of environmental factors not currently considered as part of the ratemaking process. A solar advocacy group had challenged an order issued by the Public Service Commission that allows an annual expiration of unused solar credits and does not calculate anything other than the utility’s actual “avoided costs” net metering provides.

The advocates hoped to force the PSC to have public health and climate included in the calculation for solar reimbursement. The suit also challenged the annual calculation of the rate. The Court found that there is sufficient evidence to back the Public Service Commission’s order that grants the utility company its ability to invoke an annual expiration date on solar credits. 

The Court also found that the commission had made final its decision on expiration of credits and export credit rates undergoing an annual review. Under Utah law, a final decision is subject to judicial review. 

SMALL COLLEGE CREDITS CONTINUE TO WEAKEN

The pressures on smaller niche college credit continue. The issues of competition for students in the face of unfavorable demographics and costs continues to generate downgrades and negative outlooks.

Simmons University is a private, nonsectarian liberal arts university with an all-women’s undergraduate college and coeducational graduate programs. Located in Boston’s historic Fenway district, Simmons currently serves around 5,700 FTE students and generates about $177 million of operating revenue (fiscal 2022). The outlook on its Baa2 Moody’s rating was lowered to negative.

Biola University is a private, not-for-profit nondenominational Christian university located in La Mirada, California. It was originally established as the Bible Institute of Los Angeles. Today it offers baccalaureate, masters and doctoral programs across 9 academic units. For fall 2022, the university had total FTE enrollment of 4,651 about 72% of whom are undergraduate. The outlook on its Baa1 Moody’s rating was lowered to negative.

Illinois Wesleyan University is a small, private undergraduate liberal arts college located in the City of Bloomington, IL. The university’s fall 2022 full-time equivalent enrollment totaled 1,521 across its college of liberal arts, college of fine arts and school of nursing. The university generated $67.5 million in operating revenue in fiscal 2022. Moody’s downgraded its rating to Baa3.

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

Joseph Krist

Publisher

The next issue of the MCN will be dated July 3. There are things to take care of even more important than municipal credit if you can believe it. When we are back, we will summarize what comes out of the remaining state legislative sessions as well as Supreme Court decisions bearing on municipal credits – colleges and affirmative action, e.g.

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PREEMPTION

The Texas Regulatory Consistency Act bars municipal governments from enacting policy that goes beyond state law in eight areas: agriculture, business and commerce, finance, insurance, labor, natural resources, occupations and property. Any local laws that currently do, such as tenant and worker protections, will be voided.

In Florida, a bill actually named Local Ordinances authorizes businesses to sue municipal governments over any law they deem “arbitrary or unreasonable”. While a speedy “rocket-docket” court deliberates the case, in most circumstances the government will have to suspend the rule in question. And if the challenger wins, the city must repeal it.

In Arizona, a decades-old sales tax that funds transportation projects in Maricopa County requires periodic legislation to extend the collection of the tax. The current deadline is 2025. The half-cent sales tax has been in place since 1985, and voters approved its extension for 20 years. Now the Republican legislature has passed Proposition 400.

It would lower the overall half-cent sales tax, increase freeway allocation to 46% and prohibit light rail expansion. The Arizona Freedom Caucus says their project would have cut sales tax for voters by over $3 billion, and prioritize building freeways and roads while cutting down commute times and traffic congestion. So much for local control.

Most of the preemption laws have been occurring in red states and they are in response to efforts to decarbonize. One recent exception is in California. A California state law, AB 205 took effect last summer. It is a change in regulatory practices which shifts approval for projects such as wind farms. The state has always had a role in determining whether a project is supported by a complete application. Now under AB 205, once an application is deemed complete, responsibility for approving a project lies with the state’s Energy Commission rather than with the County Board of Supervisors.

In this case, Shasta County has rejected prior applications for wind farms. Shasta County banned large wind energy systems in an ordinance last year, but the state could still approve this project under the new law. It is a form of turnabout is fair play. Just as the enactment of preemption laws is used by conservative legislatures to overcome local opposition to their energy policies, more liberal legislatures are finding that overriding local control can be effective in achieving their goals.

The gas stove issue is become one large pile of something. The Santa Cruz City Council voted unanimously to suspend a natural gas prohibition ordinance it passed in 2020 after an April ruling by the Ninth Circuit Court of Appeals struck down a similar ordinance in Berkeley that was enacted in 2019. The city of Berkeley filed an appeal to the decision May 31.

Because there is an outstanding decision in another federal District Court in favor of local control, the litigation is likely to reach the SCOTUS. While the process plays out, Santa Cruz County continues to enforce an ordinance that went into effect this year requiring electricity as the sole energy source for new residential construction in certain  unincorporated regions. 

WEST COAST PORT SETTLEMENT

The year long negotiation between shippers and the longshoremen who handle their freight at ports up and down the West Coast has finally achieved a settlement. the International Longshore and Warehouse Union and the Pacific Maritime Association announced a tentative agreement on a new contract that covers 22,000 workers at 29 ports from San Diego to Seattle. The announcement comes after pressure was put on the parties to reach a settlement. Recent weeks have seen a variety of labor disruptions at several of the ports.

The slowdown at the ports came just before the onset of the back to school and holiday shipping seasons. The major retailing and manufacturing trade groups went public with their concerns about the delays and exporters – especially agricultural – were concerned about the impact on their businesses. The negotiations followed a familiar pattern as federal pressure has been required to resolve prior disputes with port labor, most recently in 2015.

The resolution comes as throughput trends at the Port of Los Angeles improve. For the third consecutive month, cargo volume at the Port of Los Angeles increased in May, with the Port handling 779,140 Twenty-Foot Equivalent Units (TEUs) for the month. While that is a drop of about 19% compared to last May, it represents a 60% increase in cargo since February. During the first five months of 2023, the Port handled 3,304,344 TEUs, a 27% decline compared to the same period in 2022.

Now that an agreement has been reached, we will see how much of the cargo being diverted to East Coast ports returns. The uncertain labor situation has been cited as a driver of the cargo diversions. The numbers from L.A. are clear evidence of the problem.

ELECTRIC VEHICLE FEES

The issue of how to replace lost gas tax revenues has been the basis for legislative moves to increase or impose annual fees for the operation of an electric vehicle. The fees have created some strong feelings on both sides of the issue. What has been interesting is that the politics of the opposition has not fit conventional pigeon holes.

In Wisconsin, it is Republicans who say that it’s not fair to allow electrics to operate on roads that they are no longer paying for. Equity. It is Democrats who are advancing the view that the improvement to the environment is enough to offset the fact that one’s individual vehicle still uses the road. After all, those EVs are expensive. Virtue signaling. It’s the Republicans who hold the Legislature so the fee is expected to be increased from $100 to $175.

In Pennsylvania, the Legislature is considering changes to the Commonwealth’s current scheme for taxing “alternative vehicles.” Under the existing regime, each alternative fuel is converted to a gasoline gallon equivalent. The basis of this conversion is statutorily set at 114,500 Btu. The tax rate applied to the gasoline gallon equivalent equals the current oil company franchise tax applicable to one gallon of gasoline. Alternative fuels dealer-users must remit this tax.

It is as cumbersome as it sounds and the result is significant non-compliance. As a result, proposed legislation would simply impose an annual fee on vehicle operators. The sticking point will be the $290 projected fee. That would make Pennsylvania’s fee at or among the nation’s highest. Lawmakers say the fee was calculated based on the average annual gas taxes paid by owners of gas-powered vehicles at the pump in Pennsylvania.  In 2022, there were 42,785 EVs registered in Pa. compared to the 7,694 electric vehicles registered in 2018.

THE EV BELT EMERGES

As more and more announcements of new manufacturing investment are made, a clear “electric vehicle belt” has emerged. Start at the eastern border of Illinois and draw a straight line down to the Gulf Coast. Extend that strip eastward to the Atlantic. There you have the area receiving the overwhelming majority of investment in both vehicle and battery manufacturing. If you think about it, it is really no surprise.

It actually reflects many of the same factors which supported the expansion of US domestic production by manufacturers of smaller more fuel-efficient cars. Those foreign producers found available land and workers supported by governments with tax and regulatory policies. It also helped that those producers did not immediately face unionized labor.

The industry which resulted dispersed production from the industrial north to the south to the detriment of many cities and towns. Ironically, the availability of manufacturing infrastructure which resulted has allowed some of those communities to participate in current development. It has resulted in a bit of role reversal but it hasn’t been a zero-sum game.

The Inflation Reduction Act has been the catalyst for a slew of announcements of new manufacturing plants. Since the enactment, Georgia has emerged as a big winner. Multiple manufacturing plants for vehicles and batteries are in development and the development of local parts manufacturers to support those projects is underway as well. At the same time, some existing manufacturing infrastructure in places like Michigan and Ohio is being redeveloped and redeployed.

PUBLIC/PRIVATE CHARGING DEBATE

The issue of who will develop the nation’s infrastructure for charging electric vehicles created a real debate in legislatures this Spring. Two clearly different strains of thought have emerged. One view holds that utilities should be the ones to buildout charging networks and that the ratepayers of those utilities should pay the costs. That is what is happening in Florida where Florida Power and Light is building a network under those circumstances. That has drawn opposition from retailers (a lot of soon to be former gas stations) who feel unable to compete.

Concerns like that created legislative debates and different outcomes. Recent legislation in Oklahoma, Georgia and Texas  imposes limits on utilities using ratepayer money for charging networks. The Georgia legislation passed this year restricts utility ownership of charging stations to a single program that allows the dominant electric utility in the state, Georgia Power, to provide chargers in remote and rural areas, with private retailers offered a right of first refusal. 

Retailers in Colorado and Minnesota lead opposition which reflects concerns similar to those of their counterparts in other states. In those two states, Xcel Energy has a significant presence.

STRIKE TWO IN OAKLAND

The effort by the owners of the Oakland A’s MLB franchise to Las Vegas crossed another hurdle this week. The Nevada Legislature approved a $330 million package to support the development of a 30,000-seat baseball stadium. The vote came at the same time as the Vegas Golden Knights of the NHL were about to win the Stanley Cup. The timing was propitious.

Now, the hopes of A’s fans in Oakland come down essentially to the vote of the owners of the other teams. The A’s need 75% of the owners to approve the move. Oakland’s Congresswoman Barbara Lee is threatening to introduce federal legislation to require payments to cities by franchises which wish to relocate. It is the latest in a long line of Senators and Congress people trying to use federal law to influence franchise relocation efforts. It is easy to forget that Oakland is the third home city for the A’s franchise.

The city hopes to avoid the loss of its last major league franchise. The NBA Warriors moved back to SF, the NHL Seals left for Cleveland, and the NFL Raiders left not once but twice. The history at the existing stadium results in a facility which is agreed to be below standard. The effort to replace the Coliseum has been stymied numerous times by numerous factors local and regional. There may be a number of potential “bad guys” in this instance but the City as much as any shares blame.

As we write, the A’s are playing The Tampa Bay Rays. Hmmm..another team playing to below average crowds in a stadium no one has liked since it opened in the mid-80s? That has cities expressing interest? That is for another edition.

GUAM POWER

Moody’s has announced that it has its Guam Power Authority revenue bonds’ Baa2 rating on review for a possible downgrade following damage from Typhoon Mawar. Guam took a direct hit and damage to the physical infrastructure was extensive across the island. The Authority hopes to have 95% of the customer base restored to service by the end of the month. The credit implications are obvious for Guam and the Authority in particular. It will take time for demand to come back given the widespread damage. Moody’s did note that significant mitigation investment lowered overall damage to the power system.

One factor which cannot be discounted is the significant defense role filled by Guam. The increasing geopolitical pressures in the Pacific region make Guam a strategic focal point. The significant military infrastructure presence that strengthens and grows also will drive demand for restoration of housing and commercial stock needed to support a significant military presence. This will help the island to sustain an extended period of recovery especially in the tourism sector.

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

CONGESTION PRICING IN CALIFORNIA

The process of implementing congestion pricing in Manhattan meanders along. The ostensible reason for the fees is to reduce congestion and pollution. In New York, the case is being made that the fees are simply a moneymaker for agencies like the MTA. Now, that debate is spreading across the country. Given how contentious the debate is in a mass transit centric city like New York, there is no reason to expect that imposing congestion fees anywhere else will be less contentious.

Now, the Los Angeles Metropolitan Transportation Authority is undertaking the consideration of congestion fees for the use of portions of the existing freeway system in Los Angeles. Here is where the issue becomes a bit less straightforward. The agency has tried to be coy about where it would like to charge and how much. It has let slip that is projects $2.5 million of daily revenue from its plans.

The agency is said to be looking at several options including charging for use of portions of the freeway system within not just downtown but also leading from the Valley to the City. This is going to force the MTA into more perilous waters as it tries to achieve equity goals through the program. MTA has disclosed the pilot program aims to address equity concerns with subsidies for low-income drivers and carpoolers.

Complicating the issue is the fact that the congestion fee has been tied to the need to fund expansion projects in connection with hosting the 2028 Olympic Games in Los Angeles. That will not help the sales pitch as it will look like a revenue grab rather than a service enhancement.

MORE HOSPITAL CONSOLIDATION

The long-standing trend of consolidation in the healthcare industry continues. The latest example comes from Missouri where providers in St. Louis and Kansas City have announced a proposed merger.   BJC HealthCare and Saint Luke’s Health System announced the signing of a letter of intent to create a statewide integrated system. BJC had $6.3 billion of revenues in 2022 and St. Luke’s had $2.4 billion last year. There are many details to be worked out and there has been no definitive statement as to how the debt of the two systems will be addressed. It was made clear that the structure will call for the institutions to operate primarily within their existing service areas.

The new system would maintain each of the existing brands and operate from dual headquarters: one in St. Louis serving eastern Missouri and southern Illinois, and one in Kansas City serving western Missouri and portions of Kansas. Given the lack of detail as to the new debt structures it is unclear what the ratings impact will be. BJC is an AA rated issuer while St. Luke’s is an A+ issuer.

COLLEGE DOWNGRADE

Moody’s has revised Portland State University’s (OR) outlook to negative from stable and affirmed its A1 issuer rating. The move comes after ongoing FTE enrollment declines, falling more than 20% over the past six years, with expectations of continued declines over the next four years. The declines reflect a mix of the reduction in the pipeline from community colleges in recent years, fierce competition in the Oregon market and limited pricing power. 

The university will need to adjust its budget to reflect lower tuition revenues. Given its target market, the capacity of its students to absorb significant price increases is diminished. This will increase its already strong reliance on the state for support. The state also issues debt for the University as general obligations of the state. The university nonetheless retains the responsibility to generate the revenues necessary to repay it.

NET METERING

North Carolina’s rooftop solar payment rules have been in place since 2000. In line with so many other investor-owned utilities’ actions, those rates have been challenged. In this case, Duke Energy is claiming that the current system is unfair to non-solar customers because those payments are too high and amount to a subsidy for solar owners. This parrots the arguments made by generation for years.

In March, the North Carolina Utilities Commission issued new rules for net metering designed to reduce payments to those customers from Duke. Duke Energy has argued that the current system is unfair to non-solar customers because those payments are too high and amount to a subsidy for solar owners. That has become a go to argument for opponents of residential solar. The new system adopts Duke Energy’s plan to reduce what solar owners get paid and to add a new $10 monthly fee for residential customers who install solar panels. 

Credits for excess electricity would vary according to the time of day. It also adds a “grid access fee” for solar systems larger than 15 kilowatts. The new rules do not apply to rooftop solar owners who install systems before Sept. 30. They will be able to keep the current rates and rules until the end of 2026.

In New Hampshire, Gov. Chris Sununu vetoed Senate Bill 79 which would have allowed industrial-scale businesses to install renewable net metering generators of up to five megawatts annually. He was able to legitimately cite an error in the bill which eliminated the current one-megawatt cap in place for all customer generators, residents included. During his time as governor, Sununu has vetoed bills to increase the cap to five megawatts three times, in 2018, 2019, and 2020.

There is an active adjudicative proceeding in front of the Public Utilities Commission that is considering changes to the current net metering tariff structure. The State Department of Energy commissioned a study estimating that under current projections through 2035, distributed energy – mostly from rooftop solar panels – will raise the average bill of other customers in New Hampshire by about 1 percent, but will bring system-wide financial benefits. 

It is expected that a corrected bill will be offered in the next legislative session.

GAS BAN APPEAL

Berkeley, CA has asked the federal Ninth Circuit Court to grant what is known as an “end banc” hearing on its appeal of a decision which would have prohibited the city from enforcing its 2019 ban on new natural stoves and heating equipment. If a majority of active Ninth Circuit judges vote to review the case, the Chief Judge and 10 other randomly selected judges will take up the case en banc and issue a new opinion. The original opinion was rendered by a three-judge panel.

The litigation was brought by the California Restaurant Association which unsurprisingly takes the view that it cannot cook without natural gas stoves. No existing restaurant would have to stop using gas appliances. They just cannot install them in new buildings. The stakes for the city involve its rights to regulate within its own boundaries. Berkeley takes the position that it would be unable to enforce a variety of regulations the decision stands.

The original decision found that the 1975 Energy Policy and Conservation Act restricts local governments from controlling the energy use of equipment.

PREPA

The latest negative turn in the long running saga otherwise known as post-default Puerto Rico Electric Authority (PREPA) involves the source of over 20% of its power. Twenty two years ago, PREPA was an essentially 100% oil fueled generating base. That is what made the plan to develop non-oil fueled generation make so much sense. So, AES- Puerto Rico was established to develop, construct and operate a large base load generation facility to supply PREPA.

Part of the financing of the plant included an issue of tax-exempt bonds. Last week, AES-PR announced that it was unable to meet a June 1 debt service payment on that bond issue. AES Puerto Rico, L.P. entered into a temporary Standstill & Forbearance Agreement with the trustee of the 2000 Series A Cogeneration Facility Revenue Bonds and certain bondholders to address the event of default arising from non-payment of interest and principal due June 1, 2023. This enables PREPA to continue to receive power from the plant while the default is worked out.

The Project has experienced changes in law and other unexpected conditions that materially increase the Cash Operating Costs and materially decreased the Project Revenues. Specifically, reports indicate that AES points to regulations enacted by the Commonwealth dealing with the disposal of coal ash as a primary source of increasing costs above what the Power Purchase Agreement allows AES to charge for.

WEST COAST PORTS

In spite of declined utilization and more competitive East Coast ports, the negotiations between the port operators and the International Longshore and Warehouse Union drag on. The end of June will mark one year from the expiration date of the existing contracts. From time to time there have been short term interruptions at various ports at various times. That makes the shutdowns in recent days more ominous.

The shipper’s Pacific Maritime Assn. reported labor interruptions all along the coast. Ports impacted by slowdowns included Los Angeles, Long Beach, Oakland, Seattle and Tacoma, Wash. The actions reflected more coordination than has been the case up to now. Oakland said cargo operations had halted because there were not enough dockworkers to handle containers.

It is all about money now as the usually important issue of automation was settled in April. Labor uncertainty has become a drag on the revenues at the impacted ports as the cost of the longer travel times from Asia to the East Coast is offset by the uncertainty of port availability. It is a long-term credit drag on the port credits impacted. The looming back-to-school and Christmas (yes, Christmas) shipping seasons are leading the National Retail Federation and National Association of Manufacturers National Association of Manufacturers to call for the White House to mediate the dispute.

MUNICIPAL POWER AND NUCLEAR

Clark Co. Washington’s Public Utility District has been considering the feasibility of participating in the development of small nuclear generation. After a couple of delays, the County has authorized the District contribute some $200,000 to fund a share of a feasibility study to be under taken by Entergy Northwest. Entergy Northwest already supplies Clark Co. PUD with power from its existing nuclear facility.

Contributing to the study means the utility will not only receive information obtained through the study but will also get priority status for the facility’s future power sales agreements. The decision to participate follows a winter season which saw a new level of peak demand. The long shadow of the region’s experience with nuclear in the 1970’s and 1980’s looms over the nuclear proposal. The study will have to address the financial issues which result from that experience.

In Georgia, Georgia Power announced that the #3 reactor at Plant Vogtle had reached its maximum energy output for the first time. It is a significant if long overdue milestone. If all continues on track, GP predicts that Unit 3 will be fully operational in late this month. The second new reactor #4 is projected to be running within the first several months of next year.

According to GP, the latest estimates of total capital expenses (for which GP might seek rate hikes) is expected to reach $10.2 billion, which is $3 billion more than commissioners in 2017 considered reasonable. If the June date for Unit 3 is achieved, it will mark 14 years and $35 billion from approval to commercial operation.

Georgia Power owns 46% of Vogtle, followed by Oglethorpe Power Corp. with 30% and the Municipal Electric Authority of Georgia (MEAG) with about 20%. Dalton Electric will own less than 2% of the nuclear expansion. MEAG has offloaded a portion of its share through a power purchase agreement with the Jacksonville, FL Electric Authority.

In California, the State Lands Commission approved extending Diablo Canyon’s mean high-tide line lease off San Luis Obispo County through October 2030. It is just one of many steps which needed to be completed as part of the approval process to enable restart of the plant. The current licenses for its two nuclear reactors terminate in 2024 and 2025. Without the completion of a series of approvals, the Nuclear Regulatory Commission would not be able to approve the plan.

AV REALITIES

The move to autonomous vehicles continues its erratic path forward, sort of. Initially, the AV technology spotlight was on Tesla’s technology and some high profile incidents involving it. Those issues remain but it has been some time since a high profile incident. In the meantime, driverless technology companies like Cruise and Waymo have been testing the technology on the streets of San Francisco’s Bay Area and developing data.

So far, the data does not seem favorable. In June 2022, the California Public Utilities Commission authorized Cruise to deploy 30 autonomous vehicles — or AVs — for passenger use throughout designated regions of San Francisco, and said the company could charge for those rides. Five months later, the CPUC authorized Waymo to put its AVs on Bay Area streets as part of the state’s driverless pilot program. The companies are seeking extensions as well as approvals for some 100 more vehicles to operate.

This has opened opportunities for examination of the data and public reaction. It has been strong as the vehicles have a very mixed operating history. It is not that people are being injured. It’s that the technology in the cars has difficulty dealing with what must realistically be considered everyday traffic situations. Construction is a major problem cited along with the cars’ inability to deal with double-parked cars. These situations lead to the cars effectively stalling out in place often in intersections.

These tests continue to show both the promise and the shortcomings of the current state of the art in the AV industry. The vehicles are still tested in primarily favorable climates (no winter weather). Even with that, the San Francisco Metropolitan Transit Authority has indicated to state regulators that “Waymo driverless AVs have committed numerous violations that would preclude any teenager from getting a California Driver’s License”.

The SFMTA wrote a January letter to the CPUC that there were 92 reported incidents involving Cruise vehicles from May 29, 2022, through Dec. 31, 2022. 88% of them took place on corridors where Muni lines, buses and street cars operate each day.  The Authority may have summed the up where the industry is in terms of getting its technology accepted. “If they want us to believe things are getting better, they should give us data to demonstrate that, because that is not what we are seeing from calls to 911 and reports from SF Fire Department and Muni personnel.” 

MEDICAID RIGHT TO SUE

In 2016, when Gorgi Talevski’s dementia progressed to the point that his family members could no longer care for him, they placed him in petitioner Valparaiso Care and Rehabilitation’s (VCR) nursing home. Less than a year later, Mr. Talevski’s daughter suspected, and then confirmed with outside physicians, that VCR was chemically restraining Mr. Talevski with six powerful psychotropic medications. Suffice to say that ending the drugs led to improvement for the patient. That apparently did not make the facility happy.

The case includes forced visits to psychiatric hospitals and eventually a refusal to readmit the patient. The facility wanted the man committed to a psychiatric hospital. An administrative law judge nullified VCR’s attempted transfer of Mr. Talevski. Nonetheless, they did transfer him. Ultimately, he stayed at the new facility but it was located such that visitation was a burden. So, the family sued the county owned nursing home (VCR) and that then included the state through its Medicaid funding.

The family asserted that HHC’s treatment violated rights guaranteed him under the Federal Nursing Home Reform Act (FNHRA). The case was dismissed in federal District Court on the issue of standing. The District Court reasoned that no individual plaintiff can enforce provisions of the FNHRA.

On appeal, the Seventh Circuit reversed, concluding that the rights referred to in two FNHRA provisions specifically invoked in this case—the right to be free from unnecessary chemical restraints, and rights to be discharged or transferred only when certain preconditions are met— “unambiguously confer individually enforceable rights on nursing home residents,” making those rights presumptively enforceable. The Seventh Circuit further found nothing in the FNHRA to indicate congressional intent to foreclose enforcement.

The decision this week by the SCOTUS will not have a broad effect on the senior living space outside of the public sector. The Court made clear “this case is about these particular provisions and whether nursing-home residents can seek to vindicate those FNHRA rights in court “.  It does shine a light on certain practices and highlights just another aspect of the problem of mental health and the provision of services. County facilities will know have an extra level of responsibility/liability.

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

Joseph Krist

Publisher

COLORADO RIVER FALLOUT

The recent agreement to limit lower basin states ability to withdraw water from the Colorado River has been hailed as a positive short-term result. No doubt that it is but now the realities of the ongoing water shortage in the West are being exposed. One of the largest examples of unbridled growth in the southwestern U.S. is Phoenix and its metropolitan area.

Now that growth is facing limits. The State of Arizona has determined that there is not enough groundwater for all the future housing construction that has already been approved in the Phoenix area, and will stop developers from building some new subdivisions. Maricopa County, which includes Phoenix and its suburbs, gets more than half its water supply from groundwater which is being steadily depleted.

The State will not approve new determinations of Assured Water Supply within the Phoenix AMA based on groundwater supplies. Developments within existing Certificates or Designations of Assured Water Supply may continue, but communities or developers seeking new Assured Water Supply determinations will need to do so based on alternative water sources.

The state says it would not revoke permits that have already been issued and is instead counting on water conservation measures and alternative sources to produce the water necessary for approved projects. The impact will be felt more in recently developed suburban parts of the state’s metropolitan areas. The major cities’ internal development has largely been approved.

The Phoenix Active Management Area (AMA) is a region of south-central Arizona encompassing 5,646 square miles and, with 4.6 million residents, the most densely populated area in the state. The State has determined that over a period of 100 years, the Phoenix AMA will experience 4.86 million acre-feet (maf) of unmet demand for groundwater supplies, given current conditions. The term “unmet demand” refers to the amount of groundwater usage that is simulated to remain unfulfilled as a result of wells running dry in the model” used by the State.

If a city does not have a designation from the state, then each proposed development must prove to the state it has a 100-year supply of water. That demand will increase pressure on agricultural land which will be more valuable as a source of water and rights to it than it would be as a producing asset.

TRANSMISSION

One of the reasons we have followed so closely the approval process for carbon capture pipelines is that it parallels in many ways issues with expanding the nation’s electric grid. The greatest holdup to efforts to decarbonize the electric utility industry and move the country to electric cars and appliances is the inability to deliver power from where it is produced to where it is needed.

The issue of transmission impacts the whole country. Maine has just gone through an extensive permitting and referendum process over the development of a transmission line from Quebec to Massachusetts. The Grain Belt Express would connect wind power from states like Kansas and send that power to demand centers farther east. Already, concerns over permitting and land acquisition resulted in changes to power distribution agreements to address local concerns.

In any week, there are new examples of proposed transmission projects seeking approval in order to deliver power from new source to consumers. The Interior Department’s Bureau of Land Management this week said it has advanced two transmission projects proposed by public utility NV Energy that would facilitate more renewable energy development and delivery in Nevada. The agency will start an environmental review for the Greenlink North project, which will span over 450 miles to connect Las Vegas to Reno, and release a draft environmental impact statement for the Greenlink West transmission project, which will cover 232 miles from Ely to Yerington.

The Bureau of Land Management (BLM) issued its record of decision last week for the SunZia Southwest Transmission Project, delivering up to 4,500 megawatts of primarily renewable energy from New Mexico into Arizona and California. The project was first proposed some 15 years ago.  The Idaho Public Utilities Commission is hosting public hearings throughout southern Idaho in mid-June to receive testimony about a proposed 500-kilovolt transmission line which would extend 300 miles across five Oregon counties and connect to Idaho Power’s existing Hemingway substation in Owyhee County. 

The problem is clear in the Northeast. PJM is the nation’s largest regional grid operator, with a territory that spans all or parts of 13 states from the Midwest to the Mid-Atlantic, plus the District of Columbia. Of nearly 2,500 utility-scale projects totaling 250 gigawatts of capacity waiting in interconnection queues nationwide today, 95% of them are in PJM’s queue.

California is considering legislation which would expedite the approval process for transmission line development and expansion in the Golden State. SB 619, a bill that would expand the California Energy Commission’s authority to certify and prioritize transmission projects on the agency’s agenda.  Last year the legislature enacted AB 205, which authorized the commission to certify and prioritize transmission projects that cost more than $250 million and carry electricity from renewable energy facilities to a system interconnection juncture.

SB 619 would broaden the types of transmission lines eligible for certification to include those lines that convey electricity to and from other facilities — regardless of their proximity to an interconnection point. SB 619 would apply to facilities like solar photovoltaic, wind or stationary thermal power plants with a generation capacity of 50 megawatts or more. Estimates for the scope of investment required range from $30 to $50 billion.

MEDICAID

Beginning on April 1, pandemic restrictions kept states from imposing new qualification requirements on Medicaid recipients. It was thought that many people might lose coverage if they were no longer able to qualify for Medicaid. Now after one month, data is emerging about the scope and nature of determinations that individuals were no longer eligible.

The Kaiser Family Foundation (KFF) found that 19 states had begun the process of renewing Medicaid eligibility. Based on records from 14 states that provided data, 36% of people whose eligibility was reviewed have been disenrolled. Four out of every five people dropped so far either never returned the paperwork or omitted required documents.

Some states have been more aggressive than others. In Indiana, recipients are given two weeks to comply with documentation requests. The Hoosier State has 53,000 residents who lost coverage in the first month of the unwinding, 89% for procedural reasons like not returning renewal forms. That is not an uncommon phenomenon as many of those people do not have access to the internet. States know that. So that is why they impose short-term response and qualification periods.

As of April 1, KFF found that more than 1 in 4 Americans — 93 million — were covered by Medicaid or CHIP, the Children’s Health Insurance Program. Some 50% of children in the U.S. get their medical care funded through these programs. KFF estimates that 15 million people will be dropped over the next year as states review participants’ eligibility.

In the end, the states might save money but then it will increase pressure from providers on the states to provide greater levels of aid for uncompensated care. It puts more pressure on hospitals already dealing with utilization and inflationary issues. For safety net hospitals, the pressure on finances will only increase.

EPA WETLANDS DECISION

The Supreme Court decision last week to narrow the scope of the Environmental Protection Agency regulations on wetlands. The decision will be a boon to project developers – especially road developers – wetlands regulation has been effectively used to slow down, alter and even stop highway developments. Projects with significant right of way needs will be able to access certain areas which were effectively off limits for development.

Not only will it aid development but it will also pressure regulatory efforts dealing with waste. You would be surprised by the size and nature of some proposed developments adjacent to bodies of water which may no longer be regulated by the federal government. In many of those situations, activities associated with developments generate indirect threats to local water sites. Even facilities like warehouses have been found to generate pollution at adjacent water sources.

P3 BLUES

Three years ago, the University of Iowa entered into an agreement with a private consortium to operate the University’s campus utility systems. The 50-year agreement with the consortium – “University of Iowa Energy Collaborative” or UIEC – was supposed to provide greater system reliability for a more certain and affordable cost. Now, only three years into the transaction, the parties are suing each other over payments and whether the promised reliability levels had been achieved. The university is obligated to the partnership for $35 million annually.

In January, the private partner sued the University in federal court over reduced payments it received from the University. It has agreed to drop that case but to renew its efforts in state court. The University has now filed a counter claim. The issues are twofold. There have been two significant electric outages since the operator took over. The University is also fighting efforts to get it to fund a $1.5 million annual fee which it believes is the operator’s obligation. Bottom line is that the University feels that it is not getting the benefits expected.

OFFICE OCCUPANCIES AND TRANSIT

The longer it goes on, the continuation of lower occupancy rates in commercial and office buildings makes the status quo look a bit more permanent. It has become clear that in major cities with significant cultural bases, it is those primarily evening/night activities which are driving returns to cities. This started the establishment of different utilization patterns especially on mass transit. Many agencies have been reluctant to alter schedules to reflect changing in demand in fear of being accused of feeding the “doom loop” phenomenon in their city.

Now efforts are taking hold in some of the most affected markets. BART – the Bay Area system designed primarily to facilitate work-based commutation from outside the City of San Francisco to and from the City. This dictated a traditionally based rush hour schedule. The declines in demand for that service have been offset a bit by increased demand for more frequent night and weekend service. This has led BART to announce revised schedules increasing service frequency at night and on weekends.

Connecticut Gov. Ned Lamont proposed reducing service on the MTA New Haven Line to 86 percent of pre-pandemic levels, potentially resulting in dozens fewer daily trains running between Connecticut and New York City. Last summer, the state expanded service for the New Haven Line by introducing new weekday express trains as part of its TIME FOR CT initiative, designed to deliver faster trains and improved travel time.

THE FED AND ITS TAKE ON NYC

The latest Beige Book from the Federal Reserve provides some insight on the New York City economy while it copes with its recovery from the pandemic. Tourism activity in New York City has remained strong and is nearing pre-pandemic peaks. Business travel has continued to pick up, particularly domestic travel, despite competition with destinations in warmer parts of the country. For the first time in three years, graduation season has brought many international visitors to New York City.

European tourists are returning in large numbers but lags in visa processing have continued to constrain visitors from China and parts of South America. Hotel performance has remained on a strong upward trend, and New York City has had the highest hotel occupancy rates of all the major markets in the country in recent weeks.

Residential Rents are at all-time records in Manhattan, Brooklyn, and Queens and vacancy rates remain exceptionally low. Office vacancy rates were steady at elevated levels across the District and rents were mostly flat. New York City’s retail market weakened, with increases in vacancy rates and rents trending down.

INSURANCE IN CALIFORNIA

Natural disasters have always generated issues with insurance whether they be directly weather related like hurricanes and floods, or earthquakes and wildfires in California. In the aftermath of Hurricane Andrew in the early 1990’s, the insurance industry began to pull out of the home insurance market in Florida. The hurricane states in the Southeast have had to create entities to issue insurance to fill in gaps left by private providers.

The most recent example of the phenomenon comes from California where State Farm has announced that it will not write new homeowners or business insurance in California. The insurance company stated that the decision was made because of rising construction costs that are outpacing inflation, a challenging insurance market, and “rapidly growing catastrophe exposure.” State Farm was the largest underwriter of property and casualty insurance policies in California in 2021 with over $7 billion in premiums written, and a market share of 8.3%.

MINNESOTA NICE

Minnesota Gov. Tim Walz signed a bill legalizing recreational marijuana. This makes Minnesota the 23^rd state to legalize it. The legislation allows adults 21 and older to carry up to 2 ounces of marijuana in public and possess up to 2 pounds at home, starting Aug. 1. The legislation had been held up in a split legislature in recent years. The legislature came under full Democratic control in January and the Senate reversed previous actions and approved the legislation.

It will take some time for the law to have real impact. The retailing infrastructure is far behind the legislation and the state regulatory agency has said that it will be some time before sales can start. The criminal record and conviction provisions included in the law merely begin a process that the state says will take several months to execute. The legislation allows adults 21 and older to carry up to 2 ounces of marijuana in public and possess up to 2 pounds at home, starting Aug. 1.

As we go to press, Florida’s Department of State reported that the proposed ballot measure to legalize recreational marijuana gathered enough signatures to put it on the ballot in 2024. Petitions to get the proposed constitutional amendment on the ballot gathered 967,528 valid signatures some 70,000 above the requirement to reach the ballot.

The law would permit adults 21 and over to possess up to three ounces of marijuana for personal use. Medical marijuana treatment centers, which were legalized by a statewide referendum in 2016, would be allowed to sell marijuana for recreational use.

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

Joseph Krist

Publisher

COLORADO RIVER SETTLEMENT

Arizona, California and Nevada – the lower basin states -have agreed to take less water from the Colorado River. The federal government has agreed to pay about $1.2 billion to irrigation districts, cities and Native American tribes in the three states if they temporarily use less water. In aggregate, the reductions would amount to about 13 percent of the total water use in the lower Colorado Basin.

The agreement struck over the weekend runs only through the end of 2026. The majority of the cuts — 2.3 million acre-feet — would come from water districts, farm operators, cities and Native American tribes that had agreed to take less water in order to qualify for federal grants offered under the 2022 Inflation Reduction Act. Those payments will total about $1.2 billion. 

The plan as is provides some political shelter over the 2024 election cycle. It does not really address any of the long-term issues around that of water. The individual states will manage the specific cuts to specific agencies so that will leave issues like agricultural versus residential water use for later discussion. The melting snowpack is providing additional supplies to southern California through temporary water diversions. This will temper the impact of proposed cuts but that sort of weather cannot be counted on.

ILLINOIS BUDGET

As we go to press, a budget agreement has been announced for the State of Illinois. The legislature had failed to reach agreement before last week’s deadline. The spending plan is estimated to be $50.5 billion. Governor Pritzker’s proposed budget plan from February totaled $49.6 billion in spending. The budget framework includes a $200 million additional pension payment, bringing total pension stabilization investments to $700 million.

As is often the case, education funding was at the center of the debate. The budget plan provides $250 million to fund the first year of the governor’s early childhood plan to eliminate preschool deserts and help stabilize the childcare workforce. It also includes $50 million for early childhood capital improvements — and $350 million for the state’s evidence-based funding formula for K-12 schools. The plan funds a $100 million increase for public universities.

With Chicago being a favored destination for asylum seekers, the City sought additional funding for things like healthcare costs for the immigrants. As has been the case in New York, pinning down a realistic cost estimate for these costs has proved difficult. While the numbers are substantial, there are real arguments about the actual cost. The city has estimated its cost at some $1 billion.

KENTUCKY PENSION CHANGE

Kentucky announced that the County Employees Retirement System (CERS) has increased its assumed rate of investment return to 6.50% from 6.25%. The rise in general interest rate levels is the ostensible cause. In reality, governments will be required to contribute less to CERS beginning July 1, 2024 (i.e., fiscal 2025). Using the system’s most recent valuation, the actuaries for CERS preliminarily estimate that contributions from participating governments will fall to around $814 million from $866 million in fiscal year 2015, roughly a 6% reduction.

The move will be a short-term benefit for the county governments. In the longer run, the changes will lead to less cash inflow and slower asset accumulation for the historically underfunded CERS. The change occurs in the context of the Commonwealth’s history of severe underfunding of pensions. Moody’s valued CERS’ unfunded liabilities for pensions and OPEBs combined at $19.8 billion, with a funded ratio of 44%. This was based on Commonwealth of Kentucky data most recently audited financial statements as of June 30, 2022.

We view the change negatively on several levels. The assumption that the current interest rate environment will become the norm seems to ignore the economy. It is clear that current rate levels are suppressing parts of the economy. With enormous pressure being brought to bear on the Federal Reserve to slow if not reverse the interest rate trend, the move to increase the discount rate for a long-term portfolio seems questionable.

At the same time, the liability to pensioners continues at the same level. What the move does is to take a step back from addressing Kentucky’s long-term pension issues. It took a long time for any positive trends to be established. It would be a shame to see that change.

MASS TRANSIT AND BUDGETS

New York’s Metropolitan Transit Authority has announced the inevitable. It plans to raise bus and subway fares to $2.90 and increase the cost of a weekly pass. The announcement comes as the Authority continues the process of levying congestion fees against drivers. The 15-cent increase could be in effect by Labor Day. The hike is part of a proposed package of 3 to 5 percent increases in transit fares and railroad ticket prices, plus a 6 to 7 percent hike in bridge and tunnel tolls.

The announcement comes on the heels of the documentation of lost revenues of nearly $700 million due to fare evasion. The package will raise approximately $300 million annually for the agency — slightly less than half of the losses from fare-beating last year. The fares for the express bus favorited by commuters in neighborhoods with limited subway access would jump by a quarter from $6.75 to $7, while the cost of a seven-day pass would increase from $62 to $64. Railroad riders would see the cost of a monthly or weekly pass increase by 4.3 percent on average, though the MTA will still cap the price on the most expensive 30-day tickets at $500.

The fare increase process of public hearings and votes will focus unwanted attention of the subway system which continues to experience challenges in its efforts to restore patronage levels. The city continues to lag in its recovery from the pandemic. While employment has returned to prepandemic levels, attendance at the office has not.

In Illinois, the Chicago Transit Authority is looking to the State of Illinois for increased operating funding. CTA has identified a $400 million gap to be closed in its budget. Federal dollars have been offered for rolling stock replacement but funding for operations has been scarce. It comes at a time when big city mass transit systems are hard pressed to employ enough operators to maintain service.

In California, mass transit agencies in the state are seeking significant operating subsidies as well. The statewide ask is some $6 billion.

HIGHWAY ERA ENDING

The latest example of the move to remove highway infrastructure designed in the 1970’s continues. The focus has been on elevated highways which cut right through urban areas effectively creating barriers to movement within the city. From time to time the debate has unfolded in the aftermath of accidents or disaster. In the 1970’s it was Westway in Manhattan. In the eighties and early nineties, it was the Bay Area and the replacement of the Embarcadero and elevated sections of highway in Oakland.

The success of those projects led to the consideration of elevated road replacements not driven by disaster. In Seattle, the Alaska Way was dismantled after many years opening up access to the Seattle waterfront significantly. In upstate NY, the replacement of the I-81 viaduct in Syracuse moves forward. Now, the latest example of the movement’s strength comes from Milwaukee.

A process is underway to determine the best costs of action for the replacement of infrastructure for I-794, an elevated road slicing through Milwaukee’s downtown. The City has undertaken a plan for downtown development and hopes to connect more of its downtown with the City’s waterfront. The state is undertaking a process to determine the best course of action to deal with the structures need for renovation.

One of five possible approaches is the removal of some of the elevated road and its replacement with a street level boulevard. It would not be the first such road to be dismantled in Milwaukee. The first was some 20 years ago and that plan is considered to be a success.

PUBLIC POWER UNDER PRESSURE

The New York State Legislative Commission on the Future of the Long Island Power Authority, have been studying the feasibility of not renewing the current management contract with PSEG Long Island, a unit of New Jersey-based Public Service Enterprise Group (PSEG) when it expires in 2024. The company was hired in the wake of high levels of customer dissatisfaction with the recovery of Long Island’s energy grid after Superstorm Sandy. As the legislative process unfolds, the politics of the issue get more complicated.

Supporters of the plan to revert to direct control by LIPA believe that direct operation would provide better service through more accountability. Opponents cite “lost taxes’ and greater taxpayer liability for the systems operations. On April 17, a feasibility study was released which concluded that the public would likely reap some financial benefits if the utility was transitioned to a public power authority. According to the report, LIPA customers could conceivably save $50 million or more annually by replacing PSEG Long Island. Much of that assumes that direct control will keep rates lower than would be the case under the status quo.

The irony is that the direct operating model was seen as a weakness given its susceptibility to local political pressure. Now, it is seen as salvation. The process will continue over the summer with a goal of having a legislative plan in place for the 2024 legislative session. In the short run, the status quo prevails.

In California, a public agency which distributes “green” energy to its customers faced possible dissolution. The Orange County Power Authority was established to develop aggregate demand for non-fossil fueled power. It serves eight localities but the two largest customers – Huntington Beach and Irvine – account for 70% of the power demand. The existence of the Authority has been a contentious issue in more conservative Orange County.

The agency has been under pressure as the result of transparency and management concerns. The CEO was fired and new procedures adopted. Nonetheless, discontent with the agency grew. Recently, Huntington Beach voted to withdraw from OCPA and return to being a Southern California Edison customer. The city accounts for 30% of demand. This focused much pressure and attention on the other large customer Irvine.

Huntington Beach residents and businesses will likely no longer be able to choose to pay for 100% renewable energy. And their electricity bills may actually go up — currently OCPA’s basic rate plan is cheaper than the one offered through Southern California Edison. All of this may have influenced the City of Irvine to choose a different path. It voted to remain a customer of OCPA.

PORTS

Ports continue to be impacted by slower activity levels. The West Coast ports where labor negotiations color the outlook for the ports reported significant drops in throughput. The Port of Los Angeles reported a 22.5% decline when measured against 2022’s strong year. The port processed 688,109 20-foot-equivalent unit containers compared with 887,357, or a decline of more than 199,000 TEUs. The adjacent Port of Long Beach also reported a 19.6% year-over-year decline as the complex moved 659,049 containers in April compared with 820,718. The Port of Oakland processed 180,482 TEUs, compared with 188,442 for a 4.2% decline from 2022.

It is a national trend. Ports in Seattle and Tacoma, Wash., reported a 12.8% decline to 232,321 containers in April compared with 266,635 a year ago. On the East Coast, the Port of Savannah, Ga. processed 408,686 containers in April, its second-highest month this year. Still, it marked a 17.5% year-over-year decline from 495,782. However, that’s up more than 11% from 367,880 in March, which was the slowest month for the port since July 2020. Volume at Port Houston also slowed by 8% in April to 307,879 containers compared with 334,493 a year ago. The Port Authority of New York and New Jersey reported that in March, volume declined 33.4% to 574,452 TEUs compared with 862,117 a year ago.

CARBON CAPTURE

Summit Carbon Solutions is a familiar name to readers as the sponsor of a carbon capture pipeline network through the Midwest. Iowa farmland owners have been among the leading critics and opponents of the project. In North Dakota, a different source of opposition has arisen. The legislature has requested that the state investigate the ownership structure to see if the proposed pipeline violates — Senate Bill 2371 and House Bill 1135 — which were passed earlier this year and go into effect Aug. 1.

Senate Bill 2371 prohibits foreign adversaries of the United States and foreign business entities with principal executive offices located in a country that is identified as a foreign adversary from owning and developing property in North Dakota. House Bill 1135 prohibits people who are not a U.S. citizen, U.S. permanent resident or Canadian citizen from directly or indirectly acquiring agricultural land in North Dakota.

The bill also states that limited liability companies can’t directly or indirectly acquire or otherwise obtain any interest in any title to agricultural land unless the ultimate beneficial interest of the entity is held directly or indirectly by citizens of the United States or permanent resident aliens of the U.S. The request reflects the fact that Summit has listed five owners of which one – TPG Rise – is supported by investment from The Silk Road Fund — an investment fund backed by the Chinese government.  

These concerns come in the wake of The Department of Energy’s announcement that it would not follow through on a $200 million proposed grant to Microvast Holdings Inc., a lithium-ion battery company that is planning a manufacturing facility in Tennessee, seven months after the award was tentatively approved. A Securities and Exchange Commission decision in 2022 added Microvast to a list of companies subject to potential intellectual property violations in China.

UPDATES

More support for the development of a lithium extraction industry in and around California’s Salton Sea came when Ford announced a large purchase from a Salton Sea producer. Energy Source Minerals will supply Ford with lithium hydroxide produced at ESM’s Project ATLiS, located in Imperial Valley California. Project ATLiS is expected to be operational in 2025. GM had already been involved with another Salton Sea producer since 2021.

Moody’s assigned a negative outlook to California’s GO rating. The surprise increase in the budget gap garnered points with no one.

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

The May revision to the Governor’s proposed budget dropped on Friday afternoon. If the budget was filled with good news, it would not have been released during a prime news dump period. So, it should have been a clue that a surprise was in store.

That surprise came in the form of an unanticipated increase in the estimated deficit facing the State. Since the release of the Governor’s Budget in January, monthly revenue shortfalls have continued, which have contributed to the May Revision General Fund revenue estimate shortfall of $8.4 billion (before transfers and adjustments). The additional budget shortfall at the May Revision, after transfers and adjustments, is estimated to be $9.3 billion. The $309 billion revised budget now reflects a $31 billion shortfall, some 10% of state spending. The state has reserves in the Budget Stabilization Account (BSA), which is now approximately $22.3 billion.

The volatility inherent in the State’s tax structure – nearly half of all personal income tax in the state is paid by the top one percent of earners – is at the heart of the problem. Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility.

The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion is corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporation tax revenues for the current fiscal year.

So, what to do? The May Revision reduces an additional $1.1 billion in spending across the 2021-22 through 2023-24 fiscal years. Combined with the Governor’s Budget’s $5.7 billion in reductions and pullbacks and a $57 million adjustment, the May Revision includes total solutions in this category of $6.7 billion. Additional maneuvers include $3.3 billion in shifts of spending commitments from the General Fund to other funds; the withdrawal of $450 million from the Safety Net Reserve; $3.7 billion in revenue and borrowing, which consist primarily of an additional $2.5 billion from the Managed Care Organization tax and $1.2 billion in additional borrowing from special funds. Combined with the Governor’s Budget amount of $1.2 billion, there is a total of $4.9 billion in new revenue or borrowing.

The word “shift” appears all over the proposals. In some cases, shift involves the source of revenues. In others, it represents a shift from current funding to the use of bonds to finance projects which were formerly supported by General Fund spending.

NEW YORK CITY BUDGET AND THE MTA

When the most recent proposed budget from the Mayor was released, the state had not yet adopted its budget. The state budget is an important component of the City’s budget process and those negotiations can produce some unexpected and expensive changes in state funding. Now that the State budget has been adopted, changes to funding ratios create problems for the City.

The Executive Budget did not anticipate additional paratransit costs that became clear with the adoption of the state budget. Starting in July of this year, the city is required to subsidize MTA’s paratransit operating costs at 80 percent—up from 50 percent—after fares and dedicated tax revenues. This increase is limited to 2024 and 2025 and is capped at $165 million in addiƟonal contribuƟons each fiscal year. IBO esƟmates this policy will increase the city’s paratransit subsidy by $163 million in 2024 and $165 million in 2025, for a total of $328 million over the two years—or about 30 percent more than the $1.1 billion the MTA previously projected.

This comes as the MTA has quantified the negative impact of fare evasion. Fare evasion cost the MTA $690 million in 2022. The MTA is on track to lose $1 billion this year due to fare evasion. Critics cite facts like those to point out that the losses are about equal to what the MTA hopes to generate from congestion pricing. It is difficult to generate support for those fees when there are daily examples of fare evasion.

STATE REVENUE SHORTFALLS

In Massachusetts, a report by the Massachusetts Department of Revenue showed April revenue was down 31% year-over-year, with the state collecting $4.78 billion, $2.1 billion less than in April 2022. In its revenue report, the Massachusetts DOR Commissioner highlighted steep dips in short-term capital gains as a major factor in tax declines for April. Nonetheless, the state is expected to move forward with both tax cuts and new spending. most of the key proposals in the governor’s budget proposal, including a $600 child tax credit, new seniors tax credit, renters assistance, a reduction of the estate tax, and a centerpiece short-term capital gains tax cut that would reduce the rate from 12% to 5% over two years.

Illinois revenues sunk in April by $1.8 billion from April 2022 collections. The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while the legislature’s Commission on Government Forecasting and Accountability (COGFA) cut its estimate $728 million to $51.2 billion. COGFA noted that Illinois revenues are still up $132 million from last year but that counts $325 million of one-time federal American Relief Plan Act funding that won’t be available in the coming fiscal year.

MAINE TRANSMISSION

A Maine jury unanimously found that Central Maine Power was entitled to resume construction of the New England Connector transmission line. More importantly, the plaintiffs in the case announced that they would not appeal the verdict. This will allow construction to resume. CMP immediately sued the state to reverse the results, arguing the referendum was unconstitutional for creating a retroactive law nullifying a project that had been lawfully permitted by numerous state and federal government agencies. the Maine Department of Environmental Protection is expected to lift the freeze on construction which was imposed after passage of the referendum halting the project in 2021.

STADIUM NEWS

This week two cities effectively ended the possibility of professional sports franchises staying in their current homes. In one case, a referendum process allowed voters to make the decision directly while in the other the local political structure would not support a project.

Voters in Tempe voted against a proposed development plan centered around a new arena for the NHL Arizona Coyotes.  And the vote comes after the City of Phoenix and Sky Harbor Airport raised concerns about the location of the proposed development and threatened additional litigation against the deal. Propositions 301, 302 and 303 — all needed to receive a majority of “yes” votes in order for the Coyotes project to move forward. Each one was losing by a 56% to 44% margin, with the exception of Prop. 303, which was losing 57% to 43%.

There is a real likelihood that the franchise will move given the lack of a permanent place to play. There are already four cities which have been suggested as a future home for the team. Three of those cities have available arenas and the fourth will see one later in connection with an Olympic bid. The Coyotes are not the first NHL team to have arena woes – the NY Islanders eventually landed on their feet with the UBS Arena in Elmont, NY.

The Oakland A’s of MLB announced that they had entered into an agreement to develop a baseball stadium right on the Las Vegas Strip. Part of the transaction would include some $350 million provided by the State of Nevada, subject to legislative approval. It is impossible to overstate the impact that the success of the NHL Vegas Golden Knights has had on the perception of Las Vegas as a viable professional sports city. Concerns about consistent attendance and any worries about issues related to gambling simply have not materialized.

THE MOUSE WARS ESCALATE

Last month the CEO at Disney asked about Florida “Does the state want us to invest more, employ more people, and pay more taxes, or not?” Apparently, Disney believes that the answer for now is no. Following through on that conclusion, Disney announced that it was not going to pursue a planned development within the District which would have transferred 2,000 employees from California (at a state estimate of $120,000 average salaries) and seen an overall $1 billion investment.

There are lots of reasons why Disney would cancel the project. Employees were unhappy with the move and the company is in the midst of a major cost cutting program. Nonetheless, the opportunity to up the ante in Disney’s dispute with the Governor allowed Disney to package the cancellation of the project as being in support of its position.

The situation reflects the toxic matching of ideology and political ambition. It tends to backfire and it occurs on both ends of the political spectrum.

SOLAR AND NET METERING

The effort to reduce the favorable economic impact for customers who install solar panels continues to spread. Net metering – the mechanism for paying for surplus solar generation – has been steadily under attack. Ironically, most of these actions are being undertaken in states where solar would make sense. The primary effort is to reduce the price paid by distribution utilities for solar generated electricity. Such actions have been seen in California, Arizona, Texas, Florida.

North Carolina recently approved new net metering rates which will lower payments to those with solar. The new net-metering rules are scheduled to take effect July 1. A settlement negotiated last year by three North Carolina solar installers and included in the utilities commission’s May order will allow existing residential solar owners to continue to be credited for excess electricity at the current standard rate for up to 15 years.

Under new rules approved by the utilities commission March 23, customers will be credited more during times of peak demand — such as early morning in winter and evening in the heat of summer — and less when loads are lower. Overall, it is expected to lower payments to residential solar customers.

In addition, the insurance industry in Florida is cancelling homeowners insurance policies for many who have installed solar. It is estimated that half of the state’s home insurance carriers are making the move. Add that to the already existing issue of declining coverage as the result of hurricanes and it will put even more pressure on government backed insurance plans.

HYDROPOWER

It is estimated that 45% of the U.S. hydro fleet has licenses that expire by 2035. Bipartisan hydropower permitting reform legislation introduced last week in the U.S. Senate would establish a two-year permitting process to install turbines on non-powered dams and a three-year procedure for pumped storage projects unconnected to waterways. The sponsors and co-sponsors are from four states with significant hydro resources and the partisan split is even.

According to the Energy Information Administration, the United States has 1,029 FERC-licensed facilities with about 80 GW of hydroelectric capacity and about 22 GW of pumped storage capacity. Last year, hydropower accounted for about 6.2% of total U.S. utility-scale generation and almost 29% of utility-scale renewable generation. The bill, The Community and Hydropower Improvement Act, S.1521, seeks to cut years off of the relicensing process.

It is the pumped storage issue which is most intriguing. The process has recently gained lots of attention even though pumped storage has been utilized for years. Municipal investors have long been familiar with pumped storage projects. About 35 GW of potential additional pumped storage capacity is available in the U.S. FERC is reviewing three pumped storage license applications in California, Washington and Wyoming totaling nearly 2,672 MW. 

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

ROAD FUNDING

Oklahoma’s Department of Transportation is inviting drivers to take part in a six-month pay-per-mile pilot program set to launch this July. The Fair Miles program is designed to address emerging impacts on funding as electric car use grows. Drivers who volunteer to be part of the pilot will have several mileage reporting options (MRO), including an onboard device (OBD-II) and telematics, if provided by the vehicle manufacturer.

Oklahoma joins Oregon, Utah, Virginia and Washington in conducting similar pilot studies. In Oklahoma, the state is looking for 500 diverse participants, who will each be paid $50 for taking part. The project was authorized in 2021.

Indiana is taking a different approach while it figures out a long-term source of funding for roads which does not include a gas tax. In 2017, a state task force recommended several provisions which became law. They included raising the gas tax by 10 cents, indexing the tax to inflation with a cap of one penny, and directing revenue from a separate gas sales tax to a dedicated road improvement account rather than the state’s general fund.

Under current law, the annual inflation adjustment to the gas tax, which is limited to a penny, was set to end in 2024. Lawmakers in the budget agreed to an extension, pushing the expiration date out to 2027. 

CALIFORNIA TRANSIT FUNDING

The issue of state funding for transit usually plays out in places like New York and Illinois where the use and demand for mass transit is quite concentrated. There debates over state revenue assistance to transit agencies is taken for granted. It’s usually not an issue of whether to subsidize or not. This year, the issue of operating subsidies for local mass transit is coming to the state budget negotiations in California.

The California Transit Association which represents 85 public transit systems has proposed that the state appropriate some $5 billion to subsidize operating revenues to fill in projected shortfalls in local transit revenues.  The systems anticipate a cumulative budget deficit of around $6 billion over the next five years, according to the association. The state has never done this before.

The agencies are hoping for additional funds from the state’s sales tax on diesel fuel and unallocated revenue from the state cap-and-trade program. They’re also asking to use some existing capital funding to support operations over the next several years. How badly is the money needed? The agencies say they’re willing to give more operating oversight of transit operations to the state, and respond to demands for “accountability” in the form of safety and service improvements.

CONGESTION PRICING

The Federal Highway Administration tentatively approved an updated draft of a report commissioned by the Metropolitan Transportation Authority that identified ways to mitigate the potential harm of congesting pricing on disadvantaged communities. This opens a 30-day comment period after which FHA is expected to give its final approval. The M.T.A. says the tolling program could begin as soon as spring 2024.

That assumes that a toll level will be agreed upon in spite of continued strong suburban resistance. Other critics include taxi drivers, as well as Lyft and Uber drivers. The M.T.A.’s own research has shown that fare increases triggered by the tolls could slash demand for taxis and for-hire rides by up to 17 percent.

ASYLUM COSTS

Last week we discussed the budgets for the State and City of New York. One result was that the City was not going to receive financial aid from the state to reduce the costs of the asylum surge into NYC in the amounts the City had hoped for. The recently adopted New York State Budget included funding to reimburse New York City for 29 percent of costs associated with sheltering asylum seekers, up to $1 billion in reimbursement over two years. 

As the budget process moves to the City side, the NYC Council commissioned the City’s Independent Budget Office (IBO) to examine city expenses associated with serving asylum seekers that were included in the Executive Budget. A most frequently cited figure by the Mayor is $4 billion. IBO modeled a baseline cost scenario which assumes variation in the influx of asylum seekers in line with current trends. It also studied a lower-cost and higher-cost scenario.

What did IBO find? All three IBO cost scenarios are based on the assumption that the volume of asylum seekers utilizing city services will fluctuate. When this is combined with varying cost models, the resulting total costs are between $600 million and $1.7 billion lower than the Executive Budget projection of $4.3 billion for fiscal years 2023 and 2024. How did the difference come to be?

Baseline-cost scenario ($3.07 billion) – IBO estimates that the asylum-seeking population in 2024 will continue to follow trends of arrivals, stays, and exits seen in 2023, and that the current cost of providing shelter and food and other city services for asylum seekers will remain constant. This scenario totals $3.1 billion across 2023 and 2024, $1.2 billion lower than the Executive Budget.

Lower-cost scenario ($2.67 billion) – assumes that, while the asylum-seeking population will continue to grow over the course of 2024, the city will find cost efficiencies next year, lowering the per-household cost of providing shelter and food for asylum seekers.

Higher-cost scenario ($3.728 billion) – assumes that the asylum-seeking population will continue to grow over the course of 2024 and that the cost to shelter and care for asylum seekers will be higher than current rates as the city continues to ramp up emergency spending.

Across each of IBO’s three cost scenarios, the city will not receive the full $1 billion it might get from the State. The findings will give ammunition to those City Council members who did not support budget cuts for things like libraries.

WATER, MICHIGAN, BANKRUPTCY

Stop me if you think you have heard this before but another Detroit suburb is having trouble with its water system. For ten years, the City of Highland Park and what is now the Great Lakes Water Authority have been in litigation over unpaid water bills. Last month, a Wayne County Circuit Court Judge ordered Highland Park to provide a payment schedule which would resolve the outstanding $24 million debt due to GLWA.

The court case against the city resulted in at least three mediations, with the last one being overturned by the court of appeals resulting in its reversal after DWSD/GLWA agreed to settle and pay Highland Park $1,000,000 for overcharges. Instead, the parties find themselves at this crossroads. Highland Park’s City Council voted to petition Michigan Governor Gretchen Whitmer requesting she authorize the city to go into Chapter 9 municipal bankruptcy. They had hoped that this would happen by April 20.

In 2014, the city chose a neutral evaluation process under state law which was a pre-bankruptcy mediation. The order of a payment program is actually a stick to get the parties to some agreement. In fairness, it is likely a burden for the majority of Highland park’s ratepayers to make their full payment. It is also symptomatic of the fiscal problems which have seen the city run under the State emergency manager laws – once for six years and again for two years between 2001 and 2015.

FLORIDA

In 1882, the US passed the Immigration Act. That law was enacted primarily at the behest of California where Chinese immigrants were accused of taking jobs and holding down wages. The law excluded merchants, teachers, students, travelers, and diplomats. It was renewed after its original ten-year term expired and after two renewals was replaced by the Chinese Exclusion Act. That law made the restrictions permanent and they stayed in place until 1943.

Now, in preparation for his Presidential campaign Florida Governor signed his state’s version of restrictions on Chinese individuals. The new law is structured to prevent “governments or agents” from “countries of concern” – China, Russia, Iran, North Korea, Cuba, Venezuela and Syria from buying farmland or any property within 10 miles of any military installation, seaport, airport, power plant, water treatment facility or any other location deemed critical infrastructure.

The law bans citizens from those countries of concern who are not lawful permanent US residents from owning any real estate in Florida. Those knowingly selling property in violation of the new regulations may be subject to civil and criminal penalties, and the new laws allow the state to seize property improperly obtained by foreign nationals.  The legislation also prohibits state colleges and universities from soliciting or accepting gifts and grants from foreign countries of concern and bans private schools from being owned or controlled by adversarial nations. 

While the language does not limit the law to exclusively Chinese interests, the Governor made it clear in the signing ceremony that the law targeted Chinese interests. The “CCP threat” is a popular talking point among the conservative voters being targeted by The Governor and his campaign. Whether it will have any practical effect on the issue is another thing. It is a continuation of some very noisy efforts to use the law and the courts to score cheap political points.

On that note, the state has enacted legislation which purports to overturn the development agreement adopted by the Reedy Creek District and Disney at the old board’s last meeting in February. The litigation related to this is piling up with suits and countersuits flying. While we do not believe that the legal battles will impact the payment of outstanding debt from Reedy Creek, we are troubled by the willingness of the Legislature to support an unnecessarily disruptive politicization of a municipal bond credit.

P3 DEFAULT

Eastern Michigan University is considered a commuter campus with only 17.5% of enrolled students living on campus. To facilitate the attendance of its commuter students, the University had operated an extensive parking system on campus. Part of that system included a garage for 740-odd vehicles. To facilitate the management and refurbishment of the garage, the University entered into a public-private partnership for the maintenance and operation of the garage. The term of the agreement was 35 years.

The project was financed through the issuance of bonds by the Arizona Industrial Development Authority, a conduit issuer. The proceeds of the Bonds were used to, among other things, refinance the Project by prepaying a Prior Loan and redeeming Prior Notes and finance certain costs of the Project. The debt service on the bonds would be paid from repayments under a loan agreement with the operator.

The Borrower failed to make at least the Loan Payments required under the Loan Agreement that became due on May 1st, 2021, November 1st, 2021 and May 1st, 2022. In addition, the Borrower failed to make the complete Loan Payment that became due on May 1, 2023 (together with the earlier missed Loan Payments, the “Missed Loan Payments”). Those were defaults under the loan agreement. The Borrower’s failure to timely make each of the Missed Loan Payments constitutes a Loan Default Event under the loan agreement and creates a default under the Indenture securing the bonds.

In the meantime, the garage is closed so there are no revenues generated. The dispute between the University and the operator has been in the courts. Provident EMU has sued EMU twice in both federal and Michigan court. The federal case was thrown out quickly. In litigation to date, Provident accused EMU of underselling the cost of repairs needed on a 784-space parking structure and either undercharging or reserving more spaces than planned in the garage. The parties have been in disputes resulting from pandemic restrictions which limited operations.

It is part of a pattern of disputes between Universities and private housing and parking providers. The attraction of the P3 model for universities is that it shifts risk off their balance sheet. If they had wanted to guarantee the debt, they could have issued traditional parking revenue bonds. The whole point of these transactions is to shift risk. So, when revenues do not meet expectations, relying on universities to suddenly step up and backstop debt which they worked very hard not to be responsible for may be a fool’s errand.

HOCKEY ON THE ARIZONA BALLOT

On May 16, the voters in Tempe, AZ will have their chance to cast votes for or against a proposal to issue debt for the development of a mixed use commercial and residential community anchored around a new arena for the NHL Arizona Coyotes. The Coyotes have been in the Valley of the Sun for a quarter century without ever being able to lock down a permanent home. Multiple ownership groups and continuing interest in moving the franchise have not helped.

The team now plays on the Arizona State University campus. It is designed for college and while its ice was rated the best in the league, the building holds only 5,000 people. It is not a viable long-term solution. After the Desert Dogs were kicked out of the arena in Glendale, a long-term solution had to be found before the pressure to move the franchise only grew.

The project was approved by the council to become a referendum on Nov. 10, 2022, and on Nov. 29, the proposed use of land and development that would be the entertainment district was unanimously approved. The team has agreed to pay the City under the terms of a 30-year Government Property Lease Excise Tax, which allows developers to build in Arizona by paying an excise tax instead of property taxes for a set number of years. 

A robust debate has unfolded with two sides offering what can only be described as the usual arguments. It is fair to say that a failed vote would result in enormous pressure to be placed on the NHL and its other owners to move the team to where it could have a permanent home.

PUERTO RICO

Beginning in 2016, CPI—a nonprofit media organization that has reported on Puerto Rico’s fiscal crisis—asked the Board to release various documents relating to its work. When CPI’s requests went unfulfilled, it sued the Board in the United States District Court for Puerto Rico, citing a provision of the Puerto Rican Constitution interpreted to guarantee a right of access to public records. The Board moved to dismiss on sovereign immunity grounds, but the District Court rejected that defense. The First Circuit affirmed. The case moved to the US Supreme Court.

The court began by citing Circuit precedent that Puerto Rico enjoys sovereign immunity, and it assumed without deciding that the Board shares in that immunity.

The question presented is whether the statute categorically abrogates (legal speak for eliminates) any sovereign immunity the board enjoys from legal claims. The Court held it does not. Under long-settled law, Congress must use unmistakable language to abrogate sovereign immunity. Nothing in the statute creating the board meets that high bar. Lacking that language, this Court assumed without deciding that Puerto Rico is immune from suit in United States district court, and that the Board partakes of that immunity.

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity unmistakably clear. The statute does not explicitly strip the Board of immunity or expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity. The standard for finding a congressional abrogation is stringent. Congress, this Court has often held, must make its intent to abrogate sovereign immunity “unmistakably clear in the language of the statute.”

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity “unmistakably clear.” The statute does not explicitly strip the Board of immunity. It does not expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity.

MAINE TRANSMISSION

Maine’s highest court ruled today that a 2021 ballot initiative seeking to block construction of a 145-mile transmission line was unconstitutional. It ruled that the ballot measure could not retroactively ban New England Clean Energy Connect, or NECEC as the project is known. They noted the proposed transmission line had received a certificate of public convenience and necessity from state utility regulators.

The decision still requires adjudicating the issue of whether Avingrid, the project sponsor and CMP owner had completed enough work on the project that it could not be stopped. The applicability of the decision on the initiative in this case depends on what a county jury decides in litigation currently ongoing to resolve that question. 

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