Joseph Krist

Publisher

NOVEMBER 5 AND MUNICIPALS

The election results and initial announcements of cabinet nominees have set everyone about the task of trying to figure out what the impact of the federal elections will be on municipal bonds. There are certainly plenty of tea leaves to examine in the process. One thing making analysis harder in this case is the history of wild inconsistencies in terms of policymaking and implementation we saw in the first Trump administration.

The prime example is the experience with Trump’s infrastructure policies. It’s easy to chuckle and remember that Infrastructure Week never happened. The massive support for public/private partnerships initially expressed quickly withered. The Gateway Tunnel project sat unfunded. In the time between 2016 and now, many significant P3 projects have been completed even in places like New York State. But they were locally driven.

Then there is the STAR deduction. Repealed by the 2017 Tax Act, it reflected real regional animus towards states like NY and CA. Now, the President purports to support reinstatement of the deduction. Considering his election performance in many of the states (even where he lost) it would not seem to be a high priority. Someone should tell that to the President of the NYMTA who is suggesting that congestion fees can be paid out of the lower tax bill due to a reinstated STAR deduction.

What exactly does an RFK Jr. leadership at HHS mean if it actually happens. There is plenty of reason to believe it won’t. Will he try further cuts to Medicaid and Medicare? Will an effort be made to repeal the ACA? Does he continue efforts to defund rural healthcare? What is the outlook for a hospital sector given all of these uncertainties? How will all of this impact health costs for states?

For big city credits with significant migrant related impacts, the outlook is really cloudy. If there is a serious effort to deport illegal migrants, a number of ancillary costs and impacts will be borne by localities. NYC is still taking care of some 60,000 migrants. Chicago is undertaking a plan to close migrant-only housing facilities and house homeless migrants in its existing homeless housing system.

What will the final shape of the expected tax cutting plan look like and how it will impact municipal bonds isn’t clear no matter what anyone tells you. Turnover leads to a need to constantly educate Congress about municipal finance. With different seniority rules, it’s harder to find legislators with enough detailed knowledge to advance the cause. Something on private activity bonds could be positive. I would be surprised if favorable changes to advance refunding rules emerge. I would be happily surprised if SALT was preserved.

One policy change likely to be implemented is the end of the $7500 electric vehicle purchase subsidy. Trump needs to repay fossil fuel industry supporters and his ally. Mr. Musk thinks that the end of the credit will be worse for his competitors. Tesla does not rely heavily on the tax credits as some Tesla models do not qualify for them because of several requirements, including that the vehicles be free of Chinese-made components. According to the International Energy Agency, the global rollout of electric vehicles could reduce oil demand by nearly six million barrels a day by 2030.

CONVENTION CENTER REALITIES

In 2023, Orlando will host the largest number of the top 250 conventions, followed by Chicago, New Orleans, and San Diego. The South/Southeast region will host 38% of the top 250 conventions in 2023, followed by the West/Pacific region at 31%. Within individual states, California will host 17% of the conventions, followed by Texas at 12% and Florida at 8%.

Dallas is spending $3.7 billion to build a new 2.5 million square foot convention center next to an existing one built in 1973. In Orlando, Fla., the Orange County Convention Center will be expanding at a cost of $560 million. The City Council in Los Angeles approved a $1.4 billion plan this year to add nearly 350,000 square feet to the city’s aging convention center as well as to renovate an adjacent plaza. The project is expected to be completed ahead of the 2028 Summer Olympics.

In recent years, Las Vegas, Denver and San Francisco invested hundreds of millions of dollars to expand and update their convention centers. The Javits Center in New York completed a $1.5 billion expansion in 2021. It is far from clear that these facilities achieve anywhere near the financial results initially projected in support of associated debt. The number of large conventions has declined even though available space is growing.

CONGESTION PRICING

Governor Kathy Hochul announced that she was supporting congestion pricing but at a lower charge. The originally planned rollout featured a $15 charge. The Governor proposes a $9 charge. The move is motivated by the fact that the elections are over for now and that it is highly unlikely that a Trump administration would give the required federal approval. The Governor’s goal is to have the charges begin before January 20.

It’s not clear that a $9 fee generates the level of revenues demanded by the authorizing legislation supporting the charge. The idea was to establish a charge at levels sufficient to generate some $1 billion annually. Advocates are already contemplating longer amortization of debt planned to be supported by fee revenues.

State officials believe that they will not need to repeat the lengthy environmental review process because the previous review accounted for a range of tolls from $9 to $23. The state and city must sign an agreement with transportation officials in the Biden administration. The proposed reduction would apply to all types of vehicles including trucks. Press reports indicate that state officials say privately that with a $9 fee instead of $15, more motorists may decide to drive into Manhattan, at least partially offsetting the loss in revenue from the lower toll.

Under a revised plan with a 40 percent toll reduction, cars would pay an off-peak rate of $2.25 from 9 p.m. to 5 a.m. on weekdays, and from 9 p.m. to 9 a.m. on weekends. Trucks would be charged $14.40 or $21.60 during peak hours, depending on size. And passengers would see an extra per-ride surcharge of 75 cents in taxis and $1.50 in Ubers and Lyfts. Passenger cars would also receive a discount for entering the congestion zone through four Manhattan tunnels — the Lincoln, Holland, Hugh L. Carey and Queens-Midtown — during peak hours, with a proposed credit of up to $5 going down to $3.

Advocates for congestion pricing are going along with the new plan. They have already expressed an intent for steadily increasing rates while settling for an initial lower rate. There will be many questions regarding the implementation of the plan although we note that the physical infrastructure is in place. The rollout of the program will likely provide lots of fodder for both sides of the debate surrounding the fees.

We will see if the program actually produces all of the traffic and environmental benefits promised or it becomes just another way for the MTA to get revenues.

PUBLIC TRANSIT CUTS

The San Francisco Municipal Transportation Agency (SFMTA) says it is looking at an annual deficit of $240 million to $320 million starting in 2026. It has been presented with several proposals to align service with available revenues. They are said to include cuts to three cable car lines; the F Market streetcar; cuts to undetermined buses and light rail lines; eliminating some nighttime service; and shutting down buses on hilly routes. Muni ridership reached a post-pandemic high in September, with more than 520,000 weekday boardings. The problem is that’s still under 75% of 2019 levels.

AUSTIN ELECTRIC

Austin Energy said that it will bring a new geothermal project online in 2025, and that it will add five megawatts of carbon-free energy to the local grid. It is a pilot project to be located at an existing Austin Energy generation plant. Scottish company Exceed Energy Inc. partnered with Austin Energy on the project.

TAMPA BAY STADIUM

The pictures released after Hurricane Milton hit Florida’s west coast made this week’s announcement that the Tampa Bay Rays would be unable to play the 2025 season at their current home stadium unsurprising. The fabric roof was completely torn off and substantial damage was incurred inside the stadium. It was estimated that repair of the roof and the other damage would be a $55 million proposition.

So, the Tampa Bay Rays will, for the first time, play home games in Tampa. They will utilize the stadium at the NY Yankees spring training complex in Tampa. Steinbrenner Field is the largest minor-league stadium in Florida, with 11,206 seats and 13 skyboxes. Steinbrenner Field is the largest minor-league stadium in Florida, with 11,206 seats and 13 skyboxes.  The Rays’ average attendance in 2024 was 16,515, among the lowest in MLB.

The irony is that this is the second MLB team to plan to play in a minor league ballpark in 2025. The Rays join the A’s in that category. The A’s will play in Sacramento in a triple-A ballpark.

DALLAS

Moody’s Ratings has revised the City of Dallas, TX’s outlook to negative from stable. It affirmed the A1 issuer rating and A1 general obligation limited tax (GOLT) rating. The negative outlook stems from the approval of Proposition U by the electorate. Proposition U requires the city to maintain a police force of about 4,000 and use at least 50% of new revenue for public safety (including pension contributions).

The city will annually increase its pension contributions starting this fiscal year to the Dallas Police and Fire Pension System (DPFP) and the Employee Retirement Fund (ERF) in order to amortize the unfunded liabilities within 30 years, as mandated by state law. Pension funding has been a continuing credit drag on the City for some time. Proposition U is expected to result in the eventual hiring of many additional officers (a force of 4,000 is mandated by the proposition) and an increase in officer starting salaries, both of which will increase the DPFP 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

THOUGHTS ON GOVERNANCE

Corruption and/or incompetence and/or ideology are all understood to just be something one is likely to have to deal with when politicians are your clients. Nonetheless, the growing list of local officials under indictment in some of the country’s major cities is concerning. This week, the mayor of Jackson, Miss., a City Council member and the local district attorney have been indicted on federal corruption charges. They join New York Mayor Adams in the ranks of the indicted.

Then there is the recall of Oakland’s district attorney as well as its Mayor. They were voted out by substantial margins. The Mayor had been the subject of a federal investigation. Further south in Orange County, a county legislator had to resign over the misuse of federal COVID related funds.

CLIMATE ON THE BALLOT

Washington State did not approve Initiative Measure No. 2117 which would have repealed the Climate Commitment Act (CCA), one of the most progressive climate policies ever passed by state lawmakers. Over 1.5 million of those voters, or 61.7%, voted “No” while over 972,600, or 38.3%, voted “Yes.” The law requires major polluters to pay for the right to do so by buying “allowances.” One allowance equals 1 metric ton of greenhouse gas pollution. Each year the number of allowances available for purchase drops — with the idea of forcing companies to find ways to cut their emissions.

It was not all good news for the climate on the statewide ballot. Initiative 2066 bars cities and counties from prohibiting, penalizing or discouraging the use of gas for heating, appliances and other equipment in buildings. The measure requires utilities and local governments to provide natural gas to eligible customers and prevents approval of utility rate plans that end or restrict access to natural gas, or make it too costly. It overrides state building and energy code requirements designed to get more electric heat pumps – instead of gas furnaces – installed in newly built houses, apartments and commercial buildings.

In California voters approved Proposition 4 authorizing $10 billion of new debt to fund loans and grants to local governments, Native American tribes, not-for-profit organizations, and businesses. Proceeds will be applied for projects including Drought, Flood, and Water Supply ($3.8 Billion); Forest Health and Wildfire Prevention ($1.5 Billion); Sea-Level Rise and Coastal Areas ($1.2 Billion); Land Conservation and Habitat Restoration ($1.2 Billion;. Energy Infrastructure ($850 Million); Parks ($700 Million); Extreme Heat ($450 Million); Farms and Agriculture ($300 Million).

Ann Arbor voterspassed ballot proposal A with 79% of the vote. It authorizes the creation of a municipally-owned sustainable Energy Utility (SEU) which would supply, generate, transmit, distribute and store electricity from renewable sources. It would run as a compliment to the existing DTE system serving the city. Businesses and households can sign up to receive power through the SEU or they can remain DTE customers. Initially, the SEU is expected to offer services including solar and battery storage, efficiency and weatherization programs, and electrification for homes and businesses. In the future, the city hopes the SEU will include the use of microgrids and geothermal energy.  

CANNABIS ON THE BALLOT

A majority of voters supported an amendment to Florida’s constitution to legalize recreational marijuana. The initiative required a 60% super majority so it failed. In South Dakota, voters rejected the latest effort at legalization of recreational cannabis. Voters authorized legalization in 2020 but a successful legal challenge overrode that vote. voters in North Dakota rejected Measure 5 which would have made it legal for adults 21 years old and older to produce, process, sell and use cannabis in North Dakota while establishing a state body to regulate it.

Nebraska voters approved two measures that legalize medical marijuana and regulate the industry. The measures received overwhelming support — nearly 71% voted in favor of legalization, while almost 67% voted in favor of establishing a commission to regulate the industry. It could all be undone by a pending legal challenge to 3,500 signatures on the petition to get the law on the ballot. A judge in Lancaster County, however, has yet to rule on whether some of those signatures were tainted. If the signatures are rejected, the results of the election could be voided. Nebraska’s election results are set to be certified on Dec. 2.

GOING TO THE SUN

The federal government recently released data on the utilization of solar energy. Nevada was ranked in first place. It sources nearly 29 percent of its electric capacity from utility-scale solar. It is pursuing an aggressive renewable portfolio standard which requires that 34 percent of the electricity supplied by the state’s utilities comes from renewables in 2024, 42 percent in 2027, and 50 percent by 2030. 

California came in second with just over 21 percent solar capacity on its grid. It’s very aggressive requiring 60 percent of the state’s electricity to be sourced from zero-carbon sources by 2030 and 100 percent by 2045. Utah is in third place with solar providing nearly 21 percent of its grid capacity. It is pursuing a non-binding target of 20 percent clean energy by 2025. 

At the other end of the spectrum are three states with less than 1% solar generation.

North Dakota, has no utility-scale solar. New Hampshire is second to last, with just 0.05 percent utility-scale solar. Kansas is third from the bottom at 0.2 percent. 

TRANSIT ON THE BALLOT

Davidson County, TN voters approved a plan to fund bus system, sidewalk and traffic signal improvements with a half-cent sales tax hike. Voters approved the plan 65.5% to 34.5%. Nashville is no longer one of just four of the nation’s 50 largest metro areas that do not have dedicated funding for transit. The tax surcharge will end once the debt issued for the plan is paid off and Nashville’s council affirms the tax is no longer needed.

Seattle voters approved Proposition 1, a property tax measure that will spend $1.55 billion over the next eight years on streets, sidewalks, bridges, transit routes and bikeways. The levy passed with 67% of Tuesday’s count.

CHICAGO PUBLIC SCHOOLS

Voters had a rare opportunity to elect ten individuals to the board of the Chicago Public Schools (CPS). The vote occurred as a part of the process of reconstituting the CPS board under the terms of state legislation which ended 30 years of mayoral control. The 10 individuals elected will constitute one component of its membership with the remaining 11 positions filled by mayoral appointment.

The range of ideologies which now sit in the elected seats includes 4 seats supported by the teachers union while 3 seats went to school choice supporters and 3 presented as unaffiliated. The question now is how many of the appointed seats will be seen as choices of the teachers union. The Mayor must announce his appointments by December 16. This puts the schools issue in the spotlight while the Mayor fights what is shaping up to be a real battle over a proposed tax increase for the City and the need to find revenue for CPS to support its plans to keep underutilized schools open.

The Mayor does have to deal with some limits to his appointment power. According to state law, each school board district is divided in two for the purposes of the 2026 election and beyond. The new winners become incumbents in the subdistrict in which they live. The law spells out that between now and Dec. 16, Johnson must appoint school board members who live in the opposite subdistrict of the winning candidate.

This follows the recent machinations at the board which saw 7 members appointed by the Mayor (now six after social media took down one of them). They could in theory be appointed so long as they lived in the right places. This all leaves the already weak CPS credit likely even weaker. Potentially, there could be a new fight over a CEO, a pension bond issuance, school building closures and/or taxes. None of the potential likely results over the next few months are likely to be positive for the credit.

CARBON CAPTURE VOTE

South Dakota voters rejected a proposal that would have made it harder for South Dakota Counties to regulate the location of carbon pipelines. Referred Law 21 was placed on the ballot by the legislature to try to override voter sentiment against the Summit Carbon Solutions pipeline in the state. The law would have exempted “pipelines for the transmission of carbon dioxide” from property taxation and shield them from future tax increases and additional fees.

Pipeline companies and other “transmission facilities” would have needed only obtain a construction permit from the three Public Utilities Commissioners in Pierre to be exempted from all local zoning rules and regulations that other companies doing business in those jurisdictions must follow, including setbacks and other safety protections. It was designed to overcome opposition to the use of eminent domain for acquisition of right of way.

Summit Carbon Solutions will apply for a permit in South Dakota on November 19th. The Iowa Utility Commission has awarded a permit to Summit so it can use eminent domain to seize property from unwilling land owners and build the pipeline, but construction cannot start until Summit gets regulators’ approval in the South Dakota.

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

Joseph Krist

Publisher

We are finally approaching the finish line of the election. The MCN mothership resides in one of the most contested races for House of Representatives. The volume of mail has been astonishing. And everything you hear about how nasty some of this stuff can be is true. But now that we’re here – there’s only one thing left to do. Vote. Please. Don’t boo. Vote. That goes for either side. T-shirts, lawn signs, all of that does not matter if you don’t vote.

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WESTERN WATER

A federal district court judge ruled that the U.S. Army Corps of Engineers violated the National Environmental Protection Act and the Clean Water Act when it approved expanding a Colorado reservoir. The Gross Reservoir supplies 1.5 million people in the Denver metropolitan area. The Denver water utility has been seeking to expand the reservoir for some twenty years to deal with the ongoing growth in Colorado.

Work on the expansion of the existing dam began in 2022 despite the legal challenge. The project will add 131 feet to the reservoir’s 340-foot dam, allowing it to triple its water storage capacity and hold an additional 72,000 acre-feet of water diverted from the declining Colorado River beginning 2027. The decision cites the fact that the project could result in a “compact call” by the Lower Basin states (CA, NV, AZ). That would force the Upper Basin states (WY, CO, UT, MN) to release more water to satisfy the compact’s requirements.

The Upper Basin does not yet use all of the water it is technically entitled to, as the region doesn’t have large reservoirs as is the case with Lake Mead or Powell. It is still entitled to use an additional 3 million acre feet of water. Denver seeks to use water rights it acquired in 1945 to provide the additional water to the Gross reservoir. Colorado water law provides for water providers to receive a conditional water right from the state’s water court, which allows them to potentially develop that supply in the future. 

The court’s decision does not force Denver Water to stop construction, but orders the utility to meet with plaintiffs to agree on remedies for the project’s environmental impacts and notes that the groups have a right to relief from any damage caused by the construction. It’s not going to stop the dam expansion. It will possibly see Denver Water spend half a billion dollars on a project that will never be fully utilized. That will be on the ratepayers.

PORTS AND ELECTRIFICATION

This week it was announced that the US E.P.A. would award some $3 billion of grants to accelerate the electrification of vehicles at ports throughout the country. In many areas, ports have become associated with pollution from the ships themselves but primarily from the vehicles which serve the port. That includes not just the diesel trucks coming and going from the ports but much of the equipment used in the Port facilities themselves.

Two ports caught our attention. The Ports of L.A. and Long Beach were the recipients of some $412 million. This will be combined with some $225 million of funding from the Ports and the shippers. The Ports have been at the center of efforts to reduce the levels of air pollution around the Ports. The high volumes handled lead to significant truck traffic. The volume of trucks and sometimes long waits by those vehicles contributes to poor air quality.

The second is the Port of Baltimore. As part of the program, the Port will receive $147 million under the program. The collapse of the Key Bridge in March highlighted the important role the Port of Baltimore plays in the export market. The grant was announced in the wake of the settlement of claims against the operator of the freighter which crashed into the bridge. That settlement will provide $102 million towards the cost of cleaning up the debris from the bridge.

Overall, the program will provide grants to 55 ports in 27 states and territories. Ports receiving money include the Port Authority of New York and New Jersey, the Detroit-Wayne County Port Authority, the ports of Savannah and Brunswick, Georgia, as well as Philadelphia, Los Angeles and Oakland, California.

TRI STATE GENERATION

Tri State Generation has been at the center of the effort to address climate change. Its coal based generation fleet has led participating distribution coops it serves to seek out renewable power. It has been in response to customer sentiment. A few of these coops have executed agreements to withdraw from Tri State, requiring contributions from departing utilities. Those coops are replacing capacity with renewables. It has put Tri State under enormous pressure.

Now, the federal government is throwing Tri State a lifeline. The EPA is awarding $2.5 billion in federal loans and grants to retire existing coal plants and acquire new renewable energy resources across four Western states where its member cooperatives provide electricity to a million consumers. It will also fund Tri-State’s purchase of 1,280 megawatts of energy from solar, wind and wind/storage hybrid projects and more than 100 megawatts of standalone energy projects, about half of which will be located in Colorado.

The financing comes from the Department of Agriculture’s $9.7 billion Empowering Rural America (ERA) program for electric cooperatives only, helping co-ops in 23 states transition to green energy. A total of $1.1 billion of ERA money has been announced for Colorado. Tri-State received the largest allocation at $679 million.  United Power, the second-largest co-op in the state which left Tri State, received up to $261 million. CORE Electric Cooperative, the state’s largest co-op, is set to get $225 million. 

TEXAS POWER RULING

A U.S. district court ruled that a Texas law giving incumbent utilities the sole right to build transmission lines connecting to their systems was “invalid” because it violates the U.S. Constitution. Texas utility codes related to the transmission law “are unconstitutional because they violate the dormant Commerce Clause and are therefore invalid and unenforceable, to the extent they grant in-state transmission owners the exclusive right to build or acquire transmission lines in the non-[Electric Reliability Council of Texas] regions of Texas,” the district court said. The dormant Commerce Clause bars states from restricting interstate commerce.

In August 2022, the U.S. Court of Appeals for the Fifth Circuit found that the Texas transmission law likely violates the Commerce Clause. The Texas law was particularly restrictive because it prevented both regional transmission organization-planned and merchant projects. It comes after a few years of significant issues with the transmission of power in Texas. In one of those instances, El Paso which has access to power outside the Texas transmission system was able to continue to provide service when other utilities could not.

CHICAGO BUDGET

Chicago Mayor Brandon Johnson proposed a 4% increase in property tax bills for homeowners in the city as part of his plan to cover current and 2025 budget gaps. It is designed to generate $300 million in new tax revenues, although that could change based on property assessments for 2024. The tax increase proposal comes in the wake of the Mayor’s campaign pledges (last year) of no increases. His proposal includes no cuts in the City’s workforce.

Johnson’s proposed budget includes plans to use tax increment financing money for Chicago Public Schools, $52 million for youth opportunity programs, $40 million for an initiative to address the city’s homeless and migrant situation, and $39 million for a small business support program. Johnson noted that he plans to uphold the city’s pension obligations. The city’s projected budget deficit for FY 2024 is some $222.9 million, which is below previous estimates from earlier in the fiscal year. With the expiration of COVID assistance and other factors considered, the budget deficit for FY 2025 is estimated to be $982.4 million, according to city Budget Director’s office.

CHICAGO SCHOOLS ON THE BALLOT

On Election Day, voters will have their first chance in many years to elect 10 school board members, after the Chicago Teachers Union lobbied for years to end mayoral control of the school system. Enrollment numbers have ticked up in Chicago and other cities over the past two years, but still remain well below prepandemic levels. The resulting aid reductions tied to per pupil attendance have occurred at the same time spending on the schools increased.

We often criticize ideological approaches that involve finances and credits that usually come from red states. In this case, the nation’s most militant teachers union is working with the Mayor to limit changes to the school system. We do not argue here that historic funding for inner city schools was not equitable. It was not and still is not. The idea of having a neighborhood based school system is a valid goal.

But an example illustrates, in a time of clearly limited resources the goals have to be practical.  Frederick Douglass Academy High School is on the city’s West Side.  At its peak, it served more than 500 students in 2007. In the era after the Great Recession, demographic trends were negative in many cities and Chicago was no exception. In the case of the school, local trends have left the school with only 34 enrolled students.

Closing the school and getting the children to a fully staffed functioning school would seem to make sense. Under the union’s plans, these underutilized schools should be fully staffed even in the face of declining enrollments and a continuing nationwide teacher shortage. At the core of the current situation is a disagreement between the Mayor and the CEO of CPS.

The Mayor wants CPS to borrow to fund pension payment requirements. The CEO for CPS wants the City to apply new revenues generated by tax increment financing districts to covering some of the schools’ costs. Some Aldermen are advocating lessening pension funding contributions in lieu of a general property tax increase. There are still opportunities for a reasonable plan to be adopted but the politics of the situation don’t lend themselves to prudent judgments on credit issues.

ELECTION DAY

Several items on ballots across the country have drawn our attention. There are several initiatives to raise or establish taxes to support transportation. In Nashville, another effort is underway to develop and fund a comprehensive transportation system for this ambitious city. It comes after previous efforts to get voter approval for large scale projects failed. This time there is a much different backdrop to the effort to increase sales taxes than was the case in 2018 when a project including light rail was proposed.

Four states have cannabis on the ballot. Florida has an established medical marijuana scheme and now voters will be asked to approve legal recreational marijuana. Adults 21 years old and older would be allowed to purchase marijuana from licensed dispensaries. Florida also has a contentious ballot item regarding reproductive rights. Voters in Nebraska will have a vote on two initiatives which would legalize and regulate the use of medical marijuana in the state. Like Florida, Nebraska actually has two reproductive rights initiatives on its ballot.

North Dakota voters will have their third chance to legalize recreational marijuana. Efforts in 2018 and 2022 failed. South Dakota voters already voted in favor of legalization in 2020 but the head of the state police challenged the initiative in court. The South Dakota Supreme Court ultimately ruled against the measure. The current initiative was drawn up in the light of those concerns. The ballot also includes a proposed constitutional amendment regarding abortion rights.

AUTONOMOUS VEHICLES

This year, five states and Washington, D.C., enacted bills dealing with fully automated vehicles. The new laws in Alabama, Kentucky and South Dakota allow for the operation of fully autonomous vehicles. California’s new law requires manufacturers to continuously monitor every autonomous vehicle on the road and designate a remote human operator to immobilize a vehicle if necessary. The law also allows law enforcement to issue a notice of noncompliance when autonomous vehicles violate local traffic ordinances. California’s new law requires $5 million in insurance for manufacturers testing autonomous vehicles on state roads.

North Carolina’s brings the vehicles under updated dealer regulations for all cars. The new law in Kentucky for fully autonomous vehicles requires owners to file a safety and communication plan that law enforcement can use and to have a minimum of $1 million in liability insurance per vehicle, roughly 10 times higher than the amount for regular personal vehicles. Some of that reflects the fact that much of the impetus behind the law came from the trucking side of the issue. Alabama’s new law requires a minimum of $100,000 in liability insurance for fully autonomous vehicles, about the same as ordinary cars.

COOL PAVEMENT

A little over a year ago, we wrote about a test of “cool pavement”. The technology is a coating which can be applied on asphalt which will reflect sunlight. Untreated asphalt absorbs heat. The idea was to literally cool streets off in an effort to deal with local areas of overheating – “heat islands”. Now, Arizona State University researchers have issued a report on the effectiveness of the process tested.

Pavements in the city of Phoenix that were treated with cooling technology had significantly lower surface temperatures compared with conventional pavement. That heat has to go somewhere and on its way up increases the thermal stress that a person standing on the surface would experience at midday. Like if you’re waiting for a bus or to cross a street you would be buffeted by the heat rising. 

The researchers determined that cool pavement technology is most effective on large parking lots that lack shade or in car-centric cities with hot climates, low cloud cover and wide residential streets. It’s not effective in high-rise downtown areas and shouldn’t be used in areas with high pedestrian traffic like playgrounds, plazas or parks.

So, does it achieve its goal of reducing the impact on people of conditions in urban “heat islands”? Rather than rely on cool pavement to mitigate the effects of heat on pedestrians “Instead, heat exposure mitigation should focus on shading, such as trees and engineered shade, in these areas. “[Cool pavement] cannot replace the benefits of shade trees for pedestrian cooling.”

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

NEW YORK’S MUNICIPAL WORKFORCE WOES

Recently, much attention has rightfully been focused on the potential impact of the management upheaval in the New York City government. The lack of permanent commissioners at the police and Fire Department are the best examples of the knock on effects of the Mayor’s (and his team’s) ongoing legal troubles. Before that however, there were real issues with the City’s ability to attract and maintain workers to fill the career positions that are essential components of any effective bureaucracy.

Here’s one example of the impact of a hollowed out professional workforce. The City provides multiple benefits to low-income New Yorkers, including Supplemental Nutrition Assistance Program (SNAP) food stamps and Cash Assistance (CA). CA consists of two programs, Family Assistance (FA) and Safety Net Assistance (SN). The Federal and State governments determine the program requirements, and it is up to City employees at the Human Resources Administration (HRA) division of the Department of Social Services (DSS) to process applications, determine eligibility, and ensure benefit delivery. SNAP benefits are 100% Federally funded, while CA benefits are a mix of City, Federal, and State dollars.

SNAP and CA applications have significantly increased since 2020, accelerating with the end of pandemic-era safety programs. At the same time, staff levels declined during the pandemic and did not begin to recover until 2023 and 2024. From 2020 to 2022, SNAP and CA cases rose by 13%, while relevant staff levels decreased by 9%. This led to backlogs in the process which put the City out of compliance with federal standards. Timeliness has improved since 2023, but remains a challenge, especially for CA. Almost one third of new CA applications were still overdue as of June 2024, according to the most recent data provided by HRA.

Much of the difficulty with staffing is based on the pandemic and the City’s response to it. The effort to force City workers back to the office before many other facets of the City’s social service infrastructure were open or available was a major negative. It’s a situation which is manifested in the use of cancelled open positions as a way to “tighten the City’s budget belt” when issuing financial plans and updates. Hiring is likely to be a problem throughout the last one year plus of the current administration.

PFAS

The US E.P.A. is moving towards enforcement of standards covering certain chemicals generally known as PFAS and their presence in local water supplies. EPA established legally enforceable levels, called Maximum Contaminant Levels (MCLs), for six PFAS in drinking water. Public water systems must monitor for these PFAS and have three years to complete initial monitoring (by 2027), followed by ongoing compliance monitoring. Water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

Public water systems have five years (by 2029) to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed these MCLs. Beginning in five years (2029), public water systems that have PFAS in drinking water which violates one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation. 

EPA estimates that compliance with this rule is estimated to cost approximately $1.5 billion annually. The Bipartisan Infrastructure Law has dedicated $9 billion to help communities impacted by PFAS pollution in drinking water as well as another $12 billion in Bipartisan Infrastructure Law funding available to communities to make general drinking water improvements, including addressing PFAS chemicals. Estimated costs include water system monitoring, communicating with customers, and – if necessary – installing treatment technologies.

That raises the issue of the potential impact on the finances of local water systems from the rule. The circumstances of where these chemicals came from will dictate the financial burden. If it’s at a current or former military facility does the federal government have the responsibility? What is the cost breakdown between private and public sources of the pollution? It is important to note that “EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties.”

Superfund sites take a long time to be remediated and that reduces the current financial burden for localities. I note that the agency says that “EPA’s enforcement policy…will provide additional clarity on the agency’s intent not to pursue certain parties such as farmers, municipal landfills, water utilities, municipal airports, and local fire departments, where equitable factors do not support seeking CERCLA cleanup or costs.”

I see the program as a manageable long term issue rather than any short-term credit issue. There are already military installations (primarily those with air facilities) across the country which have executed agreements with host localities to share the burden of the cost of compliance. Air facilities through the use of firefighting foam have been huge contributors to the problem. A funding path would allow the costs to be spread across multiple balance sheets.

Public water systems can choose from multiple proven treatment options. In some cases, systems can close contaminated wells or obtain a new uncontaminated source of drinking water. The final rule does not dictate how water systems remove these contaminants.

HOUSING AND TAXES

A bill introduced this year in the  Honolulu City Council is the council’s third attempt since 2018 to pass an empty homes tax. It would consider homes vacant if they’re unoccupied for more than six months per year and includes exemptions for things like being in the military, receiving medical care or if the home is undergoing renovations. The Honolulu tax would be in addition to regular property taxes, and would start at 1% of assessed value before gradually going up to 3% over a few years. The bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. 

The goal is to increase occupancy rates and decrease the number of homes sitting empty. It is a concept that was first adopted in Vancouver, B.C. Like Honolulu, it had a significant stock of properties maintained as second homes and/or investment properties. Vancouver’s tax only exempts homes occupied by residents who are on a lease or sublease. The pending bill in Honolulu has been amended to exempt short-term rental owners. It is a phenomenon that we see in many areas which have significant tourism sectors in their local economies and significant second home bases. The pressure to offer short term rentals is immense.

Opponents also cite the associated costs of enforcement. In Honolulu, the bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. Bill supporters acknowledge those allocations may change during the upcoming budget process.

The primary goal of empty homes taxes is to reduce the number of vacancies. In Vancouver, vacancy rates were roughly halved. Another goal is reducing the number of investment properties. It will take three out of five votes on the Honolulu City Council to enact a tax. The complexity of solving housing shortages nationwide is reflected in situations like this. Some want the revenues to be generally available. Others want funding for housing development.

WINDY CITY WOES

The City of Chicago is facing a host of fiscal problems. The City’s FY2025 Budget Forecast, released in August 2024, estimated a $222.9 million year-end budget shortfall for FY2024, a $982.4 million deficit for FY2025 and over $1.1 billion for FY2026. These deficits equal or exceed those faced during the pandemic, and the City must now fill the $1.2 billion deficit for FY2024 and FY2025 without the benefit of the federal pandemic funding.

The City already allocates approximately 40% of its operating budget to debt and pension payments. Its personnel costs continue to increase while its revenues have not recovered as hoped. Labor negotiations are a major pressure. Chicago Public Schools face a militant teachers union (represented legally by the Mayor before he ran for Mayor) which is trying to negotiate a large pay increase while simultaneously pushing for the Mayor to support keeping schools open by. In part, limiting access to charter schools.

In December 2023 legislation for Tier 2 Chicago firefighters that changed the calculation of final average salary.21 This was promoted as the first part of a “fix” to preemptively address concerns about Tier 2 benefits potentially failing to meet Internal Revenue Service Safe Harbor rules, which requires that government pension plans that do not coordinate with Social Security provide benefits that meet certain minimum standards. Fixes to Tier 2 employee pensions and a new firefighters contract also are pending. (Tier 2 State pension benefits must meet Internal Revenue Service Safe Harbor Rules, which require public workers to receive a retirement benefit from their public pension that is at least equal to the benefit they would receive under Social Security.) This triple threat of labor issues is real.

The Mayor recently announced a hiring freeze across City departments but it is not clear whether this excludes police and fire. Those address what he can control. The FY2025 Chicago Public Schools (CPS) budget had to fill an initial $505 million deficit, which could grow by hundreds of millions more once contract negotiations with the Chicago Teachers Union are finalized this fall.

The Regional Transportation Authority (RTA) has projected a $730 million budget gap beginning in FY2026 once pandemic funds have depleted. These will all pressure the City to provide more funding over a period of massive competition for the same tax base. Tax increases are seen as currently not feasible (MCN 10.14.24). The State has its own fiscal issues to continue dealing with. The projected $538 million budget gap the City faced in FY2024 — the first year ARPA funds were no longer available to be used for revenue replacement — was originally closed in part with $49.5 million additional TIF surplus.

A Civic Federation analysis of the City’s near term fiscal outlook showed worrisome trends. The City’s four pension funds have a total of $35.6 billion in unfunded pension liabilities. All four of the City’s pension funds began to transition to state law-mandated 40-year funding plans in 2016. Since 2022, all four are now funded on an actuarially calculated basis. The FY2024 total required pension contribution was $2.8 billion (which included a $306.6 million supplemental pension payment), comprising 22.9% of total net appropriations. The two largest funds, the Municipal and Police Funds, received the largest portion of annual funding at 77% or nearly $2.2 billion.

In the meantime, the City of Chicago allowed a temporary casino space to open in September 2023. The Mayor’s FY2024 budget estimated that the temporary casino would generate $35 million to contribute toward the total $1.5 billion payment to the Police and Fire pension funds in FY2024. Meeting this projection would require just under $3 million per month in local tax allocations. The casino has only generated $13.1 million in total local tax allocations in the past twelve months and has yet to break $1.5 million in local allocations in a single month.

FEDERAL FOOD FUNDS FOR THE SOUTHEAST

The U.S. Department of Agriculture (USDA) announced that people in Florida recovering from Hurricanes Helene and Milton may be eligible for food assistance through USDA’s Disaster Supplemental Nutrition Assistance Program (D-SNAP). Approximately 407,733 households in 24 Florida counties are estimated to be eligible for this relief. USDA makes this funding available through states in the aftermath of disasters. It even allows people who may not be eligible for SNAP in normal circumstances to participate if they meet specific criteria, including disaster income limits and qualifying disaster-related expenses. 

Earlier this week, USDA announced that residents in parts of Georgia, North Carolina and Tennessee may be eligible for D-SNAP. USDA also announced that five more counties in Georgia —Dodge, McIntosh, Taliaferro, Thomas, and Warren—are now eligible, bringing the total area where D-SNAP is offered to 112 eligible counties and one Tribe across the states impacted by Hurricanes Helene and Milton. 

To be eligible for D-SNAP, a household must live in an identified disaster area, have been affected by the disaster, and meet certain D-SNAP eligibility criteria. Eligible households will receive one month of benefits – equal to the maximum monthly amount for a SNAP household of their size – that they can use to purchase groceries at SNAP-authorized stores or from

CLOSER TO THE EDGE

The National Student Clearinghouse Research Center reports that preliminary data for fall 2024 shows undergraduate enrollment increasing 3 percent. All sectors are seeing growth in the number of undergraduates this fall. There are however, worrying signs. Contrary to overall enrollment growth, freshman enrollment is declining, down 5 percent from this time last fall with public and private nonprofit 4-year institutions seeing the largest declines (-8.5% and -6.5%).

An almost 6 percent drop in the number of 18-year-old freshmen (a proxy for those enrolling immediately after high school graduation) is driving most of the decline. Is this the beginning of the long-awaited demographic cliff facing the higher education sector?

NATIVE AMERICAN GAMING

In California, card rooms have been a long running opportunity for gamblers to play legally. They are restricted to table and card games, hence the name, but slot machines are prohibited. In a number of small communities, card rooms generate significant revenues. Tribal casinos offering the full array of gambling opportunities are seen as direct competitors to the card rooms.

A new California law will now allow the tribes to sue to determine if the card rooms are, as the tribes contend, illegally operating games which are not permitted under California law. The tribes have exclusive rights to run the full array of games including slot machines. The tribes have sought to establish standing to sue over the issues. Without standing, the state courts were unwilling to hear the tribes’ cases.

A law passed in the recent legislative session has changed that. The Tribal Nations Access to Justice Act authorizes a California Indian tribe, under certain conditions, to bring an action solely against licensed California card clubs and third-party proposition player services providers to seek a declaration as to whether a controlled game operated by a licensed California card club and banked by a third-party proposition player services provider constitutes a banking card game that violates state law, including tribal gaming rights under the constitutional provisions described above, and to request injunctive relief. 

That final provision is what will enable the tribal gaming facilities to obtain injunctions against the card room operators. The bill would prohibit a claim for money damages, penalties, or attorney’s fees and would require that actions be filed no later than April 1, 2025. More than 60 tribal casinos operate statewide. It is estimated that there are 80 operating card rooms.

The law has the potential to change the landscape for the municipalities where card rooms are significant economic drivers. There are several of these in Southern California and there are concerns that should the tribes prevail in their legal efforts some of these smaller municipalities would lose employment and tax revenues.

DID ARKANSAS HIT THE MOTHER LOAD?

Researchers at the United States Geological Survey and the Arkansas Department of Energy and Environment estimate that there might be 5.1 million to 19 million tons of lithium in the Smackover Formation brines in southern Arkansas. That would represent 35% to 136% of the current amount of lithium estimated to be in the U.S. The U.S. relies on imports for more than 25% of its lithium.

The USGS estimates there is enough lithium brought to the surface in the oil and brine waste streams in southern Arkansas to cover current estimated U.S.  lithium consumption.  The low-end estimate of 5 million tons of lithium present in Smackover brines is also equivalent to more than nine times the International Energy Agency’s projection of global lithium demand for electric vehicles in 2030. 

LOCAL GAS TAX SUBSTITUTION

The issue of funding for road maintenance paid for by gas taxes continues to evolve. Cities are finding it harder to generate funds from gas taxes as electrification and fuel efficiency make gas tax revenues less dependable. At the state level, the debate over how to replace gas tax revenues has led to new or increased fees for electric car owners.

One city is trying a new model for generating revenues for street maintenance. On November 1, the City of Rock Island. IL will begin adding a flat fee to residents’ water bills to fund local street maintenance. The amount of the fee will vary with the size of the land parcels being charged. All parcels with a gross area of less than 6,000 square feet will pay $7 monthly. Parcels over 6,000 but less than 18,000 square feet will pay $10 monthly. Parcels over 18,000 but less than 43,560 square feet (an acre) will pay $20 monthly. Parcels greater than 43,560 square feet will pay $30 per month.

Currently Rock Island’s local gas tax brings in an estimated $500 K annually. The new fee is projected to generate $2 million in revenue. The new fee comes in the wake of legislation earlier this year that would eliminate an existing 1% state tax on groceries. That goes into effect on January 1, 2026. The law allows counties and municipalities to levy their own 1 percent grocery taxes by passing an ordinance. This eliminates the requirement for a referendum.

It’s an example of how even local government will have to be nimble as the transportation landscape shifts right in front of them. This is especially true as the rollout of a majority electric car market has been uneven. In the meantime, the roads still need to be maintained especially if the much heavier electric vehicles become the norm.

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

AFTER THE STORM

The Biden administration this week has awarded a total of nearly $2 billion in new grants to help harden, expand, and modernize U.S. power grids. The 38 projects that received grants are in 42 states and Washington D.C., and range in scale from $7.5 million to harden a remote grid in Alaska to $160 million for utility Georgia Power to deploy advanced power cables and ​“dynamic line rating” technologies to expand the capacity of its transmission network.

Part of the program are the up-to-$612 million in grid grants President Joe Biden unveiled earlier this week during a visit to storm-ravaged Florida. That funding will flow to utilities in Florida, Georgia, and North Carolina, as well as to the federal Tennessee Valley Authority. The money comes from the third round from the Department of Energy’s Grid Resilience and Innovation Partnerships (GRIP) Program part of the IRA.

DOE has received $50 billion in applications for the GRIP program to date, she noted, but the program has already given out about $7.7 billion of its total $10.5 billion in appropriations.

CARBON  CAPTURE

A leak in a well used to inject carbon dioxide into underground storage wells in Illinois has raised concerns over safety. Monitoring wells monitor the movement of CO2 within injection wells. These wells help ensure that the CO2 is spreading as expected and that there are no signs of leakage. Archer Daniels Midland was the first company in the country to ever put in a CO2 sequestering well. It has been operating for 13 years.

Recently, one of two such wells from ADM was found to be leaking. The timing could not be less favorable. In May, the Illinois Legislature passed the SAFE CCS Act. It makes Illinois just the second state after California to put a moratorium on approval of carbon dioxide pipelines while the Pipeline and Hazardous Materials Safety Administration decides on regulations for such projects. There are currently 22 injection well applications into the Environmental Protection Agency for sites in Illinois that are scheduled to have draft permits issued in the next six months. 

As the process plays out, concerns about issues like eminent domain continue. A recent poll surveyed registered voters across six Midwestern states. It found that eighty-one percent of registered voters say they oppose corporations utilizing eminent domain for private projects. The poll was conducted before the Decatur monitoring wells leaked. Concerns about eminent domain and aquifer protection not being included in the SAFE CCS Act remain an issue. 

As these issues are worked out, the federal government continues to push hard for carbon capture.

CARBON PRODUCTION

Th e US EPA develops an annual report called the Inventory of U.S. Greenhouse Gas Emissions and Sinks (Inventory) that tracks U.S. greenhouse gas emissions and sinks by source, economic sector, and greenhouse gas going back to 1990. Large polluters, which include power plants, belong to a subset known as “large stationary sources” and represent about half of the country’s total emissions. Recently released data for 2023 show where the carbon is coming from.

Power plants cut their emissions by 7.2 percent between 2022 and 2023. The agency said that this sector emitted 1.5 billion metric tons of carbon dioxide in 2023. Power plant emissions are down 33.8 percent since 2011. This sector represents a quarter of the country’s total emissions. in 2023, emissions from oil and gas production and processing increased by 1.4 percent, and are 16.4 percent above where they were in 2016. 

Emissions from other major pollution in industrial and waste sectors fell by 1.1 percent.

HYDROGEN

One year ago, hydrogen hubs were making news as the Biden administration announced financial support for seven of these facilities. They are designed to facilitate the production of hydrogen for fuel without producing carbon dioxide resulting from traditional production methods. These facilities were split between the production of “green” hydrogen and “blue hydrogen”. The federal dollars were designed to allow these projects to attract private capital. Now, a year into the program that private investment is not panning out.

One example is the Appalachian hub known as ARCH2. A study by a regional environmental group documents the difficulties that this facility is facing. In the year since the US Department of Energy awarded ARCH2 up to $925 million in federal grants, four project development partners have exited ARCH2 and five of the 15 originally proposed projects have been scrubbed. 

The result is that the projected economic benefits of the project are much less likely to be realized. The report on ARCH2 finds that it is expected to achieve an emissions reduction of just 2% across the tri-state region and create fewer than 3,000 permanent jobs. The end-uses proposed as part of ARCH2 by project developers – electric generation and home heating – are not currently economically competitive with other sources of fuel for these projects.

Away from the environmental consequences, the economic fallout is a bigger concern for green energy proponents. One of the basic pillars of the Green New Deal is the potential economic benefits of renewable energy as a source of employment and business activity. As proponents rely on the economic potential to offset the potentially disruptive nature of the energy transitions, failures do not auger well for long-term support.

One just has to harken back to the hit that solar energy took under the Obama Administration. Solyndra was a manufacturer of cylindrical panels of copper indium gallium selenide thin film solar cells. It was based in Fremont, California. In 2009, the Obama administration co-signed $535 million in loans to Solyndra. On August 31, 2011, Solyndra announced it was filing for Chapter 11 bankruptcy protection, laying off 1,100 employees, and shutting down all operations and manufacturing.

NUCLEAR

The municipal finance industry will finally take part in the small modular reactor space. After one failed effort by a Utah municipal utility to get involved with an SMR project, a new one has been announced. Amazon has signed three agreements to support the development and deployment of small modular reactors in the United States. The company entered into a deal with Energy Northwest, the successor to the Washington Public Power Supply System to deploy four reactors developed by X-energy that will together generate approximately 320 MW of electricity beginning in the early 2030s.

The first phase of the Energy Northwest agreement would see the deployment of four 80-MW Xe-100 SMRs at the Columbia Generating Station in Richland, Washington. Future phases could add eight more reactors, bringing the site’s total SMR generating capacity to approximately 960 MW.

EPA AND EMISSIONS

The Supreme Court will not stop regulation from the Environmental Protection Agency which requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. The E.P.A. also imposed three additional regulations on coal-burning power plants, including stricter limits on emissions of mercury from plants that burn lignite coal, the lowest grade of coal. Lignite limits would impact Texas generators.

The rules also more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants. Toxic ash ponds have long been a source of concern. There are about 200 coal-burning power plants still operating, with many concentrated in Pennsylvania, Texas and Indiana.

More than two dozen states challenged the regulation, arguing that the federal government had failed to prove that the techniques used to control emissions would curtail them to the degree that the government is seeking. It is a temporary setback to efforts to fight the rules. West Virginia, said it would continue to contest the rule.

The state’s challenge is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit. In July, a three-judge panel refused a request by the conservative-led states to stop the E.P.A. rule from going into effect while the court case continued, prompting the states and other groups to ask the Supreme Court to step in. Ultimately, this case could end up in the Supreme Court argued over different issues.

THE POST-REFUNDING WORLD

To the extent there has been any focus on the municipal bond market during the Presidential campaign, it has been on the SALT deduction. In Congress, recent disasters have focused attention on the issuance and use of tax-exempt private activity bonds. One thing lost in the era of Trump tax cuts which does not look to be resurrected is advance refunding. That has limited options for issuers in terms of reaping the benefits of favorable interest rate movements. It has renewed interest however in a different technique – the bond tender offer.

The Division of Bond Finance of the State Board of Administration of Florida (the “Division”), on behalf of the State of Florida is offering holders of up to $500 million bonds it selects the chance to sell their bonds and receive a premium for doing so through a tender offer process. This week, marks the midpoint of a tender offer which extends through October 23.

The Tender Offer is being made as part of a plan to reduce the State’s debt. The candidates for purchase were selected to maximize debt service savings through principal reduction and/or avoided future interest cost. The bonds were issued as both general obligation debt for education and transportation and revenue bond debt for the Florida Turnpike. The State has the funding to pay for the tender and it has been legislatively appropriated.

Will the offer succeed? It’s not mandatory so if you wish to keep your targeted bonds, feel free. Estimates from Barclays suggest that some $30 billion of debt will have been the subject of tender offers over this and last year. It seems that only half of the targeted bonds in these offers have been sold back. It will be interesting to see if the timing of the offer relative to the two hurricanes has any impact on the amount of bonds tendered.

PENSIONS

The Equable Institute is a bipartisan nonprofit that works with public retirement system stakeholders to solve complex pension funding challenges with data. It produces annual reports and interim results on state pension funds. It recently reported on results through 3Q24. Equable found that the funded status of public retirement systems in the U.S. has continued improving as of September 30, 2024 — thanks both to strong financial market performance and record high contribution rates.

That’s the good news. Several negative pressures on public plans include steadily growing benefit payments resulting in record high negative cash flow combined with over 1 in 5 public plans contributing less than the interest accumulating on their existing unfunded liabilities. The net result is a nearly 6 percentage point increase to the national average funded status that hovers at a fragile 81%. Why is it fragile? After investment returns of nearly 25% in 2021 the national average funded ratio had improved to 83.9%. Public plans then suffered sharp losses, strong gains again, and some flat performance as well.

Current trends support a more positive few through this year. The national funded ratio average is projected to increase from 75.6% in 2023 to 81.4% in 2024. The total pension funding shortfall will decline to $1.29 trillion in 2024, down from $1.63 trillion in total unfunded liabilities in 2023.

RENEWABLES AND PUERTO RICO

We have long advocated for a reconstruction of the public power grid in Puerto Rico on a localized basis. This reflected the ongoing failure to consistently operate a heavily centralized system in an environment does not support that approach. Now, we see steps being taken to address a portion of the capital need to support a local approach and employ resources at hand such as the sun to power the island.

The U.S. Department of Energy announced this week that it has finalized an $861.3 million loan guarantee for the development of two solar+battery facilities and two standalone battery facilities in Puerto Rico. Project Marahu, will add 200 MW of solar generation and up to 285 MW/1,140 MWh of standalone storage to the island’s grid. The Marahu solar installations are expected to produce approximately 460,000 MWh of energy annually.

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,

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

CHICAGO

Chicago Public Schools (CPS) is undergoing real governance issues as a mass resignation by the Board comes in the midst of difficult negotiations with the teachers union. The Mayor comes from the union and this has put him in a vise as he tries to pacify his former employers while facing an ever increasing City budget deficit. Tax increases seem unlikely and expense cuts will be heavily opposed. In the meantime, there was sobering news regarding tax increases.

Cook County showed that initial property tax collections were down on a year over year comparisons. It was disappointing as a new set of assessments were generated for use in this year’s tax collections. Unfortunately, the reassessment had the effect of significantly raising tax bills and the impact of those increases has slowed payments as residents find ways to afford the increases.

The area most impacted were on the County’s south side. The number of delinquencies increased by 13% on a year after year basis. In the south and southwest suburbs, collections were down by 1.5% — fueled by a 27.7% increase in the number of residential delinquencies — after reassessments in that region shifted much of the tax burden from businesses to homeowners. The shift contributed to a record 19.9% increase in that region’s median residential bill.

New pressure on the City’s water utility came in the form of new EPA rules regarding lead pipes and the water supply. (see EPA Lead Rule below). It will undoubtedly rely on significant new debt. That will require higher rates

EPA LEAD RULE

The EPA announced new rules governing the use and maintenance of lead water pipes. The new rule imposes the strictest limits on lead in drinking water since federal standards were first set. Utilities will be required to generate an inventory of their lead pipes and replace them over the next 10 years. The measure replaces less stringent regulations, adopted during the Trump administration, on lead in drinking water. The federal government banned lead pipe in new plumbing in 1986. 

The E.P.A. estimates that water utilities must replace about nine million lead pipes at a total cost of $20 billion to $30 billion over the ten year period. The E.P.A. announced $2.6 billion in new funding to support lead pipe replacement. This funding will flow through the drinking water state revolving funds (DWSRFs) and is available to support lead pipe replacement and inventory projects.  The new rule also lowers the allowable amount of lead in the before replacement to 10 parts per billion, from the current 15 parts per billion. If the water supply repeatedly exceeds the new threshold, utilities must make water filters available. 

The rule also doesn’t require utilities to pay for the portion of lead lines that are on private property, including within a home. The new rule also allows some utilities with a particularly large number of lead service lines to go beyond the 10-year deadline. Chicago, which has the most lead pipes in the nation, has that problem because city building codes required all homes (smaller than a 4-flat) to install the lead service lines until 1986, decades after other cities banned them for health reasons. It will get twice as long to comply.

Several cities have been ahead of the curve on this issue. Milwaukee Water Works is on track to replace all remaining lead pipes within the EPA’s ten-year timeframe. In 2024 alone, Milwaukee received approximately $30 million in Bipartisan Infrastructure Law funding to replace 3,400 lead service lines. 

The Detroit Water and Sewerage Department has received $90 million from the Administration and will replace more than 8,000 lead service lines this year, putting the city on track to replace all lead pipes in 10 years.

The Erie, Pennsylvania Water Works has received $49 million from EPA to enable the city to replace all lead pipes within 5 years instead of 25 years. Syracuse now plans to use state and federal financing to start replacing the approximately 14,000 service lines in the city, which expects to get to 2,400 of them next year.

Denver Water has accelerated its efforts through $76 million from the Bipartisan Infrastructure Law, allowing the city to be on track to replace all lead pipes within a decade.

In Newark, NJ. the danger from some 23,000 lead pipes was exposed in 2019 and there was no real program to provide funding for it. So, Essex County, which includes Newark, stepped up and $120 million in bonds were issued through the county’s improvement authority. We would expect to see issuance for water systems to grow as these programs move forward.

CHATTANOOGA STADIUM MOVING DOWN THE TRACKS

The latest financing for a pro sports stadium is for a minor league franchise, the Chattanooga Lookouts. The City is issuing debt payable from a variety of taxes generated from activity in and around then stadium. The plans include development of an entertainment district centered on the stadium. It is a continuation of the current trend in stadium development, especially for baseball.

It’s being stimulated, in part, by the success of the stadium developments in St. Louis and Atlanta. Ballpark Village in St. Louis was a muni financed deal. Looking at the skyline behind center field this week in San Diego, it was easy to see much of that development you see wasn’t there before Petco Park. The Tampa Bay Rays new stadium (how timely) deal is packaged as an overall development project and that is the model that proponents of a new stadium for the KC Royals are hoping to get approval for as well.

The model of pairing stadium and commercial development is extending to other sports like soccer and hockey. It is not a surprise that this happening in Tennessee. Chattanooga is taking a cue from Nashville. Nashville has been very upfront about its belief that pro sports teams are a key to achieving their economic goals. They have been pushing tirelessly for an MLB franchise to go along with the Titans and Predators.

One of the reasons there is still some doubt about where the Oakland A’s will be playing in three years is because the potential for associated development at the proposed site in Las Vegas is limited. The site was cleared this past week with the demolition of the Tropicana hotel.

As always, the details of these deals are what ultimately determine whether these projects are worth it. The results have been mixed overall. The municipalities often are at a disadvantage in those negotiations especially given the political nature of the whole process.  In this case, the process has yielded a pretty good result for the Lookouts. There will also be more of these situations as Major League Baseball continues to pressure Minor League franchise operators to modernize and/or replace stadia to maintain their working agreements with MLB franchises.

CARBON PIPELINE LITIGATION

Legal efforts to stop Summit Carbon Solutions from constructing its pipeline for captured carbon through Iowa have moved to a decisive stage. Over the last couple of years, litigation challenging Summit’s right to enter private property for the purpose of surveying land without the right of eminent domain have produced conflicting opinions.

In May 2023, a Clay County landowner along the now-abandoned Navigator CO2 Ventures pipeline brought suit against Summit on the same issues. In that case, the district judge agreed with landowners that the Iowa law in question was unconstitutional, since landowners were not compensated for intangible damages of allowing a survey on the land. 

A case in Hardin County is the one before the Iowa Supreme Court. The district court in Hardin County ruled in May 2023 that the landowner plaintiff could not interfere with Summit Carbon Solutions’ attempts to enter his land to survey for its pipeline project. The landowner is appealing the Hardin County decision on the argument that it is unconstitutional for a pipeline company to undertake land surveys and examinations before it is vested with eminent domain.

GEORGIA EV PLANT

Hyundai has begun producing electric SUVs in Georgia less than two years after breaking ground on its sprawling, $7.6 billion manufacturing plant. The official formal opening will occur in 2025 but production is underway. Hyundai has said it will produce up to 300,000 EVs per year in Georgia, as well as the batteries that power them. The plant’s vehicle production areas have been completed and are being staffed by more than 1,000 workers. Battery-making facilities remain under construction. 

ORLANDO UTILITIES COMMISSION

Within 16 years, the Orlando Utilities Commission (OUC) plans to take out of service more than 90 percent of its with generation plants that burn fossil fuels, mainly coal and natural gas, and will have erected solar panels on more than 10,000 acres. The plans will put OUC at the forefront of the changing energy production industry. Later this year, OUC will start generation at a pair of large solar plants – Harmony II and Storey Bend in Osceola County – able to provide for about 28,000 homes or roughly 10 percent of residential customers. 

While the utility moves towards creating its own base of solar power, it also wants to reduce payments under its net metering plan. That is not going over well with existing owners of residential solar. Of the utility’s nearly 250,000 residential electric customers, about 10,000 have solar panels on their rooftops. Those panels plus those of commercial customers have a combined capacity to generate 104 megawatts, or nearly 5 percent of OUC’s capacity. By 2032, according to OUC reporting to the state’s Public Service Commission, OUC “anticipates” constructing a dozen large solar plants, each covering between 500 and 800 acres, containing approximately 300,000 panels.  

DISASTER BONDS

When large scale disasters occur, Congress has authorized spending plans to assist recovery by authorizing special issuance of private activity bonds. Congress has created special tax-exempt bond categories in response to disasters over the past two decades, including Liberty Bonds following September 11, Gulf Opportunity Zone Bonds and Ike Bonds after hurricanes, and Mid-Western Disaster Recovery Bonds after severe flooding along the Mississippi River.

Each required a special act of Congress that took months before capital became available. Those processes took weeks and months to be enacted which complicated recovery. Now, large scale natural disasters are becoming more frequent and widespread. This is generating a proposal from the Council of Development Finance Agencies (CDFA). It would provide for permanent provisions governing the use of tax-exempt private activity bonds in response to natural disasters.

The bonds would not be subject to federal volume cap restrictions and would be available to the affected areas upon the declaration of a state of emergency by a state’s or territory’s governor. Disaster Recovery Bonds would be authorized for use in a Disaster Recovery Zone to finance: the acquisition, construction, reconstruction, or renovation of non-residential real property (land, buildings, and fixtures); the construction and rehabilitation of multi-family rental property for low- and moderate-income individuals; the repair or reconstruction of damaged public utilities facilities and transportation infrastructure; and the immediate repair and mitigation of severe environmental contamination to a public water source.  

DAMS

Every natural disaster creates new opportunities to learn from. In recent years, flooding has become a more widespread concern. The recent experience with Hurricane Helene has highlighted the number of dams located throughout the country. While people tend to think of the larger scale dams which provide power, water and flood control, the majority of these facilities are much smaller and localized. They primarily were designed to control flooding.

The very active summer storm season has served to highlight the infrastructure that is at the base of much of the flood control effort in the US. Some $3 billion was dedicated to dam projects under the Bipartisan Infrastructure Law, which Congress passed in 2021. So far this year, the Federal Emergency Management Agency (FEMA) has distributed a record $215 million in dam safety grants. The FEMA dam safety grant program only accepts dams that could cause loss of life if they fail and are in poor or unsatisfactory condition. 

FEMA has a limited amount of money to give out so the agency is prioritizing dams in the poorest condition that also pose the greatest risk to the public. That means that the larger hydroelectric dams in the West and dams near higher populations are the current funding priority. That has generated disparate distributions to different regions as FEMA releases funds. Eleven Midwest states will receive a total of $30 million in FEMA dam safety grants this year, just half of the roughly $60 million that 13 states in the South will receive. Another $60 million will go to 11 states in the Northeast. In the West, 11 states will receive about $45 million.

Earlier this month, the Department of Energy (DOE) announced it was handing out more than $433 million to projects that will improve safety and grid resilience for hydropower dams across 33 states. DOE will provide $63 million between seven Midwest states to improve their hydropower dams. That is half of what Northeastern and Southern states will receive and one-third of what Western states will get. DOE awarded more than $176 million to six Western states: Arizona, California, Oregon, Washington, Idaho and Utah.

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

Joseph Krist

Publisher

NYC

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

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

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

Still think the rating is stable?

HOSPITAL CONVERSION

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

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

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

AUTONOMOUS VEHICLES

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

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

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

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

HELENE

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

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

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

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

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

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

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

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

CLIMATE HAVENS

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

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

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

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

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

NUCLEAR

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

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

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

HOSPITAL PRESSURES CONTINUE

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

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

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

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

Joseph Krist

Publisher

NUCLEAR

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

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

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

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

MEDICAID ON THE CALIFORNIA BALLOT

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

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

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

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

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

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

INSURANCE AND TAXIS AND UBERS

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

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

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

NYC

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

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

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

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

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

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

NEW JERSEY TRANSPORTATION

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

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

UPDATES

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

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

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

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

Joseph Krist

Publisher

NYC

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

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

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

FLORIDA BUDGET OUTLOOK

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

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

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

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

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

NET METERING

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

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

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

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

HIGH SPEED RAIL

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

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

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

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

NEW YORK WEED

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

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

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

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

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

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

MTA

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

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

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

CYBERSECURITY

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

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

CALIFORNIA WATER

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

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

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

MISSISSIPPI RIVER BLUES

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

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

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

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

Joseph Krist

Publisher

CHESTER PA BANRUPTCY

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

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

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

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

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

TRI-STATE GENERATION

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

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

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

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

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

SUMMIT CARBON

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

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

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

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

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

BUSY TIMES FOR JUDGE SWAIN

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

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

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

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

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

A NEW RISK TO ASSESS

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

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

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

TRAFFIC REALITIES

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

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

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

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