Joseph Krist

Publisher

We are troubled this week by the initial signs coming out of Puerto Rico in the wake of the acceptance of the Plan of Adjustment in Puerto Rico’s Title III proceedings. An all too familiar mantra is already being quietly recited – no oversight, no disclosure, no accountability but yes, lots of cash please. All that market participants asks for is a level of oversight that many mainland U.S. cities and counties have experienced since the 1970’s in exchange for being funded out of insolvency. Until that changes, the chances for real lasting economic and fiscal success remain much lower than they need to be.

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SOCAL GAS DEBATE

There are several municipalities which find themselves in the center of the debate over the use of natural gas to produce electricity as the result of their ownership of the local electric utility. The latest example is the City of Glendale, CA. The City is a significant participant in a number of power supply agreements providing revenues to back the bonds issued by joint action agencies (JOA). Like many others, Glendale’s municipal utility gains access to the benefits of scale resulting from large baseload generators through JOA membership. Glendale also owns its own generating assets to provide peaking power at times of high demand.

In 2019, the Glendale City Council postponed a final decision on investing in natural-gas-fired generators to replace the city’s aging gas plant. Now the plants are three years older and still need improvement. The utility released a final environmental impact report last week recommending one of two preferred paths for the city to take. One option would to spend $260 million on five new gas engines. Modern gas turbines are relatively less polluting than the ones in place now. The second option would see the city refurbish several existing gas turbines to comply with air-pollution rules, at a cost of $201 million. The City Council is expected to vote on those possibilities on Feb. 8.

Glendale is also expanding non-fossil fueled generation. It plans to install a 75-megawatt, 300-megawatt-hour battery system at the site of an existing plant.

BACK TO THE FUTURE IN N.J.

In many areas, the use of human toll collectors is a blast from the past. A variety of electronic devices have been developed and installed on roads all over the country. In many ways, the technology is considered to be accepted. Even privacy concerns have not stopped its expansion. The latest holdout to begin the move to All Electronic Tolling (AET) is New Jersey.

The South Jersey Transportation Authority is soliciting bids for a vendor to design, develop, install, test, operate and maintain a “fully functional, turnkey all-electronic toll system” for the Atlantic City Expressway. The current schedule calls for a contract to be awarded as early July of this year. The anticipation is that an all-electronic tolling could be operational on the Expressway by spring 2025.

The solicitation makes clear that the system being sought could be extended to the New Jersey Turnpike Authority, which runs the Turnpike and Garden State Parkway. The vast majority of drivers on New Jersey’s toll roads are EZ-Pass customers. How big a majority? Try 85% on the Expressway, 89% on the Turnpike and 88% on the Parkway.

The data would seem to indicate that privacy-based opposition to mileage taxes or fees only extends so far. The reality is that electronic license reading technology is already widely used for a variety of reasons which are likely more invasive of privacy. Unless you go out of your way to avoid it (it’s hard to do) and you turn off your cell phone, you are already dealing with it.

NUCLEAR BOOST IN WEST VIRGINIA

The West Virginia legislature passed a bill to repeal state codes which restrict the use of nuclear power. Existing law states that “the use of nuclear fuels and nuclear power poses an undue hazard to the health, safety and welfare of the people of the State of West Virginia…and the purpose of this article to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

The purpose of this article was to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

SOLAR POWER

For a long time, Arizona was thought to be a perfect place for widespread adoption of solar power. This was especially true for rooftop solar. The only problem seemed to be the complete lack of support on the part of legacy electric generation utilities. There are moves underway in several states to modify the rules which require power companies to take “excess” power and to reflect that in rates. Without such a process (net metering), solar power is less attractive economically.

One of the major players in the efforts to slow solar in Arizona has been the municipal utility, the Salt River Project. Salt River effectively designed a rate structure that was seen as penalizing customers who installed rooftop solar.

Customers sued SRP claiming it was violating federal antitrust laws through its activities. The customers were appealing a trial court ruling in favor of SRP. In a unanimous decision, a three-judge panel of the 9th Circuit Court of Appeals rejected SRP’s contention that its restrictive rates were protected under federal law.

The judges ruled that there is sufficient evidence that can show the price structure was designed to deter the competitive threat of solar energy systems and force consumers to exclusively purchase electricity from SRP. This one case where the effective self-regulation of municipal utilities worked against SRP. Because they make their own rates without state regulation or approval required, SRP could not lean on the argument that the state through its regulators had approved its conduct.

The decision throws the case back to the original trial judge. There a ruling will be made as to the extent of the utility’s conduct and the damages to SRP customers.  The dispute has been going on since 2014 when SRP adopted a new pricing plan which says that solar customers who still need to be hooked up to the utility for times when solar is not available can be charged up to 65% more than prior plans. Yet at the same time rates for non-solar customers went up about 3.9%.

WHILE THE DEBATE CONTINUES

The decision comes in the midst of robust debates over how to support rooftop solar in two big states. Efforts are underway in California and Florida to reduce the impact of net metering requirements. In California, the Public Utilities Commission has proposed significant changes to net metering which would reduce the economic benefit to solar power owners.

Currently, net metering requires utilities to credit customer bills for “excess” power at full retail rates for solar exported to the grid. The plan would also levy monthly fees on customers who install solar power. The utilities are trying to present the issue as one of economic justice claiming that poorer customers are subsidizing solar. That argument is belied by data from Lawrence Berkeley National Laboratory which shows that households earning less than $50,000 a year made up 13 percent of solar adopters in 2019, and those earning less than $100,000 a year made up 42 percent.

THAT DIDN’T TAKE LONG

On January 22, three California assembly persons introduced Assembly Bill 1400 which would create a centralized state-run financing system known as CalCare, a plan that legislative analysts estimated could cost between $314 billion and $391 billion a year. It came in the wake of a proposal by the Governor to extend MediCal to all adults who meet the income limits.

The funding method for the single payer proposal was  CA ACA11 (21R), which would have increased taxes on businesses and high earners. ACA 11 also would need a two-thirds vote in each house as well as voter approval. The bill faced a Jan 31 procedural deadline and sponsors admitted that the votes are not there.

MEAG

The Municipal Electric Authority of Georgia (MEAG) is a participant in multiple large-scale generation projects with Georgia Power.  As a participant, MEAG does not have a final say about which units to operate or close. That is Georgia Power’s call. Among those generation assets are substantial base load generation plants fueled by coal.  In 2021, coal comprised 9% of MEAG’s delivered energy, up from 2% the prior year as an increase in natural gas prices made coal more economical.

Now the Southern Company – Georgia Power’s parent – has submitted its next resource proposal to state regulators. They must approve the plans. In its submission, GP pledged to close a total of 12 coal units by 2028 – representing a loss of 3,500 megawatts, which the utility plans to offset with 2,356 megawatts in natural gas.  Those units include two in which MEAG maintains ownership shares.

The next coal plant scheduled to be retired is Plant Wansley later in 2022.  MEAG has a 15.1% ownership (269 MW) in Units 1&2.  It also owns shares in Plant Scherer with 30.2% ownership in Units 1&2 (489 MW). Some 500 MW of power to replace those losses will be available upon completion of the expansion of nuclear generation which is currently scheduled to become operational in 2022 and 2023.

One potential risk to ownership in these plants is the liability associated with the disposal of coal ash. The U.S. Environmental Protection Agency announced plans in January to crack down on dangerous coal ash waste sites, including the enforcement of an Obama-era rule designed to limit the chances of coal ash toxins leaking into groundwater or waterways. Georgia Power is seeking permits to install a cover over coal ash ponds at five plants, leaving the toxic waste where it sits in unlined pits and submerged at varying depths in the groundwater.

VIRGIN ISLANDS REBOOT

The last few years have focused so much attention on the effort to restructure Puerto Rico’s debt that it is easy to overlook the other perennially troubled U.S. Virgin Islands credit. The underfunding of pensions and long-term operating and financial strains have put the electric utility serving the islands on the edge of bankruptcy and held down the general credit of the government.

Now the Virgin Islands is looking to refinance some $800 million of debt. The debt in question is known as matching fund debt in that it is payable from taxes on the production of rum by the federal government which are then redistributed back to the Virgin Islands to repay debt issued against them. Moody’s rates the existing matching fund bonds Caa2 and Caa3.

The proposed deal would call for debt to be issued with a final maturity of 2039 by a special purpose entity which would sell the bonds and apply matching fund revenues sold by the government to the corporation to repayment of the bonds. The 2039 maturity coincides with the remaining term of the existing agreements between the government and the rum producers which generate the revenues.

The goal is to stabilize the island’s pension system which is woefully underfunded. Government actuarial consultants say the system has $5.8 billion in net unfunded pension liability. The government’s actuary estimates that the transaction would assure the pension system would not run out of assets in the next 30 years. A variety of assumptions underly the transaction including a 6% investment discount rate and maintenance of current levels of rum production.

The proposed transaction provides an excellent opportunity for the market to exert its influence and insist on full and timely financial reporting. Simply restructuring debt without improving some of the conditions which created the need for the restructuring does nothing for the long-term creditworthiness of the USVI. Without it, the U.S. Virgin Islands could be the next Puerto Rico.

ILLINOIS BUDGET

Governor Pritzker has outlined his budget proposal for the State of Illinois for FY 2023. The Governor proposed a $45.4 billion general funds budget for the upcoming fiscal year. The proposed budget is a 3.4% reduction in comparison to the current year. The lower spending is accompanied by proposals for a one-year freeze of the 39.2 cents per gallon motor fuel tax, lifting the 1% sales tax on groceries and a property tax rebate of up to $300 equal to the property tax credit available on income taxes. 

Pension funding was addressed. The state has made its required minimum contributions during the Pritzker administration and the budget proposed continues that. The Governor then proposes an additional contribution above the minimum for fiscal 2023 of some $500 million. The proposal would reflect this would be the first time since 1994 that the state would reduce the pension debt by more than the minimum requirement. 

FOOD DRINK AND RECREATIONAL TAXES

There are numerous credits backed in one way or another by revenues generated from the sale of food and drink. The businesses which generate those revenues directly or indirectly were among the hardest hit during the pandemic. Now, we see evidence of the magnitude of the impact on those businesses and by extension the revenues foregone through the lack of economic activity.

We came across some interesting data from CivMetrics. They recently published data on restaurant booking data. At various points in the pandemic, the review of data from Open Table, the online booking service has been used to pinpoint turns in the perceptions of the pandemic and the removal or reimposition of limits due to the pandemic. The data shows that there is a long way to go for recovery.

The surveys cover bookings in the same week of 2022 versus 2019. Of the 40 large cities in the dataset, only four cities’ bookings are actually up. They are in Florida or Arizona. The increases are in the single digits except for Fort Lauderdale. The real story is the lingering damage to the industry in the largest cities. Philadelphia sees bookings down over 70%. New York remains 66% lower with cities like San Francisco and Seattle still experiencing declines of over 70%. Chicago bookings are down 65%.

FEDERAL FUNDS SUPPORT CREDIT IMPROVEMENT

One of the fiscal problem children in New York State has been the City of Long Beach. The city has a history of poor financial management and performance. It also found itself facing a significant liability from a property tax challenge. That litigation gave rise to an initial award amount from the City to the taxpayer of some $150 million. The city was under enormous pressure to stave off a downgrade to less than investment grade.

Now, the City’s fortunes have improved somewhat. The original property tax award has been lowered by half. The $75 million is still substantial but more manageable. The plan is to issue debt to fund the $75 million (judgment bonds are a tried-and-true method) award. This happens in a period where the City’s unaudited figures for fiscal 2021 show significant improvement in the city’s reserves and liquidity.

Put it all together and it provides a basis for Moody’s to improve the outlook for the City’s general obligation bond rating of Baa3 to positive from negative. A combination of current results improvement and the property tax settlement are the basis for the move.

The long-term fiscal issues which hammered Illinois’ credit bled down to credits dependent upon the fiscal support and condition of the state to maintain their own ratings. Ratings for some units of the state’s university system were under particular stress. Moody’s Investors Service has revised Northern Illinois University’s outlook to positive from stable. It is still a Ba2 non-investment grade credit but fiscal 2021 operations were nearly balanced, with a small deficit to potentially balanced operations projected for fiscal 2022 and beyond. 

Northern Illinois University is a multi-campus public university centered on its main campus in the City of DeKalb, IL Three satellite campuses that primarily serve graduate students. The university has a broad array of undergraduate and graduate academic programs, including concentrations in education, business, engineering, health and human science, law, and visual and performing arts. Fall 2021 total full-time equivalent student enrollment was 13,153.

Running against some trends, NIU has seen five years of enrollment growth. Last year, the growth was in the double digits. It still remains dependent on the state for approximately 40% of its revenue and that limits the available ceiling for rating improvement. The near-term fiscal improvement by the State still limited by the significant liabilities it faces going forward. The ability of NIU to maintain positive results awaits the impact of the loss of non-recurring federal pandemic support.

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

NATIVE AMERICAN GAMBLING SETTLEMENT

The Seneca Nation in upstate New York has been in a long dispute with the State of New York over how much money generated from its casino operations needed to be paid to the State. That dispute resulted in more than $600 million of gaming revenue owed to the state and various local governments being placed in escrow.  This caused the State, and the cities of Niagara Falls (Baa3 positive), Buffalo (A1 stable) and Salamanca, which host Seneca Nation casinos to have to annually adjust their budgets to reflect revenue receipts below what were assumed under the agreements. The ongoing uncertainty acted as a negative weight on those cities’ credits.

Recently, the State of New York and the Seneca Nation of Indians announced a resolution of the contract dispute. The agreement calls for the Seneca Nation release the money held in escrow and begin negotiations on a new gaming revenue compact with the state. This will result in a significant revenue boost as well as reducing the liability side of the City of Buffalo’s balance sheet. In the cases of Niagara Falls and Salamanca, the benefit will be primarily on the balance sheet as opposed to the income statement as the transfers from the State will, net of repayment of the advances, not generate significant new revenues.

The State of New York, along with the local governments, will also benefit from the resolution. In fiscal 2020, the state received $88 million in payments from the Seneca Nation when the budget assumed receipts of $303 million. In fiscal 2021, the state received $60 million when it had projected receipts of $515 million. In the fiscal 2022 financial plan, the state’s estimate as of November for current-year receipts was $663 million. The State was in a better position to handle the shortfalls than were the cities.

In recognition of that fact, the State agreed to advance revenues to the three host cities if needed to achieve balanced budgets. The largest of the three cities, Buffalo, had been able to do that without casino payments. Niagara Falls and Salamanca have needed the funds to achieve balance. All three have availed themselves of the state transfers at some point during the process of resolving the dispute. Niagara Falls and Salamanca relied heavily on state advances and as result will receive a relatively small cash infusion when the escrowed funds are disbursed

The original compact between the State and the Seneca Nation is nearly 20 years old. The settlement also calls for the negotiation of a new compact between the Seneca nation and the State. While the outcome of those talks is uncertain, a major source of uncertainty for the host cities has been alleviated. The dispute had lingered since 2017. The end of the current uncertainty is credit positive for each of the governmental entities involved.

TEXAS POWER MARKET DRIVES A MUNICIPAL DOWNGRADE

One of the municipal utilities that found itself at the center of the Texas energy crisis of 2021 was CPS of San Antonio. The price explosion in the energy market stemming from the winter freeze impacted CPS as much as any of the large utilities. It faces some $1 billion of charges for purchased power during the freeze. It is disputing some 58% of that total. The utility was seen as clumsy in its response to customers. There was also significant management upheaval.

All of that creates a difficult political environment for the municipal utility. It was considered to be an achievement when CPS was still able to obtain approval for a 3.85% base rate increase in January 2022 from the Board and City Council. It is expected that additional increases will be required over the next five years. The absolute level of those increases will depend on the regulatory treatment of the proposed charges.

The unique nature of the Texas power grid and market create specific challenges which CPS does not control. It is widely agreed that state grid remains vulnerable to a repeat of last year’s weather event as meaningful and significant improvement to physical assets of the generation/transmission system has not occurred.  While the uncertainty of the ultimate outcome of the dispute over the gas charges remains an issue, CPS has been able to generate access to outside financing of its cash needs. It has increased its use of a greater set of hedging tools to reduce its natural gas price risk.

This has all led to Moody’s lowering of the City of San Antonio, TX Combined Utility Enterprise’s (CPS Energy) senior lien revenue bond rating to Aa2 from Aa1 and junior lien revenue bond rating to Aa3 from Aa2. It is still a solid credit and there still remains financial flexibility. The retail service area is not open to competition, the utility serves several Federal military installations and there is no major customer dominance. Approximately 90% of customers are residential.

That is why Moody’s emphasizes that. ESG factors are material drivers of this rating action. “Winter Storm Uri’s extreme nature and enduring cost impact to CPS Energy, and the fact that meaningful reliability improvements have yet to be implemented at scale in the ERCOT market and the state’s energy supply chain, are considered in our assessment of environmental risk. Strained customer relations in the wake of the storm and the need to rebuild management credibility after a wave of executive departures also raise the risk profile as it relates to social and governance considerations.”  

ILLINOIS PENSION FUNDING

One approach to the issue of funding pension liabilities is to “buy out” the pension rights of pensioners through a payment to pensioners. Pensions have been a long-time challenge in the State of Illinois and the state has already undertaken a buyout program beginning in 2018. It is one of the few big issues on which there is bipartisan agreement. The existing buyout programs began under the administration of former Gov. Bruce Rauner. Under the Pritzker Administration, the legislature in 2019 extended it to June 30, 2024. The buyouts are funded by $1 billion in general obligation borrowing capacity of which $115 million in authority remains.

The program offers eligible members who no longer work for the State a lump sum payout equal to 60% of the present value of their vested pension benefit to leave the system. For some of those who are still working for the State, they have the option of receiving a lump sum benefit when they retire plus an ongoing annual payment but at a 1.5% non-compounded COLA instead of the compounded 3% COLA they are currently set to receive.

Recent legislation has begun moving through to a vote which would extend the program until June 30, 2026. The plan asks for an additional debt authorization for another $1 billion. The buyout programs cover the three largest of the funds – the Teachers Retirement System (TRS), the State Employees Retirement System (SERS), and the State Universities Retirement System (SURS). The legislation is expected to pass although there is not a lot of hard data for legislators to rely on when evaluating the program. There was testimony in committee that TRS saved $90 in the state’s contribution to pensions.

ENVIRONMENTAL LITIGATION

Last week, oral arguments began in the City of Baltimore’s litigation against BP, Exxon Mobil Corp. and 24 other oil companies which broadly alleges that the companies failed to adequately disclose the impact of their operations on the climate. The oral arguments before a Virginia appeals court will be the first since a U.S. Supreme Court ruling in May found that appellate judges could consider a broader range of factors when deciding whether liability lawsuits should be heard in state or federal court.

A 2019 ruling in federal district court sent the Baltimore case back to state court. In this appeal to the Circuit court, the companies emphasized two grounds for removing the case to federal court that it said the court had not yet considered: that the claims “arise” under federal law and that the city’s “alleged injuries” are connected to the production of oil and gas from the outer continental shelf and are subject to a 1953 federal law that regulates that production. “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.” The oil companies argued that “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.”

Baltimore has noted that a previous appeals court ruling that found the city’s claims involve the companies’ alleged “concealment and misrepresentation” of the dangers of climate change and “do not implicate any body of federal common law and are unconnected to any operations on the Outer Continental Shelf.”

The companies claim that Baltimore is seeking to upend international agreements and that a decision in the City’s favor would ““undermine national energy objectives, including federal efforts on the climate, energy independence, the stability of the electric grid, and energy affordability.”

The fossil fuel defendants will do all that they can to get their case before the U.S. Supreme Court where they believe that the current justices are more inclined to rule in their favor. This is but one of nine climate liability cases which were sent back to circuit courts across the country after the Supreme Court ruling. If the companies offer the same arguments, the cases will be put before the U.S. Supreme Court. 

OIL/GAS ROYALTY CHALLENGE

The North Dakota State Board of University and School Lands is appealing several 2021 rulings from a lower court in a case about oil and gas royalties. The appeal challenges part of a 2021 law that put a limit on how far back the state can retroactively collect unpaid royalties. Legislation last year that capped the length of time for which the state could seek to collect unpaid royalties at seven years. The defendant is a producer who is challenging the claims.

The Supreme Court has heard other issues in the case already and released a ruling in 2019 favorable to the state, which has since sought to collect what could amount to hundreds of millions of dollars in unpaid royalties from a number of oil and gas companies. This litigation flows from those efforts to collect the payments.

The total amounts in question are about $69 million for the years before August, 2013. So, it is not huge money but obviously the State wishes to secure as much legal support for the royalty charges as a general concept. That puts it closer to an issue of principal.

MICHIGAN LANDS GM EV PLANT

GM finally confirmed that it will build a new factory in the state capital, Lansing and expand capacity at its existing EV plant in Lake Orion outside Detroit. The combined investment by GM is being announced as $7 billion. GM projects that it will create 4,000 permanent jobs at the two facilities. The Lansing plant will produce batteries for EVs and is scheduled for 1,700 jobs. The existing Lake Orion plant will expand by 3 million square feet and build electric pickup trucks. It will add 2,300 jobs.

The announcement came as it appeared that Michigan might be losing out in the race for jobs related to electric vehicles. Many of the production facilities were being announced in less labor friendly states. Now this substantial investment keeps Michigan in the game. The importance of the plants to the State was made clear as some $825 million of incentives and tax breaks were offered to encourage GM to locate in Michigan.

PURPLE LINE CONTRACT

The Maryland Board of Public Works has announced its approval of a new contractor to manage the private public partnership building the Purple Line in Maryland. The new $3.43 billion construction contract is between the P3 consortium and a team led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. The financial agreement is between the state and the private consortium, known as Purple Line Transit Partners and led by infrastructure investor Meridiam. 

The total cost of the project is now over $9 billion. It was supposed to be complete by this March under the original plan but now full construction will resume in the spring. The new expected completion date is the fall of 2026. The new contract will create a cost increase for the State that will raise its annual payment requirements to the financial partners of an average of $240 million annually. That is $90 million higher per year.

Maryland transit officials have committed federal funding and fare revenue from all state transit systems, including commuter rail to fund the payments. That will require the use of other state funds to replace the “lost” revenue from the state transit system, most likely other taxes and fees.

OPEB THREAT TO NEW JERSEY RATING

The last few years have seen steady progress made in New Jersey as it sought to balance its budget and address long standing concerns about its pension liabilities. The continued efforts under the Christie administration to avoid full funding of actuarily required pension contributions played a substantial role in the series of downgrades to the State’s ratings that impacted the State. While much attention was paid to pension liabilities, other post-employment benefits (OPEB) seem to fall of the radar of many.

Now a recent disclosure by the State has refocused attention on the issue of OPEB. The state disclosed that its reported Education Retired Fund OPEB liability would increase to about $67.8 billion in the 2021 valuation from $41.7 billion the prior year. Faster growth in Medicare Advantage expenses for retirees accounted for about $12.3 billion of the total $26.1 billion increase. The state cited “claim and premium experience, primarily resulting from higher-than-expected Medicare Advantage claims leading to an increase in projected Medicare Advantage premiums for Plan Year 2023.”

The actuary revised projected medical cost increases for fiscal years 2023 and 2024 to 22.6% and 18.5%, respectively, from assumed growth of 4.5% in the preceding year’s valuation. As of the state’s fiscal year 2020 financial reporting, before the latest increase, New Jersey’s OPEBs accounted for 28% of total long-term state liabilities. The state in its 2020 annual comprehensive financial report said that its roughly $1.6 billion contribution (which is made on a pay-as-you-go basis) for OPEBs and its liability had both declined in the year ended 30 June 2020. The State had been relying on Medicare Advantage products to drive cost savings. Clearly, the latest disclosure shows that the effect has not been so positive.

WHILE THE TURNPIKE GETS AN UPGRADE

The New Jersey Turnpike was one credit that seemed poised to be hurt by the limits on economic activity that have resulted from the pandemic. Quickly, it became clear that the road’s role as a major freight conduit was helping to generate higher than expected toll revenues. The initial pandemic shock resulted in a material traffic decline of 22.5% for calendar year 2020 compared to calendar year 2019.

The availability of a vaccine allowed traffic to steadily recover throughout 2021. Monthly traffic levels in 2021 steadily improved to the point where they were only about 4.5% below 2019 levels for the second half of 2021 through the end of November. Remaining concerns on the part of car motorists continues to hold down traffic.

The pandemic did provide an opportunity for the Turnpike Authority to implement its policy of annually indexing tolls to inflation. Over the years, the process of raising tolls became increasingly political and concerns about the ability of the Authority to maintain its financial position hurt its ratings. That concern is mitigated by the indexing policy.

Those factors as well as the improved credit position of the State of New Jersey have led Moody’s to upgrade the Turnpike Authority’s rating from A2 to A1. The improved position of the State reduces pressure on state authorities to upstream increasing amounts from those authorities to the State general fund. The “upgrade reflects the credit positive impact of the implementation of NJTA’s new annual toll indexation policy, the better-than-expected traffic and revenue rebound from the pandemic driven declines, increased clarity on the pace of new debt to be issued to fund new capital investments, and a signed new multi-year subordinate transfer agreement with the state. “

At the same time, the relationship with the state holds down the Turnpike’s rating. Moody’s refers to that relationship when it notes that “NJTA is a component unit of the state, annually transfers funds to the state and the Governor approves NJTA’s budget and toll rates, limiting NJTA’s autonomy and independence. Owing to this relationship, we currently constrain NJTA’s rating to two notches above the state’s general obligation rating.”

TRANSIT AND LABOR SHORTAGES

We continue to see that worker shortages are impacting mass transit systems including ferries. Last week, the Washington State Ferries (WSF) announced that “most” of their routes were placed on reduced, alternate schedules, citing crew shortages brought on by the pandemic and a “global shortage of mariners.” That system has been cancelling trips since the Fall.

Trucking shortages are impacting a whole host of operations. North Dakota Gov. Doug Burgum signed an executive order waiving hours of service requirements for 30 days for truck drivers delivering milk in North Dakota. The emergency measures come after a major milk distributor in North Dakota went out of business, due in part to a lack of certified drivers, putting rural consumers and more than 50 school districts at risk of losing milk deliveries. North Dakota currently has 49,858 drivers with a commercial driver’s license (CDL), down from 52,824 in 2017.

The pandemic provided an opportunity for drivers and mass transit employees to examine their working conditions. The nature of the services lends itself to erratic hours, overtime, and now those issues are causing more to look to other jobs. This will drive pressures on costs.

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

Joseph Krist

Publisher

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GAS TAX POLITICS

The high cost of energy is emerging as an issue especially in the case of gasoline. Eight states are currently considering suspensions of both existing taxes and enacted future tax increases in order to provide some relief from higher prices for gasoline. Governor Newsome in CA is pushing a proposal to “pause” scheduled increases in the State’s gas tax. An annual inflation adjustment is set to take effect on July 1. Newsom’s plan is to delay the adjustment for a minimum of one year. The budget proposal could extend the tax freeze for the next two years “should economic conditions warrant it.” The governor’s office said a pause is expected to decrease fuel tax revenues by $523 million in 2022-23 based on an estimated 5.6 % inflation rate.

Maryland law authorizes fuel rates to be adjusted each July based on the consumer price index. Recently introduced legislation would repeal the rule for annual adjustments. A proposed Tennessee House bill would return the tax rates to where they were prior to a 2017 state law that raised the gas tax by 6 cents to 26 cents and increased the diesel rate by 10 cents to 27 cents. A year ago, Missouri Gov. Mike Parson signed into law a bill to raise the 17-cent fuel tax rate by 12.5 cents over five years. Now, a bill would seek to have the law overturned as a violation of the State’s Hancock Amendment requiring voter approval of tax increases above a certain level.

The Colorado legislature passed a significant transportation funding package just last year. That plan would impose a new 2-cents-per-gallon fee on gas and diesel. Annual penny increases to the fee on gas and diesel are set to follow each year through 2028. In Ohio, a pending bill would reverse legislative actions taken in 2019 which provided for raising the 28-cent fuel tax rate to 38.5 cents for gas and from 28 cents to 47 cents for diesel. The bill would return the gas and diesel tax to the 2019 rate. The rate reductions would begin no later than July 1, 2022. The tax rate would remain unchanged for five years.

In Virginia, there are three competing bills to attempt to lower fuel taxes. One would lower the tax rate on gas and diesel on July 1, 2022. The tax rate on gas would be trimmed by a nickel from 26.2 cents to 21.2 cents. The diesel rate would be reduced from 27 cents to 20.2 cents. The rates would be the same as they were prior to a July 1, 2021, rate increase. The tax rates would revert to their current amounts on July 1, 2023, and be indexed to annual changes in the consumer price index beginning July 1, 2024. Another bill would suspend collection of the state and regional taxes on gas and diesel until July 1, 2023. A third would suspend the imposition of any regional fuels tax in the state until July 1, 2023.

NYS BUDGET

Governor Hochul announced her formal fiscal 2023 budget plan as the process of adopting a budget by April 1 begins. The budget builds upon the numbers generated by the most recent Mid-Year update. The Update committed to bringing the State’s principal reserves (the rainy-day reserves and reserve for economic uncertainties) to 15% of State Operating Funds spending by FY 2025. The budget has no predicted budget gaps in the out years of the State’s financial plan through FY 2027. This in spite of significantly higher projected expenditure plans.

Since the Mid-Year Update, forecast revisions to the “baselevel forecast” provided new resources of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025. The improvement reflects strong tax receipts and reduced costs. On the strength of collections experience to date, the estimates for tax receipts have been increased by an average of $4.9 billion annually compared to the Mid-Year forecast.

The budget includes some $7 billion of one-time spending. This includes $2 billion for property tax relief (FY 2023), $2 billion for pandemic recovery initiatives (reserve funded in FY 2022),$1 billion to enlarge the DOT capital plan (deployed over three years, FY 2023-FY 2025), $1 billion for health care transformation (reserve funded from FY 2023 and 2024 operations), $1.2 billion for bonuses for health care/frontline workers (paid in FY 2023), $350 million for pandemic relief for businesses and theater/ musical arts (paid in FY 2023 and FY 2024). The baselevel forecast revisions leave surpluses of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025.

As was the case in California, the budget proposes significantly increased spending for Healthcare. The index the State uses to determine Medicaid spending is being revised. The new index would account for enrollment and population changes, which are significant drivers of costs, and supports additional Medicaid spending growth of $366 million in FY 2023, growing to $3.1 billion in FY 2027. In addition, the budget funds bonuses to aid Healthcare recruitment.

The Financial Plan continues to assume that the Federal government will fully fund the State’s direct pandemic response costs, but timing differences between State outlays and FEMA reimbursements will occur. In addition, COVID expenses related to the purchase of test kits for local governments and schools are assumed to be fully eligible for FEMA reimbursement. Pension estimates reflect the planned payment of the full FY 2023 Employees’ Retirement System (ERS)/ Police and Fire Retirement System (PFRS) pension bills in May 2022.

The Executive Budget proposes using $6 billion of cash resources for pay-as-you-go (PAYGO) capital spending over the Financial Plan to reduce debt service costs, ensure the State stays within the debt limit, and allow for a larger DOT capital plan. The PAYGO will be targeted to primarily avoid higher cost taxable debt issuances.

On the capital spending side, the importance of the Infrastructure Investment and Jobs Act to New York State is clear. The State is projected to receive $13.4 billion in new Federal funding over the next 5 years, of which $5.7 billion is expected to flow through the State budget, primarily for road and bridge projects. $7.7 billion will be disbursed by public authorities, primarily the MTA, and local governments. In total, the State is expected to receive funding for the following programs: Roads, Bridges, and Major Projects ($4.6 billion); Public Transit ($4.1 billion); Clean Water, Weatherization, and Resiliency ($3.2 billion) Broadband ($800 million); and Airports ($685 million).

Education remains at the core of the budget. New York State’s 673 major school districts estimated to enroll 2.4 million children in kindergarten through 12th grade. With total State, local, and Federal spending levels exceeding $75 billion, education is both the largest area of State spending and the largest component of local property taxes. New York State has ranked first nationally in school district spending per pupil for 15 straight years. The budget message refers to that as commitment while local taxpayers may feel otherwise. The Executive Budget increases School Aid by a total of $11 billion over 10 years – a 55% increase over that period.

The State’s unique political landscape is driven by Governor Cuomo’s resignation. The Governor needs to appeal to a variety of constituencies in her quest for election. At the same time, she is dealing with a supermajority legislature which will have its own agenda. The expectation is that the Legislature may have different priorities.

PUERTO RICO

“The agreement, while not perfect, is very good for Puerto Rico and protects our pensioners, university and municipalities that serve our people,” Gov. Pedro R. Pierluisi.

On January 18, Judge Laura Taylor Swain accepted a Plan of Adjustment in the Title III proceedings which have been underway since the Spring of 2017. The plan cuts Puerto Rico’s public debt by 80% and saves the government more than $50 billion in debt service payments. The agreement covers the commonwealth government’s general obligation bonds and its Public Building Authority, Employees Retirement System, and Convention Center District Authority bonds.

That is achieved through the forgiveness of $3 billion of pension bonds and slash $18.8 billion of general-obligation bonds and commonwealth-backed securities to $7.4 billion. Bondholders will receive new bonds in an exchange which will be accompanied by a total $7 billion upfront cash payment and a security, called a contingent value instrument, that pays if sales-tax revenue surpasses projections.

As for the future, there remain many obstacles to long-term success. The island remains climate-vulnerable. It has not been able to effectively use the need to rebuild the electric grid in a way which provides needed resiliency and reliability. It has been a significant squandering of an opportunity. The “favorable” treatment to pensioners shifts their continuing weight on the Commonwealth’s budget. The costs of pensions remain a significant risk as the result of the favorable bankruptcy treatment. Healthcare spending will remain another obstacle. The issue of unequal Medicaid funding remains.

In the end, the Commonwealth now needs to meet the test of governance. We believe that the ultimate risk to Puerto Rico from a credit perspective is the fact that lessons have not been learned from the bankruptcy. It is why so much concern is being expressed about the Commonwealth’s ability to function without some outside oversight.

This is one case where the threat of a significant cost of borrowing may not be incentive enough for Puerto Rico to improve its governance. Throughout this process, I am reminded of Argentina. The second half of the century saw Peronism insinuate itself into the nation’s politics in ways that can still be felt over a half century later. Repeated bailouts and IMF borrowings still weigh on that country’s economy. It also worked off a more solid economic base prior to its populist turn. Do we really want to be back at the debt negotiation table in 2035?

NATURAL GAS REGULATION

In 2021, lots of legislative efforts were undertaken to stem the tide of local natural gas regulations designed to end the use of natural gas in new construction. Those efforts at preemption are designed to shift natural gas regulation to the state level away from localities. With the start of the new year, some localities are undertaking more regulation in an effort to avoid preemption laws.

The 2019 California Energy Code allows local jurisdictions to establish stricter building codes if that local authority finds it necessary because of local climate, geological, topographical, or environmental conditions. The Contra Costa County Board of Supervisors approved an ordinance this week that bans natural gas from being used to power new homes and buildings in unincorporated areas of the county. The ordinance will prohibit the installation of natural gas piping in all new residential buildings and hotels, offices, and retail buildings in unincorporated parts of the county.

The ordinance anticipates a number of potential issues cited by opponents. The ordinance does not apply to future developments already approved before the new law is enacted. The ordinance also won’t prohibit emergency backup power sources, like generators, that run on fossil fuel sources. The new law would have to be approved by the California Energy Commission before being enacted. Staff recommended the county put the new ordinance in effect July 1.

NEW TACTIC IN CLIMATE CHANGE LITIGATION

As several lawsuits filed against oil and gas companies work their way through the courts, a series of decisions which keep much of that litigation in state courts rather than federal courts has led to an interesting change in strategy by those companies. We see the tactic as a sign that the long-term outlook for the defendant oil companies is not favorable in terms of the litigation.

The latest sign comes from Exxon’s response to litigation filed by eight California cities and counties which have accused Exxon and other oil firms of breaking state laws by misrepresenting and concealing evidence, including from its own scientists, of the threat posed by rising temperatures. Exxon is now turning to the Texas Supreme Court in an effort to fight the litigation. The company is headquartered in Texas so now it is using a Texas state law (Rule 202) to seek approval to sue individual California officials for limiting Exxon’s First Amendment right to free speech.

Exxon is contending that its misrepresentation of the impact of its products on the climate are protected free speech under the First Amendment. That’s right, lying is protected free speech. Exxon says that the actions of California governments are what they call “lawfare” – the use of litigation to achieve what it calls political ends. The effort attempts to make the litigation as difficult as possible including travel to Texas for depositions.

The emerging trend in the environmental litigation tied to climate change and the oil companies is that state law is likely to govern the outcome. That makes it more likely that ultimately the cases will be settled as the number of different plaintiff jurisdictions are involved makes the likelihood of an unfavorable (to the defendants) outcome. That does not mean that the cases will be resolved soon.

TRI STATE RESPONDS TO PRESSURE

We have been documenting the difficulties that utilities, especially rural co-ops face as they manage the uncertain landscape stemming from climate change. Over recent months, Tri-State Generation and Transmission Association has been at the center of controversy over its efforts to maintain its members as customers while slowly addressing its coal dependence for generation. It has been facing increasing pressure to either address the climate concerns of its retail distribution customers or to allow them to leave and obtain their electric energy elsewhere.

Now, Tri-State is taking a different approach. It has submitted for regulatory approval its “Responsible Energy Plan” in Colorado. State law requires utilities to provide a detailed plan to regulators as to how to cut carbon dioxide emissions associated with the power it sells by 80% from 2005 levels by 2030 and 100% by 2050.The plan commits Tri-State to reducing emissions from its electricity sales in Colorado (it serves customers in AZ and NM as well) by 80% in 2030, based on 2005 levels. In the near term, the company says it will cut emissions by 26% in 2025; 36% in 2026; and 46% in 2027.

It won’t be an easy process. The news also comes with confirmation that Tri-State will complete a 4% wholesale rate reduction for its members in March. The first 2% of the reduction was implemented in 2021. The effort is clearly in response to the concerns of the member retail distribution customers. It is more positive for the Tri-State credit.

FREE FARES IN L.A.

On the L.A. Metro system, the fare for one ride is only $1.75. Total annual fare revenue funds collected make up only 6 percent of total revenue. In March 2020, the system stopped collecting fares on its buses as a COVID-19 safety precaution. For the next 22 months, Metro waived fares for anyone who wanted to keep riding its buses. Recently, the free fare policy came to an end as ridership levels had improved to 80%.

It is estimated that ridership never dropped to less than 5% of pre-pandemic levels. Given the demographics of the riding public especially for buss customers, it is not surprising that ridership held up better than in most cities.  Now, with the surge of the latest COVID variant and the reinstatement of fares, it will be a real chance to evaluate the role of fares on ridership.

The results could have real implications for systems across the country. According to one study that surveyed which regional transportation investments can most reduce vehicle miles traveled, waiving fares would result in both fewer miles driven and fewer greenhouse-gas emissions, more than any other intervention, including congestion pricing or charging drivers a mileage-based fee. If the reinstatement of fares is shown to depress demand, that puts pressure on transit agencies to find other funding sources.

That has implications for New York’s planned congestion fee plan. Governor Hochul’s budget saw these fees as generating $15 billion for the MTA for capital projects through 2024. Congestion fee opponents look to those findings and can make the case that the congestion plan is what they have always contended it is: just another fee or tax.

COMPUTER CHIPS AND THE FUTURE

Intel announced that it will locate its next chip manufacturing facility in New Albany, OH. The 1,000 acre site is to be located just outside Columbus in adjacent Licking County. The project will represent a $20 billion investment directly employing some 3,000 workers. The announcement comes as legislation passed by the Senate remains stalled in the House holding up some $50 billion of support for the chip industry.

Intel has also expanded facilities in Arizona with a similar $20 billion investment announced there last year. Other projects include one from Taiwan-based T.S.M.C. It began construction last year on a $12 billion complex some 50 miles from Intel’s site near Phoenix. Samsung Electronics is locating a $17 billion factory in Taylor, Texas with construction set to begin in 2022.

The moves come in the wake of a shortage of chips and concerns that the concentration of chip production overseas puts the U.S. at risk. The plant would be the first in Ohio. Intel has stated that its expansion plans are not contingent on the federal assistance package but also cited the fact that geographic diversity increases the number of advocates for legislation supporting the chip industry.

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

Joseph Krist

Publisher

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CALIFORNIA BUDGET

Governor Gavin Newsome released his 2022-23 state budget proposal — a $286.4 billion budget plan. The budget projects the state will collect a $45.7 billion general fund surplus in the next year, of which $20.6 billion is discretionary. The plan is being called “The California Blueprint”.  The Budget reflects $34.6 billion in budgetary reserves. These reserves include: $20.9 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $9.7 billion in the Public School System Stabilization Account; $900 million in the Safety Net Reserve; and $3.1 billion in the state’s operating reserve. The Rainy Day Fund is now at its constitutional maximum (10 % of General Fund revenues) requiring $2.4 billion to be dedicated for infrastructure investments in 2022-23.

The Budget accelerates the paydown of state retirement liabilities as required by Proposition 2, with $3.9 billion in additional payments in 2022-23 and nearly $8.4 billion projected to be paid over the next three years. And in spite of all of this, the Budget projects the State Appropriations Limit or “Gann Limit” will likely be exceeded in the 2020-21 and 2021-22 fiscal years. Any funds above this limit are constitutionally required to be allocated evenly between schools and a tax refund. The Budget includes total funding of $119 billion for K-12 education. K-12 per-pupil funding totals $15,261 Proposition 98 General Fund—its highest level ever—and $20,855 per pupil when accounting for all funding sources.

The surplus allows the State to restore business tax credits, including research and development credits and net operating losses that were limited during the COVID-19 Recession, and proposes an additional $250 million per year for three years for qualified companies headquartered in California that are investing in research to mitigate climate change. The Budget also allocates $3 billion General Fund over the next two years to reduce the Unemployment Insurance Trust Fund debt owed to the federal government.

The plan also reflects the substantial infusion of federal funding to the State under the Infrastructure Investment and Jobs Act. California is estimated to receive almost $40 billion of formula-based transportation funding for the following programs over the next five years: Existing surface transportation, safety, and highway performance apportioned programs. A new bridge replacement, rehabilitation, preservation, protection, and construction program. A new program that will support the expansion of an electric vehicle (EV) charging network. A new program to advance transportation infrastructure solutions that reduce greenhouse gas emissions.  A new program to help states improve resiliency of transportation infrastructure.  Improving public transportation options across the state, with increased formula funding for transit.

The “Blueprint” is not without controversy. The Budget includes an additional $9.1 billion ($4.9 billion General Fund and $4.2 billion Proposition 1A bond funds) to continue to fund the construction of the State’s high speed rail line. It also includes funding to make California the first state to realize the goal of universal access to health coverage for all Californians by closing a key gap in preventative coverage for individuals ages 26 to 49, regardless of immigration status.

The Blueprint does highlight potential threats to the State’s fiscal position. The COVID-19 Pandemic remains a risk to the forecast. Strong stock market performance has generated a significant increase of volatile capital gains revenue that is approaching its prior peak levels (as a share of the state’s economy) in 2000 and 2007. A stock market reversal could lead to a substantial decrease in revenues.

WATER NOT EVERYWHERE

The first few days of 2022 have generated very mixed news on the water supply crisis in the American West. The U.S. Bureau of Reclamation announced that it plans to adjust management protocols for the Colorado River in early 2022. The plan is to reduce monthly releases from Lake Powell in an effort to keep the reservoir from dropping further below 2021’s historic lows.  this past November was the second-driest on record and inflows came up 1.5 million acre-feet short of the Bureau’s projections from the previous month. 

The current level of the reservoir leaves available water at 27% of capacity. That is a drop of 164 feet from what constitutes full capacity.  Worse, it is just 11 feet above the bureau’s target of a 35-foot buffer before it enters into a zone where the generation of hydropower by water flowing through the Glen Canyon Dam becomes unreliable.

In contrast, the year-end snow and rain storms in California set records for snow in the Sierra watershed and began contributing to increased flows and storage at previously drought impacted facilities.  Lake Oroville, the northern California dam and hydroelectric facility has seen all the extremes of climate impacts over the recent five years. It has gone from effectively overflowing resulting in damage to hydro facilities. More recently, hydro generation was suspended due to the low level of water available in the lake for five months.

The Northern Sierra and Trinity Mountains currently have 128% of their normal snow levels for Jan. 11. That has generated enough water to raise Lake Oroville’s level by 89 feet. That is enough water to meet release obligations to agricultural customers and create enough flow to allow limited hydroelectric generation. Initially, one of three turbines will operate with the other two pending continued increased water levels. When the Lake is full, it provides about 1% of California’s peak statewide electricity demand. As of 9 a.m. Tuesday, the lake was at 730.08 feet and 42% of its total capacity. 

PUERTO RICO

As we go to press, the Financial Oversight Board faced a 1/4/22 deadline to file the latest iteration of the modified Plan of Adjustment in Puerto Rico’s ongoing Title III proceedings. In issuing her latest orders in the case, Judge Swain indicated that a resolution to the proceedings may occur with the next 4-6 weeks. She issued decisions upholding the board’s interpretation of Act 53, the locally enacted debt and pension law associated with the Plan of Adjustment. Act 53 has language saying there will be no cuts to pensions. The Oversight Board has contended that it’s plans to freeze accruals of pension benefits and eliminate cost of living adjustments is necessary to allow the Commonwealth to balance its budgets.

The judge ruled that Act 53 language clearly only bars modifications of the monthly benefit amount, to which board has agreed. It splits the baby in that it slows but does not reverse the impact of pensions on the Commonwealth budget. The other major legal issue overhanging the process is the continuing litigation against the constitutionality of PROMESA which is being brought by two individual bondholders. They object to the use of what are effectively bankruptcy proceedings under law and procedures which do not apply to states versus territories. There had been some thought that Judge Swain might await the outcome of those challenges to the underlying law before approving a Plan of Adjustment.

The judge had prior ruled on the issue of PROMESA legality in its favor as part of the Title III proceedings. The U.S. DOJ is charged with defending the law and it does not intend for proceedings on that litigation until the first week in February. It does not appear that Judge Swain will wait for that issue to be decided.

Regardless of how the proceedings are ultimately solved it is hard to not see this whole mess as a gigantic lost opportunity. The Commonwealth government continues to undermine long-term confidence through its policies and actions. It has continued to be an impediment to a solution. The legislature continues to move in a populist manner denying reality about its short-term economic realities and its true potential.

The actions in regard to pensions reflect the continued stubbornness on the part of the political establishment as the process unfolds. It raises the issue of whether sustained sound financial operations can continue in the absence of outside supervision and/or oversight. Whenever the issue is raised, all sorts of culturally based objections are raised with the citizenship of residents always cited. If the Commonwealth truly wanted to address this concern, the Title III action certainly provided an opportunity for reform. 

NEW JERSEY TRANSIT

This week I had occasion to use subway and commuter train service in the NY Metro area for the first time since the onset of the pandemic. The train line was operated by NJ Transit and ended at a newly remodeled station operated by the NY MTA. It was a reminder of the complexity of financing the region’s mass transit resulting from the number of different entities involved in their provision. For NJ Transit, that funding comes from the New Jersey Transportation Trust Fund Authority (“TTFA”).

The Authority issues Transportation Program Bonds secured under a legal structure that requires annual legislative appropriation of contract payments for TTFA debt service. The legislature could fail to appropriate even though the source of revenues (the Transportation Trust Fund) cannot be used for anything else if not first appropriated for debt service. There would not be much motivation to fail to appropriate. The State secures between 90 and 95% of its state level debt through appropriation mechanisms so non-appropriation is simply self-destructive. In the case of the transit bonds even more so given the essentiality of TTFA-financed projects, the dedication of revenue to transportation and the importance of maintaining market access.

This week, Moody’s raised its outlook on the Authority’s Baa1 rating on outstanding Transportation Program Bonds to positive. In the end, the rating remains tied to that of the State’s GO rating currently at A3. That relationship will remain as bondholders do not have a direct lien on dedicated revenue, and there are no remedies in the event of non-appropriation.

MUNICIPAL SOLAR

The City of Manchester, NH has put into operation the largest solar generation facility in the state to be developed by a municipality. Covering 12 acres at the site, the solar array — the largest municipal array in the state — is expected to offset more than 2,700 metric tons of CO2 per year — equivalent to avoiding the emissions from the burning of 3 million pounds of coal to generate electricity. It is built on the site of a former landfill. This helps to mitigate concerns over aesthetics and siting. It offers an example of how municipal assets – especially stranded assets like landfills and brownfield sites – can be transitioned to environmental uses.

It is a small scale private public partnership. In this case, the design, development, and operation of the project is being undertaken by a private entity. The City was able to provide a site and facilitate approval. Manchester estimates that it is poised to receive energy savings and tax revenue estimated at more than $500,000 over 20 years at no cost to the city.

THE GREEN DEBATE BEGINS

There are signs that 2022 may be the time for the “green” investment market to settle on criteria to objectively answer the question, How Green Is My Investment? The municipal market is beginning to see the use of “green verifiers”, private third parties who offer to “certify” the “greenness” of a given security. At the same time, the analyst community is in the midst of their process of establishing recommended standards and disclosure metrics for use by the municipal market. The issue of disclosure is also tied to the existence of standards.

For much of the green investment boom, it can be argued that Europe has moved ahead of the U.S. in its process of green investing. That process is far from complete by the ongoing effort by the European Commission to develop a “taxonomy” to be used to classify what counts as sustainable investment. The document is not officially released but press accounts claim that nuclear and natural gas generation will be treated positively in the final document.

If that plan were attempted to be adopted in the U.S., the inclusion of natural gas and/or nuclear generation in any plan to address carbon-based climate change would be controversial at best. And that will be the central issue for the municipal utility sector. The entire range of possible approaches are already being followed by municipal utilities.

Some are better positioned than others in terms of their fossil fuel generation. Some are clearly looking at natural gas as a bridge fuel to the post fossil fuel world. Others are going the nuclear route. For some, renewables are more or less feasible than others. There are those utilities which stand to lose some significant segment of supply regardless of the process.

ENERGY, EMPOLYMENT, AND THE ECONOMY

The current debate over the Build Back Better legislation drags on. As the process unfolds, West Virginia Senator Manchin has emerged as everyone’s favorite bogeyman as the effort to legislate significant climate mitigation legislation continues. For many, the process of dealing with climate change seems straightforward. After all, who wouldn’t want to save the planet? Well, if you are employed in the energy industry and the push for renewables continues the question is being asked by workers in that industry in places like West Virginia is what is in it for me economically?

A recent report from a consortium of groups seeking to advance nuclear as a carbon free option sheds light on the economic realities facing workers and policymakers as the debate over the future of generation unfolds. The data does provide fuel for those arguing that renewable energy will not provide the thousands of good paying jobs to offset employment declines associated with reduced fossil fuel use. The data helps show why there is a high level of skepticism

Ohio had the highest number of coal electric power generation workers at the end of 2019 but shed 25 percent of its coal generation workforce—just over 4,000 jobs—between 2016 and 2019.

The median hourly wage for all energy workers in the U.S. is $25.60, 34 percent higher than the national median hourly wage of $19.14. The overall hourly wage for energy jobs is also 95 percent and 120 percent higher compared to the retail and accommodation and food service industries, respectively.

Utility and mining and extraction workers have the highest absolute hourly wages of all industry segments. Utility employees receive a median hourly wage of $41.08—115 % above the national median wage of $19.14 and 10 percent higher than the overall median wage for all utility workers, which is $37.50. At $27.19 per hour, electric power generation workers earn a premium that is 42 % higher than the national median wage of $19.14; this technology sector represents almost 11 percent of all energy jobs.

The nuclear, electric power transmission and distribution, natural gas, and coal industries support the highest wage premiums compared to the national median. These four energy industries support hourly wages that are at least 50 percent higher than the national median hourly wage of $19.14. The nuclear industry in particular supports a high hourly wage; at $39.19, these jobs earn 105 percent more than the national median but account for less than one percent of total energy jobs.

Electric power transmission and distribution jobs comprise about one in ten energy jobs and support hourly wages of $31.80—66 percent above the national median—while natural gas and coal workers earn a respective 59 and 50 percent above the national median (see Table 6). Natural gas jobs represent 7.6 percent of total energy employment while coal jobs account for 2.2 percent of all energy jobs.

Nuclear and coal generation have the highest median hourly wages; these sectors support wages that are a respective 115 and 80 % above the geographically weighted wages. Natural gas electric power generation jobs also support significantly higher wages, with a 77 % wage premium. Solar, oil, and wind electric power generation employees earn wage premiums that are approximately 20 to 35 % above national wages, but below that for gas.

WHILE ENVIRONMENTAL REGULATION CLOSES COAL PLANTS

The U.S. Environmental Protection Agency on Tuesday proposed denying requests from three Midwest coal-fired power plants to continue dumping coal ash in unlined surface impoundments, a move that could lead to the plants’ early retirements. Under a rule finalized in mid-2020, the EPA allowed utilities to continue dumping coal ash from their power plants into unlined basins until April 11, 2021.

Some 57 requests to extend the deadline have been made. Four of those requests have been deemed to be incomplete or inadequate. Two of those four are owned by municipal utilities. City, Water, Light, and Power’s 200-MW Dallman plant in Springfield, Illinois; and, Lansing Board of Water and Light’s 160-MW Erickson plant in Lansing, Michigan. This process is just the beginning of EPA efforts to address issues like coal ash storage and disposal, nuclear operations, and water quality issues related to all fossil fueled generation facilities.

In Michigan the municipal utility in Grand Haven is confronting the realities of coal and reclamation. The Michigan Department of Environment, Great Lakes and Energy (EGLE) and the Grand Haven Board of Light & Power disagree on how to dispose of coal ash and chemical residues left over after the closure of a coal fired generation plant. The issue is how to handle accumulated ash which now sits in ponds. Depending upon the age of a coal ash pond and the material which lines it, serious environmental issues can result. These require significant expenses to clean up.

It is a repeat of many other situations involving waste ponds especially those associated with generation facilities. The EPA has applied a greatly heightened level of attention to these conditions as it was a point of emphasis in the home state of the current EPA administrator. It is not surprising to see heightened state regulatory attention as a result.

LOUISIANA UPGRADE

The last year saw a bit of everything in the Sportsman’s Paradise in 2021 – hurricanes, floods, tornados, a declining oil and gas business, and continued diminished tourism to New Orleans. With all of these issues potentially raising significant obstacles to economic recovery from the pandemic, one might not have put Louisiana at the top of the potential upgrade list.

Nevertheless, the State of Louisiana’s general obligation ratings (Aa3) from Moody’s were assigned a positive outlook. Moody’s cited “the significant progress the state has made restoring its financial reserves and liquidity in recent years by aligning revenue and spending with its smaller oil and gas sector, rebuilding borrowable funds and generating budgetary surpluses in consecutive years.

Moody’s did acknowledge one commonly held concern. “The state’s recovery, however, depends in part on the economic recovery of New Orleans (A2 stable), the state’s largest city and a popular tourism destination.” The current revival of COVID creates a real timing risk for New Orleans with Mardi Gras less than a month away. This just highlights the vulnerability of tourism-based economies so long as the pandemic remains a significant public health issue.

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

Joseph Krist

Publisher

THE CHRISTMAS THAT WASN’T

This year the schedule of the holiday’s – Christmas and New Year’s on Saturdays – set up well for those businesses and institutions which had been particularly hard hit by the surge in the latest CO VID variant. And then came reality.

The resurgence of the pandemic is now threatening a real recovery from the economic damage of it. We see limits, postponements, and cancellations of events including cultural as well as sporting events. While tourism had begun to recover, the transit and hospitality industries face great uncertainty again with cruises being shortened and/or altered. The resurgence of the pandemic is already impacting return to work timelines. The resulting economic impacts will increase the already high level of pressure that exist on small businesses fighting for their survival.

The hope is that the current state of the pandemic will be short lived. It is clear that the likelihood of an additional federal stimulus is low. The Biden Administration is taking the position that the states are expected to be the primary source of government action. That will make the governmental response that much more political. That is problematic. The impact on economies will vary as those more dependent upon traditional weekday economic patterns will take an additional blow in the short term.

The Baltimore Museum of Art, closed its galleries through Dec. 29 because of an increase in positive coronavirus tests. The Metropolitan Museum of Art said it would limit attendance to roughly 10,000 visitors per day because of the highly infectious Omicron variant. That would represent a 50% drop from historic daily holiday season averages.  At the start of Christmas week, nearly a third of all Broadway shows were canceled because of positive coronavirus tests among their casts and crews, and several are shut down through Christmas.

The resurgence of COVID as a source of limits on activities is quickly spreading. Initially, hospitality businesses especially restaurants were limited by staffing and supply issues. The sports world saw a host of postponements of games. The NHL dropped out of the upcoming Olympics. It is not clear what additional measures will have to be taken and what the potential economic/financial impact will be.

The real risk is that the virus wave will be prolonged after a major federal stimulus has occurred. It is not likely that another round of robust financial aid from the federal government will be available. That is true of both individuals and businesses. The pandemic has shone a very bright light on the role of the education system as child care provider. It follows that for businesses to open that staff have care for their children. In NYC, the major banks are reversing their insistence on a return to the office during January.

Atlanta opened its schools remotely. Los Angeles delayed vaccination requirements for students which would have taken an estimated 30,000 students out of in person learning. It not always the various districts’ call as Chicago and Philadelphia faced union hostility to return to classroom efforts. New York and Chicago are pinning their hopes on the distribution of home testing kits. The results from Chicago’s effort were discouraging in that some 25,000 tests were improperly used rendering the results useless. That made it hard to meet teacher demands for safety which resulted in a system closure

P3 TROUBLES IN VIRGINIA

The public-private partnership undertaking extension of the 95 Express Lanes in Virginia have announced a delay in project completion. Work on the $565 million project to bring high-occupancy toll lanes to Fredericksburg began in 2019 and was expected to be finished in October 2022. 

Now the project is caught up in a dispute between toll operator Transurban and its contractor Branch Civil and Flatiron Construction (BFJV). BFJV contends that geologic conditions in the construction zone have affected its ability to keep the project on schedule. The issue has gone to arbitration. The initial proceeding before the arbiter called for the Virginia DOT to offer an adjustment of the price and more time to complete the project because of the soil conditions.

In January, the arbiter is expected to decide the amount of the required financial adjustment. That decision will not be subject to appeal. In the interim, construction continues. This section of road is just one part of a multi-facility expansion program being undertaken primarily through P3 approaches. Delays here could have real financial impacts on a several toll-funded projects.

Virginia remains the center of toll financed express lane projects. With some 60 managed tolled lanes already in operation, an additional 35 miles of such roads is under construction. Now, the Commonwealth is proposing another 11-mile expansion of tolled express lanes to connect to the existing and emerging network. Virginia is on track to have 10 percent of the nation’s managed toll lanes as early as next year.

MEDICAID

The Biden administration on Thursday rejected work requirements for Medicaid recipients in Georgia, the last state to have a federal waiver for such restrictions. The waivers were granted to demonstration projects under Section 1115 of the Social Security Act.  The limits on economic activities and the virus itself made compliance with work requirements to not be feasible.

The Department of HHS previously revoked work requirements in the Medicaid programs of Arizona, Arkansas, Indiana, Michigan, New Hampshire and Wisconsin. Kentucky and Nebraska withdrew their applications for work requirements notwithstanding the fact that their requirements had been approved.

Arkansas is the only state currently challenging its revocation in the courts. That litigation remains on hold while the U.S. Supreme Court considers whether or not to hear Arkansas’ appeal. Regardless, Arkansas’s latest application to renew its waiver drops work requirements altogether, substituting in their place incentives aimed at encouraging work and healthier lifestyle choices.

One other outcome of policy change in a new Administration is the end, for now, of Tennessee’s experiment with block funding for Medicaid. Tennessee plan would have called for the State of Tennessee to receive a capped funding amount for its Medicaid program under its Section 1115 waiver. The approval provided that the State would be able to redirect a portion of any resulting cost savings to other health programs.

COLLEGES UNDER VIRUS PRESSURE AGAIN

A growing number of colleges nationally have announced plans to begin classes virtually after the winter break, and a few, including Yale and Syracuse universities, have announced that they plan to delay the start of classes until later in January. Howard University will delay the start of the spring semester until Jan. 18 when it will require everyone returning to campus from winter break to provide a negative PCR test result within four days of arriving. All faculty, staff and students are required to have a booster shot before the end of January if already eligible for one, or within 30 days after becoming eligible.

IS VACCINE POLICY A GOVERNANCE ISSUE?

Arkansas, Florida, Iowa, Kansas and Tennessee have carved out exceptions for those who won’t submit to the multi-shot coronavirus vaccine regimens that many companies now require. Historically, unemployment does not cover those who resign to avoid compliance with a company policy or are terminated for refusing. The action has been received poorly by both employers who will bear many of the costs of mitigation as the result of unvaccinated employees and by other workers.

This represents a reversal from policies followed by some of those same states when they tried to use limits on unemployment benefits to try to force workers back to work before the availability of vaccines. That sort of inconsistency makes a full-scale recovery slower and puts additional businesses at risk.

HIGH SPEED RAIL ON TRIAL

The Texas Supreme Court will hear arguments on January 11 in a case which will determine whether or not the proposed high speed rail link between Houston and Dallas can move forward. Opponents of the project – especially landowners along the proposed route – have been challenging the plans of the Texas Central Railroad Company to acquire land for a right of way. Land rights are a major cultural and political issue in the Lone Star State. The primary issue is that of whether the Company has the legal right to use eminent domain to acquire the needed land.

The State Attorney General has weighed in on the case on the side of landowners. “(Texas Central and an affiliated company) may only make preliminary examinations and surveys of private landowners’ properties for the purpose of constructing and operating a bullet train if they are either railroad companies or interurban electric railway companies. In the state’s view, the respondents are neither. They are not railroad companies because they do not operate a railroad. And they are not interurban electric railway companies because the high-speed train they intend to operate is not the small, localized, interurban railway expressly contemplated by statute.

The case was originally brought in Leon County where a local judge found in favor of the landowner contesting the proposed acquisition of a portion of his land. An appellate court subsequently ruled in favor of Texas Central, saying it is a valid railroad company and could therefore exercise eminent domain.

EDUCATION FUNDING

A bill was introduced in the California Legislature which proposes to tie education funding to annual enrollment rather than average daily attendance records. The move could bring in an additional $3 billion in annual state funding for schools. Supporters say that an enrollment-based policy is less volatile. Opponents see the change as lowering the pressure to address attendance issues.  The thought is that the daily average attendance provisions motivate schools to address truancy.

Twelve percent of California’s 6 million-plus K-12 students were marked “chronically absent” in 2018-19, meaning they missed at least 10% of the school year.  The legislation requires that at least half of any new funds schools receive under the new policy be put toward combating chronic absenteeism and truancy. The bill includes a “hold harmless” provision would maintain current funding levels but allow districts to apply for supplemental funding if enrollment totals are greater than the average daily attendance formula. The bill would go into effect in the 2023-24 school year.

The proposal comes in the wake of data which shows that school enrollments throughout the state declined by some 160,000 students in the 19-20 academic year. Given that the drop occurred during the pandemic, the data may noy be truly indicative of a longer-term trend. It did occur as California saw its population drop for the first time.

In November, the nonpartisan Legislative Analyst’s Office projected that K-12 schools and community colleges will receive more than $102.6 billion in the current fiscal year. The legislation is represented as generating some $3 billion of additional funding statewide.

NYC FISCAL OUTLOOK

We are among those who are concerned that the DeBlasio Administration’s spending – especially in light of the fact that much incremental new spending was paid for with one-time pandemic revenues. The fact that the local economy is still under significant stress at the same time the pandemic once again is spreading does not inspire confidence. It is against that backdrop that we will view the expected budget pronouncements from both the Governor and Mayor.

The NYC Independent Budget Office (IBO) has released its outlook for the City’s financial plan based on its review of the plan update from the DeBlasio administration in November. IBO projects that within the framework of the Mayor’s latest financial plan, the city has nearly enough resources available to balance each year of the plan without the need for tax increases or major cuts to city services. Only 18 months ago IBO and other fiscal analysts estimated that the city’s out-year budget gaps ranged from $4 billion to $6 billion.

At the same time, the IBO does share some concerns. The unprecedented influx of federal dollars enabled the de Blasio Administration to continue, and even exp and, many city services without the need for tax increases, which have been required during previous periods of fiscal upheaval. The receipt of billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces. billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces.

Much of that uncertainty reflects the current realities of the City’s economy. New York City’s economy has generally lagged the nation’s, particularly on employment, with only about 35 percent of the jobs lost in calendar year 2020 recovered by the end of 2021. IBO expects employment growth to diminish each year from 2022 through 2025; the city is projected not to recover all of the jobs lost in 2020 until late in 2025. IBO estimates that the city gained a total of 213,000 jobs in 2021, just over one-third of the 615,000 lost in 2020. IBO projects this growth to slow to 175,000 jobs in 2022 and 100,000 in 2023, and that pre-pandemic levels of employment will not be reached until late in 2025.

IBO estimates next year’s expenditures will actually be $1.6 billion less than in fiscal year 2022. Adjusting each year’s expenditures for the prepayment of expenses with prior-year resources as well as for other non-recurring expenditures, IBO estimates that spending in fiscal year 2022 will grow by 10.0 percent from the actual level of expenditure in 2021. Adjusted spending will decline in 2023 to $99.7 billion and then grow slowly over the final two years of the plan period, at an average annual rate of 1.4 percent.

AFTER THE FIRE THE FIRE STILL BURNS

Eric Adams took over as the Mayor of New York City. He inherits a $102 billion budget and the highest headcount in the City’s history. Contracts are expiring for many city workers with the uniformed services the most prominent. Indeed, municipal union contracts will be another early challenge for Mr. Adams. The Independent Budget Office estimates that a 1 percent increase in salaries could cost the city about $600 million in the next fiscal year.

The new Mayor will not be able to look outside to other levels of government to bail out the City budget is the pandemic cannot finally be controlled. The State of New York, like every other state, is being expected to fund the response to pandemic limitations if they are not soon eliminated.

And, by the way, Mr. de Blasio’s final budget also increased spending for the Police Department by $200 million, including a $166 million increase for overtime, bringing police spending to a total of $5.6 billion. 

ELECTRIFICATION REALITIES

The big push to reduce or eliminate fossil fuel use faces many hurdles. Those hurdles raise the cost of electrification and make the cost benefit analysis less favorable in the eyes of many residential electricity consumers. The recent release of a proposed plan to address climate change by New York State’s Climate Action Council focuses attention on the issues.

The use of heat pumps to replace traditional heating and cooling systems is getting a lot of attention. The Council recommends that the state develop codes prohibiting propane, gas and oil equipment from being installed in new single-family homes and low-rise residential buildings beginning in 2024, and adopting zero-emission standards that prohibit the replacement of this equipment in existing homes beginning in 2030.

That raises the issue of cost. Heat pumps are advertised as a more efficient source of heating and cooling but many are put off by concerns over price. One provider notes that 5 percent of people who request air-source heat pump installation were interested in lowering their carbon footprint. The remainder of demand was driven by rebate programs.  The Council acknowledges that it would take five to eight years for consumers to realize the savings from heat pumps versus fossil fuel systems.

Like electric cars, the initial adoption phase relies on rebates and/or tax credits. The argument over whether or not to subsidize electric vehicles was a significant stumbling block in the debate over the Build Back Better legislation. We see subsidies as a key to the move to electrify. Whether it be solar, heat pumps or electric cars, the initial cost in the current environment is a major limiting factor in electrification.

PUERTO RICO

The effort to resolve Puerto Rico’s Title III proceedings took several hits over the holidays. This year’s Feast of the Three Kings did not see any gifts exchanged between the parties. Puerto Rico’s Financial Oversight and Management Board (FOMB) filed a lawsuit against the governor in the U.S. District Court on the island to stop the government from implementing and enforcing pension laws the fiscal panel claims would add “unaffordable” retirement benefits for public employees. Pensions have long been a major source of contention between the Commonwealth and its lenders. Efforts to maintain pension levels have led to pensioners getting more favorable treatment in bankruptcy than bondholders.

Acts 80, 81, and 82 enacted provisions designed to encourage early retirements but at current levels of pension payments. The Board had opposed the new laws and there was thought to be an agreement to delay implementation until challenges to those laws were litigated. Instead, Joint Resolution 33-2021 was signed by Gov. Pierluisi last week to require the partial implementation of Act 80 within 30 days. 

The FOMB reviewed information provided by the administration its own analysis and the fiscal panel determined that Acts 80, 81, and 82 together could increase the commonwealth’s expenses by as much as $8.3 billion over the next 30 years. The oversight board pointed out that these additional costs would be in violation of the commonwealth’s board-certified fiscal plan and the proposed amended POA, which would reduce creditors’ claim by 80% but pay government pensions in full.   

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

Joseph Krist

Publisher

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THOUGHTS FOR A NEW YEAR

This is our last issue for 2021. We will return with our January 10 issue.

As we look out towards the horizon, we have more than a few things which occur to us. This is not going to be a set of predictions but rather things which we will be focusing attention on to see what they indicate for the longer term. Clearly, 2022 will be a very political year as all of the potentially controversial and complicated issues will get a lot of attention as the political battle for control in Washington and across statehouses across the country unfolds.

That said, we focus on the more munibond centric issues which await. In New York State, the issue of pandemic response is rearing its head as we go to press. The Governor is facing an emerging challenge in the rise of the omicron variant. Many of the sectors most vulnerable to the pandemic were also important economic supports. The closure of some businesses and institutions and reinstatement of masking requirements comes at a difficult time.

The shift to a new mayoral administration in New York City in the midst of a potential pandemic reemergence creates unwanted uncertainty. The new mayor already faced challenges but now the potential negative impact of the pandemic creates even more pressure on an untested administration. For both Governor and Mayor, time is a real issue. The Governor’s proposed budget is due in mid-January and the first fiscal update from the new Mayor is due around the same time.

This all comes at a time of huge uncertainty for the City of New York. On my most recent visit this week to the City, it was a true sign of life and hope to see the theater marquees and other attractions lit up and operating. Now, some of those lights will dim again and some of the optimism which they reflected will ebb as well. It bodes poorly for the many spaces which remain vacant throughout Manhattan.

The pandemic also challenges the issue of congestion pricing scheduled to begin in 2022 for the central business district of Manhattan. The idea is ostensibly twofold – one the reduction of congestion and its use of fossil fuels and two a way to raise money for mass transit. Here’s the rub. If mass transit is permanently impacted by post pandemic employment realities, the punitive impact on private transit use is increased thereby diminishing support for the concept.

All you have to do is try to drive through Manhattan and you can see the many impacts of poor policy on congestion which go way beyond the number of cars.

The empty Ubers, the double-parked commercial vehicles, the lack of a viable policy for commercial vehicle needs, the issue of outdoor “temporary” restaurant spaces on public streets and sidewalks all contribute to congestion. All will be there even with emission free electric vehicles.  

In California, the more things change the more they remain the same. At year end we see the state proposing to effectively raise the cost of solar power. This while trying to decide whether fire, rain, snow or the lack thereof can be managed. The decision as to whether or not to reconsider the announced closure of the state’s last operating nuclear generating plant in 2025 will have major implications for the national energy debate.

Public transit faces more issues than ever. Primary among them is funding under the realities of the pandemic and its long-term impact on patronage both in terms of number of passengers as well as timing and patterns of that utilization. Just maintaining existing infrastructure is a great challenge. Funding it in an environment of lower demand and lower tolerance for increasing fares and tolls will be difficult at best. All of this against a growing back drop of reduced or subsidized fare programs across the country.

The ESG investment sector will have lots to think about. It remains a concern that there remains so much unsettled about the definition of what ESG investing truly means, what new disclosure pressures and requirements are needed to bring more clarity to the issue of what exactly is meant by ESG as an investment principle. Too much of the answer to those questions is obscured by the “black box” nature of the many and diverse methods of evaluating projects and investments. This merely sustains the view that the ESG tag is currently much more of a marketing tool or a political tool. “Greenwashing” is a real problem.

If it is a valid investment category, a much narrower set of definitions and standards must be adopted, disclosure standards must be promulgated, and methodologies for evaluation and valuation must be developed and articulated. The “black box” approach is not serving the sector well.

In the interim, we are beginning to see rating actions based on social factors. Moody’s lowered its outlook to negative from stable on bonds from North Idaho College. North Idaho College is a community college with its main campus located in Coeur d’Alene, ID, It serves 4500 students from a five-county region. The outlook reflects “governance credibility and board structure risks. These risks are highlighted by board dysfunction, with a small group of publicly elected board members and significant turnover at key senior leadership positions. Disputes between board members and with college leaders have been public, including the dismissal of the college’s former president and complaints against the actions of the board.”

That is about as clear as it is going to get. It is the type of action which should get the attention of ESG investors. The fights have drawn extra attention. The state accreditation body is conducting a review of the College and the management issues.

TEMPLE UNIVERSITY HOSPITAL

Temple University Hospital System is the largest Medicaid provider in the Commonwealth of Pennsylvania. It serves as the essential facility of last resort in Philadelphia. Over the years, the level of service provided, impoverished demand base, and continuing challenges to Medicaid funding have always pressured the system’s finances. This has caused its ratings to hover broadly over the investment grade/non-investment grade boundary. Given the impact of the pandemic on its core source of demand, one might have feared for the system’s financial well-being.

That is not the case. This week, Moody’s announced that it upgraded Temple University Health System’s (PA) revenue bond rating to Baa3 from Ba1. In conjunction with the rating improvement, the outlook has been revised to positive from stable. In spite of the headwinds that the system generally faces, growth in cash reserves and better than budgeted operating performance were achieved for two consecutive years. That in the midst of the pandemic. There was also a helpful asset transfer – the recent sale of Health Partners Plan, Inc. (HPP), added some $300 million to TUHS’ balance sheet after FYE 2021. That sort of improvement moved the ratings metrics favorably generating a strong case for an upgrade.

Going forward, the outlook change reflects Moody’s view that the results are sustainable. It also anticipates that regardless of the upcoming 2022 political environment in 2022 (the Governor’s race and a major US Senate race), the current funding position of the system in the overall Medicaid funding structure in Pennsylvania will remain essentially status quo.  

MUNIS AND SOLAR

Municipal electric utilities are right in the middle of the ongoing energy debates. They face all of the pressures on an operating basis that their investor-owned counterparts face. One of the states where the debate is unfolding across all provider sectors is Colorado. Recently, we have seen the investor-owned sector and the rural coop sector face challenges to their dependence on fossil fueled (primarily coal) generation. Utilities are increasing efforts to change supply relationships and withdraw from existing power supply relationships.

Now one Colorado municipal electric utility is taking its own steps in the drive to renewable energy. Platte River Power Authority this week issued a request for proposals (RFP) to obtain up to 250 megawatts (MW) of new photovoltaic solar generating capacity that could begin producing noncarbon energy by 2025. Platte River’s needs to replace power currently obtained by direct ownership interests in Craig Unit 1 and Unit 2. These are coal fired units. Unit 1 is scheduled to go offline in 2025 and Unit 2 is scheduled to do so in 2028.

The plan did force Platte River to be proactive in the potential redevelopment of the site. Its situation reflects one of the issues facing other utilities – that of the link between generation infrastructure and transmission infrastructure. Platte River may not be the largest or primary owner of the Craig generation plants but one of its two transmission lines initiates at the plant. Developers are encouraged to consider proposing projects that could interconnect with Platte River’s transmission system directly. That is designed to encourage a solar facility to locate near the Craig site.

Within each project proposed, developers are encouraged to include a battery energy storage component capable of providing 100% of the project’s nameplate capacity for at least four hours and be dispatchable by Platte River when needed. By using the existing transmission infrastructure, some of the coal decommissioning impact would be mitigated and the site maintained as a useful piece of the clean energy infrastructure. The issue will reappear across the electric utility spectrum.

NATURAL GAS REGULATION

New York City is poised to be the largest locality to enact its own ban on the use of natural gas in any new construction. Developers in New York City will have to install electric heat pumps and electric kitchen ranges in newly constructed buildings. The regulation will require buildings up to seven stories tall to be all-electric by 2023 and larger buildings to do so by 2027. The bill would not affect existing buildings.

The announcement comes as the gas industry continues its efforts to drive preemption legislation at the state level. The industry is positioning the question as one of choice – like helmet laws for motorcyclists, vaccinations and as a concern of the elderly and low- income individuals. The industry also hopes that fears of requirements to end the use of all natural gas appliances (not a part of any of the 50-odd local gas bans) will drive opposition.

MTA FARE INNOVATION

The Metropolitan Transportation Authority announced that beginning March 1, it will operate a pilot program to test a series of temporary promotional changes to fare structures for New York City Transit, the Long Island Rail Road and Metro-North Railroad. The Authority already has a plan – ‘City Ticket’ – which offers a reduced, flat fare for commuter rail travel within New York City on weekends.

The new plan would expand to cover all weekday off-peak trains at a fare of $5. This is a $2.75 or 35 percent discount from the LIRR’s current weekday fare between eastern Queens and Brooklyn, which is $7.75. The plan will be available to users of the Authority’s OMNY program. OMNY is the One Metro New York contactless fare payment system used on public transit in New York City and the surrounding area. OMNY users would be charged the standard $2.75 pay-per-ride fare for their first 12 trips starting every Monday. Any further trips through the following Sunday would be free of charge.

It is a positive factor to see the MTA using the realities of the pandemic and its impact on utilization to take a flexible approach to its fare system. With NYC lagging behind the nation in terms of returns to offices and use of mass transit, flexibility will be the characteristic of successful operators in the mass transit space.

TRI STATE GENERATION FACES A NEW DEPARTURE

United Power, the largest electric cooperative in the Tri-State Generation and Transmission Association filed notice of its intent to withdraw from the association, effective January 2024, with the Federal Energy Regulatory Commission. The FERC oversees Tri-State. Two other members have left and eight others are actively evaluating leaving as well. Tri State depends on coal as the primary fuel source for its generation and this has become an increasingly contentious issue between Tri State and its member co-ops.

As has been the case when confronted with a request to leave by a customer, Tri State seeks to extract a huge financial compensation from the departing utility. In this case, United estimates that the appropriate charge would be up to $300 million. Tri State thinks that the number should be closer to $1.5 billion. It will be left to the federal Energy Regulatory Commission (FERC) to decide which is the valid number.

The coal component of the dispute is real. United Power, for example, already has 84 megawatts of renewable generation on its system, including 46 megawatts of utility-scale solar. It is home to a 4-megawatt battery storage project, the largest in Colorado, and has more than 6,800 rooftop solar systems. As is the case with all of Tri State’s customers, United must obtain 95% of its needs from Tri State. As for the price of departure, two already departed small utilities paid a total of $174 million to Tri State. United is 20% of Tri State’s demand.

SMALL COLLEGES CONTINUE UNDER PRESSURE

Hartwick College is a small, tuition dependent private liberal arts and sciences college in Oneonta, NY with fall 2021 enrollment of 1,151 full-time equivalent students and fiscal 2021 operating revenue of about $44 million. A trend of declining enrollments is exacerbated by the weakening demographic outlook which colleges are beginning to confront. Hartwick’s current fiscal 2022 budget projects that the college will have a fifth consecutive year of negative cash flow from operations and further unrestricted liquidity declines. The College is undertaking a fundraising campaign but it will have to make a serious investment in recruitment to arrest the long-term trends.

If the pandemic turns out to have a serious impact on operations in the next few months, the position of already challenged institutions will continue to weaken. It is a class of credits in the education space worth watching. The weakening demographics are real and will impact many institutions to different degrees.

LEGAL CHALLENGE TO TOLL INCREASE

On January1, a $1 toll increase is scheduled to take effect on the seven Bay area bridges under the control of the Metropolitan Transportation Commission. The $1 hike is the second part of a three-series toll increase by 2025 authorized under Regional Measure 3, or RM3 as passed by voters in 2017. Despite the voter approval and the collections under the first of the planned increases, legal challenges have forced the funds collected to be placed in escrow.

That lawsuit will have the same impact on the funds collected under the next toll increase. Howard Jarvis Taxpayers Association filed the suit alleging the bridge toll may be considered a “tax,” which would be in violation of Prop. 26. Government taxes require a two-thirds majority vote in the Senate, and the related legislation only received a 54% majority. The same argument is being made in a case against a sanitation fee levied in Oakland which awaits final adjudication in the California Supreme Court.

In the meantime, substantial funding for mass transit remains in limbo. Projects at BART which do not receive any outside funding cannot be undertaken. It is ironic that an organization would sue to overturn a vote of the people in the name ostensibly of protecting those same people.

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

________________________________________________________________

PENSION REFORM HURDLES

Over the last decade, the issue of public employee pensions has been a bigger and bigger issue in any discussion of municipal credit. A significant number of state and local credits have seen credit pressures from lower rates of return which were occurring coincident with higher levels of retirements. The increasing role of pension funding in the rating process has also focused attention. In many cases, the pension funding debate has brought to light the various hurdles which exist that pension reform a much more difficult task.

The latest example involves transit agencies in California. The California Public Employees’ Pension Reform Act of 2013 (PEPRA) requires a public retirement system, as defined, to modify its plan or plans to comply with the act and, among other provisions, establishes new retirement formulas that may not be exceeded by a public employer offering a defined benefit pension plan for employees first hired on or after January 1, 2013. Employee unions have challenged the law based on their view that the California law conflicts with federal law resulting in an illegal reduction in pension benefits.

At the time of the bill enactment in to law, the transit unions were the most vociferous opponents. They pressed the federal government to intervene in support of the workers. Section 12(c) of the Urban Mass Transportation Act of 1964 requires that the U.S. Secretary of Labor certify that fair and equitable arrangements are in place to protect provisions that may be necessary for the preservation of rights, privileges, and benefits (including continuation of pension rights and benefits) under existing collective bargaining agreements or otherwise and the continuation of collective bargaining rights, While the dispute between the State and the federal government continued, then Gov. Brown signed a bill which exempted the transit agencies from the California legislation while it negotiated with the feds. Ultimately, the U.S. Labor Department withdrew its objections to the law and certified that California transit agencies were in compliance.

That did not stop the transit worker unions. They challenged the changes once again in 2019 and they were turned down by the Labor Department. Now, in the aftermath of the pandemic and the resulting infrastructure funding, the unions challenged the California pension law again. This time the Labor department is headed by a union member for the first time and now the union viewpoint is prevailing.

The policy change – reversing two previous reviews under administrations of both parties – now threatens the funding from the infrastructure bill for some 15 transit agencies. They are the Alameda-Contra Costa Transit District, Golden Gate Bridge Highway and Transportation District, Los Angeles County Metropolitan Transportation Authority, Riverside Transit Agency, San Francisco Bay Area Rapid Transit District, San Joaquin Regional Transit District, the San Mateo County Transit District and the Santa Clara Valley Transportation Authority. The State’s governor and congressional delegation are all petitioning the Department to review its decision. Without a change, over $11 billion of anticipated funding could be held back.

It is a real credit negative for these agencies. Many are already operating at reduced levels and many are only now beginning to reimpose fares. It is a policy allegedly designed to protect the working man but, in this case if it leads to service cutbacks and job reductions, exactly how is the working man helped by this?

GAS TAX

The State of Wyoming has gotten lots of attention given its role as a primary.  source of coal for the electric generation industry. It also has significant wind “resources” and is seen as a potential wind power center. Given the importance of coal to the state’s economy in recent years, it has been out front in its efforts to slow the efforts to reduce or eliminate fossil fuel use. It has tended to shun efforts to raise the cost of fossil fueled resources whether they are fuel specific taxes or overall carbon taxes.

Nonetheless, the Wyoming Legislature’s Transportation, Highways and Military Affairs committee advanced a bill to the full Legislature that would raise the gas tax by 5 cents a gallon starting July 2022, another 5 cents starting July 2023, and another 5 cents starting July 2024. Currently the gas tax in Wyoming is 24 cents per gallon. Currently, Wyoming’s gas tax is lower than that of all of its immediate neighbors with the exception of Colorado.

The timing of the proposal is interesting. The State expects to receive some $2 billion of federal money as the result of the recently passed infrastructure legislation that is broadly specified as being for roads. The effective injection of $200 million annually for ten years still does not fully address existing shortfalls in fuel tax funding in Wyoming. If nothing else, the legislation forced agencies to update and improve their capital plans which likely found an excess of potential projects relative to existing and new federal resources.

UNION HURDLES TO ELECTRIFICATION

Toyota became the latest auto manufacturer to announce plans for factories to support electric car development and assembly. It will open a factory to make batteries outside of Greensboro, NC in 2025. The investment will be some $1.2 billion and create 1,700 jobs. The decision follows that of other competitors and it shares in common with them a location in a right to work state.

It comes as the Senate debates provisions in the Build Back Better bill which would tie subsidies to purchasers of electric cars to the issue of whether or not those cars are produced by union workers. The issue has become a real sticking point and creates potential conflicts for liberal and/or progressive legislators. The debate puts domestic, traditionally union producers in line with their union employees but the subsidy limit could limit demand for the vehicles. That would make climate goals harder to achieve by making the cars less affordable.

MUNI UTILITIES AND THE ENVIRONMENT

Sea Light is the municipal electric system owned and operate by the City of Seattle. It finds itself in the middle of the conflict between the carbon-free nature of hydroelectric power versus the interests of other environmental concerns. In the Pacific Northwest, the issue of the impact of hydroelectric dams on fish migration has received much recent attention. One proposal would call for the breaching of four dams in eastern Washington.

Sea Light faces a different issue. The utility owns three dams on the Skagit River for which their operating permits expire in 2025.  The facilities generate about 20% of its power needs. Now, the city is seeking to have the facilities relicensed for 30 to 50 years. That process will require studies to be undertaken in 2022 and 2023 to develop the application for a new license. The application is required to be filed two years before the expiration, by law. The Federal Energy Regulatory Commission then will consider the application.

Sea Light has agreed to examine fish passage at the dams and it has agreed to assess decommissioning and removal of the dams — and to repeat the assessment during the life of the new license, to respond to changing environmental conditions, technology and customer demand. That may not be enough to satisfy tribal interests who are suing to have the dams removed and are even challenging the green status of hydroelectric power because of its impact on fish.

The review of the dams in Washington comes as California debates the planned closure of the Diablo Canyon nuclear plant in 2025. The planned closure has resulted in some unexpected advocacy alliances. A recent study out of Stanford and MIT found that if Diablo Canyon was kept operating through 2045, it could reduce the state’s reliance on natural gas, save up to $21 billion in power system costs and save 90,000 acres of land use from energy production.

A Colorado municipal utility is in a position to expand its resources through the use of green energy. The Arkansas River Power Authority serves six municipalities by distributing power generated or purchased at wholesale. For two decades, a private utility has provided the bulk of its power. Now, in a move that the Authority says will result in lower costs and rates, it will obtain its power from a non-legacy provider.

The Authority hopes to reduce its carbon footprint and respond to customer desires for clean energy. It also believes that it can maintain or even lower its retail rates as the result of the new power contract. It currently owns back-up generators as well as some wind generation directly. The power purchase agreement gives the Authority increased access to renewable power than would have been the case with its legacy provider, Xcel Energy.

Burlington, VT voters approved authorization for a $20 million Net Zero Energy Revenue Bond for Burlington Electric Department. 70% of voters supported the ballot item. The Department’s Green Stimulus incentives are designed to encourage residents to switch from fossil fuel-burning cars and furnaces to electric vehicles (EVs) and cold-climate heat pumps. Bond also will fund grid updates for reliability, technology systems to better serve customers, and new EV charging stations. These bonds will be paid from electric revenues.

At the same time, those same voters did not support tax-backed GO debt for traditional infrastructure. A $40 million bond authorization needed a very high 75% supermajority but the results saw approval at an insufficient 57%. The fact that the proposal got a clear majority may not necessarily mean that there is a preference for green improvements versus traditional improvements. The 75% vote requirement was a significant impediment to approval. The user pays aspect of a revenue bond financing may have made that more attractive as well.  

PRE-PAID ENERGY MOVES TO RENEWABLES

The municipal bond market has long dealt with gas prepayment bonds. These complex transactions have found an audience especially with institutional investors. As the practice became more and more accepted, it is not a surprise that the financing technique is being used to facilitate the changes occurring in the retail electric distribution space.

The California Community Choice Financing Authority (CCCFA) recently sold some $2 billion of bonds to finance activities on behalf of community choice aggregators. The two Clean Energy Project Revenue Bonds, issued on the behalf of East Bay Community Energy (EBCE), MCE, and Silicon Valley Clean Energy (SVEC) prepay for the purchase of over 450 megawatts of clean electricity. The power is secured under long-term purchase agreements with generators.

Who are the aggregators and who do they serve?  EBCE operates a Community Choice Energy program for Alameda County and fourteen incorporated cities, serving more than 1.7 million residential and commercial customers. MCE is a load-serving entity supporting a 1,200 MW peak load. MCE provides electricity service and innovative programs to more than 540,000 customer accounts and more than one million residents and businesses in 37 member communities across four Bay Area counties: Contra Costa, Marin, Napa, and Solano. SVEC serves more than 270,000 residential and commercial customers in 13 Santa Clara County jurisdictions. 

Like the gas deals, the ultimate credit rests upon the ability of the energy supplier to perform. Like the gas deals, the energy trading subsidiary of a major investment banking institution (Morgan Stanley in this case). The variety of transactions underlying the credit are similar to gas deals as in commodity swap providers, energy suppliers, e.g. This structure places the bank at the center of the key issues supporting the credit. For this reason, the rating on the bonds reflects Morgan Stanley’s current ratings.  

GOVERNANCE ISSUES FOR MUNI UTILITIES

As the sector of ESG investing continues to expand and evolve, governance issues should likely be getting more attention. While the assessment and valuation of governance factors in the ESG equation continues to evolve, we are surprised that the utility sector may be the one sector in the muni market which is seeing concerning situations regarding governance.

We have seen the aborted effort in Jacksonville to privatize that City’s electric system in a scheme which sought to enrich utility management. Questions about the management of the South Carolina Public Service Authority and its decision to participate in the Plant Votgle expansion still create significant credit uncertainty for that agency. Now, we see that the nation’s largest municipal utility faces governance issues as well.

Former LADWP general manager David Wright admitted to using his influence to persuade officials to award lucrative projects to companies he secretly planned to work for following his retirement. From a pure credit standpoint, the financial impact of these actions on DWP is minimal.

The level of situations like these, combined with the recent events at investor-owned utilities, tells you all you need to know about the current state of the utility industry. With power generation being such a key component of strategies to deal with the changing climate, management and governance are more important than they have ever been.

NORTH DAKOTA’S LEGACY FUND

In the past, we have questioned the approach of some states (in particular, Pennsylvania) took towards generating income and wealth from the oil and gas industries. This is especially true in connection with fracking derived fuels and newer fields in general such as the Bakken Field in North Dakota. Recently, the State of North Dakota saw its lending and credit support activities through the Legacy Fund receive a positive outlook from Moody’s.

In 2009, the Legislative Assembly passed House Concurrent Resolution No. 3054, which placed the question of creating the Legacy Fund on the 2010 general election ballot.  North Dakota voters approved the measure. Thirty percent of total revenue derived from taxes on oil and gas production or extraction must be transferred by the state treasurer to a special fund in the state treasury known as the legacy fund. The legislative assembly may transfer funds from any source into the legacy fund and such transfers become part of the principal of the legacy fund. The principal and earnings of the legacy fund could not be expended until after June 30, 2017. 

The first constitutionally mandated transfer of Legacy Fund earnings to the General Fund occurred in July of 2019.  The total amount transferred for the 2017-2019 Biennium was $455,263,216. The Legacy Fund corpus is currently $8.3 billion and in the 2019-21 biennium, $872 million of earnings were transferred to the General Fund.  

Legacy Fund Infrastructure Program bonds finance various capital programs around the state, including the Fargo) flood diversion project, water-related and energy conservation projects through the Resources Trust Fund, local government loans for infrastructure projects through the Infrastructure Revolving Loan Fund, state bridge and highway projects through the Highway Fund, and a new Agriculture Projects Development Center at North Dakota State University.

Legislation was enacted this year which calls for Legacy Fund earnings to be transferred to the Legacy Earning Fund in the General Fund. The legislation provides for the distribution of amounts transferred to the General Fund and specifies that earnings equivalent to 7% of the 5-year average market value of the Legacy Fund. Of those funds, the first $150 million are allocated to the Legacy Sinking and Interest Fund for debt service payments on bonds issued under the program.

ILLINOIS RECOVERY LIFTS UNIVERSITY CREDITS

Moody’s Investors Service has upgraded the University of Illinois (U of I) issuer rating to Aa3 from A1. The upgrade “reflects continued favorable operating performance, further balance sheet growth, and strong enrollment despite operating volatility caused by the pandemic. These organic improvements were supplemented by significant federal pandemic support and strong investment returns.”

In the end, what seems to have driven the move was Moody’s view of the State of Illinois’ (Baa2/stable) own improved fiscal and financial position, supporting Moody’s expectations of continued steady and on-time operating support to the university, whose dependance upon the state in terms of operating funds is about 30%.

While that is great for the flagship institution, the State’s improved fiscal outlook was cited when Moody’s upgraded the financially troubled North East Illinois University to Ba2. NEIU is a regional comprehensive public university with multiple campuses in the Chicago metropolitan area. It is designated by the US Department of Education as a Hispanic-Serving Institution. Fall 2020 full-time equivalent student enrollment was 4,672 students.

That niche status can cut both ways. If the served population is economically vulnerable, the demand for the school can vary widely. The State’s financial crisis coincided with sustained and persistent full-time equivalent enrollment losses, with enrollment declining by more than 40% over the past decade. Nevertheless, the State’s improved outlook reduced funding uncertainty for the school which gets 50% of its funding from direct state aid.

FUNDING THE POLICE

The question of policing in the City of Oakland seems to have ever changing answers. In 2014, local voters approved Measure Z which enacted a parcel tax on property which was to be dedicated to funding police. Measure Z requires the city to maintain at least 678 sworn officers in order to collect the revenue. The measure allows a grace period for taking steps to hire more officers and lets the council legislate an exemption.

Now, the City finds itself short of that requirement (albeit by 8 positions). The police department is budgeted for 737 sworn positions. So, the City Council has voted to increase funding to support recruitment and training of new officers. This is a trend that is playing out across the country as local government tries to balance the many issues surrounding the subject of policing.

Now that crime rates are rising to levels not seen in a decade, we expect that the movement to “defund” the police will not be one that is popularly supported.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for

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

Joseph Krist

Publisher

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TRANSPORT AT THE BALLOT BOX

The American Road & Transportation Builders Association reported on the results of elections and transit funding issues. voters in 17 states approved 89 percent or 244 of 275 the state and local transportation investment initiatives during the November 2 elections. The Association estimates those measures should generate $6.9 billion in one-time and recurring revenue. In Ohio, voters approved 89 percent of 140 county, city, and town-focused transportation infrastructure measures on November 2; the most of any state. Voters in 34 Texas localities approved 44 measures— primarily local sales taxes and bonds— to generate $1.6 billion for city, town, and county transportation improvements.

Texas voters also approved a statewide proposal that will permit counties to use bonds to fund transportation infrastructure projects in underdeveloped areas. Counties would repay those bonds via increased property tax revenues – authority that is currently only granted to incorporated cities, towns, and other taxing units. in Georgia, nine out of 11 counties approved a one percent Transportation Special Purpose Local Option Sales Tax, which will collectively generate $870 million in new or renewed revenue for the next five years.

TRANSIT’S SLOW RECOVERY

The Los Angeles County Metropolitan Transportation Authority announced it will resume charging bus fares starting Jan. 10, 2022. The price of a daily, weekly, or monthly ticket will be reinstated at a 50% discount to the pre-pandemic cost. The discounts will also benefit riders enrolled in the existing low-income assistance program. The new fare plan will provide an ultimate 2/3 discount to the pre-pandemic fare.

The LAMTA suspended front door boarding on its buses in March 2020 at the outset of the COVID-19 pandemic. It also relaxed rules requiring riders to use the farebox and electronic payment. The idea was to speed the entry/exit process to reduce contact. Vaccination rates and a masking requirement are cited as a basis for the changes. That takes care of the ridership angle.

The other problem hindering full recoveries for public transit providers continues to be that of staffing. Earlier this fall we noted ferry service cutbacks in Washington State due to staff shortages. Now, the metro system in St. Louis, MO is reducing service for the same reason. That bus system is short some 150 workers or 7% of their normal workforce. While the shortage is primarily for operators, the reminder are skilled trade positions which are all competitive employment markets right now.

Transit agencies across the country are having to offer signing bonuses and/or higher wage rates to attract workers. NJ Transit is offering $6,000 to bus drivers; Houston has offered bus drivers and light rail operators incentives up to $4,000 while mechanics have been offered up to $8,000. The New York MTA still has vacancies for more than 600 train operators, train conductors and bus drivers. 

WATER RIGHTS AND THE SUPREME COURT

In 2014, Mississippi sued Tennessee for allegedly “stealing” its groundwater by allowing a Memphis water utility company to pump from the Middle Claiborne Aquifer, which sits below the Mississippi-Tennessee border. Mississippi argued that it had owned that water since it entered the United States in 1817, and sought $615 million in damages from Tennessee. After losing appeals, Mississippi had its case argued before the U.S. Supreme Court.

The Court unanimously ruled against Mississippi when it determined that the legal doctrine of “equitable apportionment”—which has long been used to determine what states get control of interstate surface water—also applies to groundwater. Mississippi contended that it has sovereign ownership of all groundwater beneath its surface, so equitable apportionment ought not apply. We see things differently.” 

Now, Mississippi and Tennessee can use the Middle Claiborne Aquifer. If the states wish for a formal agreement on the size of each state’s share of the water, then they must turn to the courts to go through an “equitable apportionment” process.

OPIOID LITIGATION TAKES A DIFFERENT TURN

When a jury hears a product liability case, the likelihood of a finding against a defendant for a larger than expected amount of money is often a result. The latest example of this phenomenon is the most recent piece of opioid litigation to reach a verdict. The case was brought by two Ohio counties against pharmacies – CVS, Walgreen, and Walmart. It claimed that the pharmacies had no done enough to question prescriptions written for opioid medications. That failure is alleged to have created a public nuisance which the defendants were required to mitigate.

It follows two recent decisions in Oklahoma and California that specifically addressed this issue. Those cases were heard by judges who then rendered their verdicts. In those cases, the courts found that the pharmacies were only filling legally issued prescriptions for FDA approved drugs. Consequently, the California judge and the Oklahoma Supreme Court found that the pharmacies were not responsible for creating a public nuisance.

Now, in one of the first such trials to be heard by a jury, a verdict against the pharmacies has been handed down. The jury had to find that the oversupply of prescription pills and subsequent illegal diversion had created a public nuisance in each county. It also had to find that the problem continued even though the plaintiffs acknowledged that the number of opioids being distributed had declined. The public nuisance law in Ohio requires that the nuisance remain ongoing. The argument to the jury was that the decline in opioid sales had directly led to the abuse of heroin and fentanyl.

It is not surprising that a jury would be swayed by these arguments. It also means that it becomes more likely that with different outcomes being achieved in these cases that a long string of appeals will follow. There to be several aspects of the case which would support an appeal and once the case moves to a higher court where juror misconduct and dramatic displays (both occurred in this case) are not center stage that the verdict will be overturned if not substantially reduced.

MEET ME IN ST. LOUIS

The litigation which resulted from the move of the NFL’s St. Louis Rams to Los Angeles has been settled. That is not a surprising outcome given the potential for a trial to force the league and its owners to effectively “open the books”. What is surprising is the amount – $790 million. That is the size of the award which will be divided between and among the City of St. Louis, the County of St. Louis, and the Regional Convention Center Authority.

The gross amount of the award will be reduced by the lawyer’s share – a minimum of $276 million before expenses. It still, in combination with pandemic funding from the federal government, is an additional shot in the arm to the region’s governments.

SOUTH DAKOTA CANNABIS

The South Dakota Supreme Court ruled that Amendment A, a proposal to legalize recreational marijuana was not valid. The Court was responding to a lawsuit filed in the name of state law enforcement employees so that the state’s Governor could press her opposition to legalized marijuana. The Court found that the proposal did not hew to requirements that a ballot initiative cover only one topic.

The court concluded in the declaratory judgment action that Amendment A was submitted to the voters in violation of the single subject requirement in the South Dakota Constitution Article XXIII, § 1 and that it separately violated Article XXIII, § 2 because it was a constitutional revision that should have been submitted to the voters through a constitutional convention.

The Court seized on the idea that medical marijuana, recreational marijuana, and hemp were three separate issues. The idea is to eliminate confusion. Whether there was confusion isn’t clear but the results were. Amendment A was approved by a majority vote, with 225,260 “Yes” votes (54.2%) and 190,477 “No” votes (45.8%).

IT’S THE WATER

With all of the focus on fossil fuels especially coal for power generation, it is easy to lose sight of the fact that water plays such a significant role in the process. The location of so many plants adjacent to bodies of water reflects that. Now the part water plays in that process may be leading to the end of coal. Recently, we have seen regulators in two states deny rate increase requirements tied to the costs of compliance with federal regulation covering discharges of water from generation plants.

The rules reverse efforts in the Trump Administration to revive the coal industry through regulatory reductions. The new wastewater rule requires power plants to clean coal ash and toxic heavy metals such as mercury, arsenic and selenium from plant wastewater before it is dumped into streams and rivers. According to the Environmental Protection Agency, the rule is expected to affect 75 coal-fired power plants nationwide.

The owners of those plants were required to meet an October deadline to tell their state regulators how they planned to comply, with options that included upgrading their pollution-control equipment or retiring their coal-fired generating units by 2028. That is what is driving the recent spate of announcements from regulated IOU producers. EPA estimates that the rule will reduce the discharge of pollutants into the nation’s waterways by about 386 million pounds annually. It has been estimated that the cost to plant operators, collectively, will be nearly $200 million per year to implement.

SMALL NUCLEAR MOVES FORWARD

One of the issues we believe will move more and more to the forefront of the energy and climate debate is that of small scale modular nuclear reactors. There are three efforts underway with one seeming to be ahead of the others. The U.S. Department of Energy (DOE) announced a Finding of No Significant Impact (FONSI) following the Final Environmental Assessment for a proposal to construct the Microreactor Applications Research Validation & Evaluation (MARVEL) project microreactor.

The proposed thermal microreactor will have a power level of less than 100 kilowatts of electricity using High-Assay, Low-Enriched Uranium (HALEU). The initial goal is to establish a facility which will be capable of testing power applications such as load-following electricity demand to complement intermittent renewable energy sources such as wind and solar. It will also test the use of nuclear energy for water purification, hydrogen production, and heat for chemical processing.

This development comes as other micro and modular reactor efforts are moving through the regulatory process. The hope is that the smaller size will mitigate many construction risks which historically have wrecked the finances of many plants. Another hope is that small nuclear can be seen as an environmentally friendly choice as a source of intermittent peaking power.

MANAGING THE UTILITY TRANSITION

Pueblo County, CO has given its approval to an agreement with Public Service Company of Colorado, an operating subsidiary of Xcel Energy, which calls for the early closure of the Comanche 3 coal-fired power plant by Dec. 31, 2034, six years earlier than anticipated. The company will keep the workforce employed through that date. It will have reduced operations to reduce emissions. Public Service believes it will reach emission reductions of 87%. That is in excess of state requirements calling for a 75% reduction.

Xcel also agreed to pay Pueblo County a “community assistance payment” equal to current property taxes. It is estimated that the payments will amount to approximately $25 million annually from 2035 to 2040. Comanche 1 closes in 2023 and Comanche 2 closes in 2025. The workforce will be just less than 90 workers until Comanche 3 closes in 2034, she said. 

Now, the county has a decade to shift its tax base to reflect the closures and to develop its economy and job base independent of the power generation facilities.

AIRPORTS AND THE PANDEMIC

The Thanksgiving weekend saw the air travel industry receive two pieces of news which could not have more opposite implications. The first is the highest level of travel through the nation’s airports experienced this year. It reflected what was perceived as an improving health environment for travel. Although not at levels seen pre-pandemic, it was clear that American’s were steadily embracing the idea of a “return to normal”.

On the other hand, the omicron virus emergence raises the spectre of a negative impact on economic activity. It seems pretty clear that another widespread economic shutdown in not politically viable, we are already seeing signs of travel limitations. The confirmation of the first case in the U.S. (in California) this week will raise pressure to impose restrictions. This will potentially put pressure to put some travel limits in place even as the Christmas travel season looms.

This puts the spotlight back on airport facilities which rely on people using them and not freight. On example is a central car rental facility. The State of Hawaii opened a 4500-car central facility at the Honolulu Airport this week on December 1. As a stand alone facility, it relies on facility lease payments from rental car companies but also on a Customer Facility Fee which is based on how many car rentals occur.

In the Hawaii case, the ultimate obligation to fund debt service rests with the rental companies. Nevertheless, those companies cannot be expected to maintain the same pre-pandemic presence at the airport if travel is permanently limited.

WHAT IS NOT IN THE BILL

It is not surprising that much of the attention being paid to the infrastructure legislation has to do with its climate related provisions or the lack thereof. The bill is clearly being subjected to analysis which reflects the interests of those parties. Hence, we have heard much about what is in the bill to deal with climate issues as well as what is not. If one listens to the rhetoric, all the coal plants should be shut down today, internal combustion engines should be eliminated, and a variety of other sources of carbon emissions limited or eliminated.

So, climate advocates got some really useful stuff in the bill, right? Well, that is a matter for debate. One example has to do with power for electric cars. One would think that with range anxiety being one of the most if not the most important factor (along with the cost of the vehicles) slowing the adoption of electric cars, that addressing the issue would be an important concern. Alas, that is not the case.

The $1.2 trillion infrastructure bill signed this month by President Biden earmarks $7.5 billion for public EV charging stations. This obviously a key component of any plan to support EVs. At the same time, residential charging will be as important if not more so to drive adoption of EVs. So, there’s funding for that in the bill, right? Unfortunately, there is no funding for residential charging infrastructure.

The International Council on Clean Transportation estimates that in order to increase EV usage from 1.8 million in 2020 to 25.8 million in 2030, the United States will need 2.4 million non-home chargers — about 11 times the current number. Residential chargers, single- and multi-family, would have to climb at an even faster rate, from 1.5 million today to nearly 17 million by the decade’s end, to support the larger EV sales goal. The same study showed that 81 percent of current U.S. EV owners charge their vehicles at their homes, and 73 percent of owners use the cars to commute to work. Yet, the bill contains no public funding incentives for individuals.

The result is that financial support for EV charging at the residential level is expected to come from the distribution utilities. They will be happy to do that as long as they get regulatory support from their state regulators. That means that one way or another, the electric customer will have to pay for that infrastructure if the “subsidy” from the utility is simply recovered in rates. That puts municipal utilities in the center of this issue.

A TALE OF TWO PORTS

The focus on supply change issues especially at the major ports in California could easily lead investors to assume that all ports are moving in lock step as the economy recovers and utilization of ports increases. The huge backlog of containers at the Ports of Long Beach and Los Angeles as well as delays for truckers are well documented. While the threat of fees for delayed movement of containers did some good to address the problem at Long Beach/Los Angeles, those delays are impacting other ports as well.

The Port of Oakland said containerized import volume last month was down 14% from October 2020 levels, while exports were down 27%. The number of ships was down 43% from the previous year. Oakland attributes the decline to “crippling delays” at Southern California ports, forcing companies to divert ships to bypass Oakland and travel directly to Asia. The largest impact has been on U.S. exporters. “Producers who ship goods out of Oakland have been stymied by scarce vessel space,” according to Port of Oakland officials.

IS THIS THE FUTURE OF DEVELOPMENT?

An agreement has been reached which may finally allow the development of a nearly 20,000 residential development in north Los Angeles County. the Tejon Ranch Co. and an environmental group announced that litigation against the proposed 6,700 acre project will be withdrawn. In exchange for the end to the litigation, Tejon Ranch agreed to the installation of nearly 30,000 electric vehicle chargers at residences and commercial businesses in the development. Natural gas connections will not be allowed.

It follows a path established by another L.A. County development – the Newhall Ranch – which reached agreements with environmental interests to facilitate its 21,000 unit development. That agreement included 10,000 solar installations and electric vehicle recharging stations in every home, plus more in the surrounding community.

It would be surprising if this sort of arrangement does not become fairly standard. Preemption legislation may prevent blanket bans on natural gas hookups by localities but the localities can still use the zoning and permitting processes to achieve climate goals. There is no reason why natural gas hookups cannot be addressed through mutual agreements like the ones in L.A. County.

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

Joseph Krist

Publisher

The signing of the hard infrastructure bill is as much a beginning as it is the culmination of a process. Now, state and local governments and agencies have choices to make. Some will wish the money to fund real expansions of facilities, some will devote most to rehabilitation. As we discuss, some are looking at the funding as a source of “free” money to be applied to already determined projects which can now allow governments to undertake them without raising revenues of their own.

Those decisions will determine what the ultimate result of the infusion of federal infrastructure dollars is in terms of new facilities will be.

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BROADBAND AND CARBON CAPTURE GET FEDERAL SUPPORT

Broadband and carbon capture are two clear winners in terms of the federal infrastructure legislation. The law introduces qualified broadband projects as a new category of exempt facility of private activity bonds (PABs) under federal Tax Code. Qualified broadband projects include facilities for the provision of broadband internet access to census tracts in which a majority of households lack broadband access prior to the date of issuance of qualifying bonds. Additional support stems from the fact that this new category of PABs enjoys a 75% exemption from the volume cap requirements for privately owned projects and a 100% exemption from volume cap for government-owned projects.

Qualified carbon dioxide capture facilities were included in a new category of exempt facility PABs. Qualified carbon capture facilities include key clean energy technologies such as eligible components of industrial carbon dioxide emitting facilities used to capture and process carbon dioxide, and direct air capture facilities. An eligible component is further defined by the Act as any equipment that is used to capture, treat, or store carbon dioxide produced by industrial carbon dioxide facilities or is related to the conversion of coal and gas byproduct into synthesis gas. 

We have previously discussed carbon capture and its potential for use of the municipal bond market to finance its development and expansion. This legislation is another significant step in that process.

BRIGHTLINE RETURNS

The high-speed rail line serving Florida’s east coast between Miami and West Palm Beach has resumed full service after being shut down for the pandemic. The Brightline is encouraging rides with a variety of special fares and an offer of a free first ride. That promotion will last thru the end of 2021. The resumption is one more potential object lesson in the process of recovery from the pandemic. We note that Brightline will use federal regulation for its COVID staff and passenger protocols. Brightline required all staff to be fully vaccinated prior to the reintroduction of service and staff and guests will be required to wear masks in stations and onboard all trains. 

The resumption comes as the Sunshine State’s cruise industry undertakes its slow climb back to pre-pandemic levels of demand. There will be plenty of chances to gauge demand but at least some operators are taking a cautious approach. Port Canaveral recently said at an annual update that it expects to see 779 cruise ships with the potential of a 6.6 million passenger capacity in 2022. However, the port budgets actual passenger traffic in the range of 4.1 million as ships ramp back up.

Compare those projections with the experience just before the pandemic shutdown the economy. In 2019, Port Canaveral saw 689 ships with a total passenger capacity of 5 million berth at its facilities serving a total of 4.7 million passengers. That means 2022 may see a 13% increase in ship activity and a 12.7% decrease in actual passengers compared to 2019. Some of that reflects a trend towards bigger ships. Port Canaveral is the home port to 11 ships of which 9 have passenger capacities in excess of 4,000.

A successful cruise industry is key to Brightline’s long term plans to serve Disney World. It is expected that cruising passengers would be a fertile source of potential demand.

PRIVATE TOLL SUBSIDIES

The Elizabeth Crossing tunnel project in Hampton Roads has been financed and developed as a public private partnership. In order to develop support for the project and its tolls, provisions had to be made to alleviate the impact of tolling on low income workers. A program was developed serving a small number of drivers – the Toll Relief Program.

Now that program is being expanded. Annual funding will increase six-fold in the program in 2022 to more than $3.2 million and then grow 3.5% annually. The 2022 Toll Relief Program is open to Portsmouth and Norfolk residents who earn less than $30,000 a year. The enrollment period begins December 1, 2021, and closes February 15, 2022. Toll reimbursements for the new program begin on March 1, 2022. Current participants must re-enroll to receive the 2022 Toll Reduction Program benefits. 

The funds will allow for the following changes to be implemented in 2022: provide participants with a 50 percent toll discount on up to five round-trips a week to reduce the cost of commuting to and from work; more than double the number of drivers, up to 4,300, eligible for the program; eliminate the minimum number of trips required before discounts become available; and, apply the rebate for the discount on a daily basis instead of monthly. 

The toll rate increase that was scheduled for 2021 and suspended due to the COVID-19 pandemic will now be spread out over the next three years.

TRANSIT FUNDING CONTRAST

The long-term debate over transportation funding in the Commonwealth of Pennsylvania has taken yet another turn away from a solution. Earlier this year we discussed a plan to rehabilitate nine bridges throughout the state by means of a public private partnership. (MCN 9/27) That plan would have required the establishment of tolls on those bridges which are currently free. Pushback was to be expected.

Now, the pushback has come legislatively. The State House representatives voted 125 to 74 for requiring legislative approval of specific proposals to add tolls. The bill would require PennDOT to publicly advertise toll proposals, take public comment and seek approval from both the governor and the Legislature. The tolls would be put in place from the start of construction in 2023 and could last for 30 years. The fact that the projects impact the four corners of the State meant that the tolls could have a more widespread economic impact. This did not help politically.

The other factor is the impact of the recent federal infrastructure legislation. The availability of that money eroded support legislatively as well. One has to wonder if this is one potential downside of the legislation. Many lower levels of government might look at the federal funds as a convenient excuse to avoid difficult or creative transit plans. It’s a fact of life under a federal system that the ultimate application of federal funds may disappoint or limit the total amount of funding which might be possible. The problem will not be unique to the Commonwealth.

One opposite response is seen in Oregon where the federal legislation is not changing plans to expand and upgrade to bridges in the state. Two of them are being undertaken funded by tolls. That expansion of I-205 project in the Greater Portland metro area is estimated to cost about $700 million. By comparison, Oregon is only receiving $400 million in flexible federal funds under the legislation.

Side by side these two contrasting attitudes shine a light on the realities of many programs. The federal money is not necessarily the blank check which many think it is. Grants have conditions, other funding has requirements for funding from states as well, and some of the programs are meant to support state infrastructure revolving funds.

BRIGHTLINE RETURNS

The high-speed rail line serving Florida’s east coast between Miami and West Palm Beach has resumed full service after being shutdown for the pandemic. The Brightline has resumed with a variety of special fares and an offer of a free first ride. That promotion will last thru the end of 2021. The resumption is one more potential object lesson in the process of recovery from the pandemic. We note that Brightline will use federal regulation for its COVID staff and passenger protocols. Brightline required all staff to be fully vaccinated prior to the reintroduction of service and staff and guests will be required to wear masks in stations and onboard all trains. 

The resumption comes as the Sunshine State’s cruise industry undertakes its slow climb back to pre-pandemic levels of demand. There will be plenty of chances to gauge demand but at least some operators are taking a cautious approach. Port Canaveral recently said at an annual update that it expects to see 779 cruise ships with the potential of a 6.6 million passenger capacity in 2022. However, the port budgets actual passenger traffic in the range of 4.1 million as ships ramp back up.

Compare those projections with the experience just before the pandemic shutdown the economy. In 2019, Port Canaveral saw 689 ships with a total passenger capacity of 5 million berth at its facilities serving a total of 4.7 million passengers. That means 2022 may see a 13% increase in ship activity and a 12.7% decrease in actual passengers compared to 2019. Some of that reflects a trend towards bigger ships. Port Canaveral is the home port to 11 ships of which 9 have passenger capacities in excess of 4,000.

SALTON SEA LITHIUM DRILLING

We recently discussed the potential for the Salton Sea (MCN 7.9.21) to be a source of lithium for electric car batteries. The developer of the project (backed by investment from GM) began drilling its first lithium and geothermal power production well this month.  The geothermal portion of the plant is designed to produce steam to drive turbines. The Imperial Irrigation District, meanwhile, has agreed to buy most of the 50 megawatts of power that the plant would initially generate.

The geothermal project is the first new such project undertaken in California in 30years. It is unfolding as efforts to extract lithium from the ground is raising significant environmental concerns. Mining efforts are being challenged in the federal courts. 

ENERGY POLITICS

It has not taken long for the pressures of high gas prices to make its way into the political process. South Carolina will have a gubernatorial election in 2022 and it is already generating some controversial ideas. One candidate is now proposing to suspend the state’s gasoline taxes as an answer to high current gas prices. The SC Department of Transportation has made its case that this would be a bad idea. The proposal would suspend the tax for eight months. SCDOT estimates a $625 million revenue loss.

“The legislative process to consider – much less approve – such a measure as dedicating replacement funds to SCDOT will not take place until next year. This means that state funding would not be accessible to pay for projects and other roadworks until after July 2022 or eight months from now.  That’s eight months with no state funding to pay for new paving projects, new bridge projects, no ability to pay for day-to-day maintenance work on South Carolina’s extensive roadway network, and financially the biggest blow would be to SCDOT’s ability to provide the matching funds to draw down $1 Billion in federal infrastructure dollars. “

States will have to be careful as they navigate the infrastructure legislation. It is not simply a question of accounting for funds passing through from the federal government. Many of the funding sources are tied to maintenance of effort requirements on the part of states or are intended to serve as a source of funding to be leveraged to support other funding and financing mechanisms.

WINTER RAISES ENVIRONMENTAL QUESTIONS

The colder weather (it is supposed to have snowed as we go to press here at the mothership) has already begun to impact retail electric bills. With natural gas prices seeing explosive cost increases, those costs will pass down to retail. One example is the experience of the Maine Public Utilities Commission which opened bids for the default, standard offer electricity supply for customers served through the Canadian power supplier Versant’s utility lines. The lowest bid for forward supply next year was 89% higher than this year. Residential customers who take standard offer supply can expect bills to rise as much as $30 a month. 

In New York State, the impact of a changing energy landscape has shifted the State’s power grid from nuclear with the final shutdown of Indian Point. From an environmental perspective the replacement of that power has led to more carbon dependance not less. The power generated from the nuclear plants is being replaced largely by natural gas fired generation.

This highlights what may be a central dilemma as the power generation industry moves away from fossil fuels. Many utilities want to use natural gas as a bridge a low or no emission future. While cleaner than coal, gas clearly has its own environmental flaws and there has been much opposition to its increased use. It is the easier short-term alternative for many utilities so we expect that the natural gas debate continues.

FIRE AND UTILITIES

This summer the extraordinary wildfire season refocused attention on the role of utility equipment as a source of fire risk. That discussion always leads to Pacific Gas and Electric whose equipment and maintenance policies have led to several fires. This has raised righteous indignation about private utilities and their profit motive and the lack of maintenance spending.

This week, we saw evidence that it is not just investor-owned utilities which find themselves in PG&E’s predicament as it relates to equipment maintenance and fire. Estes Park Power and Communications, the municipally-owned electricity provider for Estes Park, CO has confirmed that one of its power lines sparked a fire burning outside the town. A preliminary investigation by the Larimer County Sheriff’s Office found the fire was likely sparked after a tree fell onto an electric distribution line amid high winds. 

The municipal connection stems from the fact that Estes Park draws its power from the Platte River Power Authority, the wholesale electricity provider also serving Fort Collins, Loveland and Longmont. Estes Park has apparently tried to deal with tree trimming. The city trimmed vegetation around the distribution line a month ago and it spent more than $900,000 on fire mitigation projects in 2020 and is on track to spend a similar amount this year. 

CREDIT REBOUNDS

S&P announced that it had revised its U.S. airport sector view to positive from stable based on improving aviation industry conditions. This improvement is reflected in the strong rebound of U.S. domestic passengers in recent months, stabilization of airline credit conditions, massive federal assistance provided to the sector, and recovery in airports’ revenue-generating capacity and rate-setting flexibility.

Laredo, TX is the third busiest port by trade in 2021, and number one busiest inland port, in the United States. Over 50% of northbound commercial trucks crossing the Texas-Mexico border come through Laredo, a market share that has been consistent for many years. This heavy bias towards commercial vehicles being such a large source of revenue allowed the World Trade Bridge to generate revenue as limits on commercial vehicle traffic were less stringent than for private passenger vehicles. Now, that the restrictions on individual cross border travel have been lifted, the outlook for revenues at the Bridge remains bright.

That has filtered into the ratings for the bonds issued to finance capital costs at the bridge. Moody’s Investors Service has upgraded the ratings on the Laredo International Toll Bridge System’s senior and subordinate lien revenue bonds, respectively, to A1 and A2 from A2 and A3. It cited consistent strong cash flow and the expected boost from increased border traffic.

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

GEORGIA AND CLIMATE CHANGE

Southern Co. announced in its quarterly earnings statement that Georgia Power’s share of the third and fourth nuclear reactors at Plant Vogtle has risen to a total of $12.7 billion, an increase of $264 million. The original projection of the total project cost for all participants was$14 billion. Along with what cooperatives and municipal utilities project, the total cost of Vogtle has now reached $28.5 billion, more than double the original projection.

Southern Co. also disclosed that the other owners of Vogtle – Oglethorpe Power Corp. owns 30%; The Municipal Electric Authority of Georgia (MEAG) owns 22.7% and the city of Dalton’s municipal utility owns 1.6%. Florida’s Jacksonville Electric Authority is obligated to purchase a portion of MEAG’s capacity They contend that Georgia Power has tripped an agreement to pay a larger share of the ongoing overruns, a cost the company estimates at up to $350 million.

Another issue which involves municipal owners is Southern’s plan to reduce its coal generation by 55%.  At its peak, it operated 66 generating units of coal, producing 20,450 megawatts. It now operates 18 units producing 9,799 MW. Georgia Power plans to remove roughly 3,000 MW of coal in the state, including two of the four units at Plant Bowen and one at Plant Scherer, which is the largest coal plant in the country.

Georgia Power plans to remove roughly 3,000 MW of coal generation in the state, including two of the four units at Plant Bowen and one at Plant Scherer, which is the largest coal plant in the country. The main owners of Scherer 1 and 2 are Oglethorpe Power Corp.; the Municipal Electric Authority of Georgia; and the city of Dalton, Ga. Florida Power & Light Co. and Jacksonville, Fla.’s electric company, JEA, agreed earlier this year to shutter the unit that they jointly own at Scherer by 2022.

This makes timely operation of the expanded Votgle plant even more important.

The decision will also have an impact some 2000 miles away. Three Wyoming mines supply most of the coal burned annually by the Robert W. Scherer Power Plant. Last year, roughly 10% of the mines’ combined coal production went to Scherer. It’s just another nail in the Powder River Basin economy. The share of State severance tax revenue that comes from coal is down almost 15% from 2011.

FEDERAL ROLE IN ELECTRICITY INCREASED

The infrastructure bill includes significant changes in the role of the Federal Energy Regulatory Commission (FERC) in regulating the development of electric transmission projects. The recent election in Maine highlighted some of the issues. The long term need for long distance transmission to facilitate the delivery of power from a variety of sources has highlighted the role of the states in regulating transmission infrastructure development.

The role of states in this regulatory process is seen as a major hurdle to development of a reliable electric grid. To address this, the infrastructure legislation enhances the ability of federal regulators to permit new transmission projects, by giving authority to the Energy Department to designate national transmission corridors for clean electricity projects. This has been a problem since a 2009 federal appeals court ruling, which found that FERC lacked the authority to overturn state regulators’ rejection of power lines planned in DOE sanctioned corridors.

Under the Energy Policy Act of 2005, DOE was required to conduct a study of transmission congestion every three years and identify transmission corridors needed to address it. The new legislation provides for FERC to conduct studies more frequently and expands the criteria for projects that can qualify as “national interest electric transmission corridors.” Where projects previously needed to address transmission congestion, power lines that enhance the ability to deliver “firm or intermittent energy” will also qualify for the designation.

The National Academies of Science estimates American transmission capacity needs to grow by 60% by 2030 to put the country on track for net-zero emissions by midcentury. Researchers at Princeton University reckon that the build-out could cost some $360 billion by 2030. Here is one data point which will temper the impact of the legislation. In 2019, U.S. utilities spent $40 billion on transmission, with about half of that dedicated to new transmission investment, according to the U.S. Energy Information Administration. The infrastructure package and accompanying $1.7 trillion reconciliation bill contain about $20 billion in incentives for transmission development.

NUCLEAR IN THE INFRASTRUCTURE BILL

The infrastructure legislation includes federal funding for part of the costs of a proposed modular nuclear generating facility proposed for the State of Washington. The proposal is one of three currently being considered to support the technology with the others located in Idaho and Wyoming. The legislation provides enough funding to the Washington facility to cover half of its estimated construction expense.

The project in southern Idaho involving small reactors cooled by water is furthest along in development, and has struggled with delays, design changes and escalating cost projections. The developer has hoped to sell power to participants in the Utah Associated Municipal Power Systems. Originally planned for 12 individual small reactors, the project has already been scaled down to six reactors, now forecast to cost $5.1 billion. The plant is projected to begin coming online in 2029.

The reduction in scale reflects a less than enthusiastic response from potential participants. Currently, the project has secured contracts to take 22% of the its proposed 462 megawatts of power.  The plant proposed for Washington state would be at the existing Hanford reservation where there is a long history of nuclear power development.

Here’s where the municipal utilities come in. Energy Northwest, would manage the proposed reactors under an agreement announced last year. A third partner is Eastern Washington’s Grant County Public Utility District, which would own the reactors and be responsible in raising about $1 billion in financing. The plan is far from a done deal. The memory of the ill-fated Washington Power Supply System still leaves a bad taste in the mouths of many in the region.

MUNICIPAL GAS UTILITY PRESSURES

The impact of sustained increases in natural gas prices on coverages for municipal utility credits is becoming clearer. The winter billing periods are beginning and utilities across the country announcing significant increases in the cost of natural gas service to their consumers. These are showing up in bills for direct uses of residential gas (cooking, heating) as well as indirect uses as in general electric and/or combined utility rates.

The details of a gas utility’s gas procurement process are a key element of short-term risk to credit. Those who have procured gas under long-term contracts at favorable terms will be better off. Those who purchase on a shorter term or spot basis are quite vulnerable.

On the municipal front, we are beginning to rate actions. Colorado Springs Utilities has announced that it is increasing residential rates for electricity by 13.5% and natural gas by 26.8%. Combined customers who receive electric, gas, water, and sewer from CSU will see a 10.9% increase in their monthly bill. Commercial customers will see a 22.2% increase in total bills. The rate hikes are on top of those enacted after the late winter cold snap.

INTERMOUNTAIN POWER

The Intermountain Power Project (IPP) was effectively the beneficiary of increasingly restrictive siting policies in the State of California. No one has ever disputed the basis for locating the plant in Utah closer to local coal supplies. Utah didn’t need the power as evidenced by the fact that 98% of plant output is sold to California municipal utilities. The benefit to Utah was the use of Utah coal and the jobs that the plant provided.

Now that coal power is losing favor and under regulatory pressure, the rationale for the IPP is no longer valid. So, the project has undertaken an effort to convert the plant from coal generation to natural gas fueled generation. IPP plans to soon issue some $2 billion of bonds to finance the conversion. Now, with the project moving to a critical phase the Utah legislature has enacted legislation to make it harder for IPP to enter into contracts for the project.

The agency is exempt from public meeting and procurement laws and benefits from some 72 amendments to state law since 2002 to facilitate IPP operations. Now that IPA will convert the plant to natural gas by 2025 and will increasingly burn emission-free hydrogen, produced with energy from solar farms under development nearby, the agency suddenly needs to brought to heel. It is clear that the law was driven by efforts to derail the conversion from coal.

IPP is already facing continuous litigation from its host location, Millard County. Property tax issues have generally been the central point of dispute. The county spends $500,000 a year litigating against IPA and there are two lawsuits pending in Utah’s 3rd District Court. Those cases deal with IPP’s contention the plant’s value is far lower than what the Utah State Tax Commission has assessed, while the county claims it should be much higher. 

In the end, the whole situation could just be a case of the County spitting into the wind. Coal is increasingly dead unless it can be bailed out by carbon capture. At this stage of the technology, carbon capture will not be reliably on line in time to save some generation.  This legislation will not, in the end, stave off the inevitable. It does reflect the desperation of some host communities facing loss of major fixed assets and jobs.

LIPA AND SOLAR

The Long Island Power Authority is in the middle of the environmental debate as the result of plans to levy monthly fixed charges to residential customers who install solar. The proposed LIPA solar charge would amount to between $5 and $10 a month for systems installed after Jan. 1.  LIPA, which is under no state mandate to institute the so-called customer benefit charge, plans to do so Jan. 1, following a public hearing later this month and a board vote in December.

It comes in the wake of recent legislation offering tax rebates to homeowners who install rooftop solar but those rebates are only being offered to upstate residents. LIPA customers are not eligible. The issue arises with LIPA already under pressure to revise its management contracts with PSE&G for running LIPA’s electric system. The quality of LIPA responses to several weather events has led to increased complaints about service. Now, LIPA wishes to tax an alternative.

FLINT WATER SETTLEMENT

Since 2014, the City of Flint has been best known for its horrendous drinking water situation. Ever since the contamination in the water was attributed directly to the switch in water sources undertaken by emergency management, an effort to get compensation has been in process. Now, a major piece of the outstanding litigation stemming from the contamination has been settled.

The $626 million deal makes money available to Flint children who were exposed to the water, adults who can show an injury, certain business owners and anyone who paid water bills. $600 million is coming from the state of Michigan. Flint itself is paying $20 million toward the settlement. The State’s failure to properly manage the water system creates the obligation. The former Governor and a water regulator face criminal charges.

The net amount of the settlement after legal fees is yet to be determined. The initial ask is for $200 million. That is to be decided at a later hearing before everything is finalized and money can begin to flow.

PRISON CLOSURES IN NEW YORK

New York officials announced plans to close six state prisons early next year. It continues a process initiated under the Cuomo administration which closed 18 prisons during his nearly 11 years in office. The closings come as the state’s prison population has dropped to 31,469, a 56 percent decline from a peak of 72,773 in 1999. The six prisons that will close are well under capacity: Taken together, they can fit up to 3,253 people, but now house just 1,420, all of whom will be transferred to other facilities before closing in March 2022.

The largest of the six prisons being closed is Downstate Correctional Facility, a maximum-security prison in Dutchess County in the Hudson Valley, which can fit up to 1,221 people, but is operating at 56 percent capacity. The smallest is the Rochester Correctional Facility, which holds up to 70 individuals. The usual criticisms of the plan come from the usual sources; corrections officer unions and local politicians. They point to the economic impact on employment on local communities. 

The plan reflects the realities of the current political climate in the state where there has been great emphasis on criminal justice reform. The budget saving is not huge for the State. Out of a $180 billion budget, the move is expected to save taxpayers $142 million. The opposition to the plan is expected and mirrors opposition to previous closings in New York and a series of prison closings in California.

IS FREE TRANSIT STUCK IN THE STATION?

Last week we referenced a proposal by the Boston Mayor-elect to eliminate fares on the MBTA’s Boston-area transit system. A one-way subway ride costs $2.40. In fiscal 2020, fares accounted for about one-third — or $694 million — of the transportation authority’s $2.08 billion in revenues. We expressed concern about the realism of the plan given the fact that it rests on assumed outside funding.

That assumption is already being put to the test. The Governor made two telling comments. “Why they should pay to give everybody in Boston a free ride does not make any sense to me.” “Somebody’s going to have to come up with a lot of money from somebody, and I do think if the city of Boston is willing to pay to give free T to the residents of the city of Boston, that’s certainly worth the conversation, I suppose.” It is one thing to offer something for free when you can provide the funding. It is another to expect others to pay for it.  

OPIOID LITIGATION

Hard on the heels of a California state judge’s decision that said that opioid manufacturers and distributors had not created a “public nuisance” for which they had a liability for damages, a second decision has been handed down reinforcing that view. The Oklahoma Supreme Court, by a 5-1 vote, rejected the state’s argument to that effect. “Oklahoma public nuisance law does not extend to the manufacturing, marketing and selling of prescription opioids.”

The Oklahoma decision echoed the California decision. Oklahoma’s 1910 public nuisance law typically referred to an abrogation of a public right like access to roads or clean water or air. The judges found fault with the state’s case, saying it failed to identify a public right under the nuisance law and had instead attempted to apply a “novel theory” to what was more likely a products liability case.

The company, the Oklahoma judges said, had no control over the distribution and use of its product once the drug left its control. Just as was the case in California noted that “Regulation of prescription opioids belongs to federal and state legislatures and their agencies.” It looks more and more like the opioid crisis will not the be the large or perpetual source of funding to state and local government which the tobacco settlement is viewed as. There is a $5 billion settlement offer on the table for the hundreds of state and local governments to settle their remaining claims.

PUERTO RICO AND SOCIAL SECURITY

Supplemental Security Income (SSI) is a long-standing program which is available to U.S. citizens in the 50 states, the District of Columbia and the Northern Mariana Islands, but not in Puerto Rico, the U.S. Virgin Islands and Guam. The program provides monthly cash payments to older, blind and disabled people who cannot support themselves. Throughout the run-up to the Title III filing by the Commonwealth of Puerto Rico, this disparity was frequently cited as an imposed disadvantage in the funding of Puerto Rico’s budget.

This week, the issue has found its way to the U.S. Supreme Court. Oral arguments were heard in a case filed on behalf of an individual. The plaintiff is a disabled man who received the benefits when he lived in New York. He continued to receive payments even after he moved to Puerto Rico in 2013. When the Social Security Administration became aware of the move, it sought repayment of the benefits paid until the “error” was discovered, eventually suing him for about $28,000.

The plaintiff is asking the Court to review decisions made in light of the acquisition of certain territories from Spain under the treaty which ended the Spanish-American War. Within that Treaty of Paris was a statement noting that Congress would determine the political status and civil rights of the natives of the island territories. In the early 1900’s, the Supreme Court was asked to review nine cases in total, eight of which related to tariff laws and seven of which involved Puerto Rico. 

At the time, Puerto Rico was a primarily agricultural economy exporting rice, sugar, coffee, and rum. To reach its conclusions that for purposes of tariffs it created “the doctrine of ‘territorial incorporation,’ according to which two types of territories exist: incorporated territory, in which the Constitution fully applies and which is destined for statehood, and unincorporated territory, in which only ‘fundamental’ constitutional guarantees apply and which is not bound for statehood.” 

Territorial incorporation has been criticized over the years but it has withstood efforts to reverse it. This case would appear to be the best hope of overturning a view based in the same time and culture that produced Supreme Court approval of separate but equal schools and public accommodations. The era which produced the Plessey v. Ferguson separate but equal doctrine produced the Insular Cases decisions. One injustice has been overturned. Could this be a vehicle to overturn another?

TRI-STATE TRANSIT DISPUTE RESOLVED

When the pandemic effectively closed down the economy, transportation took a steep hit to revenues. So, $14 billion for the region was approved by Congress in the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and the American Rescue Plan Act. The plan to share the funding was to be the product of negotiation between NY, NJ, and CT. Those talks took a significant stumble over the issue of how much would go to the MTA and how much to New Jersey.

The MTA’s average weekday subway and bus ridership remains down between 30% and 50%. New Jersey Transit’s ridership on rail, buses and light rail was is down between 30% and 40%. Now, the three states have agreed on how to divide the federal pandemic aid to mass transit. New York will receive about $10.8 billion, New Jersey will get about $2.6 billion and Connecticut will receive about $474 million, under the agreement.

The additional cash is credit positive for the MTA and New Jersey Transit credits.

ST. LOUIS FOOTBALL CASE MOVING FORWARD

There have been a number of developments in the litigation filed by the City of St. Louis against the NFL and the owner of the now Los Angeles Rams. The litigation stems from the move of the St. Louis Rams to Los Angeles after the 2016 season. As the case has plodded through the pre-trial process, the NFL had resisted most offers of a settlement. Once it was clear that the case could go to trial and that the pre-trial process including depositions would get underway, the motivation for a settlement grew.

The potential for depositions is something the NFL would like to avoid at all costs. Questioning under oath about the processes and actions undertaken to facilitate the franchise move are not in the best interests of the league to have analyzed. So, it is not a surprise that there are reports of a $100 million offer from the Rams’ owner to settle and that the City declined. It is not clear as to what stage of the negotiations are at so it is difficult to assess how much is at stake for the parties. Clearly, the City could use the budget windfall which would result from a better offer.

All 32 teams — and their owners at the time the lawsuit was filed — are defendants in the case.  The machinations have been intense leading to additional settlement pressure. Five owners (including the Rams) have been deposed and four of the non-Ram owners have been fined by the court for failing to turn over financial documents in a timely manner.  

The trial is scheduled to start on January 10.  The league needs to avoid a trial to prevent former owners from testifying. One has already stated in the press that St. Louis’ stadium proposal to replace the Edward Jones Dome, where the Rams had played from 1995 to 2015, met league guidelines to keep the franchise in St. Louis. 

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.