Joseph Krist

Publisher

In between songs in the Broadway show “American Utopia”, the legendary musician David Byrne takes a few minutes to discuss voting, its importance, and low participation rates. He very effectively uses light to illuminate the small segment of the audience which 20% accounts for. The point was that in a democracy the ballot box is one of the most effective tools one has and that, if left unused, it was hard to blame the system for much.

That comes to mind when you realize that Mayor-elect Eric Adams of New York was elected this week with a less than 1in 4 turnout rate. He won the nomination with 28% of the vote cast out of 948,000 in June. So, in an era where serious policy questions found their way to the ballot – voting rights, transit, climate policy – there is no way to discern what the public might want or support as well as what is a realistic policy ask which municipal bond investors can make. It leads to Inaction and inaction now is not a realistic option. 

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MUNICIPALS GET THE SHORT END OF THE STICK

The battle between the “progressive” wing of the Democratic party against the more moderate has created one major casualty – the municipal bond market. There were four main asks made by the market – direct pay bonds, increased private activity issuance, the SALT deduction and tax-exempt refunding. None of these were included in the most recent ”framework” being circulated. Municipal bond provisions were characterized by Progressives as a subsidy for the rich. The focus on the tax benefits created for municipal bond investors diverted attention away from the realities of the market.

With rates low on a historical basis, it is easy to minimize the cost to issuers and states and municipalities from being unable to use these tools. It is more difficult to point to the costs of not having these tools available in that low-rate environment. Nonetheless it is disappointing to see that the sector which will be counted on greatly to execute many of the infrastructure projects associated with progressive causes are not being given the flexibility to do so on a cost-effective basis.

Municipal bonds face some real hurdles. There is no core of legislators on which the market can rely for expertise and support. The task faced by lobbyists for the industry is made more difficult by the fact that there is not a strong group of legislators forming a caucus to support municipal bonds.

AUSTIN BACKSLIDES ON CLIMATE

It is hailed as a progressive outlier in Texas but the City of Austin finds itself in a less progressive situation at its city-owned electric system. This week, Austin Energy announced that it will not retire its stake in the Fayette coal power plant next year. Closing Austin’s portion of the plant by 2022 was an important step to achieving carbon-reduction goals outlined in Austin Energy’s Resource, Generation and Climate Protection Plan to 2030. It was considered a key component in support of the City’s announced goal of net zero emissions by 2040.

Austin Energy said it was unable to reach an agreement on the closure with the Lower Colorado River Authority, which co-owns the plant. Five years ago, Austin’s share of the Fayette coal plant was found to be responsible for “80 percent of the utility’s greenhouse gas emissions and 28 percent of all Austin’s greenhouse gas emissions.” The utility already plans to retire a natural gas fired plant (DP2) in March, 2022 as a part of that plan. It is an older, less efficient steam unit, it costs more to operate than newer units. The plant requires more natural gas per megawatt hour of power it produces than newer, more efficient units. DP2 is at least 30 percent less efficient than newer combined cycle gas plants.

So where does this leave Austin’s power generation profile? As of November 1, the sources were solar at 52.5%; natural gas at 19.5%; coal at 14.5%; nuclear at 10.9%; and biomass at 2.5%. That leaves Austin one-third dependent on fossil fueled plants for its power. That creates a serious hurdle for the City to overcome as it seeks to meet its stated energy policy goals. For now, the utility is focused on operating a wood fueled biomass plant in east Texas.

The wood-fired plant was under a “seasonal mothball” status, meaning it was made available to run only during the higher energy demand summer months. Improved operations and current market conditions make the biomass plant more economical to run year-round. The wood waste fuel that powers the plant is delivered directly to Nacogdoches and stored onsite with a 10-day supply.

The utility purchased the biomass-fueled power plant in 2019. The largest biomass plant in the country, Nacogdoches began commercial operation in 2012 under a 20-year power purchase agreement with Austin Energy. Purchasing the plant saved the utility approximately $275 million in additional costs over the remaining term of the agreement.

OPIOD LITIGATION

In 2014, the California counties of Santa Clara, Los Angeles and Orange along with the city of Oakland, filed litigation against four manufacturers of opioids seeking monetary damages for the costs incurred in fighting the opioid epidemic.  The central question at issue in the litigation was whether the companies were liable for creating “a public nuisance” under California law. It has taken a long time for the case to reach the trial stage but it did and now the initial result is in.

The suit was tried in Orange County State Superior Court in a bench trial. The judge has now ruled that the companies did not have liability. The ruling covered a number of potential factors. The core finding is that “any adverse downstream consequences flowing from medically appropriate prescriptions cannot constitute an actionable public nuisance.” The fact that the manufacturers may have employed questionable marketing tactics in its dealings with potential prescribers, the prescription requirement effectively protects the companies from liability.

The decision could impact other opioid litigation involving California. Johnson and Johnson had made a national settlement offer after its initially lost a liability case in Oklahoma with a $465 million liability. California had delayed participation in a national settlement pending this case among other court actions.

CLEAN ENERGY CONNECT

“Do you want to ban the construction of high-impact electric transmission lines in the Upper Kennebec Region and to require the Legislature to approve all other such projects anywhere in Maine, both retroactively to 2020, and to require the Legislature, retroactively to 2014, to approve by a two-thirds vote such projects using public land?” The most expensive ballot referendum campaign in Maine history was also the second most expensive political campaign overall in Maine history mercifully came to an end.

The vote to stop construction on the New England Clean Energy Connect project was not close with 60% of the vote in favor of the question. It is fair to point out that the vote may have been as much about the project sponsor Avingrid as it was about anything else. Avingrid is the subsidiary of a Spanish company that has been acquiring investor-owned power companies in the U.S. for several years. Their long game has been to establish an offtake network for renewable power generation.

In the meantime, Avingrid has developed a reputation for poor service and underinvestment in its infrastructure. (Full disclosure – I am an Avingrid customer in New York State. Why ratepayers in Maine hate Avingrid is no surprise to me.) That reputation is helping to put Avingrid’s plan to acquire Public Service of New Mexico in doubt. It is likely that the Maine vote is more reflective of Avingrid’s horrible image in Maine than it is a statement against renewable power.

One other factor impacting the vote negatively was the fact that the power would mostly be sold in Massachusetts. While the cost of the project would ultimately be borne by the buyers of the power, the environmental impact of the line was an issue for Maine residents.

ELECTIONS AND POLICY

Much emphasis has been put on who won the elections across the country with lots of attention paid to gender and ethnicity in regard to who won and lost. From our vantage point, we are more interested in what the policy implications of some of those victories will be.  While each race had its own set of local concerns that drove issues and campaigns, a few themes emerged fairly consistently across the board.

Buffalo showed that the electorate does not embrace socialism. In this case, the incumbent mayor had to mount a write-in campaign after losing the primary to an avowed socialist. It’s not that socialism has never had its day in the U.S. It’s just hard to reconcile that hard red nature of somewhere like North Dakota today with its history some 110 years ago as a laboratory for socialist thinking. For now, it does not seem to be a viable policy option.

Seattle and Minneapolis showed that the electorate is not in favor of defunding the police and mass decriminalization. While those two cities were probably the most prominent example of anti-police sentiment, the reality is that a recent crime spike did lead people to opt for the status quo. Voters in Minneapolis made two statements this week when they reelected the incumbent mayor and voted down a ballot item which called for eliminating the Minneapolis Police Department and replacing it with a Department of Public Safety.

The vote came after a fiscal 2022 budget process that produced maintenance of and increases to police budgets. The votes reflected concerns over the level of violence associated with protests. Minneapolis, along with Seattle and Chicago becomes the third major city to undergo significant civil unrest followed by major increases in violent crime.

Virginia Beach voters approved significant capital financing for resilience projects. Residents approved a referendum  that will allow the city to issue up to $567 million in bonds to cover the cost of accelerating a flood protection program designed to deal with stormwater and sea level rise problems.  A total of 21 projects were offered by the city to fund through a three-phase bond issuance program.

The projects were specifically identified in the referendum ranging from the conversion of a city-owned golf course into a park with stormwater storage to extensive storm drain improvements and road elevation to the construction of flood barriers.  The City effectively made the case that bonds would allow the projects to be completed in about half the time it would have taken to finance the projects without bonds.

Road and bridge infrastructure saw lots of support. Increased or extended sales taxes were approved in Fulton Co. (Atlanta) and five other Georgia counties; bonds were approved for the State of Maine; four of five Texas county bond issues passed; localities in Washington, Virginia, Ohio, and Colorado passed as well. All were primarily for traditional transit infrastructure.

A constitutional amendment guaranteeing clean air, water, and a clean environment (no specifics) passed in New York State. Our view on this amendment was covered in the 11/1 MCN.

Voters in Columbus OH by an 85% majority rejected Issue 7 which would have set aside $87 million of the city’s general fund to “promote and fund” programs for “clean energy education and training,” “energy conservation and energy efficiency initiatives” and others. The originators of the ballot referendum petition supporting the plan have been unwilling or unable to give specific answers as to where the money would go, who would administer it and how they came up with the $87 million price tag.

The issue was not whether Columbus voters want clean energy. The issue was over who sponsored the plan and who would control the funding.

BOSTON

Boston voters took a different path and elected a strongly progressive candidate as mayor. The results will provide an opportunity for a major American city to consider a number of progressive causes. The new mayor favors rent control and free transportation. It is not clear whether the City would need state legislative approval especially in the case of the MBTA which is a state agency. The mayor-elect made clear that she hopes to apply Green New Deal concepts to the city. It will be a good opportunity to see how viable the progressive agenda is when it comes time to execute on the idea.

The ”local Green New Deal” advocated by the mayor-elect includes achieving 100 percent renewable electricity by 2030 and carbon neutrality by 2040, repairing and retrofitting buildings to reduce emissions, growing a “green work force” to maintain the city’s new climate-friendly infrastructure, planting more trees and greenery to eradicate heat islands, and divesting from not just fossil fuel companies but also private prisons and gun manufacturers. 

The end of transit fares is a key component of the plan. The plan counts on increased state and federal funding for the loss of revenue from and an end to fares on MBTA facilities. That funding would come from an increase in state gas taxes. That creates one inconsistency right away – gas taxes to fund mass transit to eliminate cars?  At a time when the consensus is that gas taxes are an outmoded and inefficient way to fund transportation?

ILLINOIS UPGRADES

Two of the State of Illinois’ revenue backed issuers got good ratings news this week from Moody’s. The Illinois Toll Road received an upgrade to Aa3 from A1. The rating reflects the gradual and steady resurgence in traffic volumes as the limitations of the pandemic are diminished. Authority revenues declined sharply to a trough in April, with monthly traffic 51.3% down and monthly toll revenues 39.1% down compared to April 2019. As the pandemic slowed, results at the toll roads began a sustained and steady recovery to current levels, with September 2021 traffic approximately 3% below September 2019 traffic levels.

Commercial traffic has shown much more resiliency than passenger traffic, with fiscal year 2020 commercial traffic down only 1.5% from the prior fiscal year 2019, and commercial traffic in the first nine months of 2021 approximately 6% above the first nine months of 2019.

Moody’s affirmed the Chicago (City of) IL O’Hare Airport Enterprise’s A2 rating on $986 million senior lien revenue bonds and A2 rating on $395 million passenger facility charge (PFC) revenue bonds. The enterprise has $8.6 billion of senior revenue bonds and $395 million of PFC bonds outstanding. The outlook was revised to stable from negative. The airport’s recovery from the pandemic has slightly trailed the national average, which is normal for airports with high exposure to slower-to-recover international traffic. As we go to press, the pandemic restrictions on foreign travel to the U.S. will be relaxed so that credit impediment will be out of the way.

FEES UNLOCK THE PORTS

In an effort to break the accumulation of containers clogging the country’s major ports, the port operators are turning to charging for the storage of containers awaiting shipment. This past Monday, the ports of Los Angeles and Long Beach began to impose a new congestion surcharge on container cargo. The two ports handle one-third of US container trade. The growing accumulation of containers awaiting transfer to trucks and trains inhibits the ports from accepting any more containers. This also inhibits the revenues during those delays in offloading by limiting volume.

According to Moody’s, the inventory of containers at marine terminals was 40% above pre-pandemic levels and the length of time a container typically waited was 100% above pre-pandemic levels. The number of container ships at anchor increased to 73 in the fourth week of October. That is a huge increase since some 15 ships were at anchor at the end of June. The problem is reinforced by the fact that more ships were waiting longer as days at anchor increased to 12 from five over the same period. Shortages of warehouses, trucks and the chassis used to remove import containers from terminals means terminals cannot clear storage fast enough to accommodate new inbound cargo.

The surcharge will be set at $100 per container per day, and will increase by $100 per day throughout the penalty period. Effectively, the $100 daily escalation makes one container incurring four days of penalties equivalent to 10 containers incurring one day of penalty. Compare that to what both ports currently earn for container throughput – roughly $75 for Los Angeles and $65 for Long Beach per 40-foot container in fiscal year 2021 The move will increase revenue not only through the separate fee but also by accelerating the movement of containers through the ports thereby increasing basic port revenues.

CLIMATE

The State of California currently plans an end to oil production in the state by 2045.  One major municipality – Long Beach – has announced plans to accomplish its climate goals involving oil and gas production by 2035. In fiscal year 2020, revenue from oil production funded $18.9 million of the city’s budget. Some $3 million of that is from a barrel tax for funding specific to the police and fire departments. By 2035, the city expects the oil fields to cease production and in between now and then, the city will fund the abandonment of oil fields.

The plan is to use revenues from remaining oil fields to fund the cost of the gradual closure of oil production wells. This has sparked dismay from environmentalists even though the potential costs including those associated with the transition away from production has been estimated by city staff at between $81 and $146 million. 

Its largest employer may be a Chevron oil refinery but the City of Richmond, CA continues its efforts to take a forward approach to climate change. That economic aspect makes it interesting to see that the Richmond City Council could vote next month on a proposed ordinance that closes a loophole in the city’s natural gas ban, which applies to new structures and major renovations. Gas-powered appliances and fireplaces are now exempt from the ban but would not be under proposal, which would leave electricity as the city’s primary power source.

The city would join some 50 others in California which have enacted similar restrictions. This places California as an outlier in that many states have enacted preemption legislation to prevent their municipalities from following suit in their states. Unsurprisingly, the real estate and construction industries are pushing back hard against the proposal.

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

ENVIRONMENTAL RIGHTS ON THE NYS BALLOT

This year, New York State voters are being asked to approve amendments to the State Constitution.  One proposed amendment is fairly simple – “Each person shall have a right to clean air and water, and a healthful environment.” That’s it. No enabling language, no guide as to what satisfies that right, who is responsible for it, or what constitutes compliance. Should this pass all of the required voter tests, exactly what would this mean for virtually all issuers as there is really no aspect of life that is not touched in some form by government?

A recent editorial in the Syracuse Post-Standard asked some simple but good questions. “Could a private citizen sue a private company over emissions that are permitted under federal and state regulations? Could a county government be sued over combined sewage overflows, and be ordered to spend billions to upgrade sewer systems? Could citizens use the “Green Amendment” to stop “green” developments like solar and wind farms?”

The idea seems to be that the goals of amendment supporters cannot be implemented legislatively. Right now, that is not a serious argument as the State Legislature is currently facing veto-proof supermajorities. From that perspective, it is fair to ask why isn’t this accomplished legislatively? Putting issues to a vote of the people has become an escape valve for unwilling legislators to avoid dealing with contentious issues. Putting them in the hands of the judicial branch is an often drawn out and inefficient method of creating policy.

The simplicity of the proposal will attract people since it’s hard to be against a clean environment. Without any guidance as to which and how various entities would be “responsible” for whatever remedial or compensatory actions might be required, the amendment serves as a dangerous source of operating uncertainty for governments at all levels throughout the State. A potential liability cloud would be likely to emerge. 

As the climate change debate unfolds, the issues of cost, economic impact, environmental impact and legal impact will create challenges and contradictions as the various aspects of competing visions for dealing with climate change become clear. The real costs of much of what passes for progressive infrastructure policy have always been both underestimated and somewhat hidden. The inability to deal with the economic realities of the cost of adapting to climate change has long been a hurdle to implementation. That’s why proponents look to initiatives or referenda to try to impose top-down solutions. It’s why they often don’t advance the cause very far.

It matters because the conflicts are already emerging. Fishing issues complicate over offshore wind and ocean turbine generation. Is one technology more or less fish friendly? Where can it be located? Coastal and island residents have issues with the sight of wind turbines offshore while some inland rural residents object to solar installations on “aesthetic grounds” (yeah, the view). In both cases, “environmentalists” are against renewable energy?! In Maine, a transmission line built to deliver hydroelectric power is being challenged at the ballot on November 2 by environmentally motivated voters.

That is why it takes more than 15 words to make a difference.

PANDEMIC MASS TRANSIT

One of the sectors receiving a lot of concern is the mass transit space. Big city municipal mass transit entities across the country were among the hardest hit credits in the face of pandemic-induced restrictions on life and the economy. The majority of the concern comes from the issue of how permanent lost patronage will be. The systems are essentially demand driven entities and they are emerging from the pandemic with structures and operations which may or may not fit real time realities.

That covers the demand factor in the credit equation. Now, it is becoming clear that mass transit operators are just like any other employer in terms of facing a staffing shortage. Those shortages are leading various mass transit agencies to reduce or eliminate services. The most prominent early example was the Washington State Ferry System which limited service even in high demand periods due to a lack of qualified staff.

The latest example is Metro Transit serving Minneapolis. It has announced that it faces an operator shortage for its two light rail lines. The schedules will effectively lower service from 6 trains per hour to 5 trains per hour. Fewer runs mean lower revenues. All of this makes it difficult to estimate realistic ridership recovery times. The timing of ridership recoveries will be a key factor to determine the longer-term outlook for mass transit agencies.

FUNDING TRANSIT

The City of Charlotte, N.C. has adopted a plan to develop mass transit for the Charlotte metro area known as the Transformational Mobility Network. The Network would include 110 miles of rapid transit corridors for light rail, 140 miles of buses, a 115 mile of a greenway system, and 75 miles of a bicycle network. Now that the plan’s project list is complete, the hard part begins. That would be funding for a multi-billion dollar project cost.

Earlier this year, a dispute arose over how the ultimate cost of the project was being characterized to the public and the market. Proponents cost the project at approximately $13 billion. The dispute comes over whether total financing costs should be included in the cost estimate. Skeptics believe that the all-in cost including financing is $20 billion. It matters due to the size of the discrepancy as well as the perception that the City has been less than candid about the actual cost.

It matters because two votes will determine whether or not the plan is adopted and financed. For the project as conceived to go forward, the city would need the North Carolina General Assembly to grant approval for the city to put a referendum for a one-cent sales tax on the ballot. In a separate election after legislative approval, the plan would need to receive a majority of Mecklenburg County voters to vote in favor of it. If approved in 2022, the sales tax would take effect as of July, 2023. The plan is for 20% of the revenue to go to non-transit allocation like roadways and greenways. The other 80% would go to transit projects, which include buses and the rail system.

If the process unfolds, it will be another test of the willingness of the southeast U.S. region to locally fund and execute mass transit projects. Some of the same issues which plagued the effort in Nashville to develop and fund major transit infrastructure are already being raised. Issues of economic justice and equity are being raised in support of demands for lower fares and/or taxes while service improvements would be provided. Regardless of how the plan fares, it will be an instructive process to watch.

SAN ANTONIO GETS A NEGATIVE OUTLOOK

In the aftermath of the Texas power disaster earlier this year, the San Antonio municipal electric utility confronted a number of issues that transcended the obvious issues the February cold snap exposed. It became clear that the utility had real management issues. There has been a high level of staff turnover and top leadership had come under fire from a variety of sources. It left management in a weakened position as it dealt with the issues raised by the cold snap.

The City of San Antonio appointed a Committee on Emergency Preparedness, which was formed to address communications failures and other issues. The Committee came up with 37 recommendations. To date, none have been completed. The slow reaction reflects a number of factors, none of which are positive. That increased pressure at the utility which saw the CEO announce their retirement, the COO was replaced, and the chief legal officer was replaced in June. The COO office was restructured and the responsibilities divided.

All of this occurred in an environment where the utility would be seeking rate increases (double-digit) in the wake of service disasters. Now, an uncertain management team has not successfully articulated a plan to address the shortcomings identified as the result of the cold snap. It seems unable to estimate the level of needed rate increases. Some of those rate increases will result from the need to fund some $450 million of extraordinary costs incurred during the cold snap. That process will influence rate levels for the next 25 years.

Clearly the utility faces significant financial and operational pressures. The potential for significant staff turnover and the currently weak position of the CEO raises real governance issues. The current environment does not leave much tolerance for management uncertainty as process of moving the utility towards a more environmentally positive track unfolds.

We have watched the moves made by CPS with some concern. The ongoing management upheaval is negative in and of itself. For “green” investors, one has to ask whether the ascension of a member of the board of the Natural Gas Association to a top planning position will create a bias towards support of expanded natural gas generation as CPS manages its system going forward? Wil that be consistent with the goals of “green” investors? All of this added up to a negative outlook from S&P.

SANTEE COOPER CAN’T WIN

At this point, Santee Cooper the South Carolina public power agency must feel somewhat set upon. The effort by some to get the state to sell the utility is alive and well but has been hampered in the pandemic era. Now, it has joined what we believe will be a growing list of utilities to see much higher fuel expenses which will likely lower debt service coverage ratios. The rising price of natural gas and some just plain bad luck are the culprits here. SCPSA projected early this year it would meet energy demand with 58% of its electricity generation coming from coal-fired units.

Higher electric demand generated the need for near term fuel purchases. Natural gas price increases caused prices to rise from $2.50 British thermal unit (BTU) to $5.40 BTU within weeks in late 2020 and early 2021. Santee Cooper could secure enough timely delivered coal to generate only 39% of its electricity during the surge. SCPSA says that if Santee Cooper could have secured $60 million in coal to increase energy generation to meet the early year surge, the utility would have netted $110 million in revenues. Instead, the utility’s fuel costs exceeded projections by $130 million.

The agency is planning on cutting $60 million in capital project expenditures and to reduce $18 million in operations and maintenance expenses to cover some of the revenue shortfall. It will be a concern if necessary upkeep is not funded and executed.

MORE NUCLEAR DELAYS IN GEORGIA

Georgia Power has announced yet another revision to its projected schedule for the two new units under construction at Plant Votgle to commence commercial operations. Now Georgia Power says the third reactor at Plant Vogtle won’t start generating electricity until sometime between July and September of next year. Previously the company said it would start in June at the latest. The fourth reactor won’t come online until sometime between April and June of 2023.

The latest delay announcement comes as the Georgia Public Service Commission plans to vote next month on what could be a $224 million rate increase to pay for $2.1 billion in construction costs on Unit 3.  The company said in a recent filing that the latest delay stems from more substandard construction work at Unit 3 that must be redone. It said contractors continue to not meet schedules for completing work. Georgia Power said it’s diverting workers from building Unit 4 to fix Unit 3′s problems.

NEW YORK VS. THE NATION – PANDEMIC RECOVERY

Much attention is being paid to the difficulty that the New York City economy is facing as the recovery from the pandemic unfolds. Recent data from the City’s Independent Budget Office (IBO) confirms some of the factors impeding the “return to normal”.

Here is what they found. Compared with the rest of the United States, New York City lost a greater share of employment in the first months of the Covid-based recession, and to date it has recovered a smaller portion of its job loss. The city’s economy lost 957,000 jobs in March and April of 2020, just over a fifth (20.3 percent) of total employment, which peaked at 4.7 million in February 2020. Total U.S. employment, excluding New York City, also peaked and declined over the same two months. Employment fell to 126.4 million jobs in April 2020, about one-seventh (14.5 percent) less than the 147.8 million peak two months earlier.

Beginning in May 2020, employment began to recover in both New York City and the U.S. In each month from May through December, employment growth was slower in the city than the rest of the nation, though in most months after December, New York City employment grew faster. For the entire May 2020 through September 2021 period, employment grew at an average monthly rate of 0.36 percent in the city compared with 0.39 percent elsewhere in the country.

From April 2020 through September 2021, New York City’s economy added 440,000 jobs, not quite half (46.0 percent) of the jobs lost in March and April of last year. NYC employment in September was 4.2 million, 89.0 percent of the February 2020 peak. Excluding New York City, U.S. employment in September totaled 143.0 million, 97.0 percent of the February 2020 level. Almost four-fifths (79.2 percent) of the jobs lost in March and April 2020 have been recovered.

MANAGED RETREAT AND NYC

The recent severe rainstorms which led to flooding in historically vulnerable residential areas in New York City has sparked renewed discussions of buyouts to relocate damaged homeowners. While the choice to buy housing in well-known areas of vulnerability to flooding is at its core an individual one, governments are in a position of having to decide between restoring neighborhoods or encouraging relocation. Now, the recent storm has led the City to choose managed retreat.

After Sandy, New York State launched a $276 million pilot program to buy out 721 homes in Staten Island and other areas of the state. Of that, $202.8 million was spent to buy out 504 properties on Staten Island. Many of those properties have become permanently under water.  New York City has zoning that designates special coastal risk districts and limits new development in exceptionally flood prone areas in Broad Channel and Hamilton Beach in Queens and in Staten Island.

New Jersey has an ongoing, buyout program (Blue Acres), through which it has purchased property that is or could be damaged from flooding and storms, using federal and state funding. The program started in 2007, accelerated in 2012 after Sandy. The state has since spent over $200 million of $300 million reserved after Sandy and made offers on over 1,000 properties.

The managed retreat concept is not new but we expect that it will be a more frequent topic for consideration and debate. At some point, the numbers just do not support restoration and mitigation. Nevertheless, certain advocates for “equity” do not want to buy out homeowners unless replacement housing is constructed in an effort to merge the environmental and economic issues.  In the case of NYC, much of the at risk housing is also considered affordable. The fact that the housing was “affordable” precisely because of the environmental risk gets lost in the debate.

It just illustrates the difficulty that policy makers face when dealing with climate resilience. While it may not be viewed as such by property owners, much of the housing in question was cheap because of its location.

NATRURAL GAS, NEW YORK STATE, AND ECONOMIC JUSTICE

Natural gas has been the target of many localities and states as the industry fights efforts to regulate and limit the use of natural gas in new construction. Natural gas is the subject of a debate over whether it is a viable long-term replacement for coal or at best, a short-term bridge to a decarbonized world. The debate has led some state legislatures, at the behest of climate change deniers, to enact legislation preempting the right of lower local levels of government from banning the use of natural gas.

One state to buck that trend is New York State. This week state regulators did not approve permits for two new gas fueled generation facilities. In 2020, Astoria Gas Turbine Power, LLC—a subsidiary of the energy company NRG—applied for a Clean Air Act Title V air permit as part of its plans to build a fossil fuel–fired turbine generator in the northwest Queens neighborhood. The plant would replace a 50-year-old high-polluting peaking plant with a gas facility.

The New York State Department of Environmental Conservation (DEC) said that the project was not in line with the state’s Climate Leadership and Community Protection Act, which was signed into law in 2019 and aims to reduce the state’s greenhouse gas emissions by 85% by 2050. The politics of the issue are clear. DEC said it received more than 6,600 comments about the plan, with 85% of those public comments in opposition to the proposal, according to the state.

DEC noted that the project did not comply with a section in the Climate Act stipulating that permits “shall not disproportionately burden disadvantaged communities.”  The same reasoning is at the center of a decision not to approve a second gas plant upstate. In these cases, the state is staking out a stronger position than has been the case with many states as power producers deal with opposition from the public to new natural gas generation.

COLLEGE ENROLLMENTS

Over recent years, college enrollments have been under pressure. Primary factors include demographics which have reduced the supply of applicants. The National Student Clearinghouse Research Center shows undergraduate enrollment down 3.2% since fall 2020. This follows enrollment declines of 3.5%. The data reflects head counts through Sept. 23 at half of the institutions that report to the Clearinghouse, roughly 1,800 schools.

Now, the declining pool of applicants is being pressured by the economic realities of the pandemic. From the fall of 2019 to this semester, the number of undergraduate students has now fallen by a total of 6.5 %. This is the largest two-year drop in enrollments since the 1970’s.

A number of factors contribute to the trend. In the short-term, higher wages are seen as driving potential students, especially poorer ones towards work instead of school. Other data points to the pressure facing low-income students. The institutions which compete on price – community colleges and public universities have seen higher rates of decline than the private institutions at the other end of the tuition spectrum.

Undergraduate enrollment at public four-year institutions and four-year for-profit schools has fallen more this fall than the previous year, down 2.3% from 0.8% and 12.7% from 0.3 percent respectively. Community colleges report a 5.6% decline in enrollments. These declines offset the recovery in enrollments at the expensive private institutions. One other factor we have written about since the start of the Trump Administration is foreign student enrollments. Combined with last year’s numbers, the Clearinghouse reports an overall decline of more than 20% among international undergraduates.

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

ESG AND RATINGS

This week we read about an effort to develop a rating system for municipal bond credits based on non-financial criteria. The plan is to introduce several economic and demographic factors into the ratings process which heretofore are not currently weighted. Some of the factors include an analysis of housing affordability. The goal is to try to use the investment process to drive social policies on the behalf of municipal bond investors.

We note a couple of problems with this process. Owning bonds and objectively rating them for someone else seems to be inconsistent.  One of the entities expressed belief that by rating bonds and taking investment positions in bonds, they would somehow have access to officials and information that is not provided now. There seems to be an underlying assumption that bondholders have control over local decision making. Were that true, the municipal market would function much differently.

If the market had that sort of pull, it would be in the position of effectively dictating policy to be carried out by a locally elected entity. Is it the market’s job to achieve general social goals? Would local residents not object to having policies dictated from outside entities against whom local residents have no direct recourse? Do you believe for a minute that the municipal bond investment community wanted to see credits like NYC in the 70’s, Philadelphia and D.C. in the eighties, and Puerto Rico currently be run as poorly and irresponsibly as they were?

Puerto Rico provides the best example. Municipal bond investors would like to see an economy less centered on government employment and income redistribution. They would like to see a solid educational system, a functioning power system, and real development of the local economy. Yet, throughout the process the “bloody shirt” of accusations of colonialism and prejudice weighs down the conversation. Even in the midst of its restructuring, there remains a high level of concern that the Commonwealth will return to its “bad old ways” as soon as outside oversight is ended.

We expect to see more instances of the debate over what constitutes a healthy municipal bond credit as ESG investing moves center stage. One of the current hurdles to development of sound ESG investing criteria is that there is no real definition in the municipal market for what constitutes ESG investments. The industry needs to develop agreed upon standards as well as agreed upon metrics to be established to enable what are at the end of the day, quantitative investment decision making issues.

And it also must be noted that “corporate” approaches to municipal bond analysis are nearly always doomed to fail. Until the Tower Amendment is no longer preventing the imposition of full SEC reporting requirements for municipal issuers, the municipal market will remain unique. Expecting that an investor will receive better disclosure through its ownership of small bond positions reflects a bit of naivete.

In the end, the municipal market needs to move more quickly to develop an accepted set of standards to fairly analyze the ESG sector. We need to define our terms and provide an objective way to measure or quantify those issues which define whether or not a bond issue is green or social. Right now, there are more entities providing rivalling definitions of what is green or social or good governance than I have fingers to count. That has to change. Once that framework has been fully established, then the market will be able to evaluate and price risk.

Until then, the ESG concept remains primarily a marketing tool or a “greenwashing” tool.

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OIL AND GAS IN NORTH DAKOTA

In 1889, Congress passed the Enabling Act “to provide for the division of Dakota [Territory] into two states, and to enable the people of North Dakota, South Dakota, Montana, and Washington to form constitutions and state governments, and to be admitted into the union on an equal footing with the original states, and to make donations of public lands to such states.” The Enabling Act provided further land grants to the State of North Dakota for the support of colleges, universities, the state capitol, and other public institutions.

Revenues are generated through the management of trust assets, which include approximately 706,600 surface acres and nearly 2.6 million mineral acres in the state.  Article IX, Section 2 of the North Dakota Constitution directs that the “net proceeds of all fines for violation of state laws and all other sums which may be added by law, must be faithfully used and applied each year for the benefit of the common schools of the state and no part of the fund must ever be diverted, even temporarily, from this purpose or used for any purpose other than the maintenance of common schools as provided by law.”

The Department of Trust Lands conducted an audit in 2016 that claimed that one drilling company was underpaying royalties to the agency that leases rights for grazing and oil, coal and gravel production from state lands.  So, the department sued the company for breach of contract. Previous litigation on similar issues had historically been found in favor of the state up through the state Supreme Court level. The case was sent back to the lower court for retrial.

Now, a state district court judge found in favor of the energy company. The judge said the state’s claim of a breach of contract with the company was in question because the state failed to provide “any contract or lease … that allows this court to meaningfully review the contract obligations and whether a breach has occurred.” If upheld, there are significant ramifications for the state.

The Board had notified more than two dozen energy companies last year that they must pay money they had deducted from royalties owed to the state for developing its minerals. An earlier audit found that some oil companies took improper deductions for transportation, processing and other costs out of royalties owed to the state

NEBRASKA UTILITY PRESSURES

The Nebraska Power Review Board is a five-member body appointed by the Governor created in 1963 to regulate Nebraska’s publicly owned electrical utility industry. As a 100% public power state (the nation’s only), the Power Board is unique. The Board’s operating funds are received entirely from assessments levied on power suppliers operating in the State of Nebraska. The executive director is appointed by the Board. As constructed, the Board puts the Governor in a position of real influence if they choose to be.

One of the Board’s primary responsibilities is the creation and certification of retail and wholesale service area agreements between electric utilities operating in Nebraska. Any amendments to existing agreements must be approved by the Board. The Board maintains the official records pertaining to these agreements, which establish the geographic territory in which each utility operating in Nebraska has the exclusive right to serve customers. There are approximately 390 such agreements maintained by the Board.

Now, likely at the Governor’s behest, the Board is considering whether it should have the final say over contracts reached between power districts and energy suppliers, such as wind farms, and be able to weigh in on whether existing power plants should be decommissioned. The Governor is squarely on the partisan view that coal plants should remain open and his administration is not considered supportive of wind renewables.

This could potentially put the larger generation utilities in a difficult position. The Nebraska Public Power District owns and operates a large coal fired plant that is among the state’s largest carbon emitters. NPPD has been under pressure from customers and renewables advocates as it plans its future. Other utilities seeking to diversify away from fossil fueled sources could see those efforts limited or even thwarted. 

Any recent expansions of capacity in the state have been through power purchase agreements.  Those agreements are currently exempt under state law from review by the Power Review Board. The concern for the utilities is that local control – through elected officials in the case of the large Omaha, Lincoln, and NPPD systems – is the issue. It would be another form of a favorite topic of ours – preemption. It is not a surprise that an ideological governor would seek to so overtly intervene.

FLOOD INSURANCE

The National Flood Insurance Program (NFIP) is managed by the Federal Emergency Management Agency and is delivered to the public by a network of approximately 60 insurance companies. Rates are set in accordance with ratings established by FEMA. Since the 1970s, rates have been predominantly based on relatively static measurements, emphasizing a property’s elevation within a zone. This year, that rating system is undergoing major change.

Risk Rating 2.0 is designed to incorporate more flood risk variables. These include flood frequency, multiple flood types—river overflow, storm surge, coastal erosion and heavy rainfall—and distance to a water source along with property characteristics such as elevation and the cost to rebuild. The changes will be phased in over two years.  New policies beginning Oct. 1, 2021, will be subject to the new rating methodology. Also beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums.

In one example, Monroe County which covers the Florida Keys — FEMA says more than 90% of homeowners will see their annual flood insurance premiums go up, sometimes by thousands of dollars a year. It would be higher, but annual increases for each homeowner are statutorily at 18%. Congress is apt to make changes more favorable to homeowners if the politics of the issue dictate such an action.

Recently, the First Street Foundation released a report documenting the risk on a local level from flooding. First Street, like many others, is attempting to show modeling which “quantifies” the potential risk from flooding related to climate change over the next 30 years. Like any other model, the variables examined and the precise mathematical strategies are a product of unique circumstances.

First, they define their infrastructure categories. Critical infrastructure includes facilities such as airports, fire stations, hospitals, police stations, ports, power stations, superfund/hazardous waste sites, water outfalls, and wastewater treatment facilities. Social infrastructure includes government buildings, historic buildings, houses of worship, museums, and schools. 

The report’s analysis found that over the next 30 years, risk to residential properties is expected to increase by 10%, risk to social infrastructure will increase by 9%, risk to commercial properties is expected to increase 7% and risk to critical infrastructure facilities is projected to increase by 6%. Additionally, 2.0 million miles of road (23%) are at risk today, expected to increase by 3% over the next 30 years. Distinct patterns of county-level community risk highlight significantly increasing risk along the Atlantic and Gulf Coasts and large increases in risk in the Northwest. Risk is concentrated along the coastal areas of the Southeastern U.S. and the Appalachian Mountain region.

Among counties, Washington County, NC has the most significant county level increase in flood risk; with a 100% increase in critical infrastructure flooding, a 50.8% increase in the flooding of residential properties, a 51.7% increase in the risk of flooding of commercial properties, and a 32.3% increase in the flooding of roads over up to the year 2051. The highest concentration of community risk exists in Louisiana, Florida, Kentucky, and West Virginia, as 17 of the top 20 most at risk counties in the U.S. (85%) are in these 4 states.

At the city level, a large percentage of risk is concentrated in Louisiana (3 cities) and Florida (6 cities). The major population centers of New Orleans, LA Miami, FL (St. Petersburg, FL); and Tampa, FL all rank among the “most at risk” cities.

KAWASAKI SUBWAY CARS

For the last 20 years, U.S. rapid transit systems have been modernizing their rolling stock. With American-owned rail car production essentially a thing of the past, foreign owned producers have become the primary suppliers. New York’s MTA has made six purchases from the Japanese manufacturer, Kawasaki. Other purchasers include the Port Authority Trans Hudson line (PATH) and the Washington D.C. Metro system.

Over the weekend, problems with Washington Metro’s fleet led to derailments. The Metro decided to temporarily pull all of its Kawasaki rolling stock out of service for detailed inspections. For WMATA, this represents some 60% of its fleet. This has led to significant service cutbacks. Safety is a crucial issue for WMATA after a series of incidents over recent years.

WMATA has been aware of wheel set assembly issue since 2017. She said preliminary data showed that since 2017, there have been 31 WMATA wheel assembly failures –including 18 in this year — and 21 failures were uncovered during inspections that began Friday and are ongoing. This has raised concerns at the National Transportation Safety Board. The Board has announced that it may issue an “urgent recommendation” telling transit agencies to inspect Kawasaki train cars.

For the PATH system, such a recommendation could impact its entire fleet of subway cars. The MTA has been the largest buyer. SEPTA, serving Philadelphia is another customer although its Kawasaki rolling stock is some 40 years old.  The transit agencies will want the situation resolved, not just because of the obvious issues, but also because the production of the equipment is in factories in the U.S. Kawasaki and the Canadian builder Bombardier, both produced their U.S. rolling stock in factories in New York State. A Chinese electric bus manufacturer produces for the U.S. market at a California factory.

TRAVEL INDICATORS – AVIATION

United Airlines said on Tuesday that it had $7.8 billion in operating revenue during the third quarter, which was better than Wall Street had expected. The company expressed optimism about the coming months. The airline pointed to the fact that government officials around the world are slowly easing travel restrictions and companies are starting to send employees on more business trips.

The 24 U.S. scheduled passenger airlines employed 407,965 full-time equivalents (FTEs) in August 2021, a 1.3% increase from July 2021 (402,561). August’s total number of FTEs was up 5,404 from July but still down 40,295 FTEs, or 10.8%, from the March 2020 (457,260) onset of the pandemic. The August FTE total was also down 9.2% from the most recent corresponding pre-pandemic month, August 2019 (449,461). August 2021 had the lowest FTE total for the month of August since 2015 (397,007).

The employment increase between July and August resulted largely from the four network airlines, which added 4,704 FTEs. This increase was led by Delta Air Lines, which added 2,342 FTEs for a month-over-month increase of 3.3%. Southwest Airlines decreased the most with a loss of 229 FTEs or 0.4%.

NATURAL GAS AND MUNI UTILITY CREDITS

This winter is shaping up as a costly one for utility customers especially if they rely on natural gas. Natural gas prices have been steadily increasing but we have yet to see evidence of the potential impact of rising prices on individual utilities and their customers.  That is beginning to change.

The Colorado Springs City Council established a new rate schedule for its customers for this winter. It takes into effect the rising cost of gas to the utility to generate power and will translate into significant rate increases for customers. The new rates will increase natural gas prices on average by $15.92 per month up to $75.33, or about 26.8%, and electric costs by $12.60 up to $105.82, or about 13.5%. The increases are scheduled to take effect in November and stay in place through February.

For those utilities which use natural gas either directly for heating and cooking or to fuel their generation plants, we expect that increases in rates will be the norm. The city projected in August spending $4 to $4.50 per 1,000 cubic feet of gas over the winter. The actual price of gas is already closing in on $5 per 1,000 cubic feet of gas this month. The Colorado Springs combined utility system spent $140 million in February of this year during the well documented cold snap.

Colorado Springs raised natural gas prices by about $22 per month for residential users and electrical prices by $7 per month through April 2022 to pay off the cold-snap costs.  Natural gas prices are also largely responsible for putting Utilities $280 million over its $1.1 billion budget for this year. 

THE BEIGE BOOK

The Fed’s latest summary of economic activity came out this week. Economic activity continued to increase across all Districts, with the pace of growth characterized as slight to modest in most Districts. Manufacturing activity generally increased at a moderate pace. Residential housing markets continued to experience steady demand for new and existing homes, with activity constrained by low inventories.

Conversely, commercial real estate conditions continued to deteriorate in many Districts, with the exception being warehouse and industrial space where construction and leasing activity remained steady. Consumer spending growth remained positive, but some Districts reported a leveling off of retail sales and a slight uptick in tourism activity.

Demand for autos remained steady, but low inventories have constrained sales to varying degrees. Reports on agriculture conditions were mixed, as some Districts are experiencing drought conditions. Districts characterized the outlooks of contacts as generally optimistic or positive, but with a considerable degree of uncertainty. Restaurateurs in many Districts expressed concern that cooler weather would slow sales, as they have relied on outdoor dining.

We note that much of this period covers a time when a push to require vaccination as a condition of school attendance (teachers), working in an office, or attending public events in enclosed places was still in its early stages. While there have been some prominent examples of resistance, vaccine mandates have proven effective. Once vaccination was attached to employment requirements, vaccination rates in certain jobs (like schools, sports teams) rocketed up.

We note that despite a lot of noise from opponents, legal challenges to vaccination mandates are falling short in the courts. The fact is that vaccination requirements are nothing new. Most school districts require vaccination for mumps, measles, and other diseases so it’s been hard to see how opponents have a case. As vaccination takes hold, there should be real economic benefits.

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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PUERTO RICO FIGHTS REALITY

The Puerto Rico legislature continue its uphill battle with the Oversight Board. The latest example is legislation under consideration which would keep pensioners safe from any cuts to pensions The P.R. House passed a bill with amendments designed to force the Oversight Board to accept zero cuts to pensions, allocate $62 million per year for municipal governments, and provide at least $500 million per year for the University of Puerto Rico for five years.

The Oversight Board’s response was predictable. The Board said the legislation proposed by the House and amended by the Senate would force it to withdraw its support for the proposed Plan of Adjustment. The Board’s view is that the legislation “endangers Puerto Rico’s ability to come out of bankruptcy and repeats the unsustainable spending practices and policies that drove Puerto Rico into bankruptcy in the first place.”

The Board did not stick to that position for very long. It said reducing the remaining modest pension cuts would increase the risk the plan is neither confirmable nor ultimately affordable, since the governor and the legislature refuse to consider a plan with pension cuts, the board said it was willing to take these risks.

It will now see if this move generates support for legislation which many creditors support which would specifically authorize debt issued to refinance existing bonds under the proposed Plan of Adjustment. The agreement on pensions should allow that authorizing legislation to proceed.  The Board could seek to move forward with a Plan of Adjustment which did not include an agreement with the municipalities.

The lack of such an agreement could be a stumbling block as the Commonwealth seeks to finance itself in a post-bankruptcy. The bond insurers expressed concern about a possible lack of authorizing legislation becoming an obstacle to a vote to affirm the Plan of Adjustment. The actions of the government, particularly the legislature, in seeking to concede as little as possible have not developed trust to support confidence in the Commonwealth’s long-term resolve to manage its fiscal affairs. The Commonwealth’s political establishment continues to take a populist approach consistently emphasizing cultural and ethnic issues in an effort to maintain an unworkable status quo. The continued reliance on statehood as the answer to so many of Puerto Rico’s problems conveys a sense of denial.

ARMY CORPS OF ENGINEERS P3

The idea arose during the Obama administration, was chosen as one of the Trump administration’s preferred infrastructure projects, and now has finally come to the municipal market. Fargo, North Dakota has experienced severe floods five times in a 100-year period. The last flood in 2011 was particularly severe. That built momentum for the development of the Fargo-Moorhead Diversion Project. The need for the project was clear but the logistics of the involvement of two states and the US Army Corps of Engineers complicated financing for the project. This created a more open attitude towards the use of less traditional approaches like a public private partnership, something that would be a first for the Corps.

The overall $2.75 billion project relies on $750 million from the federal government, $870 million from North Dakota, $86 million from Minnesota, and $1.1 billion from local tax levies. Now an authority created to access the municipal bond market for the project has successfully issued some $275 million off debt for it. That represents the portion of the share of the project borne by the two municipalities which will benefit from it. The financing is the first for a P3 for an Army Corps of Engineers project.

Initial financing came in the form of a WIFIA loan. The Authority repays its debt from proceeds of flood control and infrastructure dedicated sales tax revenues of the city of Fargo, ND and Cass County, ND. If those revenues are insufficient, debt service (principal and interest) is ultimately secured by the general obligation unlimited tax pledge of Cass County, pledged via the provisions of state statute, should the sales taxes and special assessments prove inadequate to pay debt service.

The Metro Flood Diversion Authority is managing the P3-financed piece of the overall project under a 35-year agreement with the private partners. Fargo and Cass County in North Dakota, Moorhead and Clay County in Minnesota and the Cass County Water Resource District formed the district for the project and all have a fiscal stake. The Red River Valley Alliance LLC is composed of lead contractors Spain-based Acciona (ACXIF) with a 42.5% equity stake; Israeli firm Shikun & Binui (SKBNF) with 42% equity investment; and Canada’s North American Construction Group (NOA) with a 15% equity investment. 

SUPPLY CHAIN ISSUES DELAY MORE PROJECTS

We recently highlighted a project in Maine which will likely be delayed due to difficulties in obtaining building supplies needed to comply with project specifications. It is far from the only project threatened by supply chain issues. The latest example comes from Tennessee.

A bridge replacement project – the completion of Mack Hatcher NW Extension in Williamson County – has been delayed. The lead contractor for the project says that the delay stems from a materials supply shortage of railing on the project’s multi-use path along the roadway. The railing must be completed to ensure the safety of pedestrians and/or cyclists on the path. The company also struggled to find a subcontractor to complete specialty work to the bridge’s surface over the Harpeth River. The contractual completion date is November 30.

These situations highlight one concern that even supporters of a large federal program for infrastructure acknowledge. The current mismatch between the demand for skilled tradespeople and the supply of those workers continues to worsen. The fear is that projects will not be able to be undertaken or will have to face additional costs and extended timelines so long as the imbalance exists. The implication is that schedules and cost estimates going forward will have to be increased.

OREGON MILEAGE TAX EXPERIMENT

Oregon was the first state to begin a pilot program in support of vehicle mileage taxes. The limited test, which started with some 1200 drivers, was designed to study the impact of mileage taxes versus gas taxes and see if a VMT is a viable alternative. Several years into the test, some issues are emerging which are a bit discouraging while at the same time instructive to policy makers.

The discouraging part is the lack of participation in the program. The current enrollment is around 750 drivers and the original 1200 participants remains the program’s high water mark. Observers attribute the low participation to a lack of incentives for drivers to try the program and the amount of the fee – currently 1.8 cents per mile. The problem is that at 1.8 cents cars which get more than 20 miles per gallon pay more under the VMT than they would paying current gas taxes at the pump.

That highlights one of the major hurdles VMT proponents will have to overcome. There is a great suspicion that a VMT is merely an under the radar way to raise revenues. This issue is complicating efforts to move Pennsylvania away from fuel taxes to a VMT model. If the Oregon numbers hold up and motorists feel that they are the recipients of a tax increase, support for the VMT concept diminishes. 

Proponents admit that unless legislatively mandated, participation in the currently voluntary program will remain low. A bill which would have forced Oregonians whose vehicles get more than 30 miles per gallon into OReGO no later than July 2026 was not enacted. We expect that other states will have similar experiences if their programs are not voluntary. The politics of VMT remain very difficult.

In Pennsylvania, a commission appointed by the Governor has recommended a phase out of gas taxes and their replacement with revenues from an 8 cent per mile VMT. If drivers can’t make the numbers work in Oregon than an 8 cent per mile charge is likely less favorable for Pennsylvania drivers. The Pennsylvania plan would also increase tolls on highways, double registration fees and impose fees on packages delivered in the state.

UTILITIES AT THE CENTER OF DEVELOPMENT

The availability of power, water, and roads has always been a factor in the location of any large industrial facility. Now, as the economy moves more and more towards a renewables-based utility grid, the actual cost of power becomes more of a factor. The latest example of this phenomenon is the recently announced electric vehicle production facilities to be located in Kentucky and Tennessee.

The chairman of Ford has been explicit in explaining the role of electric costs in Ford’s decision. He said that Ford for the first time considered electricity prices in deciding on a site and that the company wants to work with states that are “giving you access to that low-energy cost.” One analysis found that the TVA offers an average industrial rate of $4.58 per kWh. This compares to DTE’s and Consumers Energy’s average rates for its largest users of $7.59 and $10.94 per kWh.

As pressure increases on industrial facilities to run on electricity instead of fossil fuels, this kind of decision process will likely repeat itself across the country. Municipal utilities will be well positioned to compete on a cost basis given their lack of a need to return profits to shareholders as well as their more favorable tax position.

SOME UTILITY UPDATES

Seven municipal utilities and the federally owned TVA are founding members of a new entity to market power more efficiently in the Southeastern U.S.  The Southeast Energy Exchange Market (SEEM) is designed to facilitate sub-hourly, bilateral trading, allowing participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission. That is meant to provide a more flexible environment for the absorption of increasing amounts of energy generated by sun and wind. 

The public power entities in the group are Associated Electric Cooperative, Dalton Utilities, MEAG Power, N.C. Municipal Power Agency No. 1, NCEMC, Oglethorpe Power Corp., Santee Cooper, and TVA. The founding members represent nearly 20 entities in parts of 11 states with more than 160,000 MWs (summer capacity; winter capacity is nearly 180,000 MWs) across two time zones.

A new Montana law empowering the state attorney general to order power plant repairs and imposing fines of $100,000 a day against noncompliant Colstrip owners was stayed in federal court.  The law attempts to prevent the majority owners of the coal-fired power plant from winding down maintenance as they prepare to exit in 2025. The pressure on the plants comes from the fact that they are 70% owned by Washington and Oregon utilities. Those states have strict mandates requiring utilities to reduce their fossil fuel exposure.

The fully political nature of the law was underlined in the court decision. “The PNW owners have presented evidence, uncontroverted by the state and other defendants, that the purpose of SB 266 is to protect Colstrip Units 3 and 4 from ‘out-of-state corporations’ and ‘woke overzealous regulators in Washington state,’ as evidenced by the Governor’s signing statement and transcript of SB 266 hearings.’’  The judge also noted that the State of Montana did not offer any arguments against the plaintiffs.

The wind power industry is benefitting from tail winds in the regulatory space. Vineyard Wind, the large project planned for the New England coast, has announced a “first-in-the-nation partnership” with 20 municipal electric systems in Massachusetts which would purchase some of the project’s output.  Massachusetts enacted a new law this year which would apply the state’s Renewable Portfolio Standard, which governs the increasing amount of clean energy that utilities must purchase each year, to municipal light plants (MLPs) for the first time. The 41 MLPs in Massachusetts must get 50% of their power from “non-carbon emitting” sources by 2030 and achieve net-zero emissions by 2050 under the new law.

TIDE COMES IN FOR PORTS

They were on the front line of entities impacted by pandemic induced limits on travel and demand but now ports are at the center of the effort to reinvigorate the nation’s clogged supply lines. The high demand issues facing ports have been in the news lately and they are getting more scrutiny in the wake of the oil spill of the California coast. The need for ships to anchor while they wait for capacity to open up at the Ports of Long Beach and Los Angeles has been cited as the possible cause of the pipeline rupture causing the spill.

Now, the ports are going to shift to 24 hour a day operation in an effort to eliminate the current backlogs at the West Coast ports. Long Beach and L.A. have long been the nation’s busiest ports and so now they will bear the brunt of the supply chain effort. The plan not only moves goods to market but also opens the revenue spigot wider as increased volume is processed more smoothly. There will likely be some additional costs associated with the increased activity but these will likely be more than offset by volume driven revenue flows.

CARBON CAPTURE STRUGGLES

Earlier this year we discussed the potential for the municipal bond market to be targeted to finance the development of carbon capture projects in the fossil fuel industry’s effort to save itself.  We expressed concern that these projects could not obtain private financing and that this would lead developers to the market they always turn to for its low financing costs – the municipal bond market.

One project that received federal support from the Trump Administration was Project Tundra in North Dakota. This $1 billion project is being undertaken in support of the 692-MW Milton R. Young coal-fired power plant. The plant is owned by the Minnkota Power Cooperative. The project has lost its lead engineering partner which left the project in 1Q 2021. Minnkota has also acknowledged that its efforts to obtain “private financing” for the project is lagging.

Financing is being complicated by the limits on the ability of potential financiers to invest in projects designed to support the use of coal. Those policy limits overcome the fact that investors in Project Tundra could reap $50 in tax credits for each ton of carbon that is captured and sequestered underground near the plant, a figure that could be higher in the future if Congress boosts the credit.  Project Tundra received $43 million in initial DOE grants under former President Donald Trump. The electric co-op said earlier this year it is seeking a $700 million DOE loan guarantee and expects to tap into a new $250 million state loan program designed specifically for Project Tundra that was signed into law in May.

Cooperatives are finding themselves increasingly under pressure as they are some of the largest participants in large base load coal generation plants across the country. They need to diversify their generation bases and accelerate the move to renewables. The early signs for carbon capture, at least financially, are not good. The carbon capture effort seems to be following a path blazed by any number of environmentally sound but financially unfeasible technologies which have run through the municipal market. Caution is appropriate.

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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TRANSIT IN NEW YORK CITY MOVES FRONT AND CENTER

The first significant capital project to fall victim to a different political calculus in the face of abrupt “regime change” in Albany is the proposed Air Train project in Queens to LaGuardia Airport. The chief political proponent of the project was former Governor Andrew Cuomo. In reality, the project was not clearly supported by advocates while opponents were vocal and relentless. Once Governor Cuomo was out, there was no true core support for the $2.1 billion project. Opponents were successful in taking advantage of the upcoming gubernatorial election in November, 2022. Without clear support for the project, it was harder to justify the proposed cost and disruption.

On the private vehicle front, the dispute between New York and New Jersey over congestion pricing is growing more acrimonious. New Jersey has long been concerned that its residents who commute into Manhattan will be asked to pay the fee without any of the revenues being applied to agencies other than the MTA. Now, Governor Murphy of New Jersey is threatening to put the Port Authority of New York and New Jersey in the middle of the fray. One way that a governor can influence PA activities is by vetoing the minutes of Port Authority meetings.

Such an action could prevent the Authority board from approving all budgets and contracts. For bondholders it is a procedural issue which should not impact the availability of revenues for debt service repayment. As a practical matter, it is an issue in that the Port has been a central player in recent large scale transportation projects (bridges and airports) and that the Authority is being counted on to finance various regional projects. Even Governor Murphy called the tactic a “nuclear option”. The fact is however, that it is one of the few points of leverage a New Jersey governor has over a governor of New York is the Port Authority.

The Regional Plan Association, a major influencer on economic policies in the NY metropolitan area has suggested that New Jersey drivers get credit for the high tolls they pay to enter into Manhattan. The proposed congestion plan has some unforeseen consequences for regional policy. Take the case of a doctor who would commute to work at a hospital outside of the congestion zone and pay no more than they do now. The same doctor would have to pay the $15 congestion fee if his hospital employer was located south of 60^th Street. You could have individuals working for the same hospital system but facing different transit costs just by virtue of where their hospital is located.

UNEMPLOYMENT LOAN PAYBACK

With the end of extended federal unemployment benefits and the process of economic recovery underway, attention now focuses on the need for states to reimburse the federal government for loans made to the states to fund unemployment benefits. According to an analysis from the Tax Foundation, states have paid out $175 billion in UI benefits since the pandemic began in March 2020, with the federal government providing an additional $660 billion in extended and expanded benefits.

States often initially finance sudden growth in unemployment claims through borrowings from the federal government. If a state maintains a loan balance at the beginning of two consecutive calendar years, federal law triggers a series of automatic unemployment insurance tax hikes on businesses in the state. The federal government waived interest payments on state UI loans until September 6 to aid states struggling to pay UI benefits because unemployment rates soared during the height of the pandemic.

Every major recession creates liabilities for states which have had significant spikes in unemployment. The loans are repaid from the proceeds of assessments levied against businesses in those states. They can be paid in one sum from the proceeds of borrowings undertaken by states issuing bonds which are repaid from those assessments.

What is different this time is the magnitude of the unemployment problem which resulted from the pandemic. Those assessments become a cost to businesses in those states and weaken their competitive position.  Ohio officials cited a potential 50% increase in 2022 federal UI taxes for Ohio employers if the state’s loan was not repaid. Borrowing for funding repayments of federal unemployment insurance loans is a tried-and-true practice and not considered to be credit negative. 36 states and territories borrowed from the federal UI trust fund during the 2008-09 recession. Eight states issued bonds to repay the loans.

So, Ohio decided to be one of the states which found funds to repay their unemployment insurance loans before the federal interest waiver expired. It joined Hawaii, West Virginia, and Nevada in the group of states which repaid their loans. 31 states applied at least some portion of federal Coronavirus Aid, Relief and funding to replenish their UI trust funds, for a total of $15.4 billion in transfers. At the end of September, 11 states and the US Virgin Islands began to make interest payments on amounts borrowed from the federal government.

SALT, CONGRESS, AND THE COURTS

In a 3-0 decision, the 2nd U.S. Circuit Court of Appeals in Manhattan said the federal government had authority to impose a $10,000 cap on the state and local taxes that households’ itemizing deductions could deduct on their federal returns. New York, Connecticut, Maryland and New Jersey challenged the so-called SALT cap implemented as part of a $1.5 trillion tax overhaul in 2017.

The decision comes in the midst of the debate over the bipartisan infrastructure and reconciliation bills. The states’ arguments centered on the idea that eliminating the SALT cap was “coercive”.  The Court found that the states did not show that their injuries were significant enough to be coercive. The Court pointed to many federal provisions which do not have even impacts on the states. “We do not mean to minimize the plaintiff states’ losses or the impact of the cap on their respective economies but we find it implausible that the amounts in question give rise to a constitutional violation.”

On the legislative front, Congress’ nonpartisan Joint Committee on Taxation has said repealing the SALT cap could cost the U.S. Treasury $88.7 billion this year. That could make the deduction a casualty of the horse trading which will apparently be required to get an infrastructure bill.

TVA AND CLIMATE CHANGE

A coalition of TVA distributors has requested that Congress amend the proposed Clean Energy Performance Program (CEEP) to alter the potential penalties facing cities and power coops that rely upon TVA for nearly all of their power if the federal utility doesn’t meet the new standards to cut its carbon emissions. The CEEP would impose a $40 per megawatt hour penalty on any utility that does not boost its share of carbon-free energy by 4% a year. The penalty payments cannot increase customer bills.

There are 153 municipal and coop distribution customers of the TVA. They do not have direct control over how the TVA manages the generating assets which provide for the overwhelming bulk of their power supplies. Most of TVA’s distributors have signed 20-year power purchase agreements to buy 95% or more of their wholesale power from TVA.

The Southern Alliance for Clean Energy (SACE) has analyzed the integrated resource development plans for the four large utility holding companies in the Southeast. That includes the TVA. TVA has set a long-range goal of being carbon free by 2050. That is on the longest end of most target dates. It plans to achieve at least a 70% reduction in carbon by 2030 and an 80% reduction by 2035 while keeping electric rates stable. TVA says it has already cut its carbon emissions by 63% since 2005.

SCAE has calculated that among the four, the TVA (and by extension its customers) are the most exposed to the need to pay penalties under the plan. The annual increases in clean electricity under the TVA plan range from 0.2-0.3% at TVA. This would require TVA to pay the largest penalties.

Two major municipal utilities are at the center of the issue. TVA’s two largest local power companies (LPCs) — Memphis Light, Gas and Water Division (“MLGW”) and Nashville Electric Service (“NES”) — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for 8% of TVA’s total operating revenues during the nine months ended June 30, 2021. Sales to MLGW and NES accounted for 9% and 8%, respectively, of TVA’s total operating revenues during the nine months ended June 30, 2020.  

ALABAMA PRISON FUNDING

In the summer, the State of Alabama tried to execute a public/private partnership to build new prisons. The State has long operated under federal consent decrees to address overcrowded and squalid conditions at its maximum security prisons. The plan originally would have funded the construction of the new facilities by a private contractor but the prisons would have been staffed, managed, and operated by Alabama Department of Corrections staff. The facilities would have been leased to pay off debt issued for the prisons and then the facilities would become fully owned state property.

Political considerations drove pressure on the state and the underwriters of the proposed debt to finance the project. There were objections to the fact that the proposed builder also operated private prisons. Opponents felt that the company should not profit in any way from the construction contract even though they were only acting in the capacity of builder. That pressure caused underwriters to drop out of the financing and the public/private plan was scrapped.

That did not end Alabama’s obligation to comply with consent orders and it did not improve conditions. Now, the Alabama Legislature has approved the use of $400 million in CARES Act monies to fund the project. This has met with predictable outrage from anti-prison activists. They believe that the use of these funds for this purpose violates the Act. Those arguments are offset by the actions of some states to fund tax cuts with the CARES money.

ILLINOIS ENERGY FALLOUT

Coal fired generating assets owned by the Springfield, IL municipal electric utility were at the center of this summer’s debate over Illinois’ clean energy plans. The city’s three generating plants along with the Prairie States generation plant were prime targets of the legislation. While a compromise was reached allowing the plants to gradually close, the effects of the legislation are still having impact.

Springfield has announced that one of three plants which are not operating and scheduled for future retirement has now been retired permanently. The cost of compliance with new legal requirements drove the decision. The plant be will be decommissioned two years ahead of schedule and will never run again. An outside entity reviewed the plants and established that the cost of repairs needed to operate the plant again were prohibitive given that the plant is scheduled for retirement in 2023.

HUDSON YARDS

The massive Hudson Yards development area on Manhattan’s west side has managed to be able to cover its debt service obligations in spite of the effects of the pandemic on office occupancy, retail demand, and tourism which benefits the development. Now that it has survived the pandemic and managed to achieve a level of critical mass, the area is better able to fully meet its obligations to support Hudson Yards Infrastructure Corporation’s (HYIC) $2.7 billion outstanding revenue bonds.

This improvement is reflected in the Moody’s upgrade of Hudson Yards debt by one notch to Aa2. The project is now generating enough revenue such that the expectation is that the City will no longer need to appropriate monies any interest support payments for the remaining life of the bonds. The City is not yet off the hook entirely. When the original bonds were issued the city committed to pay interest on the bonds if the underlying Hudson Yards revenues were insufficient. That commitment will remain in place for the life of the bonds. The city’s obligation to make interest support payments, if required, is net of any available HYIC funds, and like the Tax Equivalency Payments, is absolute and unconditional, subject to annual appropriation.

WORKER SHORTAGES, SUPPLY CHAINS AND MUNICIPAL OPERATIONS

As is the case with so many industries, municipal governments are facing some worker shortages as well. This weekend, you need to have a reservation for some Washington State ferry (WSF) routes. Beginning in mid-week, the system had to cancel 16 scheduled sailings impacting residents of the San Juan Islands. WSF officials said there were not enough Coast Guard Documented Crew Members to continue some services. The staff shortage has been an ongoing issue since this spring.

Colorado’s DOT is facing pressure with the onset of snow season. They report that they are nearly 200 workers short, a 150% increase above the normal average of unfilled spots. The shortfall is attributed to the shortage of licensed commercial vehicle drivers that is impacting all sorts of businesses and school transit all over the country. Colorado DOT is already making plans to prioritize roads for plowing which will extend the time needed to clear roads.

The Maine DOT is delaying some major projects including a bridge replacement due to an inability to garner sufficient building supplies. In Maine, the issue is components being not available for construction to conform to specifications. “A national resin shortage is slowing our ability to obtain the additional material we’ll need in order to get the site ready for the accelerated bridge construction process.” The project may have to be delayed until the Spring as a result of the product shortage.

This highlights a concern that the recovery could be held back by a lack of sufficient labor and supplies to effectively undertake many of the projects proposed in the infrastructure and reconciliation bills. There are a number of instances where worker shortages have limited the ability of many municipal services to return to desired levels. It has only been a couple of weeks since the widespread adoption of vaccination mandates and the of extended unemployment benefits. We will see if this remedies some of these situations. 

SOUTH CAROLINA NUCLEAR FOLLOWUP

The aftermath of the ill-fated Sumner nuclear plant expansion continues to leave a trail of wreckage. Former SCANA Corp. CEO Kevin Marsh becomes the first criminal casualty of the effort to conceal problems and delays at the project. He reached a plea agreement which will result in a two-year federal prison term. He plead to conspiracy to commit wire and mail fraud. Marsh has also pleaded guilty in state court to obtaining property by false pretenses. He awaits sentencing on that charge.

A second former executive at SCANA and a Westinghouse Electric official, the lead contractor to build two new reactors at the V.C. Summer plant, have also pleaded guilty.  One more Westinghouse employee has been indicted and is awaiting trial. The CEO blamed Westinghouse for misleading him.

NEW YORK CITY AND TAX INCENTIVES

We have historically viewed the use of tax incentives negatively. We question the real impact of these programs and the lack of good comparative data has always complicated the analysis. Now, the NYC Independent Budget Office (IBO) has delivered an analysis of the City’s Industrial Program. The program was established under the Giuliani administration to respond to the fact that from 1990 through 1995, the number of manufacturing jobs in New York City fell by about 55,000 to reach 206,000.

The program provides tax breaks, primarily property tax reductions over 25 years, to encourage the preservation of industrial space in the city in order to retain and create manufacturing, warehousing, and other industrial jobs and to diversify the local economy. The same sorts of property tax breaks for development have been a constant since WWII in New York. The program provides for the Industrial Development Agency to acquire nominal title to the site and then lease it back to the firm seeking to develop the property.

Ownership of the site by the IDA allows the firm benefit from a tax break on the land and building. The firm then makes a reduced property tax payment in the form of a payment in lieu of taxes. The firm also becomes eligible for sales and mortgage recording tax breaks.

Since its inception in 1995, 370 projects have benefitted from the Industrial Program. In 2019, 200 projects received tax breaks, at a cost of $31.5 million in foregone revenue for the city.  For the first 21 years of the program, manufacturing and wholesale trade accounted for well over half of the new projects nearly every year. Since 2016, though, these two sectors have typically made up less than half of the new projects and the number of projects entering the program has been declining. 

While recent attention to tax breaks has focused on efforts to attract new businesses, most of the firms receiving benefits from the program were already located in the city and had fewer than 100 employees. IBO estimates that about 60% of the firms were expanding employment in the years leading up to receiving Industrial Program assistance, while around 20 % were contracting. 

Just over half of firms (54%) that had employment in New York City in the year of project start expanded their employment in the three years following the completion of their capital project. Another 9% maintained the same size, while about 37% contracted. Overall, IBO found that less than a third of these firms met or exceeded the employment goals set when they applied for the program.

IBO did find that the majority of firms that received assistance through the program either expanded employment or stayed about the same size three years after completing the construction or renovation of their industrial space. They did offer evidence to support one complaint of critics of tax incentives. The Industrial Development Agency could not provide detailed information on the actual capital investments at the site made by participating firms. Lack of hard data has always complicated both sides of the debate about tax incentives. 

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

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

As we go to press, the infrastructure and reconciliation legislation is hanging in the balance. The ultimate outcome of the legislative process remains in doubt. The House and Senate did pass — and Mr. Biden signed — legislation to fund the government until Dec. 3, with more than $28 billion in disaster relief and $6.3 billion to help relocate refugees from Afghanistan. The issues are coming down to a question of what is infrastructure and what is social engineering.

The tax changes contemplated seem likely to survive as they appear to have support. They call for raising the corporate tax rate to 25%, up from 21%; setting a top individual income tax rate of 39.6%, up from 37%; and increasing the capital gains tax rate to 28%.

It’s energy policy which becomes a major stumbling block. Senator Manchin’s demands include means-testing any new social programs to keep them targeted at the poor; a major initiative on the treatment of opioid addictions that have ravaged his state; control of shaping a clean energy provision that, by definition, was aimed at coal, a mainstay of West Virginia; and assurances that nothing in the bill would eliminate the production and burning of fossil fuels.

The process as it unfolds, highlights the difficulties which hold back a serious systematic approach to the funding and financing of infrastructure.

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POLICE FUNDING

With just over a month to go before Election Day, we see several items on local or state ballots which will go some way to judging the staying power of certain trends. Minneapolis voters will decide on whether they wish to effectively shut down the City’s police force and replace it with a Department of Public Safety. That department would include a variety of medical and mental health practioners along with some traditional law enforcement who would answer many of the mental health situations which police are currently called on to deal with.  

The initiative would provide for joint oversight of the resulting organization by both the executive (the Mayor) and the legislative (City Council). This has raised concerns over day-to-day management and the split in final executive authority. The proposed plan may actually result in more public safety spending than is currently the case. It would however reallocate funding among services provided resulting in “effective” police defunding.

This vote occurs against a backdrop of generally rising urban crime. Cities which had some of the most violent public actions over the issue of police conduct in 2020 are actually increasing police funding. We recently noted the increase in funding through a very generous labor negotiation in Chicago. Now the outgoing Mayor of Seattle has proposed a budget which increase the number of officers on the city police force on a net of attrition/retirement basis.

This past two years have seen a dramatic reduction in the size of Seattle PD’s uniformed force as resignations and retirements reached unprecedented levels. The 2022 Proposed Budget for SPD includes funding sufficient to add a net of 35 new officers. This increase would increase the average officer count to 1,230 still well short of the 1,343 officers that had been funded for 2021.

THE ELECTRIC ECONOMY

Ford said it would build two battery plants in Kentucky and one in Tennessee, all in a joint venture with its main battery cell supplier, SK Innovation of South Korea. It will also build an assembly factory in Tennessee. In combination, the four facilities are scheduled to create 11,000 jobs.

Half of those jobs will be created at Stanton, about 50 miles northeast of Memphis. The campus is expected to employ 6,000 people and will house suppliers and a battery recycling operation as well as the truck and battery factories. Ford and SK Innovation will invest $5.6 billion at the site. Two plants in Kentucky will be in Glendale, about 50 miles south of Louisville, and are expected to create 5,000 jobs, at a cost of $5.8 billion. 

The plants will be at the center of the debate over the potential impact of electric cars and incentives to be provided by the federal government. It has been proposed by labor interests that government incentives be provided for electric cars produced at unionized facilities. Initially, it seemed to be an effort to target companies like Toyota who are both foreign owned and non-union.

Those provisions might be problematic. “Right to work” laws in Tennessee and Kentucky bar union membership as a condition of employment. Efforts to unionize workforces in the South have historically failed. So, the issue becomes – good green jobs vs. unionized green jobs. The Republican-controlled Legislature has voted to put Tennessee’s right to work law as an amendment to the state Constitution by placing a measure on the next gubernatorial ballot.  That sets up a conflict as the manufacturing facilities to be established have been announced as union shops.

PUERTO RICO PENSIONS

One of the major stumbling blocks on the route to a final Plan of Adjustment for the Commonwealth of Puerto Rico has been that of pensions. The Commonwealth has been very resistant to changes in pension payments for its government retirees. Now, in an effort to move talks forward and increase the likelihood of Plan approval, the Oversight Board has softened its stance. The Board announced it “is willing to agree” to increase the threshold of beneficiaries exempt from any reduction from $1,500 to $2,000 per month.

“The Oversight Board is also willing to support restoring any reduction in pension benefits should Puerto Rico receive federal Medicaid funds in excess of amounts projected in the 2021 Certified Fiscal Plan for Puerto Rico and should such funds generate enough savings in the government’s general fund budget to permit a restoration of the benefit reduction.  The Oversight Board said it could also accept “contingent on the commonwealth obtaining and maintaining adequate Medicaid funding.” The fiscal office said it would accept these proposals “if the Puerto Rico Legislature adopted the necessary legislation for the Plan of Adjustment and the Governor signs that legislation into law.”

One has to question the use of increased Medicaid funding to prevent reductions in pensions. That would seem to complicate the Commonwealth’s historic use of the Medicaid funding imbalance between it and the states. One of the main arguments for statehood is that it would address the historic funding imbalance. It’s not clear how using Medicaid to cover pension costs exactly makes the case for statehood or increased aid.

These strategies which rely on status and the resulting inequalities to address shortcomings in the management of its fiscal affairs become more tired each year. Oversight and financial responsibility will continue to be prerequisites for success in the restructuring process. The resistance encountered throughout this process bodes poorly for the Commonwealth’s fiscal future. The real question is: Has the bankruptcy been truly transformational on will the Commonwealth quickly return to its old ways once the bankruptcy process comes to an end?

CALIFORNIA WATER WAR TRUCE

The Imperial Irrigation District, the largest single recipient of Colorado River water, and the Metropolitan Water District have settled a lawsuit that once threatened to derail a multistate agreement governing the use and apportionment of Colorado River water. Under the agreement, Imperial can store water in Lake Mead on the Arizona-Nevada border under Metropolitan’s account. Imperial will contribute water under a regional drought contingency plan.

The dispute was rooted in negotiations under the Drought Contingency Plan developed in response to the long-term drought in the Colorado River basin. Imperial sued Metropolitan, alleging the water agency that serves Los Angeles violated a state environmental law when it did not negotiate directly with Imperial in the drought contingency talks. The Los Angeles County Superior Court ruled against Imperial, which appealed to the California Court of Appeals earlier this year.

Imperial sued Metropolitan, alleging the water agency that serves Los Angeles violated a state environmental law when it sidestepped Imperial in the drought contingency talks. The Los Angeles County Superior Court ruled against Imperial, which appealed to the California Court of Appeals earlier this year.

The new settlement agreement commits both agencies to seeking additional state and federal funding for restoration projects. At the center of this issue is the Salton Sea. The area around it is a mix of potential (brine deposits filled with lithium) and pollution wreaking havoc on the lives of those who live nearby. The seabed itself is the site of an increasing number of industrial facilities. How they would be impacted by efforts to refill the sea through a restoration program is unclear.

HOTELS BACK IN THE MUNI MARKET

The hospitality business was among the hardest hit by the restrictions and realities of the pandemic. Once again, a major economic disruption has disrupted that industry. While the circumstances of the Great Recession and the pandemic are very different, the net result on the operation and finances of projects within that space is quite similar.  Several hotel projects developed in the first half of the 2000 decade ran into serious problems requiring defaults and restructurings which led to real investment losses.

So, we are intrigued by the latest effort to obtain financing for a startup hotel project which comes out of North Carolina. A hotel/conference center project located adjacent to the UNC-Charlotte campus is the latest example. The project was conceived after the Great Recession and construction started in 2019. Who was to know that the greatest public health disaster in a century was just around the corner?  The positive view points out that the worst of the initial phase of the pandemic coincided with the bulk of the construction period.

The facility began operations at the end of 1Q21, just as vaccines were taking hold. The operations since then have been unsurprising in that occupancy opened in the mid-30% range which is well below the projected average occupancy for fiscal 21-22. Going forward, the hotel assumes an average 75% occupancy rate five years out. Already the facility has seen the impact of a negative turn in the pandemic as occupancies which had risen a bit over the summer took a downward dip as the pandemic resurged especially in the South.

What really got our attention is the use of the issuer, Public Finance Authority. This issuer seems to be the one to turn to when the typical in-state issuer of bonds for what are essentially commercial projects chooses not to associate with the risk. This always raises a red flag for us. Public Finance Authority is a Wisconsin issuer but often issues debt for other jurisdictions. That is the case when local considerations (usually political) interfere with financing, PFA often steps into the breach.

This deal goes to great ends to maintain the tax exemption for the bonds. The facility is owned by the UNC-Charlotte endowment. Neither of the institutions is designed to draw customers from has any ownership interest. The ownership by the endowment of a tax-exempt entity is designed to clear the tax exemption hurdle.

In the end, you won’t see this risk if you are an investor directly in bonds. The retail investor who owns a high yield fund is likely to see that risk. In today’s environment of historically low rates, it will be an opportunity which those funds will be attracted to.

MTA

New York State Comptroller Thomas P. DiNapoli annually reviews the financial outlook for the Metropolitan Transportation Authority, the state agency responsible for the mass transit system in the New York metropolitan area. The MTA may be the most heavily impacted issuer in the market as the result of the pandemic. It has been bailed out financially in the near term by the receipt of some $1o billion in federal pandemic assistance.

In February 2021, the MTA projected cash deficits before gap-closing actions of $5.7 billion in 2021, $4.8 billion in 2022, $4.1 billion in 2023 and $4 billion in 2024. On July 21, 2021, the MTA released a midyear update to its 2021 budget and a four-year financial plan based on the preliminary budget for 2022 (the “July Plan”). Fare and toll revenue is expected to increase by $1.7 billion in 2021, $1.6 billion in 2022, $831 million in 2023 and $395 million in 2024. Dedicated taxes and subsidies also improved by $1.8 billion during the financial plan period.

Despite these improvements, the July Plan still forecasts substantial gaps of $4.8 billion in 2021, $2.9 billion in 2022, $2.5 billion in 2023, $2.8 billion in 2024 and $3.3 billion in 2025. The report clearly highlights the variables facing the Authority as it plans ahead. The Office of the State Comptroller estimates that fare revenue in 2022 could be $300 million higher than planned if workers telecommute an average of 1.5 days per week starting next spring, but could be $500 million lower than planned if workers telecommute an average of 3 to 4 days per week.

The longer-term risks facing the MTA are clear. One is that two potential revenue sources remain uncertain. The first is the potential for more federal money under the pending reconciliation bill. The other is the reliance on congestion pricing in Manhattan which is currently under review. Congestion pricing is expected to generate $15 billion for the MTA’s 2020-2024 capital program. The starting date of the program is still unknown, although the MTA now assumes it to be in 2023.

The report sums up the import of a financially viable MTA. “The greater New York City region cannot achieve a full economic recovery without a financially stable MTA.” No, it cannot.

ZERO EMISSIONS CREDITS

So called Zero Emissions Credits (ZECs) are the primary vehicle which states use to support the operation of existing nuclear generating plants. They are most recently in the news as one of the difficult issues to deal with in the legislation supporting state initiatives to support clean energy. Laws were enacted from 2017 to 2019 to fund zero emissions credits (ZECs) in Connecticut, Illinois, New Jersey, New York and Ohio.  It happens that nuclear is often the primary source of carbon free power. According to Exelon, nuclear provides 85% of the clean energy in Maryland and Illinois, 91% in Pennsylvania, and over 50% in New York.

One item in the pending reconciliation legislation in the U.S. Congress would provide federal funding for ZEC credits. (American Nuclear Infrastructure Act (S. 2373)) As the reconciliation process unfolds, $6 billion to fund ZECs from 2022 to 2026 where they are demonstrated as economically necessary to limit emissions is included in the Senate approved bill. 

COAL SUBSIDIES?

The legacy of the effort to support legacy generating assets in Ohio continues manifest itself. The 2019 legislation which was passed as the result of illegal efforts to influence legislators has been seen as an effort to support nuclear power. Tucked into that legislation were subsidies for two World War II era coal fired plants. Now, the Ohio legislature is considering a bill to repeal those subsidies. The bill is sponsored on a bipartisan basis in one house and by Republicans in the other.

The two plants are owned by investor-owned entities through the Ohio Valley Electric Corporation. Before the bill, only customers from AEP Ohio, Duke Energy Ohio and AES Ohio, formerly Dayton Power & Light, were charged for the plants, paying $176 million from 2016 through 2019. The 2019 legislation enlarged that customer base to pay for the subsidies. The plants were built in the 1950s to provide power to a uranium enrichment facility in Pike County. The contract with the U.S. Department of Energy ended in 2003.

OVEC took over the distribution of power from the plants since that time. The Ohio Manufacturers’ Association, representing commercial and industrial ratepayers has said the plants lost $1.3 billion from 2012 through 2019 and continue to lose money. We are big believers in the idea that the market should be allowed to deal with issues like this. In this case, the market is speaking loudly and clearly.

Unfortunately, the debt issued for the two plants extends to 2040. OVEC does not effectively have other revenue generating assets to support that debt.

Disclaimer:  The opinions and statements expressed in 2003.  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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GOOGLE AND NEW YORK CITY

We see a number of positive factors in the announcement that Google is going to purchase for $2.1 billion an existing building to add to its office space in New York. Google already leases 1.2 million square feet in the building. Ownership represents the kind of statement that cities are looking for in the post-pandemic environment. This is especially true for New York City. Google also announced plans to increase staff by 2,000 on top if the 12,000 corporate employees it already employs in Manhattan.

Google notes that the purchase does not alter plans to delay full office returns until the first quarter of 2022. At the same time, Google reiterated that “As Google moves toward a more flexible hybrid approach to work, coming together in person to collaborate and build community will remain an important part of our future.”  The purchase will close by the first quarter of 2022 and the site is expected to open by mid-2023. The building will be part of a five building “campus” comprised of other owned buildings.

The move does not appear the result of tax breaks so the gradual expansion of Google in the City has drawn much less opposition than did the plan to subsidize Amazon’s proposed Queens campus.  It is an important step in the City’s recovery process. The timing works well as part of the larger recovery process currently underway in the City. We now have a major business real estate investment, the reopening of Broadway and numerous other cultural and entertainment venues. Restrictions on international visitors are being relaxed. All of these are important factors in assessing the outlook for the NYC economy going forward.

NATURAL GAS LOSES IN MICHIGAN

While recent legislative debates have increased attention on the potential role of nuclear as a source of “green” energy, natural gas has been in the spotlight as utilities explore the feasibility of using it as a bridge to the end of fossil fuel use to generate electricity. Utilities are seeking to use natural gas (as a clean alternative to coal) for incremental growth in generating resources. Environment and climate change are challenging the notion that natural gas is actually a clean alternative.

The situation has been coming up as utilities seek to replace legacy fossil fuel powered generating capacity while increasing the resilience and diversity of their generating resources. For coal centric utilities, the move to green energy has been frought with concerns with cost, reliability, and the need to rapidly decarbonize. This has led utilities, including many smaller ones, to look into the use of natural gas (as opposed to coal or oil) to meet local energy demand while also satisfying the environmental concerns of its customers.

Those efforts have led to mixed results. The latest example is the Grand Haven, MI municipal electric utility. Plans for a $27 million power plant in Grand Haven have been dropped by the Board of Light and Power, which cited community opposition as the reason. The plant would have been financed through a $45 million bond issue. It was intended to replace a coal fired plant which closed in 2020.

The move highlights the complexity of issues confronting utility managers as they operate in a non- fossil fuel environment. Grand Haven is unique in that in additional to traditional uses of the power and steam produced by a generating plant, the city uses power from generating sources it owns to heat its sidewalks to remove snow. Now it will have to find resources to fund snow removal by more traditional means.

We see Grand Haven as an example of the environment facing municipal utility operators as they try to adapt to consumer demands and environmental regulation realities. Municipal utilities, given their status as government entities are, on a practical basis often more accountable to their local customer bases than the managements of investor-owned utilities. The Grand Haven general manager summed it up well – “We’re a community-owned utility. If the community doesn’t want us to do something, we don’t want to do it.”

KEYSTONE STATE P3 MOVES FORWARD

The Commonwealth of Pennsylvania decided to take a public-private partnership approach to the rehabilitation of eight major bridge crossings throughout the state. Now it is moving forward with that process pursuant to authorizing legislation. Act 88 of 2012, the state’s transportation P3 law, allows PennDOT and other state agencies, transportation authorities and commissions to partner with private companies to participate in delivering, maintaining and financing transportation-related projects. The law created the seven-member Public Private Transportation Partnership Board, appointed to examine and approve potential public-private transportation projects.

Upon board approval, the department or appropriate transportation agency can advertise a competitive RFP and enter into a contract with a company to completely or partially deliver the transportation-related service or project. The plan for the eight bridges was approved in November, 2020. Now, the state’s Public-Private Transportation Partnership Office announced that three teams will be invited to submit proposals.

The teams include some of the usual suspects in the large P3 universe. Each of the groups includes one of three established participants – Macquarie Infrastructure Developments; Kiewit; and Cintra Infrastructures SE. The firms have all participated in a variety of P3 projects across the country.

HOUSING IN CALIFORNIA

Two pieces of legislation designed to increase the production and availability of “affordable’ housing in California have been enacted. SB 9 authorizes a local agency to impose zoning and design requirements unless those standards would have the effect of physically precluding the construction of up to 2 units or physically precluding either of the 2 units from being at least 800 square feet in floor area, prohibiting the imposition of setback requirements under certain circumstances, and setting maximum setback requirements under all other circumstances.

The law limits how much an existing structure can be demolished to affect the development of existing units. The idea is to supplement existing housing rather than the outright removal and replacement of existing single family to facilitate development. That will limit the amounts of new units produced and addresses existing homeowner concerns.

SB 10 would, notwithstanding any local restrictions on adopting zoning ordinances, authorize a local government to adopt an ordinance to zone any parcel for up to 10 units of residential density per parcel, at a height specified in the ordinance, if the parcel is located in a transit-rich area or an urban infill site. It is a follow up to a previous legislative effort to facilitate and encourage more dense multifamily housing development around transit facilities. Areas around BART stations are a good example.

Those efforts were portrayed as engines of gentrification. We disagree. Housing is at the center of concerns which many have about the sustainability of a California without an economic middle. It is widely recognized that outmigration is fueled in large part by the cost of housing. As median single family home values are at the million-dollar level, the ability to sustain a middle-class life is significantly impacted.

INFRASTRUCTURE BILL DEBATE HIGHLIGHTS CLIMATE/JOB CLASH

As Congress debates and attempts to legislate the proposed $3.5 trillion infrastructure bill, concerns have been expressed about the ability of the economy as currently structured to facilitate many of the proposed programs and facilities. Specifically, there are real worries based on current conditions that there will be an insufficiency of skilled trades workers. This is true for both legacy type infrastructure projects as well as the emerging clean energy industry jobs.

On the green side comes one example from California. The California Solar and Storage Association asked the Superior Court of California in San Francisco to overturn a new requirement that installers be “certified electricians.” The industry employs 35,000 in California.

One of the subplots to the green energy debate is the issue of how much skill in the sense of true skilled tradesmen (electricians) is needed for both individual and commercial solar installations. The question is one of how much skill does it take to put the pieces of the erector set together versus what it takes to connect the system up and get it working.

The industry believes that the vast majority of the work is construction rather than electrical. This means that one or two certified electricians might be all that is needed to safely and correctly connect and get the system operating. The California requirement would likely require many more electricians. This then raises issues of equity in that the use of certified electricians will likely require the use of unionized electricians. Historically, skilled trade unions have been slow to deal with diversity and training of minorities.

INFRASTRUCTURE BILL AND THE TAX EXEMPTION

Don’t look now but the tax-exempt status of municipal bonds is again under attack. Much of the industry’s focus has been on items like advance refunding capability and private activity and direct pay bonds. All of these have garnered support in the market as well as Congress.   At the same time, the debate over the ultimate size of the pending reconciliation bill has renewed focus on how the plan would be paid for.

This has led to some on the progressive side of things to target tax exempt income. The proposed 3% high income surcharge is included in the budget reconciliation bill now being debated by Congress. The provision would impose a tax equal to 3% of a taxpayer’s modified AGI in excess of $5 million, or $2.5 million for a married individual filing separately. The legislation defines MAGI as adjusted gross income reduced by any deduction allowed for investment interest, which does not include tax-exempt income.

Proponents of this provision insist the tax-exempt municipal bond income would not be considered to be included in calculating modified adjusted gross income. As it stands, the language of the proposal does not make this crystal clear.  So far, comments on the provision rely on staff and outside attorney interpretations to support the view that the limit does not apply to municipal bond income. The proof will be in the details.

STATE RATINGS CONTINUE POSITIVE STREAK

As states continue to return to the market for general obligation debt, the positive impact of the first stimulus bill of 2021 continues to be reflected in the ratings of state GO debt. The latest beneficiaries were two states whose tourism-based economies absorbed significant hits as the result of pandemic induced shutdowns.

Nevada saw its rating outlook from Fitch revised to stable from negative. Given the crushing impact of the pandemic on Las Vegas, this is an impressive turn. Hawaii. S&P took a similar action for general obligation debt from Hawaii.

HYDROPOWER UNDER PRESSURE

There could probably not be a worse time for hydroelectric resources to be unable to generate their maximum amount of electricity. The debate over climate change and the vicious ongoing drought have put hydroelectric facilities under the microscope. Many see hydro as an important component of the effort to deal with climate change while others see dams as major environmental problems due to their impact on fish.

Now, the ongoing drought is casting a new light on hydroelectric facilities. The US Energy Information Agency has released its latest Short Term Energy Outlook (STEO) and the news about hydro is not good. EIA forecast that electricity generation from U.S. hydropower plants will be 14% lower in 2021 than it was in 2020. The dry conditions have reduced reservoir storage levels in some Columbia River Basin states.

According to the U.S. Department of Agriculture’s National Water and Climate Center (NWCC), reservoir storage in Montana and Washington is at or above average. However, as of the end of August 2021, reservoir storage in Oregon measured 17% of capacity, less than half its historical average capacity of 47%. Idaho reported reservoir storage at 34% of capacity, lower than its historical average capacity of 51%.

California contains 13% of the United States’ hydropower capacity; in 2020, hydropower plants in California produced 7% of the country’s hydropower generation. The reservoir at Lake Oroville, the second-largest reservoir in California, hit a historic low of 35% in August 2021, prompting the Edward Hyatt Power Plant to go offline for the first time since 1967. So far this year, hydropower generation in California has been on the lower end of its 10-year range.

The latest STEO expects hydropower generation in the Northwest electricity region, which includes the Columbia River Basin and parts of other Rocky Mountain states, to total 120 billion kWh in 2021, a 12% decline from 2020. We expect hydropower generation in the California electricity region to be 49% lower in 2021 than in 2020, at 8.5 billion kWh.

EQUITY AND TRANSIT

Minneapolis was at the center of the events which have continued to propel race issues to the front of almost any debate on public policy issues. One of the issues which continues to receive attention is the issue of equity. These issues touch on zoning policies, housing and education policies, and the availability of jobs. One of the early sectors to see the impact of this debate is transportation.

Much of the focus has been on how and where infrastructure is funded and constructed. This has put the location of roads and highways at the front of that debate. One segment of that debate is around the funding of mass transit. One of the early progressive targets has been the fare-based system of funding mass transit. This has led to the adoption of a variety of programs in cities across the country which seek to lower or eliminate fares for the lowest income passengers on those systems.

Now, after enacting zoning changes and developing a police reform program on the City ballot this November, the issue of assistance to low-income public transit patrons is back in the news in Minneapolis. It seems that 600,000 metro Minnesotans are currently eligible for a program initiated in 2015 which provides for reduced fares for income qualified riders.  So how frustrating is that only less than 5% of eligible riders are signed up for the program. It’s an example of even the best-intentioned programs like this in the end rely on individuals being motivated enough to participate.

WATER

Indian Wells Valley Groundwater Authority was established after legislation was enacted in 2014 to manage groundwater supplies. The law was a reaction to the results of prior droughts which led to large scale pumping of water sourced in aquifers. The Sustainable Groundwater Management Act (SGMA) was designed to protect the most overdrawn groundwater basins, often in rural regions, by requiring plans to balance the amounts of water being pumped from, and recharged into, aquifers by 2040.  Indian Wells is a groundwater management agency (GMA).

In its role as a GMA, Indian Wells plans to significantly raise the fees it charges to local systems which use groundwater. The increases – $2,100 per acre foot of water – would be especially meaningful for large industrial customers. One of them, Searles Valley Minerals, is the only U.S.-based company to produce a critical ingredient for the pharmaceutical glass used in COVID-19 vaccine vials. SVM also provides some water supplies to the unincorporated rural community of Trona (pop. 1,900). 

So far, the two large industrial customers are refusing to pay the higher charges leading to threats of cutoffs in the water supply. A lot of the pressure comes from the fact that Indian Wells Valley is home to the Navy’s largest single landholding in the world, the Naval Air Weapons Station China Lake, covering 1.1 million acres. The Navy was instrumental in the creation of the Groundwater Authority and has maintained tight controls on water demand which could impact the naval facility. Now, the drought is severely pressuring local supplies.

The rate increases are the subject of litigation. One proposed alternative would raise fees and reduce water usage to the authority’s preferred target, but over the two-decade period set up by the law.  Any decision on such litigation could be precedent setting so it should be of interest to all water investors.

SEC ENFORCEMENT

Recent testimony by the head of the Securities and Exchange Commission (SEC) indicated that the municipal bond market was expected to undergo closer scrutiny from the Commission. Even before those expanded efforts bear fruit, the SEC is already active in this area.

The Securities and Exchange Commission charged a San Diego County school district, Sweetwater Union High School District, and its former Chief Financial Officer, with misleading investors who purchased $28 million in municipal bonds. The District and the CFO are alleged to have provided investors with misleading budget projections that indicated the district could cover its costs and would end the fiscal year with a general fund balance of approximately $19.5 million, when in reality the district was engaged in significant deficit spending and on track to a negative $7.2 million ending fund balance. 

The SEC order issued upon settlement of the case indicates that the CFO managed the bond offering for the district and was aware of reports showing that the projections were untenable and contradicted by known actual expenses. Nevertheless, the District and the CFO included the projections in the April 2018 bonds’ offering documents and also provided them to a credit rating agency that rated the district, while omitting that the projections were contradicted by internal reports and did not account for actual expenses. Additionally, the complaint alleges that the CFO signed multiple certifications falsely attesting to the accuracy and completeness of the information included in the offering documents.

This is the fifth announcement of this kind regarding school district issuers since March of 2019.

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 spread of the Delta variant of corona virus has once again put the pandemic at the center of many current debates. We examine several sectors to see how the latest virus-related events are impacting several sectors and issuers. We also note that the argument over vaccine and other health regulations has run into an unanticipated hurdle. Proponents of vaccine requirements will have to overcome legislation and subsequent court decisions which support religious exemptions especially in regard to employment. Those decisions and laws actually make it harder to impose vaccine requirements in the face of claims of limits on religious freedom.

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COVID AND HOSPITALS

Hospitals throughout the pandemic were heavily impacted financially by the pandemic. The unanticipated costs of supplies associated with the pandemic and the loss of revenue associated with elective procedures was highly negative to bottom lines. The initial aid package delivered by Congress enabled many institutions to weather the revenue impact and maintain their credit ratings. The hope was that with the advent of vaccines that the pandemic’s impacts could be lessened and more regular operations would support hospital finances.

The reality has been that the rollout of the vaccine and the reluctance of too many to be vaccinated have led to the situation which prevails today. The rise of more difficult cases has once again strained hospital resources. One unanticipated factor has been the reluctance of healthcare professionals to be vaccinated. In combination with the general issue of a labor pool that is slow to return to the pre-pandemic status quo. When you add in burnout from the pandemic, hospitals are under real pressure.

All of this occurs against the backdrop of the revenue impacts on hospitals as the result of COVID.  Alvarez & Marsal is a consulting firm that specializes in turnarounds in the healthcare field as well as other sectors. They have released research about the impact of the pandemic on hospital revenues. Their data covering the 25 largest not for profit hospital systems showed Net Patient Revenue plunged almost 20 percent from the fourth quarter of 2019 to the second quarter of 2020 as the country locked down. The infusion of federal CARES Act funding enabled revenue to recover at the end of the 2020 calendar year to a drop of just 3 percent from 2019 to 2020.

Operating income declined 11 percent from 2019 to 2020. Discharges decreased 18 percent (4th quarter 2019 to 2nd quarter 2020) and 9 percent year to year (2019 to 2020). Patient Days dropped 13 percent (4th quarter 2019 to 2nd quarter 2020) and 4 percent year to year (2019 to 2020). Length of Stay increased 7 percent (4th quarter 2019 to 2nd quarter 2020) and 6 percent year to year (2019 to 2020). Surgeries fell 36 percent (4th quarter 2019 to 2nd quarter 2020) and 11 percent year to year (2019 to 2020). Emergency Room visits declined 31 percent (4th quarter 2019 to 2nd quarter 2020) and 17 percent year to year (2019 to 2020).

How do hospitals cope? The latest example is the Henry Ford Health System in Detroit. It recently announced the temporary closure of some 120 beds across its system due to the inability to meet state staffing requirements. For a large system like Henry Ford, this represents less than 10% of beds. At smaller facilities, the impact of that number of closures would be significant. It’s not expected to be a serious credit factor at the larger institutions. Once again, the view that bigger is better in healthcare is validated.

COVID MANAGEMENT

From the start of the pandemic, mass transit agencies in general and the MTA in particular have been at the center of efforts to maintain ridership and finances. In New York, this week marked the return to the office for City employees. While there are many concerns regarding the details of the New York City plan (capacity limits, mask requirements, testing for the unvaccinated), one of the major concerns on all sides of the issue has to do with concerns over returning to mass transit.

It is not currently mandatory for MTA employees to get vaccinated, but the authority will begin requiring weekly COVID-19 tests on Oct. 12 for those who do not have proof of vaccination. The agency says that more than 70 percent of MTA employees have received at least one dose of the coronavirus vaccine. Lower rates of vaccination are seen among employees for transit divisions, like trains and buses.

MTA has provided a $500,000 death benefit to its nearly 68,000 employees since last year to vaccinated employees who die from COVID-19. That benefit is being extended through the end of the year. A total of 171 MTA employees have died of COVID-19–related causes since the beginning of the pandemic. Only three MTA employees have died of COVID-19–related causes since June, when the policy was implemented.

The extension of the benefit period through year end is part of the effort to encourage the recalcitrant to get vaccinated. That effort will support efforts to return more private sector employees to an office setting.

COVID LABOR SHORTAGES

Many sectors of the economy are reporting labor shortages, The number of help wanted signs on a wide variety of businesses is significant. It isn’t just private businesses which are seeing the pressure from labor shortages. One area of emerging pressure is an apparent shortage of school bus drivers. Between personal vaccination resistance and the lack of availability of vaccines for many school age children, the situation is not a total surprise. Add to that the uncertainty created by efforts in some states to preempt mask requirements and it is clearly a problem.

It is not clear who will pay the costs of replacing school district workers. In Massachusetts, the governor is committing some 90 National Guard troops to drive school busses due to driver shortages in Chelsea, Lawrence, Lowell, and Lynn. A total of 250 Guard have been activated for the purpose of aiding in addressing a driver shortage throughout the Commonwealth. In Delaware, a charter school in Wilmington, Del., has resorted to offering parents $700 to not use the school bus system to get their kids to and from school.

A more extreme situation confronted Pittsburgh, PA. It postponed the opening of its schools by two weeks. The school district was short 426 drivers (229 CDL and 207 non-CDL), resulting in a seat gap for approximately 10,996 City of Pittsburgh students. A combination of hiring and limits of the availability of buses vs. the option to walk is being used to address the shortage. Pittsburgh also offered to “reimburse” families who transport their children on their own.

COVID LEGISLATION

A review by Kaiser Health News found that 26 states pushed through laws that permanently weaken government authority to protect public health. Some of the more egregious examples are Arkansas (mask ban), Idaho (county officials allowed to override public health orders), and Kansas and Tennessee where school boards, rather than health officials, have the power to close schools.

In at least 16 states, legislators have limited the power of public health officials to order mask mandates, or quarantines or isolation. In some cases, they gave themselves or local elected politicians the authority to prevent the spread of infectious disease. At least 17 states passed laws banning COVID-19 vaccine mandates or passports, or made it easier to get around vaccine requirements. At least nine states have new laws banning or limiting mask mandates. Executive orders or a court ruling limit mask requirements in five more.

The Arkansas law has been stayed by the courts for now. Troubling is the view expressed by the bill’s sponsor who said “It’s time to take the power away from the so-called experts, whose ideas have been woefully inadequate.” The bill was based on a template from the conservative anti-government group the American Legislative Exchange Council (ALEC). ALEC is behind any number of laws designed to achieve conservative goals in state legislatures. The move to limit the powers of local health officials has led to at least 303 public health leaders who have retired, resigned or been fired since the pandemic began.

For ESG investors, these changes should raise flags. When it comes to public health, these issues raise questions about how the potential impact of these changes reduce the ability of officials to deal with crises in real time. That should put issuers operating under those constraints to compare unfavorably with other issuers when it comes to ESG investment measurement.

COVID AND GOVERNMENT EMPLOYMENT

The number of noneducation state and local jobs, which make up about half of the public sector and include workers in areas ranging from city parks and city halls to police forces and correctional facilities, is down by more than 400,000 since the pandemic struck, according to the latest federal Labor Department estimates for August as cited by the Pew Foundation. Private employment is up 3.4% since December, though still not fully recovered from its losses since the pandemic struck earlier in 2020.

The greatest reductions since the pandemic began have been in local governments. As of August, local public payrolls were down 5.3% from pre-pandemic totals, more than 350,000 jobs, excluding education positions.  State government employment—also excluding education—has declined slowly every month this year, with the total down 2.1% from pre-pandemic levels, or about 57,000 jobs.

The research shows that multiple factors are holding down employment. Temporary layoffs have not been fully offset by rehires as in person services are still slow to come back. Budget pressures that led to hiring freezes or furloughs earlier in the pandemic remain in place in some jurisdictions. The “great rethink’ among many workers which is slowing a return to private sector jobs is also hitting government. More workers are leaving government, including retirements. There were fewer noneducation workers in state and local government than in July 2019 except in Rhode Island, South Dakota, Texas, and West Virginia.

One caveat to the numbers. Employment in industries operating in facilities owned by government also include employment at state and/or tribally owned facilities. The best example is tribal owned casinos. Pew notes that Labor Department estimates show that there were nearly 23% fewer workers in state and local government-owned amusement, gambling, and recreation facilities in March compared with a year earlier while fire protection jobs were essentially unchanged.

ILLINOIS CLEAN ENERGY PLAN ENACTED

Exelon plans to refuel its Byron and Dresden nuclear plants ‘as a result of the action taken by the Illinois legislature to enact a comprehensive energy bill.’ The Byron plant was slated for defueling and closure beginning this past week. The Dresden plant was to be taken offline in November.

The municipal credit angle is clear. As we detailed last week, the measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The takeaway from the battle over energy in Illinois is that it highlighted the issues which impact the debate – nuclear vs, no nukes; the loss of employment and tax base, and the uncertainty as to the actual costs of an energy transition. Over the past half century of the environmental debate, the inability of advocates to estimate the real costs of the contemplated changes have always caused skepticism.

In the case of the Illinois plan, the official estimate of the initial costs—an average electricity bill increase of $3.55 per household per month—is likely to be less than the true costs. Isn’t it always? Already, flaws in the law are being cited. One example is the plan to offer rebates of up to $4000 to support electric vehicle sales. The law does not address the fact that existing programs to provide rebates are funded from eight counties in and around Chicago. Absent additional legislation, only residents of those counties would benefit from the rebate.

CHICAGO – FUNDING THE POLICE

The fact that Chicago’s problems with violent crime have become a national issue and the power of local political interests remains intense does not lessen the impact of the announced contract agreement between the City and its police force. Keep in mind that the agreement occurred in the post- George Floyd environment and in the wake of several incidents of questionable police involved shootings.

In this environment, the City has announced a new contract that gives them a 20% pay raise over eight years, more than half of it retroactive. The agreement was still police friendly on other issues. The city did not get the requirement it sought compelling officers to disclose secondary employment or hours worked at those second jobs. It also did not cap those moonlighting hours.

The agreement creates the need for the city to find $377.6 million for four years of back pay. Retroactive paychecks will range from $18,000 to $36,000, depending on seniority and retroactive overtime pay that will add as much as 20% to that amount; and back duty availability pay that means up to $7,600 per officer.

We view the agreement as credit negative for the City. The issue is as much based in concerns about management as it is on the size of the raise. The Mayor has been dealing from a position of weakness in terms of her relationship with the police. But she inherited the lack of a contract from former Mayor Rahm Emmanuel.

How it is dealt with is another issue. The City’s 2021 budget (the fiscal year is the calendar year) set aside just $103.3 million for back paychecks. The city plans to cover the rest by refinancing $1 billion in existing debt to generate $232 million in savings. The city still must find an additional $325 million to cover future costs of the contract. 

The hope was that the negotiations in the face of the pandemic and fiscal realities would create real change in the police department. Here’s how it impacts individual officers. The contract calls for rank-and-file CPD officers to receive a 10.5% retroactive pay raise and 9.5% more through January 2025. The city has also agreed to increase so-called “duty availability pay” to $950 per quarter and the annual uniform allowance to $1,950.

Duty availability pay will be offered “retroactively” from July 2017 to all officers whose probation period has ended after 18 months. Going forward, that pay will be available after 18 months, instead of 42. Rank-and-file police officers will be asked to absorb half of the increase in health care contributions imposed on police sergeants and Chicago firefighters and paramedics. The second half of that increase will be postponed until July 1, 2022 to allow members to retire under the current levels: 2.2% at age 55, or 0% for those 60 and over.

The failure to seize the opportunity reflects the Mayor’s relatively weak position. The details defer much of the difficult work in addressing long term issues with the police (pensions, increasing costs of managing litigation) to future negotiations. For the Mayor, the most important feature of the deal is its length. It guarantees labor peace until after the 2023 mayoral election.

LADWP

The Los Angeles City Council voted to have the Department of Water and Power transition to 100% renewable energy by 2035. That is ten years sooner than was envisioned just three years ago. In March of this year, the LA100 study was released. The study was conducted by the U.S. Department of Energy’s National Renewable Energy Laboratory in partnership with LADWP and USC. It found that the DWP — the nation’s largest municipal utility — can reach the city’s goal by 2045 or sooner if it rapidly deploys wind and solar power, electrical storage and other technologies.

The LA100 study showed that the transition to 100% will cost between $57B to $87B.  The Council estimated that the clean energy transition could create 9,500 jobs. As of calendar year 2019, renewable energy constituted 34% of the overall mix and 51% of the total power generated at LADWP was free of carbon.

ST. LOUIS FOOTBALL LITIGATION

The lawsuit filed in 2017 in state court in Missouri claims the NFL broke the league’s relocation rules by allowing the Rams to leave St. Louis after the 2015 season, and misled the public about its intention of staying here. The plaintiffs claimed the Rams’ departure cost the city millions in amusement, ticket and earnings tax revenue. The suit alleges breach of contract, fraud, illegal enrichment and interference in business by the Rams and the NFL, causing significant public financial loss.

The plaintiffs in the case are the St. Louis Regional Convention and Sports Complex Authority (RSA), the public entity that owns the Dome and in 2015 and 2016 spent $18 million on a failed plan to keep the Rams in St. Louis with a Mississippi riverfront stadium, and the city of St. Louis and St. Louis County. The RSA gets its funding from the city, county and state of Missouri.

Absent a settlement, a trial is scheduled for January in the midst of the NFL’s playoffs.  St. Louis is seeking $1 billion or more through the litigation. The total return to the plaintiffs will be smaller as they have agreed to pay their attorneys 35% of any award.

NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

One of the longstanding sources of support for the Tar Heel State’s local government credits has been the Commission. The existence of the Commission and the powers it has have long been cited for the State’s generally positive local government credit profile. While the State does not directly support local credits, the Commission has established a perception that it is a key factor in preventing defaults.

Some 1,100 municipalities, counties, boards of education, public hospitals, utility districts, mental health agencies, housing authorities, universities, airport authorities and other public authorities are subject to the Commission’s oversight. Established in response to the negative impacts of the Great depression on local North Carolina credits, the Commission approves debt issuance and reviews the financial operations of issuers. Recently, evidence of the Commission’s positive role came in the announcement that 38 municipalities had been released from its Unit Assistance List. This reflects the strengthened condition of those issuers.

The State is not taking things for granted. SB 314 was passed by the General Assembly and signed into law last month.  The new law provides for a legal process for the voluntary or involuntary dissolution of a distressed governmental unit that is no longer viable. It also gives the LGC the authority to mandate specialized training for officials in a unit of local government exhibiting fiscal distress.

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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NEW YORK PENSIONS

Throughout all of the years when the State of New York’s credit was on its way down, one area which remained a positive was the management of the State’s various pension funds. It has been a reflection of regular funding, good investment management, and flexibility in terms of the structure of the pension fund obligations.

Over recent years, the issue of how to effectively lower pension benefits and funding requirements in states with significant unfunded pension obligations has been a continuing problem. One way is to introduce different tiers of pension beneficiaries based on date of hire. It is a slow path but a steady one and it has proven out.  New York has had several tiers of pension categories which clearly establishes a precedent.

Another issue has been the debate over how realistic the discount rates being applied were when pension funds estimated their unfunded liabilities. The higher the assumed return to the fund the better off the fund would be so long as the annual actuarially required contribution (ARC) from current funds was made. These assumed rates of return were kept high even in the face of poor investment performance. It allowed legislators to reduce annual ARC requirements and avoid tax increases.

Eventually, one has to pay the piper and the pension funds have been no exception. Slowly, assumed rates of return have been lowered. There has still been concern that in many states the assumptions remain too high. Here once again, NYS finds itself in a leading position. The State Comptroller and pension fund overseer has announced that the long-term assumed rate of return on the Fund’s investments will be lowered from 6.8% to 5.9%.

In 2010, he decreased the rate from 8% to 7.5%, in 2015 to 7% and in 2019 to 6.8%. The median assumed rate of return among state public pension funds is 7.0% as of August 2021, according to the National Association of State Retirement Administrators. This comes as the State was able to report a funding ratio of 99.3%.

MEET ME IN ST. LOUIS

The City of St. Louis has always suffered economically in comparison with its surrounding St. Louis County. The trend of migration from the City to the County in the post WWII era accelerated in the late 1960’s. The resulting damage to the City’s tax base and economic base has been a drag on its credit for years. The existence of the City and County as two distinct governments created tensions between the two governments which have interfered with sound regional infrastructure development and the provision of many services.

At the same time, the City’s financial management was weak and its fiscal position and ratings continued to decline. The result was a decline to a Baa2 rating for general obligation bonds and a Baa3 lease appropriation rating. Now, the City has benefitted from the strong pre-pandemic economy and reported consecutive years of current budget surplus. Add $ 498 million of federal funding through the American Rescue Plan Act (ARPA) to the mix and the outlook improves.

And so, it is as Moody’s upgraded the City of St. Louis, MO’s general obligation unlimited tax (GOULT) debt rating to A3 from Baa1. Appropriation debt is now rated Baa2. The balanced current operations along with the aid provides a more stable base to support the credit. The city has remained the center of employment in its region and it does have a tax structure which captures revenues from commuters through economically sensitive activity taxes such as earnings, payroll, and sales tax revenue. This is a real factor in offsetting the less favorable economics and demographics of the City. Thus, the positive fiscal result.

NYC AND ELECTRIC VEHICLE CHARGING INFRASRUCTURE

The City of New York will pilot the installation of public vehicle chargers for electric vehicles. They will be provided at newly reserved curbsides beginning in Manhattan. They are designed to charge a vehicle in under one hour up to at least 80% capacity. Charging will cost of 35 cents per kilowatt-hour. 

Press reports indicate an expectation that the DOT will also announce plans to expand its network of curbside charging stations from the current 24 stations — each with two plugs — to 10,000 by 2030. However, those chargers will be of the slower “Level Two” variety. The initial 24 stations are part of a pilot program to install 100 curbside chargers by next month. The installations are part of a four-year “demonstration”. 

It is the sort of investment if cities are serious about their curb management from both business and transportation perspectives. Reservations of curbsides for these vehicles as well as reservation of curb for deliveries are two ways localities can take a forward leaning approach to vehicle management. Larger cities are in a unique position to take advantage of their effective ownership of their streets including curb space. It is a way to drive results and not just policies.

WEST VIRGINIA COAL UPDATE

We have regularly discussed the role of regulation in the process of decarbonizing the electric power grid. In particular, discussed the role out of state regulators play in the regulation of the operation of coal fired generating units which supply power to those states. Recently, we focused on regulatory actions in Virginia and Kentucky which could impact the operations of coal fired generation in West Virginia. Decisions in those two states limiting the amounts which could be charged to customers in those two states have made an earlier closing date for coal assets more likely.

Now, Appalachian Power and Wheeling Power petitioned the West Virginia Public Service Commission to approve making West Virginia customers responsible for $48 million annually to cover wastewater compliance work to keep the John Amos, Mountaineer and Mitchell coal-fired generating plants in Putnam, Mason and Marshall counties federally compliant with federal effluent limitation guidelines. The companies are asking West Virginia customers to shoulder all of the cost burden for these planned upgrades required to keep the plants compliant with wastewater discharge guidelines. Not making the wastewater treatment upgrades would require that the plants shutter in 2028.

ENERGY AND ASSESSMENTS

The vulnerability of reliance on extractive energy industries has been made clear. What policy changes could not accomplish in terms of the production of fossil fuels, the pandemic and its impact on oil demand did. One example of the potential impact of a changing energy environment occurs in Colorado.

Colorado is better known for its relationship with fossil fuels through mining. There are areas which produce oil. One of them is Weld County. This northern Colorado county produces an estimated 90% of the oil extracted in the state. The County has gone through the declines in production associated with the pandemic which reduce unemployment and support tax revenues. Now that process has impacted the County through a reduction in assessed valuations for oil and gas properties.

Weld County its all-time oil production peak at nearly 170 million barrels in 2019. Production dropped to just under 150 million barrels out of the ground in 2020. According to production data kept by the Colorado Oil and Gas Conservation Commission, this year’s yield is on pace to fall an additional 30 million barrels. The County saw an unprecedented $2.7 billion reduction to its assessed property valuation last year, a nearly 18% decline from 2019. This resulted in property tax revenue declines of $45 million. 

The County is not unprepared. It has $100 million in a general contingency fund, another $100 million in its public works reserve fund and $36 million in a reserve account for county buildings. This should aid in the transition from extraction Colorado’s oil and gas sector is taxed at a property assessment rate of 87.5%, three times what commercial property is taxed at and more than 12 times the rate for homes.

At the local level, the reliance on large taxpayers is not without risk. The Platte Valley School District relies on oil production facilities for an estimated 95% of revenues. The assessed property value in the school district last year went down even more sharply — 34% — than the county as a whole.  That could have implications for the County tax base going forward. Much of the population increase in the County is suburban sprawl from Denver, fueled by lower housing costs and property taxes. Those lower residential taxes reflect the revenue derived from energy extraction.

NYS AND ELECTRIC VEHICLES

One of the questions we asked when Andrew Cuomo resigned was what does the change in governor in New York mean for a variety of policies – criminal justice, the economy, the state’s role in economic development, the environment? This week we received our first indication of where policy might be going under a Hochul administration.

The new Governor has signed legislation that will require all passenger vehicles sold in the state to be emission-free by 2035. Hochul signed an order instructing the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. A simultaneous executive order calls for the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. The goal is to eliminate emissions from medium- and heavy-duty vehicles by 2045.

The actions make New York State the second, after California, to enact limitations on sales of internal combustion powered vehicles.

CLIMATE LITIGATION

Hoboken, NJ will have its lawsuit against fossil fuel producers heard in state, rather than federal, court. Hoboken sued oil and gas companies in 2020, charging climate change-related violations both of state common law and New Jersey’s Consumer Fraud Act. The city joined several others in pursuing legal remedies to address climate change issues.

The companies petitioned to move the case to federal court which is seen as a friendlier venue for these suits. The judge ruled that Hoboken’s lawsuit is not subject to “complete preemption” under the Clean Air Act or the Outer Continental Shelf Lands Act and that no federal officer is implicated in the city’s suit.  At the same time, he cautioned the city that “federal law may ultimately block Plaintiff’s claims through ordinary preemption.” 

That issue will have to be decided in state court. The defendants are likely to appeal the matter to the U.S. Court of Appeals for the 3rd Circuit.

VEHICLE MILEAGE TAXES

In California, the legislature recently extended a road usage charge pilot program until Jan. 1, 2027.  The debate spotlighted the usual suspects in terms of the arguments made and the pitting of rural versus urban interests. Rural voters and their representatives complain that the mileage tax would penalize then because of their need to travel relatively large distances as part of their day-to-day life.

That argument ignores the reality that under the current scheme, electric car drivers get all of the benefit of infrastructure while only gas-powered drivers pay those costs through taxes. If your car gets 20 mpg and you take a 60-mile trip, you use three gallons of gas which generates an average of 27.9 cents per gallon. So that trip cost (in terms of a tax) 84 cents. A 1.4 cent per mile mileage tax would generate the same level of revenue for the same trip.

The logical conclusion is that vehicle mileage fee proponents have done a bad job of addressing this concern. Take Pennsylvania where initial estimates of what a vehicle mileage fee would be are around 8 cents per mile.  That simply is not going to fly with long distance drivers. It then generates opposition to the concept rather than the price. The actual amount of the fee is not the big hurdle but it gets in the way of acceptance of the concept. It also comes as very mixed signals come out of Washington.

On the one hand, are the climate deniers and fossil fuel defenders who oppose any change. There is however, some bipartisan support for vehicle mileage fees in Congress and the Transportation Secretary has spoken very favorably about the VMT concept. Nevertheless, the proposed $3.5 trillion infrastructure package originating in the House does not include a VMT.

MUNICIPAL UTILITY IN MICHIGAN

The State of Michigan has not seen the creation of a municipal electric utility since 1912. Reliability issues, especially in the recent past have led many to question the ability of investor owned, profit based electric utilities to properly invest in grid resilience and reliability. It is an issue which has gained heightened attention in the aftermath of winter storms in Texas and the current disaster in Louisiana. We expect that this trend will continue.

The latest municipality to deal with these issues is the City of Ann Arbor, Michigan. The City Council voted unanimously, to ask the city’s Energy Commission to make a recommendation by Dec. 31 on whether the city should undertake a feasibility study to explore alternatives to the current situation which relies on DTE Energy. The hope by proponents of municipal power is that the process could lead to recommendations for the formation of a municipal utility.

Such an action would have to be approved by the City’s voters. State approval is not needed. In the City, the Energy Commission is expected to make recommendations to the City and then a feasibility study would be undertaken. Supporters of a municipal utility hope that the process leads to a ballot initiative in November, 2022.

PURPLE LINE P3

Maryland’s Purple Line has been a poster child for what could go wrong with a public-private partnership. The project was supposed to be completed by the Spring of 2022 but litigation and other construction delays destroyed that timetable. Eventually, the private partner pulled out of the project threatening its viability and completion.

The State of Maryland stepped into the process designing new partnership agreements dealing with many of the issues which disrupted the project. The net result is that the State would have to accept more of the financial costs of delays associated with approvals and litigation. Now, the Maryland Transit Administration, said the agency and private team managing the project expect to have a new contractor selected in December and a new construction contract finalized by Feb. 17. 

The hope is that this process could allow substantial construction to resume in the Spring or early Summer of 2022. A new construction contract previously had been scheduled to be finalized this month but, construction teams bidding on the project asked for more time to submit proposals. The timing change because it would modify a $250 million Purple Line legal settlement approved in December.

MDOT has been able to fund some work over the past year, including moving utility lines and manufacturing light-rail vehicles and some of the system’s electrical components.

PRIVATE HIGH SPEED RAIL

We always notice that high speed rail developers highlight the “private” nature of their projects and the lack of reliance on grants for funding. The effort is designed to make the projects look like products of an all private approach to funding. In the end though, these projects all seem to rely on some form of cost subsidy from a government funding source.

The latest example is the Texas Central, a proposed high speed line between Dallas and Houston. Texas Central has publicly stated that construction is projected to begin at the end of 2021 or beginning of 2022. Now, it appears that the start of construction hinges on the inclusion of federal lending in the infrastructure bill currently being written in the House.

The cost of the project is estimated at $24 billion. Financing commitments from private lenders cover about half of that amount. The remainder would be financed by federal loans to the project. That funding would be cheaper than private funding. Texas Central estimates that the fare for the train would be $150 based on comparisons with current airfares.

Land acquisition remains a hurdle for the project. 40-percent of the land required for the train has already been secured.  The remainder is planned to be acquired after financing is in place. The only sure section of the project is to be an initial test phase. Once financing is secured, the first 50-miles of track will be built from Dallas to the south so engineers can conduct tests. 

ILLINOIS POWER

A 100% clean energy sector by 2050 is the goal of legislation in Illinois which was under consideration as we go to press. The plan would lead to the closure of private, for-profit coal powered plants that generate more than 25 megawatts of electric generating units by 2030, and it would close down municipally-owned coal-fired power plants and natural gas power plants by a deadline of 2045. The proposal includes $694 million in taxpayer funds for Exelon to prop up its carbon-free nuclear power plants in Byron, Dresden, and Braidwood. 

Governor Pritzker’s office said the current version of the Senate bill would still allow the municipally-owned Prairie State and Springfield City, Water, Light, and Power coal-fired plants to “continue polluting for 24 years with no restrictions.” The measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The pressure to protect the public power owners of the Prairie State Generating plant was intense. After all, municipal purchasers of the plant’s output are spread across three adjoining states to Illinois. The significance of the target date of 2045 for public power operators is that essentially all of the debt of the various agencies and municipalities which has been issued to finance Prairie State by that time. There is however, no guaranty that future legislatures will not enact legislation which could shorten that time frame. Should that be the case, some of the borrowers would find themselves paying for stranded assets. 

Prairie State emits 12.7 million tons of carbon dioxide per year, the most of any generating plant in the state.  The two IOU owned nuclear facilities are cited for their lack of carbon emissions and their role as employers of over 20,000.

CARBON FREE BUT…

The Illinois debate reflects many facets of the national energy debate. Obvious existing carbon free generation – nuclear and hydroelectric – are under pressure on other environmental grounds. While debates continue around the country – nuclear in Illinois and hydro in the Pacific northwest – the impact of drought on the debate complicates it.

The drought has significantly reduced the total amount of carbon free power for the West and Southwest. Hoover Dam’s normal capacity is 2,074 MW. Currently it is limited to 1,567 MW. The dam requires a power pool minimum elevation of 950 feet to produce power (with an expected capacity of 650 MW), Lake Mead’s elevation as of Aug. 31 was 1,067.96. feet. USBR’s California hydropower reservoir water levels are expected to remain above power pool minimums throughout the remainder of 2021, including at the 663-MW Shasta power plant at Shasta Dam and the 162-MW Folsom plant at Folsom Dam. Against this backdrop, there is growing support in the Northwest for removing dams in the name of species preservation.

The nuclear issue comes down to dollars and cents. New York and New Jersey subsidize their nuclear generators. A move to do so in Ohio has resulted in a significant criminal scandal. The energy industry has been at the center of scandal in Illinois. Nuclear generation has threatened municipal utilities in South Carolina and Florida. This has created a huge hurdle to overcome the carbon free nature of nuclear generation.

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 reversal of the pandemic has reinstated pressure on many credits. Many areas are reinstating limits on activities. School districts are having to quarantine students who test positive. Indoor activities are increasingly seeing mask requirements and testing requirements. Reopening of cultural and entertainment facilities are being delayed. The specter of a second Christmas season is a real risk to local finances.

It is not realistic to assume another massive federal bailout. So, the risks of the pandemic, especially in those states most resistant to regulation, are arguably as big a threat to credit as they have been at any time since the onset of the pandemic. So, we look at local credits, hospital credits, and higher education credits as likely being at the front of the line in terms of exposure to pandemic risk.

GIG WORK BACK IN COURT

After we went to press last week, a California judge found that determined that Prop. 22 infringes on the power the state Constitution explicitly granted to the California Legislature to regulate compensation for workers’ injuries. This is the law which sought to treat workers like those for Uber and others as independent contractors. The initiative had several different goals. The judge in the case cited that factor in declaring the law unconstitutional. The ballot measure also violates a constitutional provision that requires laws and initiatives to be limited to a single subject.

The ruling is based on the idea that a ballot initiative cannot be amended after it is passed by voters, any unconstitutional provision renders it unenforceable. The decision effectively kicks off a period of what is likely to be a year while appeals work their way through to the California Supreme Court. If the TNCs are successful in getting an initiative on the Massachusetts ballot in 2022, the election and the court decision could occur at the same time.

PUERTO RICO WATER FLOATS

Once again, the long-term financial strength and credit strength reflected in water and sewer utilities has been validated. One successful part of Puerto Rico’s financial stabilization was completed when the Puerto Rico Aqueduct and Sewer Authority restructured its outstanding debt. The refinancing, which was priced on Tuesday, will generate approximately $570 million in debt service savings over the life of the refunding bonds. The Authority was able to execute transactions that included an exchange, a tender for cash, a current taxable refunding, and a forward delivery refunding.  

The all-in interest cost, including expenses associated with pricing and selling the new issue, was 3.24%. If that doesn’t validate the notion that it is a great time to be an issuer, I’m not sure what will. The pricing reflects an assumption that a net rather than a gross revenue pledge will secure debt service. All in all, it marks an important milestone in the process of Puerto Rico’s financial recovery. A successful refinancing in December 2020 and this current transaction have lowered Prasa’s annual debt service requirement by an average of $35 million per year and approximately $920 million during the life of the bonds. 

INTERSTATE REGULATION

The Commonwealth of Virginia State Corporation Commission approved a request for a rate increase for Appalachian Power. So far so good. What did not get approved was the full request made by the company. That request was designed to generate revenues sufficient to fund environmental improvements to two coal-fired power plants that generate the bulk of the utility’s electricity. The SCC’s ruling, while not final, could force the closure of the Amos and Mountaineer plants — both in West Virginia — by 2028, Appalachian has said.

This puts the West Virginia plants in jeopardy even though the Mountaineer State’s regulators take a more sympathetic view. Once completed, the improvements will keep the plants in operation until 2028. The denied portion of the rate request would have funded additional surface water protections, which would have extended the plants’ lifespan by another 12 years. It’s not like there is a strong forward market for coal generated electricity past then.

The Virginia Clean Economy Act passed in 2020 requires Appalachian to use all carbon-free electricity by 2050 for its approximately 524,000 customers in Virginia. So, despite the location of the plants in another state, the regulatory requirements of the service area apply.  It is an example of a number of similar situations where operations of generating facilities in one state can be impacted by regulatory actions in another.

The municipal angle is that there are several municipal agencies who either own or participate in fossil fueled generation with investor owned partners from other states. Their state regulatory schemes will apply and could force changes in ownership of out of state generating assets. The Pacific Northwest is the likeliest region to see these phenomena as strong regulation in Washington State is threatening the ability of the state’s utilities to hold fossil fueled assets.

NYC REBOUND

With so much attention focused on the course of the pandemic as the Delta variant expands, it is easy to overlook some positive signs for NYC. There remains significant concern about the outlook in an environment where limits on rental payments and evictions expire.  Yet there are signs that the residential market is returning to form. July is typically the highest turnover month for apartments in the city.

While many tenants are in place as the result of rent and eviction imposed for the pandemic, the demand for new apartments has skyrocketed. Along with that boost to demand has come a major escalation in rents. In light of the recent experience, it is not surprising that landlords are seeking every dime they can. Not only are sticker prices up but the days of discounting appear to be over.

Nonetheless, the recent positive turn in the residential market does not necessarily bode well for the commercial market. It is still unclear what the ultimate breakdown will be between in office vs. remote work. The full approval of vaccines may finally alter that dynamic. While we believe that some greater proportion of workers will be permanently remote than was the case before the pandemic, we think that ultimately the realities of corporate management and culture will lead to most office workers returning to that setting.

That will be the long-term key for those businesses reliant on essentially daytime traffic associated with work versus the kinds of establishment which rely on tourism and/or entertainment.

EVICTION MORATORIUM

“If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.” And with that the federal moratorium on evictions currently authorized through executive order comes to an end. Now we move into the next phase of recovery from the pandemic, a return to more “normal” conditions. The decision from the Supreme Court holding that the C.D.C. had exceeded its authority will now either force Congress to enact legislation or end the moratorium.

The decision comes as there is much focus on the poor distribution of funds authorized to provide aid to renters directly. In turn, the pressure on landlords continues as owners have not been allowed to avoid the costs of operating buildings. Localities still need to collect property taxes. Only about $5.1 billion of $46.5 billion in aid authorized had been disbursed by the end of July, according to the Treasury Department.

Now that the moratorium has been declared illegal, the focus turns to those states where tenant protections are weaker and eviction proceedings more rapidly concluded. Four states – South Carolina, Tennessee, Georgia and Ohio – have the highest levels of rent backlog and will be at the leading edge of the issue. The long-term answer is legislation but we see that as unlikely.

METROPOLITAN OPERA

This leading cultural institution and contributor to the NYC economy has been on a pronounced downward trajectory for the last ten years. Changes in management led to changes in the Opera’s programming with an emphasis on “newer” (younger) customers. As the transition unfolded over that time period, attendance and demand continued to be pressured as the new offerings did not generate enough new interest to offset the negative impact of the programming changes.

Since then, the Opera and its unions have engaged in pitched battles over the effort to contain costs in the face of disappointing attendance. That continued as the Opera faced the realities of the pandemic including giving up a bit over a season and a half of cancelled performances. This culminated in the decline of the Opera’s credit ratings to Ba2.

Looming over the Opera regardless of the course of the pandemic was its problematic relationship between it and the employees, especially musicians. The ongoing labor standoff threatened the reopening of the Opera even as the pandemic waned. Now, an agreement with the most prominent union, that representing musicians has been reached. This should enable the Opera to conclude remaining more minor disputes and allow performances to occur.

That is good for the City and its tourism and entertainment industries. They lie at the heart of any city recovery. At the same time, the Met’s settlement with its workers reflects its long-term operating realities. The pay deal reached reduces the number of permanent musicians and it requires the remaining musicians to take a 3.75% pay cut. There are provisions linking pay levels to attendance levels and resurgent revenues. Nonetheless, the immediate impact is negative.

NPPD STUCK IN THE CLIMATE MIDDLE

Nebraska Public Power District has long been a reliable electric utility credit. Its construction programs were generally successful and it managed to be a stable credit even through construction of nuclear generation. It is not a criticism to view it as a sleepy credit. Now, the District finds itself in a controversial position despite its history.

As the owner of a nuclear facility and a large coal fired generating facility, NPPD now finds itself in the political crosshairs. The climate debate has now extended its reach into the Cornhusker State. On one side are environmental and climate activists who oppose fossil fueled and nuclear fueled generation. They would like to move the District away from both of those sources and develop new renewable generation. They also wish to prevent large scale transmission projects.

On the other side is Governor Pete Ricketts. He advocates the use and expansion of nuclear power and investment in carbon capture in order to save coal plants in general and the District’s huge Gentleman goal fired generator. A recent opinion piece from the Governor sums up his position. He buys into the notion that wind and solar are unreliable and that only fossil and nuclear fueled generation is the answer. To that end, the District has been encouraged to partner with a private carbon capture developer to employ carbon capture at the Gentleman plant.

The real game is revealed farther on. “Nebraska is the second largest ethanol-producing state in the nation. The future of ethanol is tied to the future of oil production and combustion engines. “This is the kind of ideological approach that puts tried and true credits in the middle of an argument over which it has no control nut for which it may ultimately incur a financial obligation. So far, efforts to involve NPPD in this sort of project has not put it at significant financial risk.

The concern is that the devotion of effort and resources in an effort to preserve 20^th century legacy assets could put NPPD at a disadvantage if the plants can’t be operated. Carbon capture just has not been able to work at scale and certainly not at the scale required to make it an economically viable technology.  The effort to enlist NPPD in the carbon capture effort has been going now for eight years.  It would be disappointing to see a conservative run financially sound credit harmed by ideological considerations.

THE WATER WARS GET LOCAL

So far, we haven’t seen a municipal system lose its water supply directly due to competition for groundwater sources from agriculture interests. Yet we are seeing on a smaller scale what might happen as drought conditions drag on in the American West. As the drought continues to impact surface water supplies, agricultural interests are often the first target of water use restrictions and supply cutbacks. In those cases, the use of groundwater supplies is the preferred alternative even if it is costly.

Now the impact of the long-term drought becomes clear. In addition to the obvious impact of lower snowpack, runoff, and river and lake/reservoir levels, the lack of water from the atmosphere prevents underground aquifers from having their supplies recharged. Ultimately, those sources will become far less reliable. In the short run, we will see residential and agricultural issues clash as they are currently on a smaller scale.

We came across a story about residents near Klamath Falls, OR. They are finding that local aquifers which supplied water to their area have been being depleted at rates well above historical levels. This is occurring because of significantly higher use of underground water by agricultural interests in the face of reduced rain and surface supplies. The greater use of the water has put residential wells at a disadvantage. This results in individual residential wells drying up leading to reliance on outside supplies.

This takes on more relevance as population trends show people moving to areas without sustainable long-term water supplies.

WIND PRODUCER HEADWINDS

One of the major obstacles to the development of offshore wind turbines has been concerns expressed by fishermen about the potential disruption of fishing grounds. It has led to changes in Maine’s offshore permitting process to placate lobstermen. Now, concerns about aquatic wildlife are being used in an attempt to delay the Vineyard Wind project which will be located off the shores of Connecticut, Rhode Island, and Massachusetts. The question is do the plaintiffs in the latest case really care about the whales or is the issue people’s view of the ocean.

Opposition to wind turbine locations have long characterized the islands off the New England coast. Opponents of early projects were pretty straightforward in framing their opposition as one of aesthetics. The concern about ocean views drove much opposition to proposed plants off Martha’s Vineyard. As the demand for and acceptance of renewables accelerated, there was less support for the aesthetic concerns.  Now, project opponents are trying a different tack – saving the whales.

ACK Residents Against Turbines is a group of Nantucket residents who oppose the siting of wind turbines some 14 miles off the coast. The basis for the suit: a belief that the proposed turbines will negatively impact whale breeding grounds. A closer look at the plans makes a good case that the environmental issues are just a smokescreen for the latest form of NIMBYism – not in my view. This project has been through its environmental review process and received federal approval to begin development.

The group of plaintiffs had participated in litigation against earlier projects. That experience has emboldened opponents of the turbines.  So far neither side has been able to amass enough objective information to persuade the other. In the absence of such data, it makes it look like the aesthetic concerns are what is driving the litigation.

Those concerns are cited by opponents of wind and solar power. The panels might cause too much glare, they might take away my view (usually of someone else’s farm), they might do any number of things. The irony is that much of that opposition comes from people who claim to be environmentalists and/or supporters of renewables. In the end, the arguments come down to NIMBY.

ZONING UP FOR A VOTE

Zoning rules, specifically those rules governing the development of housing, are at the center of the debates over economic justice. Numerous attempts have been made to legislate answers the issue of housing supply and affordability. One issue which can be addressed legislatively is zoning policy. Zoning is under scrutiny as a tool of economic injustice, Regulating lot sizes and individual development limits has long been understood as way to influence development. In particular, single- family zoning has been under the most focus.

Affordable housing advocates have long sought to permit lot owners to be able to create multiple residential housing units on traditionally single-family land. Now, legislation is moving forward in the California Legislature which could permit two-unit buildings on currently single-family lots. That could potentially create a net 3 new units on parcels which only had one. The move comes after previous efforts to encourage development of multifamily housing near transit facilities (high rises around BART stations, e.g.) failed over concerns about potential gentrification and displacement of current residents.

Rhetoric on both sides has been predictably hyperbolic. There is not a lot of objective research to assuage all possible concerns.

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.