Joseph Krist

Publisher

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Now that the stimulus package has been enacted, attention can be focused on an infrastructure bill. We fully expect a package to pass. The stars are certainly aligned more favorably for such a result than has been true for some time. Nonetheless, we do not expect the process to occur in a straightforward manner. It has become quickly apparent that the many disparate issues interest groups are seeking to address through an infrastructure bill may very well result in a less effective package. It will be difficult to satisfactorily address the many issues which could potentially arise.

The infrastructure bill is being hammered out at a time when there is no clear set of initiatives which could satisfy all of these groups. Infrastructure is being linked to  “economic justice”, climate change, and a host of social issues. Unfortunately, a consensus around how best to deal with those issues among advocates remains unclear. As identity politics rule the day, interest groups have been unable to find commonality in a way that generates the most benefit for the most people. We see housing advocates complaining that electrification will be too expensive for low income groups. Carbon taxes are seen as an additional economic burden as well.

The lack of consensus will serve as an effective hurdle for many ideas. Transportation is at the center of this debate. Recently, we have seen advocates for mitigating climate change challenge the notion of electric vehicles. They claim that removing internal combustion vehicles and substituting electric vehicles is not enough to help the climate. That only reducing vehicle ownership will suffice. That would make many think that that issue can be solved through renewable energy production. At the same time, others oppose the siting of renewables on environmental grounds. 

One of the great failures of “the left” in this country over the second half of the 20th century forward has been dealing with the economic realities of what they want. We are not going to be able to fundamentally reorder the economy without expecting disruption and cost. Disruption and cost lead to resistance. The cost of environmental remediation has always been underestimated. A clean environment is not free. And there has to be another answer to the problem away from taxing the wealthy.

Municipal bonds will wind up being at the center of this. This is the only major financial market in a position to address all of the issues which might ultimately become part of the infrastructure debate. Jobs, housing, healthcare, education, transportation are all right in the muni wheelhouse. And don’t look now but there was actually a serious mention of advance refundings and private activity bonds at a Senate hearing on an infrastructure bill. There’s hope!

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CLIMATE RISKS IN 2021

The National Oceanic and Atmospheric Administration (NOAA) has released its Spring 2021 outlook estimating flooding and other natural disaster risk for the upcoming season. Prior outlooks have predicted flooding and wildfire events which have had credit implications for impacted areas. As environmental issues come to have greater rating significance, these outlooks help investors anticipate and evaluate climate risks in their portfolio.

It has already been a difficult winter in many areas and the impacts have been clear. Now, a different set of climate concerns come with the warmer months. Drier conditions in the Southwest U.S. associated with La Niña and the failed 2020 summer monsoon have been contributing factors to the development and intensification of what represents the most significant U.S. spring drought since 2013, which will impact approximately 74 million people.

The precipitation outlook favors above-normal precipitation for parts of the Midwest, the Great Lakes, the Mid-Atlantic, the Northeast and in Hawaii, while below-normal precipitation is forecast across the southern Plains and much of the West.

One big difference this year is the projection of much less flooding. NOAA hydrologists are forecasting limited moderate flooding this spring and no areas with a greater than a 50% chance of major flooding for the first time since 2018. Widespread minor to moderate flooding is predicted across the Coastal Plain of the Carolinas while minor to isolated moderate flooding is predicted for the Lower Missouri and Lower Ohio River basins. Overall, this flood year is not expected to be severe or as prolonged as the previous two years. 

Water supply forecasts through spring are predicted to be below to much-below normal for most of the desert southwest, southern Oregon, and southern Idaho into much of the Rocky Mountains, which will play a major role in drought persistence this spring.

ANOTHER NUCLEAR DELAY

Georgia Power announced another delay in the in-service date for the first of its two new reactors at the Plant Votgle site. After many delays, the first new unit was scheduled to be on line in November of this year. Now the date has been delayed until at least the Spring.

The issue is that the start of hot functional testing for Plant Vogtle Unit 3 will be delayed from the original start date in the second half of this month.  Georgia Power’s had already announced in February  that productivity had slowed into January 2021, which increased the total project budget by $325-$415 million. A rise in active COVID-19 cases at the site delayed productivity, but these abated in February and March. The schedule on the project has been beset by COVID related issues for some time so the January problem was above “normal”.

For each month the plant is able to ultimately unable to open, an additional $25 million in costs will accrue. Georgia Power attributed the delay to “additional construction remediation work” necessary before the reactor undergoes testing and fuel loading. Originally set to occur this month, the testing has been postponed until April. Just to refresh, MEAG Power owns 22.7% of the project and another municipal issuer Oglethorpe Power Corporation owns 30%.

AND A SMALL UTILITY SHALL LEAD THEM

In 2014, the Holland Michigan and county electric utilities issued debt for the Holland Energy Park (HEP). The facility is a natural gas fueled generating station. It was funded with bonds secured by net electric revenues. It was a bit of a gamble since the plant generated power in excess of the utility’s demand.

The move by utilities to look at generation alternatives to coal and oil made the project’s excess power attractive as a “green” source. So all of the excess is sold into the Michigan grid at prices which have enabled the utility to generate revenues for the City’s general fund. That even after Holland BPW was able to reduce electric rates by an average of 6% for customers and it proposes to cut rates some 10% starting in July.

And yet this all highlights one of the emerging dilemmas facing the climate change movement. In Holland, the utility can show that it has reduced its carbon footprint and point to financial success associated with it. Climate change advocates would say that the plant represents little if any progress in terms of fossil fuel dependence. Trying to convince a ratepayer that 6 and 10% cuts in rates are bad won’t fly.

It is part of the economic realities confronting the climate change movement.

TEXAS POWER CRISIS AND MUNICIPAL UTILITIES

The publicly owned San Antonio, TX electric utility CPS Energy will have a chance to test the market’s reaction to the financial ramifications of the recent power distribution debacle in Texas. The utility and its customers face potentially much higher rate requirements to meet the obligations resulting from the exorbitant bills being delivered to utilities by the state’s grid operator, ERCOT. CPS hopes to issue some $375 million of long term debt to refinance outstanding commercial paper.

The situation with the charges from ERCOT has resulted in Fitch and S&P lowering their CPS bond ratings to AA- and they both joined Moody’s in maintaining negative outlooks. The ultimate magnitude of the ERCOT charges related to February’s difficulties is unclear. ERCOT ran up $20 billion in charges for five days of energy supply to utilities across Texas.

The size of the bills and the limited resources of smaller systems have led to a cumulative shortfall in payments to ERCOT of over $1 billion net dollars. These shortfalls are financed by delivering “short” payments to generating utilities like CPS which sell power through ERCOT. Through 3/22, this has resulted in a revenue reduction from ERCOT of $18 million.

As of now, the potential for increased costs to CPS is unclear. CPS is vulnerable to seeing more of ERCOT shortfalls negatively impacting CPS’ finances. The issue will remain a cloud over the utility as ERCOT’s billing practices are now the subject of multiple legal challenges. In addition, the Texas legislature is considering bills to address the situation. Nonetheless, there are still significant risks to CPS’s financial position. Natural gas costs for CPS related to the storm are estimated at $670 million and purchased power costs assigned to CPS are estimated at $365 million. Some $365 million of the costs of natural gas and purchased power have been paid.

Currently in the absence of legislative or regulatory fixes, CPS is forced to pursue a legal strategy against ERCOT. The goal is to protect CPS from what are generally agreed to be exorbitant rates charged to utilities and their customers during the storm. While the process works its way through the three branches of state government, CPS has had to seek increased credit line capacity and plan for a potential debt program to address the final costs stemming from the storm.

That plan is at the center of the pressure on CPS’ ratings. It would fund the ultimately determined cost resulting from storm-related charges with the proceeds of debt secured by a separate charge on customer bills. It has been shown in the recent past that there is a strong appetite for securitization of costs like this with potential investors. Nonetheless, the overall impact of such a plan would be negative for CPS’ ratings. The official statement may actually summarize the whole situation – “CPS Energy believes that its efforts … to ultimately accommodate the final financial and operating results of the 2021 Weather Event will prove successful, but success has multiple measures.”

That, in a nutshell, summarizes the basis for a negative outlook on the credit.

NASSAU COUNTY OUTLOOK

A locality and its residents may chafe over the limitations imposed by the role of a financial control board but it is hard to argue with their results. Oversight boards have been essential in the fiscal rehabilitation of entities across the country. In the 20 years since the initial legislation creating the Nassau County Interim Finance Authority (NIFA) was enacted, the County has navigated a recovery through several economic cycles and restructuring of its debts. Through the use of control periods, NIFA has had a direct hand in managing the County’s fiscal affairs.  That role addresses any governance concerns that negatively impacted the County’s ratings over the years.

NIFA allowed the county’s ratings to slowly but steadily improve to where they stand today at A2 by Moody’s. This  rating reflects “expectations that sale tax revenues will increase due to Nassau County’s recent economic recovery, supported by a very large tax base with strong wealth and income.” It looks like the county will achieve a third consecutive year of improved financial results in 2021. Governance is also considered a positive factor now because of NIFA’s role. This cushions the rating against the pressure of the County’s relatively high taxes and debt burden.

All of this moved Moody’s to revise its outlook on the county’s rating to positive. The change is based on the expectation that financial results will continue to be balanced and that an economic recovery will drive revenue growth, especially that of sales taxes.

NYS BUDGET

As this piece went to press, the annual budget process for the State of New York is coming to a head. The new fiscal year begins on April 1 so the pressure is on. The process this year has been complicated by the process of passage of the federal stimulus and the ongoing political drama enveloping the Governor. Now that the stimulus has been passed and the State is receiving more than it expected, the push will come to restore spending cuts in the Governor’s proposed budget. The political pressure is coming from the Legislature to raise taxes and increase spending which it believes that the Governor will be in a much weakened position to stave off.

Cuomo’s proposed budget only included temporary tax increases if the state did not receive Covid-19 assistance from the government in that third stimulus package. The Legislature’s plan would cost more — $208.3 billion, an increase of $15.6 billion, or 8.1%, over the current year’s budget. The proposed spending is $12.2 billion, or 6.3%, higher than Cuomo’s proposal. It all would be funded by what progressives refer to as a millionaires tax.

This would come from increasing the top income tax rate from 8.82% for single filers earning more than $1 million and couples earning more than $2 million to 9.85%. And it would establish two new brackets: 10.85% for taxpayers between $5 million and $25 million and 11.85% for taxpayers over $25 million. The plan would also increase capital gains taxes, create new taxes on businesses and increase the state’s estate tax.

New York State’s budget process has often been the accelerant to the overall legislative process on difficult issues. The negotiations follow a well established process and policy decisions through the “three people in the room” process. This year that dynamic along with national trends and the pandemic have led to a breakthrough for advocates of legalized recreational cannabis in NYS.

That process has resulted in an agreement which would legalize recreational marijuana for adults 21 and older, Personal possession of up to three ounces would be permitted. As expected a significant sales tax of tax on sales would be assessed at 13%. The first  9% would go to the state with the other 4% to local governments.

One twist in the proposal is for distributors to pay an excise tax, which could be as high as three cents per milligram of THC.  It would be levied according to a sliding scale, based on the type of product and how strong it is. In a reflection of the division of opinion in the state along geographic lines cities, towns, and villages may also choose not to approve retail and delivery weed within their jurisdiction.

The plan also addresses many of the issues which typically inform debates on the issue. Tax revenue from sales would fund the operations of the newly created Office of Cannabis Management and police officer training to detect impaired driving. Forty percent of the remaining revenue is targeted for school aid.  A 40% share would be put into a fund establishing grants for social equity which has been a significant issue in the NY debate. The remaining 20% would fund drug-treatment and public-education programs.

FLORIDA TRANSPORTATION TAX RULING

Hillsborough County voters approved a 1% sales tax in 2018 with nearly 60% of the vote. The charter amendment initially included references to exact percentages allocated to the Hillsborough Area Regional Transit Authority and the three cities within Hillsborough County. It also struck specific references to how much money can be spent on certain types of projects like roads or transit. That wording provided an opening to opponents of the measure.

They cited the removal of that language in subsequent litigation that struck down portions of the amendment and argued that these changes had so fundamentally changed the amendment such that it was no longer consistent with what voters approved in 2018. By a margin of 4-1, the Florida Supreme Court agreed.

Hillsborough residents and visitors have paid the sales tax since the beginning of 2019. To date, the county has collected nearly $500 million in taxes from the sales surtax. The status of those funds is unclear at present. The irony is that the effort to fund the transportation plan could be another pandemic victim. Hillsborough County commissioners originally were moving towards putting an amendment on the ballot to address the legal concerns but like many things in 2020, it was thought that the pandemic and impacts on voting might not result in approval. Now the County will have to attempt what would effectively be a corrective ballot question in 2022 under different circumstances.

PREEMPTION

Legislation to block local governments in Georgia from limiting what fuel sources offices, houses and other buildings can use is poised to clear the Legislature. The State Senator  who carried the bill in the Senate, said “its intent is to stave off future efforts in Georgia to abolish the use of fossil fuels like coal and natural gas going forward.” In Georgia this bill received bipartisan sponsorship and support although it is ultimately a move “against” the climate change movement.

This bill joins another under consideration in Indiana which has the same goals in mind. (It’s what happens when outside advocacy groups write legislation.) One local legislature there has taken a very public stance against preemption calling it “an assault on local home rule”. The issue here is limitations on new solar and wind.  

Alabama law says revenue from gasoline and other motor fuel taxes levied by the state can only be used for infrastructure and similar uses, but there are no such restrictions on the local gas taxes collected by hundreds of governments. A pending bill would alter that. It says that all taxes on motor fuels, “whether called an excise tax, license tax, or otherwise, levied by a municipality or county or by local law may be used only for road and bridge construction and maintenance.”

USC AND A FINANCIAL RECKONING

USC has had its share of bad press in recent years reflecting its place at the center of a number scandals. Most of the public attention has been on events which while negative, did not present significant financial implications. Now, the university faces a real financial hurdle in the wake of its latest problem.

USC announced that it has resolved outstanding litigation against the University in connection with its employment of a doctor at its student health facilities who was eventually charged with sexual assault. The resolution comes with a cost – USC will pay more than $1.1 billion through a combination of three sets of settlements with more than 700 accusers. The sum dwarfs to prior settlements at Penn State and Michigan State. The U.S.C. claims cover a 2018 federal class action already settled for $215 million, a second group of several dozen cases in which the amount of the settlement was not made public and a third settlement for $852 million.

USC has a strong resource base and Aa1 and AA ratings. Nevertheless, the University’s financial response will result in a weaker credit. The university president said, according to press reports,  the university would fund the settlement over two years through a combination of “litigation reserves, insurance proceeds, deferred capital spending, sale of nonessential assets, and careful management of nonessential expenses.” Press reports indicate that no philanthropic gifts, endowment funds or tuition would be redirected to pay the costs.

We’re not saying it’s the end of the world but the ratings need to reflect the fact that the total sum is equal to 25% of FY 2019 net assets and essentially equal to net student revenue for the FY 2019. By any measure it is a serious hit. At least a one notch downgrade seems more than 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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PREEMPTION

We recently discussed the issue of preemption of the rights of local governments by state legislators seeking to prevent localities from imposing restrictions on things like the use of natural gas. As localities have increased their use of their regulatory powers to dictate local energy policy, Republicans have turned to state level preemption legislation in an effort to stem that regulatory tide.

Now the recent stimulus bill includes what might be considered a form of preemption. As enacted, it includes a provision that could temporarily prevent states that receive government aid from turning around and cutting taxes. They are prohibited from depositing the money into pension funds and cannot use funds to cut taxes by “legislation, regulation or administration” through 2024. The law says that states and territories that receive the aid cannot use the funds to offset a reduction in net tax revenue as a result of tax cuts because the money is intended to be used to support the public health response and avoid layoffs and cuts to public services. 

Republicans in Congress don’t like the requirement. They are invoking states rights as an argument against the provision. At the same time, they worked very hard against the plan to prevent a so-called blue state pension bailout. States are required to submit regular reports to the Treasury Department accounting for how the funds are being spent and to show any other changes that they have made to their tax codes. The treasury is expected to offer guidance on the eligible purposes which the funding could be spent on.

The debate sheds light on the emerging divide between state governments and their fiscal interests and county and municipal governments who have not fared as well as pandemic restrictions hurt local sales tax and property tax revenues. These are often key sources of revenues for localities.

UBI AND STOCKTON

The concept of universal basic income programs is getting a wider hearing especially given the leading position in polling for the office of New York City Mayor by Andrew Yang. Mr. Yang has been the most prominent proponent of the concept and it is the cornerstone of his campaign. He is selling it as a cure for homelessness and a significant cutback in local social service spending. Proponents of a UBI cite a recent report documenting the results of an experiment in Stockton, CA which provided a UBI to some 125 residents of the city.

Prior to this, Stockton was likely best known to municipal bond investors as one of the California cities which filed for bankruptcy in the aftermath of the Great Recession. It was a particularly contentious process and it shed light on the economics of the city and its residents. You will hear a lot about the Stockton UBI experience so it is worth it to see just what happened.

The Stockton Economic Empowerment Demonstration, or SEED, was the nation’s first mayor-led guaranteed income initiative. Launched in February 2019 by former Mayor Michael D. Tubbs, SEED gave 125 Stocktonians $500 per month for 24 months. The cash was unconditional, with no strings attached and no work requirements. The report focused on several key questions. How does guaranteed income impact income volatility? How do changes in income volatility impact psychological health and physical well-being?

To qualify or be considered for SEED, recipients had to be at least 18 years old, reside in Stockton, and live in a neighborhood with a median income at or below $46,033.The study came to several primary conclusions. Guaranteed income reduced income volatility, or the month-to-month income fluctuations that households face. Unconditional cash enabled recipients to find full-time employment. Recipients of guaranteed income were healthier, showing less depression and anxiety and enhanced wellbeing. The guaranteed income alleviated financial scarcity creating new opportunities for self-determination, choice, goal-setting, and risk-taking.

Whenever programs like this are proposed, issues over what the money would be spent on arise usually in opposition to them. The study addressed those concerns directly. Consistently, the largest spending category each month was food, followed by sales/merchandise, which were likely also food purchases at wholesale

clubs and larger stores like Walmart and Target. Other leading categories each month were utilities and auto care or transportation. Less than 1% of tracked purchases were for tobacco and alcohol. In February 2019, 28% of recipients had full-time employment. One year later, 40% of recipients were employed full-time.

In the end, it was clear that the recipients were benefitted in ways which bode well for the program. The author’s however point out that there are many issues facing eligible communities. The study concludes that guaranteed income should not be considered as a singular approach for household stability, “Additional policies to implement alongside a guaranteed income include: protection against predatory financial actors and instruments like caps on adjustable interest, second-chance banking, third-party targeting of financially vulnerable populations, and exorbitant fines and fees from the criminal justice system; address the unique barriers that women face in the market through paid family leave and universal child care.

We take the same approach to this issue that we take with new technologies or processes. The studies to date have involved small numbers of individuals. It is comparable to a technology which works on a prototype but is not as successful when it is attempted at scale. UBI opens a debate about a variety of issues starting with how it is funded. Mr. Yang proposed a national value added tax (VAT) which many see as regressive. This study did not address the issue of how to fund such a program. If a UBI comes at the expense of a variety of other approaches, it is not clear what the net benefit is.

AFTER THE FIRE

Last week saw public transit begin to show signs of a comeback. New York, the MTA reports said subway ridership on Thursday was the highest single day total since the pandemic began, with 1,863,962 paid trips taken. There were an additional 1.13 million daily trips recorded on MTA/NYCT buses, putting the overall system trip total at around 3 million for the day. 

Pre-pandemic daily ridership regularly exceeded 5 million rides per day. So the current ridership represents an overall rate of 46% of pre-pandemic levels. As the economy reopens, we do not expect a full return to pre-pandemic levels but a steady increase in ridership is to be expected. This is especially true if the currently closed cultural and entertainment facilities reopen as planned in the fall.

That could become even more likely if current trends in air travel take hold. The Transportation Security Administration screened 1,357,111 passengers at airports across the country on March 12, the highest number since March 15th, 2020. It’s an indicator of why these businesses are counting on pent up demand driving the economic recovery.

WHAT A DIFFERENCE A BILL MAKES

The scope of the recently enacted stimulus legislation has triggered a reboot for the credit outlook for states. Moody’s has announced that its overall outlook for state credit ratings is now stable. They expect state fiscal positions to be maintained and even bolstered in light of the relief package and the fact that revenues held up better than almost anyone expected.

That perception of a stronger fiscal position created a real stumbling block that hindered passage. Ironically, there has been much huffing and puffing over the issue from “red state” politicians. The package includes restrictions on what the money can be spent on. While the “red state” politicians complained about a bailout for what they saw as poorly managed states and pension funds, those same parties are now complaining that the bill stands in the way of tax cuts in those states.   

Underpinning all of this is the fact that we have recently witnessed what happens when Keynesian economics are applied in full measure. The majority of Americans have seen their economic experience shaped by the idea of government as an impediment to growth and that any tax is likely a bad tax. That image helped to support a less tempered approach to the recovery from the 2008 recession. There were complaints at the time that the federal recovery response was inadequate.

While state and local government fared relatively poorly in that recovery – many services never returned to pre-2008 levels and employment at the state and local level reflected that – there were significant reserves built up because of those aggressive cost control actions. It can be argued that in the short term, state government is much better positioned to benefit from the expected economic recovery.

CULTURAL FACILITIES

The combination of vaccine availability and the warmer weather is giving cultural institutions a chance to reestablish themselves in the post-pandemic economy. Those which are able to operate in some fashion outdoors – music and the other performing arts – mostly did not in the summer of 2020 but are gradually announcing summer shows. Now that the industry received direct aid in the stimulus, they are in a better position to determine their best course forward.

The Los Angeles County Museum of Art announced that it will reopen April 1 after a yearlong closure. Museums are allowed to reopen indoor spaces at 25% capacity with safety protocols in place. LACMA will require guests to wear a face mask, undergo online health screenings and make an online reservation for timed entry. In New York, the famous Shakespeare In The Park summer series will occur this summer after it was cancelled in 2020.

With indoor dining (albeit limited) returning in jurisdictions including New York City and even California’s Disneyland scheduled to soon reopen, the outlook for the local economies they support improves. The symbiotic relationship between these larger entities and their surrounding economies and dependent businesses drives a more positive outlook. As generators of retail sales taxes, those dependent businesses are especially important to local economies and employment.  

PUBLIC PRIVATE BROADBAND INITIATIVE

Vermont has approved a plan to help more Vermonters in some of the hardest-to-reach corners of the state get connected to broadband quickly and cost-effectively.  It is a problem confronting many rural locations which was highlighted by the need to run schools on line rather than in person. In this case,  the plan provides for offering up to $2,000 per unserved location for infrastructure connection costs. If broadband companies fully enroll for the discounts, more than 10,000 customers who currently do not have broadband could be connected by the end of next year. It seeks to address the costs of extending basic infrastructure to support broadband to widely dispersed customer bases in rural areas.

Vermont Electric Cooperative (VEC), established in 1938, is a non-profit, member-owned electric distribution utility that provides safe, affordable, and reliable electric service to approximately 32,000 members in 75 communities in northern Vermont. We have long advocated for federal support for expanding the role of rural electric co-ops to achieve the same positive results with broadband which their service areas enjoyed with the connection  to electric power.

ELECTRIC VEHICLE ECONOMICS

At the current global average battery pack price of $135 per kilowatt-hour (kWh) (realizable when procured at scale), a Class 8 electric truck with 375-mile range and operated 300 miles per day when compared to a diesel truck offers about 13% lower total cost of ownership (TCO) per mile, about 3-year payback and net present savings of about US $200,000 over a 15-year lifetime. This is achieved with only a 3% reduction in payload capacity. 

This is according to research from the University of California and the Livermore Lab. The estimated average distance traveled between 30-minute driver breaks is 150 miles and 190 miles for regional-haul and long-haul trucks respectively in the US.  Thirty minutes of charging using 500 kW or mega-Watt scale fast-chargers would add sufficient range without impairing operations and economics of freight movement. 

Realizing the full economic potential of electric trucks therefore requires surviving a long period of infancy marked by low demand for vehicles and charging, and consequently, higher cost of new vehicles and slow return on charging infrastructure. Binding targets for vehicle sales, supported by targeted subsidies indexed both to international battery prices and cumulative sales can deliver the scale of adoption needed to launch this new industry on a sustainable future trajectory.

THE ELECTRIC GRID AND MUNICIPALS

The recent ice storms and resulting power outages in Texas have rightly focused much attention on “the grid”. One of the major issues which arose in Texas had to do with its lack of connection to other sources of transmission outside of the state. The issue is forcing consideration of alternative sources of generation and transmission. Increasingly there are more examples of local government initiatives to address the concern.

The latest is found in Camarillo, California. There the City Council approved a contract with the Clean Coalition to oversee the design of solar-based microgrids at five critical city facilities that will incorporate Tesla batteries. The city council also directed city staff to enter into a contract with Tesla for a 1-MW/ 4-MWh battery to be installed at the city’s wastewater treatment plant.

The battery will be paid for by the California Public Utilities Commission’s Equity Resiliency Self-Generation Incentive Program (SGIP).  Without the rebate, the battery would cost about $2.2 million, with permitting and other costs increasing its final price to $3 million installed. The battery, which can power the wastewater treatment plant for about 11 hours before being recharged, comes with a 15-year warranty and 10 years of O&M coverage.  By charging the battery during off-peak hours and using it on peak, Camarillo will save at least $90,000 a year.

Tesla has contracted for about 160 battery projects under the California SGIP, of which 125 are with public entities. In Camarillo, the sites will be typical municipal facilities – city hall, a police station, a wastewater treatment plant, a library and the public works yard. Now the issue, is how to fund the full project.

The city council will have to decide if the city should pay for and own the microgrids or use a power purchase agreement (PPA) model.  Private providers can take advantage of federal investment tax credits for the facilities. However, the city applied for grants from the Federal Emergency Management Agency’s (FEMA) Building Resilient Infrastructure and Communities $500 million grant program that could cover up to 75% of the project’s capital cost.

PENNSYLVANIA GAS TAX PROPOSAL

Pennsylvania, Gov. Tom Wolf (D) has proposed phasing out the gas tax as the main funding mechanism for the state’s highway fund, and he has established a commission to recommend options for replacing it with alternative revenue sources. It is likely that much attention will be focused on vehicle mileage taxes (VMT) as the likely replacement.

A flat fee per mile based on vehicle weight and measured by the odometer would be the simplest version of a VMT tax to administer and avoids most privacy issues. The concern about “tracking” drives much opposition. Odometer readings could be done at yearly inspections or by installing an on-board-unit (OBU) that electronically transmits VMT to a central computer.

Today, about 56 percent of the state’s transportation tax revenue is raised through motor fuel taxes. The Tax Foundation estimates that a VMT would, if we assume a flat rate, need to be levied at 8 cents per mile to raise $8.4 billion.  That would be some 56% of the Commonwealth’s estimated annual revenue requirement to cover transportation funding. And funding via the gas tax is getting harder. In 1994, a passenger car averaged 20.7 miles per gallon (MPG) and drivers paid 3.2 cents in state and federal tax per vehicle mile travelled. In 2018, a passenger car averaged 24.4 MPG and drivers only paid 2.1 cents per vehicle mile traveled.

ANOTHER NEW TECHNOLOGY FOR THE MUNI MARKET

Global aluminum production reaches 50 million tons per year.  When processing bauxite by various methods, red slurries are formed, which are removed from the process in the form of pulp and stored in sludge storage.  Now, a Canadian company has developed a technology for the integrated processing of red mud with the production of target valuable products – iron-containing pigments and coagulants, aluminosilicate materials, amorphous silicon dioxide, precipitated calcium carbonate, titanium, zirconium, scandium and other rare-earth elements.

The plan would be for a plant to process the mud and develop a source of rare earth elements. Developers are looking forward at space and cost limitations at existing storage sites and deciding that the economics of storage will be less favorable than the economics of mud processing. It is also being sold as a green technology reflecting its role as a reducer of waste.

Given those characteristics, such a project would seem to be ripe for tax exempt private activity bond financing. And the State of Louisiana seems to agree. The board of trustees for the Louisiana Public Facilities Authority approved a “significant allocation” of tax-exempt private activity bonds that will be used to fund the construction of the new facility in St. James Parish.  The authorization by the board is for no more than $850 million. Governor John Bel Edwards approved private activity bonds up to $250 million for the project so far. 

The project would be built in Gramercy, LA at an existing aluminum smelter where there are 35 million tons of bauxite residue at the site. The residue is estimated to contain 10 rare earth elements and 15 minerals — among them titanium, iron and other metals — that have been identified as strategic and critical by the U.S. Defense Logistics Agency. 

Every project stands on its own. One can’t help but look back on previous projects which sought to address widely agreed upon environmental problems. The nature of the problem, the apparent lack of other solutions, and regulatory mandates all pointed to real markets for products which ultimately failed to support successful investments.

This would not be the first non- U.S. technology to find a home in the municipal market during its developmental phase. For those of us with significant high yield experience projects like this make one remember medium density fiberboard, paper deinking, plant waste processing, and nuclear waste processing. Waste management in its broadest sense has been a continuing source of investment risk in the high yield space and this is just its latest manifestation.

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

________________________________________________________________

STIMULUS MONEY FOR STATES AND LOCALITIES

As we go to press, the Senate has passed its version of the stimulus bill and it awaits an expected vote in favor in the House. It is important to note that the $350 billion of aid to state and local government does not include additional funding under individual categories like vaccine distribution costs, school reopening costs which alone get an additional $144 billion. Medicaid gets a boost. Under the stimulus bill, states newly expanding Medicaid under the ACA would also receive a 5 percent bump in the federal funding match for their traditional Medicaid programs for two years. Because the traditional Medicaid population is significantly larger than the expansion population, the funding increase  is projected to cover a state’s 10 percent match for expansion enrollees and then some over those two years.

There are finally more specific numbers available to let us see how much of the $350 billion included in the pending stimulus legislation for state and local governments will reach individual governments. The bulk of the money goes to state governments with $216 billion of the $350 billion in the package for state governments. California will receive the largest share at $26.264 billion, followed by Texas at $16.824 billion, New York at $12.6 billion, and Florida at $10.3 billion. So much for the blue state bailout aspect of the debate as the largest shares are split among the colors.

Counties in California will receive $7.6 billion, the largest county share of the $65 billion available for those entities. Notable county shares include Alameda at $324 million; Los Angeles at $1.947 billion. Other major county allotments include Cook County, IL at $999 million; Nassau County, NY gets $398 million and neighboring Suffolk County gets $286 million. City totals include $1.345 billion for the City of Los Angeles, $636 billion for San Francisco; $880 million for Detroit, $435 million for Boston; $1.982 billion for Chicago; $4.3 billion for NYC; $500 million for Cleveland; Philadelphia would see $1.3 billion. Puerto Rico and its municipalities would receive a combined $4.3 billion.

One of the key issues underpinning opposition was doubt about the needed amount of aid to state and governments. Opponents seize on data from states like Minnesota (see our comments below) to support their cause. There also were issues with how initial aid was spent in that some recipient cities were pretty clear that they were using the funds for general budget relief rather than direct pandemic mitigation. It did not help the case but was not enough to stop the bill.

THE PANDEMIC ECONOMY – TWO DISPARATE EXAMPLES

As one of the largest municipal bond issuers in the country, the outlook for the NYC economy is of prime interest to investors. So we saw with interest the latest analysis of the city’s economy from its Independent Budget Office.

Based on Bureau of Labor Statistics data through December, New York City lost 557,000 jobs for the year 2020. During the first two quarters of 2020, with New York State as the epicenter of the pandemic in the U.S., the city lost a total of 889,000 jobs, or 19.0 % of total employment. A relatively strong initial recovery followed, with the city adding 210,000 jobs in the third quarter as the pandemic eased over the summer.

But job growth subsequently slowed through the fall and even turned negative in December; during the entire fourth quarter of 2020, the city had a net increase of just 122,000 jobs. In 2020, the largest losses were concentrated among major sectors closely tied to services and consumer activity, including leisure and hospitality (202,000 jobs), administrative and support services (53,000 jobs), and retail and wholesale trade (49,000 jobs). IBO forecasts employment growth of 152,000 jobs in 2021, 149,000 in 2022, 107,000 in 2023, and an average of 53,000 per year in 2024 and 2025.

That would leave the City just below pre-pandemic employment peaks. That reflects  an outlook which sees leisure and hospitality as having the weakest projected recovery of any sector, with jobs at the end of the forecast period still down from pre-pandemic levels by 23.2% (466,000 jobs in 2019 versus 358,000 jobs in 2025).

Where are the hopeful signs? Health care, information, professional/technical services, and financial services are cited as the sectors which may reach levels of employment above their pre-pandemic levels. The lag will come in sectors tied to tourism and high levels of disposable income.  It should be noted that despite the pandemic, personal income—the total of all sources of income received by city residents—increased by an estimated 2.9 percent in 2020, to $701.8 billion. Yes that reflects a high level of transfer payment from among other things, the federal stimulus payments and unemployment insurance. That is reflected in wage and salary data which shows in 2020, a decline of 3.4 percent from 2019.

The apparent incongruity between employment levels and wage impacts reflects the continuing split in the City’s economy – the so-called tale of two cities. Many of the lower-wage industries that saw the steepest employment losses also suffered large declines in aggregate wages, including leisure and hospitality (41.2%), administrative and support services (19.7%), and trade (13.4%). Meanwhile, certain higher-wage industries saw increases in aggregate wages, including information (10.5%), securities (6.1%), education (3.3%), professional/technical services (3.1%), and health (1.6%).

It is impossible to discuss the NYC economy without mentioning real estate. IBO estimates total taxable real estate sales of $61.3 billion for 2020, down from $99.8 billion in 2019. Going forward, the commercial real estate sector appears poised to be the area of the most risk for declining property valuations and property tax collections. Businesses in consumer-facing sectors have seen the largest losses in employment and earnings, and many existing jobs in professional and technical sectors have shifted toward alternative working arrangements.

The NYC numbers accompany a similar analysis of the economy of Minnesota which accompanied a favorably revised state budget estimate. In March and April 2020, as the pandemic was taking hold and economic activity was being restricted to slow spread of COVID-19, Minnesota lost 388,000 jobs, approximately 13 percent of February 2020 employment. The state began adding jobs in May, and through December 140,000 of the jobs lost in the early spring had been recovered.

As of December, Minnesota had 248,000 (8.0 percent) fewer jobs than in February. Between February and December 2020, Minnesota’s leisure and hospitality sector—made up of accommodation and food services and arts, entertainment, and recreation—lost 123,400 jobs, 44 percent of the sector’s February employment.  Since the onset of the pandemic, Minnesota’s labor force has fallen by 102,000.

TEXAS POWER CRISIS

Texas’s largest and oldest electric power cooperative – Brazos Electric Power Cooperative Inc, which supplies electricity to more than 660,000 consumers – filed for bankruptcy protection, citing a disputed $1.8 billion bill from the state’s grid operator (ERCOT). The move highlights the risk facing many of the Lone Star State’s electric utilities, especially municipal utilities.

One such utility- the City of Denton’s electric system – last week sued ERCOT in a state court to prevent it from charging it for fees unpaid by other users of the grid. The situation highlights the increased risk that local utilities face as the result of the difficulties at ERCOT, the manager of the single state Texas grid. We expect to see more stories like this. What will matter is how these issues are resolved.

One municipal utility – San Antonio – has gone on record as blaming the grid situation and its now clearly attendant financial risk as the basis for delaying renewable energy investments. The initial reaction of state government was to blame renewable resources for the inadequate supplies of power even though the impact of the storm was as great or greater at legacy fossil generating sources. This all reflects the pressure being put on by the state’s natural gas producers.

So now we are not surprised to see that in the wake of the recent power outage, some cities with municipal electric systems are reacting to this pressure by scaling back their plans to move to a fossil free generation environment. San Antonio and Austin are extending the period of time before natural gas in new buildings is banned and they are reducing their reduced emissions goals.

CARBON CAPTURE AND MUNICIPAL BONDS

While the infrastructure debate continues, a variety of proposals are being floated which could allow tax-free municipal bonds to be used to finance the development of carbon capture technologies. Carbon capture is controversial. Many would argue that it is not a proven technology. So we find it somewhat troubling that some in Congress are willing to advantage their favored industry with private activity bond status while not moving forward on items like advance refunding.

The proposal comes shortly after the only operating carbon capture facility in the U.S. was shut down. NRG Energy, which owns the project, announced that it would be shut down indefinitely. This Texas project was the largest in the world and it did not work. Reliability and performance issues doomed the plant. Another effort in Mississippi failed financially and never operated.

The CCS technology at the required so much energy that its owner and operator  (NRG) had to build a natural gas generator—the emissions of which were not offset by the technology employed at the plant—just to power the scrubber. Other economic issues included the fact that NRG actually wanted to use the carbon to extract oil at other properties. The economics of the CCS plant depended on the use of the carbon for oil production. When oil prices tanked, the plant was taken off line as it was uneconomical.

All of this reminds of the many other technologies presented to the municipal bond market – medium density fiber from wood waste, paper deinking just to name two – which took advantage of tax exempt financing to provide at least some portion of project economics.  They did not work either. Those projects left a trail of default wreckage throughout the tax-exempt high yield fund space. Like amusement parks, waste technologies, and other projects which needed tax exempt financing because at market taxable rates the project economics do not work, CCS projects look like they are next to take their place among those failures.

FOSSIL FUEL LIMITS

A move towards local bans on the use of natural gas in new building construction was enough to motivate the gas industry to try to override local rules through state legislation. (See last week’s edition on PREMPTION) In Vermont, the state’s largest city, Burlington has just elected to take a different approach. Rather than restrict through regulation, the city chooses to use taxing power This year’s town meeting vote saw the regulation of thermal energy systems in the city of Burlington pass by 8,931 to 4,910 votes or about 65%-35%. This is the first step in a multi step process.

The result allows the city to ask the state Legislature if it can draft legislation to tax new developments if they choose to use fossil fuels in their heating. This vote will come back to residents if the Legislature approves, and then the City Council will draft another resolution for voters to vote again on a potential carbon fee. The experiment will bear watching as it merges a liberal city like Burlington with an idea most prominently advanced through the University of Chicago. We expect municipal issuers to face similar choices in light of the efforts to stymie a regulatory approach.

PANDEMIC POLICY IMPACTS

The pandemic and its impact on revenues at the state level generated some unexpected results. With all of the emphasis on job losses and high unemployment rates during the first few months of the pandemic, the impact of lockdowns and reduced economic activity on state revenues was not estimated correctly. The budget season and the need to generate revenue estimates to support the budget process have documented the pandemic’s effect.

One of the trends to emerge is that the pandemic’s impact on incomes was wildly unequal. It turns out that the structure of a state’s taxes had real impacts on the effect of the pandemic on revenues. Because the impact of job losses was concentrated to a great degree among lower wage job categories as opposed to white collar workers who could work remotely, the expected pressure on income tax collections just has not materialized to the extent anticipated.

This has led some to look at changes to their state’s tax structure and propose changes. In New Mexico, a bill is being offered that would raise the state’s marginal income tax slightly. Senate Bill 89 would increase the percentage rate on taxable income for people earning the most. The top bracket would tax at a 6.5% rate, up from the current 5.9%. It is estimated to bring in $100 million in incremental revenue. State statistics say only 4% of the state’s households earn more than $200,000 a year.

PUERTO RICO AND MARKET CREDIBILITY

The executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority spoke at a high yield conference this week. The comments were supposed to reflect positively on the outlook for Puerto Rico’s efforts to regain access to the municipal bond market. Depending on your viewpoint, you may react positively to them. We however, beg to differ.

“Not only were we able to gain credibility through restructuring issuers COFINA [Puerto Rico Sales Tax Financing Authority], Government Development Bank, Puerto Rico Infrastructure Finance Authority Ports  but we were able to gain more credibility when we went back to the market in September and December 2020 with both the Public Housing Administration and the water utility.”  That is indeed questionable.

Neither of the two issuers referenced issued debt backed by governmental as opposed to enterprise revenues. They both refunded more expensive existing debt so the debt service payment on those bonds should be more likely. We see a real distinction in that water debt historically performs very well in bankruptcy and the housing debt is paid from revenues from the federal government.

It is the area of governmental versus enterprise debt with which we have a problem. The government’s opposition to any adjustment in pension payments – even temporary – is a warning sign that the stomach to achieve real reform is not there. The economy still reels from hurricanes, earthquakes, and floods. The tourist economy remains pandemic bound. And many of the structural weaknesses of the local economic environment remain unaddressed. But to date, much political capital is wasted on the quest for statehood in a political environment where that is not soon achievable.

The government has dug in on pensions. It has always been our view that the Commonwealth has to act responsibly on its own before it can have credibility. The pension issue should be viewed as a test. Like the Christmas bonus, it is a sign of an entity which will not accept reality. The Title III process is one quarter away from being four years along and yet it’s clear that there remain significant hurdles to overcome before that process can end. Then the Commonwealth can begin to consistently deliver on its own the necessary financial and economic information investors need in order to rebuild trust.

THE FUTURE OF WORK

Much has been posited about the future of work in the face of technological change. In addition to the obvious impacts of the pandemic on employment from economic activity restrictions, a number of pre-pandemic factors became more real as businesses adapted to pandemic economic realities.

The issue of technology or its older name automation is not new. It has already had profound effects on the nature of work and the hierarchy of employment which has resulted. For those preexisting factors, the pandemic served as an accelerant. Diminished traffic accelerated the full automation of tolls on the Pennsylvania Turnpike. The NYS Thruway completed automated toll equipment on additional segments of the road.

On the corporate side, pandemic restrictions increased reliance on machine based contacts with customers – banks, grocers, restaurants. It has come out that even the kids taking your drive thru order at McDonald’s are being replaced in a trial. There are plenty of other examples. The pandemic exposed structural issues with the economy. A new report from the Future of Work Commission, a 21-member body appointed by Gov. Gavin Newsom in August 2019, notes that Among California’s low-wage workers, 53% are employed in essential occupations, which are most vulnerable to the virus compared with 39% of workers in middle- and high-wage occupations, many of whom are able to work from home.

Combine this with the newfound attractiveness of remote work to many in the workforce. The result is fewer people commuting and occupying offices further pressuring service jobs. That then increases the disconnect between work and residents of lesser means. This comes as there is much focus on the potential for property tax pressures stemming from lower demand for commercial spaces. All of this points to more uncertain environment for general obligation tax supported credits. It is manageable, but uncertain.

NUCLEAR FALLOUT IN OHIO CONTINUES

The Ohio Senate voted unanimously to repeal the nearly $1 billion in subsidies that were to have been sent to two Ohio nuclear plants owned by a former FirstEnergy subsidiary. The bill also would eliminate the fees on Ohioans’ electric bills that pay for the subsidies. A court ruling has stayed the collection of these fees pending appeal.

The Federal Energy Regulatory Commission ruled in 2019 that if power generation companies receive state subsidies like the ones offered by HB6, the commission would make it harder for those companies to sell electricity from the two nuclear plants. That ruling said that new resources receiving subsidies will now be subject to the Minimum Offer Price Rule (MOPR), which raises the price floor for those resources attempting to sell their power into the wholesale market.  The result effectively penalizes nuclear power even though the intended target is wind and solar generation.

The subsidization of nuclear and the efforts of the  nuclear industry to obtain these subsidies are at the core of ongoing scandals in Ohio and Illinois. The Ohio House Speaker was indicted and the Illinois House Speaker retired in reaction to pressure related to efforts by utilities owning  nuclear assets to obtain subsidies. There is irony that legislation designed to support legacy generation actually hurt in this case.

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

________________________________________________________________

PREEMPTION AND LOCAL RATINGS

As ESG investing has its turn in the spotlight accompanied by rating agencies debating the merit of scores covering these factors, governance should be an even bigger topic. The pandemic and the decline in the demand for fossil fueled energy are moving state legislatures to consider a variety of laws limiting the power of local governments to regulate a growing number of issues and challenges direct democracy.

The phenomenon of “home rule” and the resulting limits on a locality’s ability to enact regulations, tax increases, or even the enactment of new taxes has long been a factor in municipal credit analysis.  When such laws have limited a locality’s ability to raise revenues or forced them to turn to the voters for approval of taxes, the resulting inability to raise revenues has been a basis for downgrades.  The reliance on higher levels of government for approval of steps which allow localities to manage their affairs is something that should raise the ire of rating agencies and investors alike.

Now legislatures at the state level are going farther in their effort to support certain industries even in the face of declining local support. We see the activity in two primary sectors – climate change and voter initiatives. In the area of climate change, in 2020 the Arizona legislature enacted a law that prevents municipalities and counties from banning new gas infrastructure and hookups and Oklahoma, Tennessee and Louisiana also passed preemption laws regarding natural gas. 

Now, the American Gas Association is building on those 2020 successes to back similar “preemption” legislation in 12 mostly Republican controlled legislatures – Arkansas, Colorado, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Missouri, Mississippi, Texas, and Utah. So much for the party’s historic stance on local control always being better. A new Montana bill in the legislature would prevent local governments from “imposing carbon penalties, fees or taxes” based upon carbon use. It comes as the city and county of Missoula, and the cities of Bozeman and Helena, formally adopted a joint agreement this month to work with NorthWestern Energy in developing a green tariff.

The effort comes as the market, in terms of fossil fuels, has essentially already voted on the topic. The current debate comes as the U.S. Energy Information Administration is projecting that the levelized cost of electricity is coming down for new utility-scale onshore wind and solar photovoltaic (PV) projects to levels below all fossil or conventional fuels including combined cycle gas turbine (CCGT) power plants. It makes the fight against movement away from fossil fuels more irrational.

It is a real issue. By late January, 42 California cities had taken action to limit gas use in new buildings. Seattle just took that step.  Recent research and anecdotal evidence suggests that the use of electric appliances and heating is not more expensive than natural gas. So it becomes an more an issue of ideology or resistance to change rather than sound management and local control. We see that as a governance factor which should be given significant weight in the rating process.

In the case of voter initiatives, legislatures in many of the states where the right of voter initiative and referenda is established are being asked to consider legislation limiting or outright revoking the practice. Proponents seek to prevent voters from directly considering a variety of laws. The initiative process has been key to the legalization of cannabis and the expansion of Medicaid under the affordable Care Act. Those two issues, combined with support for climate change legislation seem to be the forces driving these moves to impose control on localities.

We see the relative inability for many localities to fully control their fiscal situations to be a negative weight on credit.

THE PANDEMIC AND NEW YORK CITY

As the cultural center of the nation, New York City unsurprisingly saw major impacts as the pandemic shut down nearly all of the major cultural facilities. Now the New York State Comptroller has released data establishing just what the impact was.

In 2019, New York City’s arts, entertainment and recreation sector employed 93,500 people in 6,250 establishments. These jobs had an average salary of $79,300 and generated $7.4 billion in total wages. Some, 128,400 residents (including nearly 31,000 self-employed residents) drew their primary source of earnings from the arts, entertainment and recreation sector. As of December 2020, arts, entertainment and recreation employment declined by 66%

from one year earlier, the largest decline among the City’s economic sectors.

The arts, entertainment and recreation sector includes three subsectors, the largest of which is performing arts and spectator sports. This subsector accounted for half of the 93,500 jobs in this sector overall. The second-largest subsector, which had 32,700 jobs (35% of the total) with an average salary of $36,600, consists of amusement, gambling and recreation businesses. Museums, parks and historical sites is the third subsector, accounting for 14,300 jobs (15 percent of the total).  

Federal stimulus did help somewhat. Federal Paycheck Protection Program loans supported 62 percent of firms and 70 percent of employment in the sector. However, NYC & Company (the City’s convention and visitors bureau) estimated that nearly 67 million tourists visited the City in 2019 and accounted for $70 billion in economic activity. In 2020, however, they expect the number of tourists declined to 23 million.

MTA REPRIEVE

The Metropolitan Transportation Authority announced that major reductions would be avoided through 2022. The change in outlook reflects the high level of confidence that the soon to be approved stimulus legislation will provide significant operating fund relief to the Authority. The federal aid will be complimented by higher than projected tax revenues which make their way to the Authority.

With patronage at the MTA bridges and tunnels returning at a much faster rate than is the case with mass transit, the authority’s board also approved a plan to raise tolls at the MTA’s bridges and tunnels by approximately 7 % and to use that money for public transit. The increases will raise the one-way toll at major authority crossings to $6.55 from $6.12 for New York E-Z Pass users and to $10.17 from $9.50 for drivers who do not have a New York E-Z Pass.

Staten Island drivers benefitted for years from both a resident discount and a rebate program, will see the toll to cross the Verrazzano-Narrows Bridge rise to $2.95 from $2.75.

None of this addresses the capital needs of the overall system, especially work which continues to remediate damage from Superstorm Sandy. The $54 billion plan to modernize the system was suspended when the pandemic hit.  The Authority still faces some daunting realities. Some  five million riders used the subway on weekdays a figure which has fallen to about 1.6 million. That is a two-thirds drop. It is far from clear when and if ridership at that level returns. But the immediate heat is off and concerns about ratings and default are abated.

MARYLAND ROAD P3 MOVING FORWARD

The Maryland Department of Transportation (MDOT), MDOT State Highway Administration (MDOT SHA), and the Maryland Transportation Authority (MDTA) today announced the selection of  a private partner for the planned construction and expansion of the American Legion Bridge and I-270. The decision follows the enactment of legislation creating parameters for the P3 which sought to address issues which resulted from the ongoing Purple Line development. Those issues led to the breakup of that P3.

One of the major issues had to do with responsibility for delays and resulting cost increases arising from an extended legal review process. The legislation established limits on how much of the increased costs related to the development phase of the project. The proposal recommended by the state calls for the private partner (Accelerate Maryland Partners LLC ) to be at risk for up to $54.3 million of cost increases through the approval/development process.

The partnership consists of established P3 players in the US. Accelerate Maryland Partners LLC includes: Transurban (USA) Operations Inc. and Macquarie Infrastructure Developments LLC as lead project developer/equity; Transurban and Macquarie as lead contractor; and Dewberry Engineers Inc. and Stantec Consulting Services Inc. as designers.

In the financial proposal, Accelerate Maryland Partners offered a $145 million Development Rights Fee and a $54.3 million Predevelopment Cost Cap. Accelerate Maryland Partners also showed a long-term commitment to the American Legion Bridge I-270 to I-370 project by proposing a higher rate of return on its equity investment in exchange for taking greater construction cost risk upfront, reducing the state’s risk in the project. 

The full approval process is expected to extend through the Spring of this year.

PENN DOT BRIDGE PLAN

The Pennsylvania Department of Transportation (PennDOT) is moving towards a P3 model for its Major Bridge P3 Initiative. The Pennsylvania P3 Board approved the Major Bridge P3 Initiative on November 12, 2020, which allows PennDOT to use the P3 delivery model for major bridges in need of rehabilitation or replacement, and to consider alternative funding methods for these locations.

Now Penn DOT has announced a list of 9 bridge projects which it believes are viable as tolled facilities. The bridges being considered for the Major Bridge P3 Initiative are “structures of substantial size that warrant timely attention and would require significant funds to rehabilitate or replace. Additionally, these bridges were selected based on the feasibility of construction beginning in two to four years to maximize near-term benefits, and with the intention that their locations are geographically balanced to avoid impact to just one region.”

Tolling would be all electronic and collected by using E-Z Pass or license plate billing. The funds received from the toll would go back to the bridge where the toll is collected to pay for the construction, maintenance and operation of that bridge. Pennsylvania takes care of 41,000 miles of roads, fifth highest in the country. It’s also responsible for the third-highest number of bridges, 25,400, more than half of them at least 50 years old and 2,500 in poor condition, second highest in the country.

The plan comes as the Commonwealth is in the midst of a significant debate over funding for PennDOT.  Efforts to put tolls on sections of I-80 in 2008 met fierce resistance from local drivers and the plan as scuttled. It is likely that the tolling of existing free facilities will be met with significant opposition. At the same time, PennDOT saw a net drop in gas tax funding and the Pennsylvania Turnpike’s requirement to pay $450 million a year mostly for public transit drops to $50 million in mid-2022, and the Legislature hasn’t determined how it will replace that money.

A more comprehensive transportation funding approach in PA would be positive for holders of Pennsylvania Turnpike Commission revenue bonds. The diversion of revenues from the Turnpike to the funding of local road projects resulted in significant debt issuance to fund the annual payment requirement. That lowered debt service coverage and negatively impacted ratings. A resolution to those factors would be credit positive.

GAS TAXES

A variety of proposals are being advanced to address the need to raise revenues to fund transportation infrastructure. While Congress debates infrastructure funding at the federal level, states and localities are already trying to raise funds on their own.

Mississippi has had the same motor fuel tax of 18.4 cents a gallon since 1987. Now the Legislature is advancing a bill which would provide for the issue of a gas tax increase to be put to the state’s voters on June 8. The bill proposes a statewide election on whether to increase the gasoline tax by 10 cents a gallon and the diesel fuel tax by 14 cents a gallon.  Sponsors believe that gas tax revenues would then be able to support $2.5 billion of debt for roads.

The New Mexico legislature will consider Senate Bill 168 which would increase the gasoline excise tax from 17 cents to 22 cents per gallon. The legislature estimates that the increase would raise over $63 million annually once fully phased in by 2025, mostly for the state road fund. Only Mississippi, Missouri and Alaska have lower gas taxes. At 22 cents per gallon, the standard gas tax would still be more than 14 cents below the national average. New Mexico lawmakers have decreased the tax twice since last raising it in 1993.

The North Dakota House has passed a bill that adds another 3 cents per gallon to the state’s gas tax which has not been raised since 2005. It is currently 23 cents per gallon. The proposal also raises the annual fee on electric vehicles from $120 to $200, on hybrid vehicles from $50 to $100 and on electric motorcycles from $20 to $50.

Efforts to grapple with the growing adoption of electric vehicles continue. The Utah Legislature failed to advance legislation which would have increased six-month and yearly registration fees for owners of electric vehicles, plug-in hybrids and other alternative fueled vehicles in Utah. The defeat was based in concerns that punitive fees would discourage their purchase.

UBER AND MASS TRANSIT

The pandemic has certainly put a major dent in Uber’s business plan. They only advertise Uber Eats, the food delivery arm of the operation. revenues to the company are now derived as much from food delivery as they are from ride sharing. While it won its costly battle over how its “employees” are legally classified, it lost in England when it was ruled in the courts that its drivers “across the pond” are indeed employees.

So it is in the midst of those environmental factors for Uber that it released a “research report” about their “value proposition” to public transit agencies for Uber to become an embedded part of their systems. The effort to strike a more conciliatory tone towards these agencies marks a sharp turn from their previously adversarial stance. It reflects somewhat of a reality check in terms of the role of public transit.

“Bus, rail, and subways have dominated public transport for the last 80+ years. Those modes are here to stay – simply put, there is no more efficient alternative than high-demand trunk lines on fixed routes to move a large number of people along dense corridors. Efficient public transportation enables cities and towns to flourish by providing mobility for essential workers, older adults, people with disabilities, those who forgo car ownership by choice or by circumstance, and is the only available option by which millions of people access economic opportunities. Without efficient public transportation, cities would grind to a halt.”

At the same time, “Our estimates suggest that only about 1-6% of bus trips could be provided at a lower cost with ridesharing – a relatively modest share of overall trips.”  That sort of sums the whole problem up. In terms of the physical provision of mass transit services, they really aren’t cost competitive and as we economist like to say, produce a number of negative externalities. Whether it is over how they treat the people who drive for them, how the vehicles contribute to gridlock, and the addition of thousands of fossil fueled vehicles. What they can do is offer technology management but so do a bunch of other providers. But then there’s nothing behind the curtain, eh?.

WEST VIRGINIA INCOME TAXES

One of the more interesting proposals to be made in this 2021 budget season comes out of West Virginia. The Governor has proposed eliminating the state’s personal income tax. The debate now underway includes several different plans to make up for the lost revenue the end of the income tax would bring. One idea the governor has is a “tiered” system of severance taxes. The tiered system would tie severance taxes collected by the state on oil, natural gas and coal extraction to current market prices for each commodity.

Each commodity would be taxed at one rate as long as the price remained below a designated level, but would be taxed at increasing rates as the price rises. Previous attempts to change the state’s severance tax scheme proposed that when the price of natural gas was less than $3 per thousand cubic feet, it would be taxed at 5%. As the price of gas rose, the rate would increase correspondingly, maxing out at a 10% rate when prices exceed $9 or more per thousand cubic feet.

The debate occurs in the absence of a formal legislative proposal from the Governor. When a tiered system was included in legislation in 2017, the plan included provisions that when the price of natural gas was less than $3 per thousand cubic feet, it would be taxed at 5%. As the price of gas rose, the rate would increase correspondingly, maxing out at a 10% rate when prices exceed $9 or more per thousand cubic feet.

The proposal comes as states with progressive income tax schemes have had better than expected revenues as those at the top of the scale were better able to keep their jobs and maintain income. The proposal also comes as the reality of low energy prices continues to sink in. In 2017, the state estimated that the revenue impact from a tiered severance tax system would be at best neutral. It expects that current price dynamics will remain for an extended period.

NEW JERSEY BUDGET

Governor Phil Murphy released his budget proposal for FY 2022. It comes after the state extended its fiscal 2021 year end and enacted tax increases. This plan does not add to those increases. The proposed FY2022 budget addresses one of the major drags on the state’s credit by including an additional $1.6 billion to meet the goal of contributing 100 percent of the Actuarially Determined Contribution (ADC) to New Jersey’s pension system a year earlier than initially planned. The proposed $6.4 billion pension payment, which includes contributions from the State lottery, would mark the first time the State has made a full contribution since FY1996. 

The $44.83 billion spending proposal assumes 2.4 percent growth in total revenue and includes a sizable surplus of $2.193 billion, just under five percent of budgeted appropriations. The proposed FY2022 budget increases state aid to schools by $576 million. The State’s Garden State Guarantee, which provides two years of free tuition at four-year institutions for students with household incomes of less than $65,000 is funded in the budget.

The FY2022 budget proposal also increases total resources for NJ TRANSIT to $2.65 billion, nine percent over FY2021 and 15 percent over FY2019. As a result of last year’s millionaires tax enactment, the proposed FY2022 budget includes $319 million in direct tax relief for middle-class families, which will provide up to a $500 rebate to over 760,000 couples and individuals with qualified dependents. The budget also includes $1.25 billion in funding to support various property tax relief programs.

The proposal checks off a significant number of boxes in terms of the state’s historic areas of concern: pensions, NJ Transit, state aid to limit local property taxes; middle class tax rebates, and debt issuance. It’s the surest sign of all that 2021 is an election year in NJ. Nonetheless, if adopted the overall impact on the state’s credit would be positive.

PUERTO RICO DEBT PLAN

Puerto Rico’s Financial Oversight and Management Board (FOMB) announced a new plan support agreement (PSA) with holders of $18.8 billion out of a total $35 billion in general obligation (GO) and Public Buildings Authority (PBA) debt. The new PSA reduces the approximately $18.8 billion of GO and GO-guaranteed liabilities by 61 percent, to $7.4 billion, resulting in an extra $2.7 billion in a principal debt cut compared to the agreement reached in February 2020. The deal reduces GO debt service payments by $4.7 billion, as well as cutting the maximum annual debt service by 22%, to $1.15 billion, relative to last year’s PSA.

The deal includes a contingent value instrument (CVI) that pays an additional amount to bondholders if Puerto Rico’s economy outperforms the projections in the FOMB-certified May 2020 commonwealth fiscal plan. The CVI relies on collections of 5.5% of the commonwealth’s 11.5% sales and use tax (SUT) pledged to Cofina that exceed estimates. The creditors who are a party to the agreement would receive 45% of the increment above the amount projected, subject to annual and lifetime caps. GO and PBA bondholders would receive $7.4 billion in new bonds and $7 billion in cash. 

The agreement will be presented as part of the plan of adjustment (POA) the fiscal panel is due to file in court by the March 8. The new agreement’s cash and debt consideration to bondholders provides a 27% average reduction for GO bondholders and a 21% average reduction for PBA bondholders. The chairman of the FOMB said the GO and PBA deal now has the support of 60% of bondholders. Court approval the deal must be submitted to a vote in which two-thirds of participating bondholders vote in favor in each class of bonds. 

In a nod to the populist pressures facing the Governor, he said would not support a plan that includes an agreement between the Official Retirees Committee and the oversight board for an 8.5 percent cut to government pensions exceeding $1,500 a month, which would affect 25% of retired public workers. It sets up as another example of pensioners being favored over bondholders as was the case with the City of Detroit bankruptcy.

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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TAXING TECH

It took a long time and an extended legal battle for states to get the ability to tax sales on the internet. Fortunately, the issue was settled before the pandemic occurred. This allowed states to reap some of the “benefits” of the move to online retailing that reflected stay at home orders. Now the effort to tax one of the most valuable industries – technology companies – have moved to a new phase.

The Maryland legislature has passed the nation’s first tax on the revenue from digital advertisements sold by companies like Facebook, Google and Amazon. The legislation is estimated to generate as much as an estimated $250 million in the first year after enactment. The intent is to use those monies to aid education in the state.  

The effort comes as Connecticut and Indiana have introduced bills to tax the social media industry.  Prior efforts have fallen short in West Virginia and New York. Industry opponents of the tax include telecom companies and local media outlets.  Opponents claim that the tech companies will pass the cost to their advertisers (mostly small businesses) as a reason not to tax.

A company that makes at least $100 million a year in global revenue but no more than $1 billion a year would face a 2.5% tax on its ads. Companies that make more than $15 billion a year would pay a 10 % tax. Facebook’s and Google’s global revenues far exceed $15 billion. the Maryland tax would be the first to be applied solely to the revenue a company got from digital advertising in the United States.

It is an idea pioneered in Europe where the tech companies face less favorable government regulation. France has imposed a 3 percent tax on some digital revenue. Austria taxes income from digital advertising at 5 percent. The tax will be litigated by the companies. They feel that because the largest tech companies are not based in Maryland, the law would tax activity that originated outside the state, violating the Constitution.  When sales taxes were approved, the issue of a physical nexus for tech companies and the jurisdiction levying taxes against them it was argued prohibited those taxes.

LOUISIANA

We have had states as a declining credit sector for some time. Now that the budget season for states is fully underway, the problems being faced by states due to the pandemic have become clearer. They are trying to formulate budgets to meet the requirements of increased pandemic related costs, declines in economic activity, and high unemployment. While there is hope regarding vaccines and the potential revival of economic activity, the outlook for states is uncertain at best.

So we were surprised to see that Moody’s has chosen now to revise the rating outlook of the general obligation, lease and State Highway Improvement Revenue Bonds of the State of Louisiana to positive from stable. “Louisiana’s positive outlook reflects the significant progress the state has made restoring its financial reserves and liquidity in recent years by aligning revenue and spending in a post-energy boom era, rebuilding borrowable funds and generating budgetary surpluses in consecutive years.” We acknowledge these improvements. However, the state’s major industries – fossil fuels and petrochemicals – face enormous pressures in the near and long term.

The other major industry is tourism. Moody’s acknowledges that “the state’s recovery, however, depends in part on the economic recovery of New Orleans, the state’s largest city and a popular tourism destination. Ultimately, tourism may indeed return to pre-pandemic levels but that remains a highly uncertain proposition. Mardi Gras was cancelled this year. Issues related to climate change continue to have a significant impact on the state’s longer term outlook. The state’s historic vulnerability to climate issues continues.

So we ask ourselves what is it that moved a change in outlook now? We continue to believe that with states at the center of managing the vaccine rollout and continuing uncertainty about ultimate levels of federal funding, the outlook can only be uncertain at this time.

ILLINOIS

With all of its problems in addition to the pandemic, Illinois is one state that we are confident will not receive an improved outlook. Gov. J.B. Pritzker of Illinois presented his proposed budget for FY 2022. It comes in the wake of the defeat at the ballot box of a proposed constitutional amendment establishing a graduated income tax. Voters chose to maintain the existing flat income tax at 4.95%.

The Governor’s plan contains no new tax increases and avoids major service cuts.  It seeks to end business tax breaks. The business tax changes include reversing a phase-out of the state’s corporate franchise tax, eliminating an additional tax credit for companies receiving other state incentives that create construction jobs, capping the discount retailers get for collecting state sales tax, limiting accelerated depreciation under a federal tax change and accelerating the already scheduled expiration of a tax exemption for biodiesel fuels.

The plan would also extend repayment of state borrowing, shift earmarked revenues to the state’s general fund and use existing federal COVID-19 relief funding to address a budget deficit of more than $2.6 billion. The dedicated revenues that would be shifted to general government operations are a 10% share of state income taxes that local governments are due to receive. 

The State’s long standing credit issues remain. The Governor’s proposal would cover the state’s required pension contribution totaling nearly $9.4 billion. For the current budget year, the state has nearly $5 billion in unpaid bills and $4.3 billion in short-term borrowing, including $2.8 billion from the Federal Reserve that must be repaid over three years.

The budget debate will occur in a significantly changed political environment in Springfield. After being replaced as Speaker of the Illinois House, Michael Madigan has resigned his seat. One of the last of the old school machine politicians, Madigan was as often an obstacle to progress as much as he could be an ally and his departure is as credit positive as anything else.

GAS TAXES

A confluence of forces has pushed transportation funding – particularly roads – towards the top of the priority list in many states with budget season upon us. They are all approaching the issue from various perspectives and the resulting proposals for funding reflect those diverse standpoints.

In Wisconsin, the top two revenue sources for the state’s transportation fund — fuel taxes and vehicle registration fees — fell short of projections by more than $116 million combined in Fiscal Year 2020. Transportation dollars included in a federal relief package passed in December are estimated by the American Association of State Highway and Transportation Officials estimates to provide Wisconsin with about $188 million in transportation funding.  The Wisconsin Department of Transportation projected fuel tax revenues would remain below 2020 levels for next two years and total revenues in 2022 are expected to be the lowest since 2013.  

In Washington, the state legislature is considering a proposal which would bring the state’s gasoline taxes to $0.85/gallon. That would be the highest combined gasoline tax in the nation. The increased gas tax is estimated to  raise more than $16 billion dollars over the next 16 years for Washington transportation projects. Conversely, Ohio Governor Mike deWine has proposed cutting state funding for public transit. The woes of public transit agencies during the pandemic have been clearly shown. Consequently, bipartisan pushback on the Governor has been strong.

CALIFORNIA MUNICIPAL UTILTIES

The ongoing saga which is Pacific Gas and Electric over the last few years led to many calls for a public takeover of the utility and its transmission and distribution assets. Whether it be the damage resulting from wildfires or the impacts of the resulting policy of rolling blackouts, efforts to separate Californians from the troubles of PG&E are increasing.

One municipality at the forefront of such an effort is the small city of Gonzales, CA. This city of 9,000 has formed an electric utility, the City Gonzales Electrical Authority. The Authority has contracted with a power supplier to deliver wholesale electric power via a community-scale microgrid. The microgrid is designed to integrate a mix of 14.5-MW-AC of solar energy, 10-MW/27.5 MWh of battery energy storage and 10-MW of flexible thermal generation. The initial customer for the power is the Gonzales Agricultural Industrial Business Park, which houses processing facilities for fresh vegetable and wine producers.

Concentric Power, the power supplier, will develop, design, build, operate and maintain the microgrid assets, including both generation and distribution. The distribution assets will be transferred to Gonzales Municipal Electric Utility. The initial term of the energy services agreement is 30 years and the project is expected to break ground in mid-2021 and be ready for service in 2022.

The GEA microgrid power program’s objectives include, among other things, an integrated microgrid system that, at least in early phases, is independent from the Pacific Gas & Electric power delivery system. One of the industrial park’s major tenants already produces some of its own renewable-based power. This project will enable the park to integrate these existing distributed energy sources and operate the industrial park facilities independent of the larger transmission grid.

We think that projects like this are just the start for municipal utilities across the country. Microgrids have the potential to improve reliability and resilience for systems of all sizes. By virtue of public ownership of distribution assets, the utility is able to make decisions based on value and efficiency rather than the dividend needs of a corporate parent.

MUNICIPALS AND ELECTRIC VEHICLES

The City of St. Louis has just enacted a series of bills mandating electric vehicle readiness and charging stations in new construction and certain rehab projects. The city is mandating that beginning in January 2022 single family (new construction) have one electric vehicle ready space per dwelling unit. Beginning in January 2022 multifamily residential (new construction and rehabs of more than 50% of building area) have one electric vehicle ready space for five to 20 parking spaces; two electric vehicles spaces and one charging station for 21 to 49 parking spaces; and if 50 or more parking spaces exist, 5% of them be electric vehicle ready and 2% have charging stations.

Beginning in January 2022: nonresidential (new construction and rehabs of more than 50% of building area) have one electric vehicle space for 10 to 30 parking spaces; two electric vehicle spaces and one charging station for 31 to 49 parking spaces; and if 50 or more parking spaces exist, 5% of them be electric vehicle ready and 2% have charging stations. Beginning in January 2024: single family (new construction and rehabs of more than 50% of building area except where parking is more than 50 feet from the main structure, or has insufficient electrical service capacity) have one electric vehicle ready space per dwelling unit.

Beginning in January 2025: multifamily residential (new and rehabs of more than 50% of building area) have one electric vehicle ready space for five to 20 parking spaces; two electric vehicles spaces and one charging station for 21 to 49 parking spaces; and if 50 or more parking spaces exist, 10% of them be electric vehicle ready and 2% have charging stations.

The legislative process also produced cost estimates for compliance with the requirements. Those costs include needed panel capacity, conduit and wiring which could cost $750 to $2,000 each for new, multifamily construction and $1,500 to $10,000 in retrofits. The cost for one- to four-family residential, the city said, can range from $380 for an EV-ready outlet and $800 to $1,170 for charging stations. The cost for one- to four-family residential, the city said, can range from $380 for an EV-ready outlet and $800 to $1,170 for charging stations.

In Arkansas, the state Department of Energy and Environment launched a program this month using nearly $1 million from Volkswagen’s environmental mitigation fund to provide rebates to public and private applicants that install Level 2 EV stations, which can charge electric vehicles in eight hours or less using a 240-volt output. Arkansas has an estimated 202 EV charging locations with 434 individual stations. While nearly one-third are in greater Little Rock, Thirty-seven of Arkansas’ 75 counties have no charging locations.

ANOTHER EXAMPLE OF TRANSIT’S FINANCIAL WOES

The revenue losses experienced by mass transit systems across the country have been in the news for some time but with so much focus on NY’s MTA, the impact on other big city systems gets a bit lost. The latest example comes to us from the Pacific Northwest.

In Seattle, Sound Transit faces a projected $6 billion reduction in tax revenue due to the COVID-19 recession. Sound Transit’s board requested last week that the new federal transportation secretary to provide an extra 30% Federal Transit Administration (FTA) contribution to major projects in progress. That would translate into a $1.9 billion windfall for ongoing extensions. Sound Transit is looking for that funding in addition to some $2 billion received under the initial stimulus package.

The agency has already implemented several tactics to deal with its funding needs.  At the federal level, there is estimated to be $70 billion Congress already approved for low-interest, deferred-payment loans through the Transportation Infrastructure Finance and Innovation Act (TIFIA) currently unspent. Sound Transit knows how that funding source works as it is the biggest TIFIA client, having borrowed $3.3 billion for five projects. 

WINTER STORM GENERATES UTILITY HOT AIR

As public sentiment drifts inexorably towards the demand for electric power from renewable sources, the ice storms which plagued the country last week generated a host of claims that the resulting power outages highlighted the “dangers” of renewable fueled electric generation. Claims are that the rolling blackouts imposed across several states would not have occurred if wind and solar generation were not part of the equation.

One municipal utility in Colorado offers a different perspective. Platte River Power Authority in Colorado is a long time municipal bond issuer. In this instance, the storm led PRPA to ask consumers to reduce their power consumption because of a cascading series of events that threatened the power supplier’s ability to meet anticipated demand . In the summer, consumers across the country face requests like that especially in the case of hot weather.

The energy emergency throughout Colorado and the middle of America was sparked by a spike in demand for natural gas, which often is used to reduce electrical energy consumption peaks. In this case, the gas supplier chose to supply residential and smaller customers with gas while reducing gas supplies to peaking electric generation. It is true that wind and solar were of limited use in the storm which curtailed or halted production of both.

Proponents of the status quo for electric generation will point to events like the storm to justify keeping coal generation open. What it should do is increase attention and resources on battery and storage technologies. The development of those technologies to “economic critical mass” will be central to long term climate concerns.

Regardless of the current issue, transmission infrastructure lies at the center of any energy discussion. We have seen public entities in multiple regions finance and operate. Large scale transmission projects have been developed by municipal issuers in New York and California for decades. For a long time, the issuers’ focus was on generation. Now the likely focus for issuers will be on transmission, storage, and distribution.

CANNABIS AND THE ECONOMY

A report by Leafly and Whitney Economics has attempted to quantify the economic impact of the cannabis industry on a number of economic indicators. One has to rely on private sources of this data as Federal prohibition prevents the US Department of Labor from counting state-legal marijuana jobs. Until that changes, the industry will drive much of the data. Now that we have established the nature of the lens through which data is viewed, here is what they see.

Medical marijuana is now legal in 37 states, while 15 states and Washington, DC, have legalized cannabis for all adults. The 2021 Leafly Jobs Report found 321,000 full-time equivalent (FTE) jobs supported by legal cannabis as of January 2021. Now compare that to any number of jobs in more traditional categories. In the United States there are more legal cannabis workers than electrical engineers. There are more legal cannabis workers than EMTs and paramedics. There are more than twice as many legal cannabis workers as dentists.

The job growth was across jurisdictions both established (CA) and new (IL). California saw the industry generate 23,700 new jobs while Illinois saw job growth of 8,348. States that you do not normally associate with forward thinking social environments saw job growth. Oklahoma’s industry grew 6,200 new jobs and Pennsylvania saw just under 7,200 new jobs.

Other data on sales is revealing. Colorado continues to lead the nation in per-capita cannabis sales. In California there are now more cannabis workers (57,970) than bank tellers (41,140). Florida now sells more cannabis products than any other state except California and Colorado, even though it’s only legal for medical patients. With the opening of its first state-licensed adult-use cannabis stores in 2020, Illinois tripled its total sales last year. Michigan’s first adult-use marijuana stores opened in Dec. 2019, and that new customer base drove 2020 sales to more than double Michigan’s 2019 medical-only revenue, from $420 million to $990 million.

ENERGY OUTLOOK

U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis.

On a volume basis, U.S. consumption of gasoline declined by more than other petroleum products in 2020. EIA forecasts that U.S. gasoline consumption will rise in the forecast but remain lower than 2019 levels. U.S. gasoline consumption is forecast to average 8.6 million b/d in 2021 and 8.9 million b/d in 2022, up from 8.0 million b/d in 2020 but lower than the 9.3 million b/d consumed in 2019. total U.S. consumption of natural gas will average 81.7 billion cubic feet per day (Bcf/d) in 2021, down 1.9% from 2020.

EIA forecasts that consumption of electricity in the United States will increase by 1.6% in 2021 after falling 3.8% in 2020. It expects the share of U.S. electric power generated with natural gas to fall from 39% in 2020 to 37% in 2021 and to 35% in 2022. Coal’s forecast share of electricity generation rises from 20% in 2020 to 21% in 2021 and to 22% in 2022. Electricity generation from renewable energy sources rises from 20% in 2020 to 21% in 2021 and to 23% in 2022. The nuclear share of U.S. generation declines from 21% in 2020 to 20% in 2021 and to 19% in 2022.

EIA estimates that the U.S. electric power sector added 17.5 gigawatts (GW) of new wind capacity in 2020. EIA expects 15.3 GW of wind capacity will be added in 2021 and 3.6 GW in 2022. Utility-scale solar capacity rose by an estimated 11.1 GW in 2020. The forecast for added utility-scale solar capacity is 16.2 GW for 2021 and 12.3 GW for 2022. At the same time, EIA expects U.S. coal production to total 589 million short tons (MMst) in 2021, 50 MMst (9%) more than in 2020. In 2022, EIA expects coal production to rise by a further 5 MMst (1%). These increases reflect higher forecast demand for coal in the electric power sector because of rising natural gas prices, which increases coal’s competitiveness relative to natural gas for power generation dispatch.

CLIMATE CHANGE

The Oregon Climate Change Research Institute at Oregon State University has released the results of its study of flooding patterns in the Columbia River Basin. The goal of the research was to better understand how flooding in the Columbia River basin might change as the planet warms. 

The study used hydrology models and a previously collected set of streamflow data for 396 sites throughout the Columbia River basin and other watersheds in western Washington over a 50 year period. The results led the study to conclude that the Willamette River and its tributaries are expected to see the biggest increase in flooding magnitude, with 50% to 60% increases in 100-year floods. Parts of the Snake River will see a 40% increase in 10-year floods and a 60% increase in 100-year floods. 

The question yet to be answered is what mitigation infrastructure might be required. The region’s historic reliance on dams is under challenge anyway and the data generated for the report will force communities potentially impacted to reevaluate their infrastructure needs.

AIRPORT TRAFFIC

We saw that some issuers which depend on air travel are taking steps to align the decreased revenues which have resulted from the pandemic. Several are using refundings at current low interest rates to restructure amortization schedules to reflect new expectations about revenues.

An estimated 368 million passengers flew in 2020, the lowest number since 1984. The Bureau of Transportation Statistics (BTS) reported that April saw the biggest drop in U.S. passenger traffic. Three million people flew that month, a 96% year-over-year drop and the lowest monthly total in BTS records since 1974. The previous low was 14.6 million passengers in February 1975.

That explains why some specific projects like stand alone rental car facility credits are extremely vulnerable to limits on travel.

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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DETROIT AND A NO SPREAD MARKET

It was in 2014 that Detroit managed to work its way out of bankruptcy with limited tax bondholders recovering 34 cents on the dollar and unlimited tax holders 74 cents. This week the City was in the  market with general obligation debt. The City sold $135 million stand-alone, tax-exempt general obligation bonds with maturities out to 2050. The bonds came at  spreads of 100 bps to 128 bps to the Municipal Market Data’s AAA benchmark. Taxable bonds came at spreads of up to 250 basis points to Treasuries.

So have things improved greatly in terms of the city’s financial position and management? They certainly have but the city still faces daunting obstacles in its path to economic stability. The purpose of the bond issue itself is evidence of the city’s problems. In November, more than 70% of voters authorized $250 million of GO borrowing to finance blight removal. Proceeds will help finance the city’s renovation of 8,000 vacant homes and demolition of another 8,000. Those are some of the factors holding the city’s GO rating at BB-.

The driving factor enabling the city to achieve a fairly effective cost of borrowing is the continuing flow of money into municipal bond funds. In effect, too much money is chasing too few bonds. The pandemic and the need to keep interest rates low as a result of it have created a very favorable environment for borrowers whether it be new money in the case of Detroit or de facto restructurings. For those borrowers whose financial positions have been clearly impacted by the pandemic – especially those sectors dependent upon travel or entertainment – the current rate environment and supply and demand patterns encourage more borrowing.

KROLL REJECTS ESG SCORES

We were heartened to see Kroll Bond Rating Agency take a position on the issue of how environmental, social, and governance factors (ESG) should be addressed as part of the credit rating process. There is increasingly pressure on the rating agencies to develop methodologies which investors and fund managers and marketers can use to address the increasing investor emphasis on ESG. This interest has led to various efforts to develop distinct ESG scoring methodologies by a variety of entities with varying degrees of success (or the lack thereof). One of the criticisms of the effort, stems from that fact that many of the characteristics evaluated for purposes of ESG scoring do not necessarily lend themselves to a quantitative judgment.

Kroll’s view is that solid credit analysis has always taken ESG factors into account when developing a rating. “KBRA believes that ESG risks and opportunities are best analyzed through a lens of how well these risks are being identified and managed by issuers and/or by their transactions.” It you think about it, with municipalities being on the front line of both the impacts of natural disasters and the response to them, one could argue that the municipal market has been an ESG market for all its history.

Municipal bonds have always been unique in that “management” in the public sector has always been dependent upon the political process. Anyone who thinks that the market has not been making decisions for decades based on what are now grouped as ESG factors, just does not understand what the municipal market finances.

We don’t need a separate scoring system for evaluating things like the ESG value of clean air and water, reliable available public transportation, pollution control equipment, schools and recreational facilities. The social and environmental benefits of those investments is pretty clear. As for the governance aspect, so long as elected officials are the officers of municipalities, governance will be an imperfect process.

NJ MOVES TOWARDS BETTER CLIMATE RISK DISCLOSURE

The State of New Jersey has enacted a new law which would require municipalities to identify critical facilities such as roads and utilities that might be affected by hurricanes or sea-level rise; make plans to sustain normal life in the face of anticipated natural hazards, and integrate climate vulnerability with existing plans such as emergency management or flood-hazard strategies. Municipalities must “rely on the most recent natural hazard projections and best available science provided by the New Jersey Department of Environmental Protection” when they update master plans every 10 years, as required.

Seas at the Jersey Shore are expected to rise by up to 2.1 feet by 2050 and by as much as 6.3 feet by the end of the century, compared with the 2000 level, according to the latest forecast from Rutgers and the DEP. Nevertheless, as is always the case, the municipality’s lobbyists are planning to try to overturn the law under New Jersey law regarding state mandates.

So here is a challenge for all ESG investors. The municipalities balking at the new requirements would likely change their minds if they lost market access over climate issues. The Office of Legislative Services concluded in an analysis of the bill last September that its measures would result in just a “marginal” spending increase at municipal and state levels. You do not need a rating agency or really any other entity to tell you that the refusal to deal with climate change is a major credit impact. It is just common sense.

TRANSMISSION BOTTLENECKS THREATEN NEW GENERATION

One of the issues facing the utility industry is how it will accommodate the needs of alternative energy producers to be able to deliver their power to the transmission grid. It is becoming more of an issue as the renewable energy industry grows in tandem with increasing regulation driving producers away from fossil fuel usage. Recently, a couple of situations have arisen highlighting the issue and causing debate.

In Maine, the state’s investor owned utility Central Maine Power (CMP) is under fire for its “mismanagement” of the absorption of renewable energy from independent producers. Recently, CMP notified the developers of renewable energy resources that it had incorrectly estimated the cost for these producers to access the transmission grid operated  by CMP. CMP informed solar developers that its initial statements about how much it would cost solar projects to connect to the energy grid – costs that solar developers had already relied on for business investments in the millions – were incorrect and that an undisclosed number of projects would need to pay hundreds of thousands, if not millions, of dollars more in order to connect to CMP’s transmission system.

CMP has active requests for 2,000 megawatts of capacity in small renewable projects, known collectively as distributed generation. But the current grid is designed to handle a peak load of only 1,700 megawatts. Now, CMP is sending notices to solar power producers with whom it has signed and executed agreements to distribute their power that the costs determined by system impact studies were incorrect.

Typically, interconnection agreements were entered into after a system impact study evaluated whether a transmission utility’s substation and local distribution network can safely and reliably handle the new power. Projects don not move forward until those costs are established. The price rise from CMP could damage the economics of some projects such that they are not longer viable to operate. A survey sent last week to members of the Maine Renewable Energy Association found that more than 100 solar projects in 74 communities have received revised cost estimates from CMP totaling tens of millions of dollars.

The issue moves forward as it highlights policy making conflicts between state and local governments. CMP is making its moves while three Maine solar energy projects will receive a total of $17.6 million in federal loan guarantees from the Rural Energy for America Program operated by the U.S. Department of Agriculture’s Rural Development office. The projects each have interconnection and net energy billing agreements with Central Maine Power. 

As the week went on, the political reaction emerged and put significant pressure including the potential for a state investigation of CMP’s solar hook up practices. Lo and behold, CMP announced that it had found faster and less costly solutions that will allow more large solar projects to hook up to its electric distribution network. “CMP believes lower-cost upgrades, or the complete elimination of upgrades, may be possible with further study. Specifically, where initial estimates were $10-$15 million per substation reflecting a complete rebuild of the substation, estimates for all but a limited number of substations are now in the range of $175,000 to $375,000 for those substations that will require upgrades.”

So far, the problem seems to be one for the investor owned utilities to deal with. While cost is an issue for all for all utilities which transmit as well as generate and distribute, this will be another area of risk as the renewable industry grows. Municipal utilities will have to step up their game when it comes to assessing the costs and viability of renewable alternatives. They will not be immune to the pressures of adapting to small scale local generation.

CYBER SECURITY FRONT AND CENTER NOW

It has long been a  concern that a malicious hack could access the operational systems of many utilities. For a long time, the main focus was on the power industry. The worry has always been that a hack could result in blackouts of conceivably long durations. The Atlanta and Baltimore hacks did not interfere with operations at facilities like utilities and airports. 

Now the worst fears of the cyber security industry have come true with the recent hack of the water utility in Oldsmar, FL. In that event, hackers were able to take over a portion of operating systems and alter the chemical treatment process at the city’s waterworks. Someone had seized control of one employee’s computer  for several minutes and increased the level of sodium hydroxide—a caustic alkaline chemical used in small amounts to control the acidity of water. At the levels the hacker set, the amount of that chemical would have been increased 100 times above safe levels.  

Fortunately, the operators at the plant were able to stop the potential poisoning of the water supply to 14,000 residents. Unfortunately, we still remain at the mercy of local officials in terms of what the risk actually was or is, and what it might cost to prevent a recurrence. That remains the case with no clear standards for cyber security disclosure and a likelihood that such hacking efforts will be repeated. It is a risk that investors need to ask more questions about.

We think that the vulnerable utilities will be the smaller local utilities. They tend to be less than well funded given the small economic bases supporting them. This makes them more reliant on third party systems providers reflecting a less than adequate level of technical expertise. The risk is greater now that many of these systems are being monitored and operated remotely due to the pandemic. This requires remote access to utility systems which increases vulnerability. The intruder gained access to the plant through an employee who had installed TeamViewer, a widely used piece of software that allows someone to remotely view and control a computer.  

FOSSIL FUELS WORTH THE FIGHT?

A new study released by the Ohio River Valley Institute  has cast doubt on the value of reliance upon the gas extraction industry to local economies. Between 2008 and 2019, twenty-two old industrial and rural counties in Ohio, Pennsylvania, and West Virginia, which make up the Appalachian natural gas region, increased their contribution to US gross domestic product (GDP) by more than one-third. The direct economic benefits to those counties however, were nowhere near commensurate with their contribution to the national economy.

The 22 counties’ share of the nation’s personal income fell by 6.3%, from $2.62 for every $1,000 to just $2.46. Their share of jobs fell by 7.5%, from 2.8 in every 1,000 to 2.6. Their share of the nation’s population fell by 9.6%, from 3.2 for every 1,000 Americans to 2.9 for every thousand. In 2010, the American petroleum Institute projected that  nearly 44,000 new jobs would be created in West Virginia and 212,000 in Pennsylvania. Another study predicted the creation of an additional 200,000 jobs in Ohio.

Between 2008 and 2019 the number of jobs nationally increased by 10%, but in Ohio, Pennsylvania, and West Virginia, job growth was less than 4%. The 22 major gas-producing counties did even worse, with combined job growth of only 1.7%. Of the 22 major gas-producing Appalachian counties, only one met or exceeded national performance for all three measures of prosperity – income, jobs, and population. One other county outperformed the nation for two measures. Two counties outperformed the nation for a single measure. And 18 underperformed the nation for all three measures.

This sort of data should show the folly of reliance upon the fossil fuel industry. In states like Wyoming, the state is expected to embark on a legal effort to maintain fossil fuel production. This even as several coal mines will be closing this year in the state. That is not as a result of things like the Federal leasing ban on extraction. It’s a product of the market. Wyoming does not levy any income tax on either individuals or corporations. It relies on the easy money from mining and drilling. The risk is always that the product will run out, that markets change, and that progress continues.

Like any other concentration issue, reliance on one concentrated economic sector is always a source of credit risk.

PUERTO RICO DEBT PLAN

Puerto Rico’s Financial Oversight and Management Board (FOMB) announced that it reached an agreement in principle with several creditor groups to lower the commonwealth’s debt to “sustainable” levels. It requested a one-month extension of the deadline to file an amended plan of adjustment. The board said it reached the agreement with creditors holding about $7 billion in GO and Public Building Authority (PBA) bonds.

The new proposal would entail annual payments of $1.15 billion to $1.3 billion from the central government plus a Sales Tax Financing Corp. (Cofina) payment for 20 years, until 2041, and annual Cofina payments of $991 million between 2042 and 2058. The new proposal would represent a cut to the principal of the debt of between 55 percent and 58 percent, much lower than the one proposed in October, which was between 66 percent and 69 percent.

For the Puerto Rico Electric Power Authority (PREPA), an agreement between PREPA and the New York State Power Authority (NYPA) has been renewed. The agreement continues the role of NYPA in the utility’s recovery. NYPA helped inspect 50 energy substations following the earthquakes early last year and assisted in restoring power to hundreds of homes across the island. NYPA also helped prepare damage assessments and cost estimates to facilitate insurance claims.

NYPA will offer technical assistance to help stabilize Puerto Rico’s power grid and help prepare recommendations for rebuilding and hardening the island’s power system. NYPA will help PREPA strengthen its emergency preparedness and resiliency initiatives and will offer technical assistance to help stabilize Puerto Rico’s power grid and help prepare recommendations for rebuilding and hardening the island’s power system so that it is better able to withstand the types of natural disasters which have plagued the Commonwealth for years.

IBO BUDGET REVIEW

The New York City Independent Budget Office has released its preliminary review of Mayor Bill de Blasio’s budget proposal for FY 2022. The review is interesting not only for its view of the upcoming FY, but it also provides some view of the fiscal impact of the pandemic on the City.

IBO projects a fiscal year 2021 surplus of $3.62 billion. It estimates there will be $582 million in additional resources this year, offset by $324 million in unspecified labor savings, leaving $258 million more than the de Blasio Administration expects to be available to roll into 2022.  Total tax revenue is expected to fall by 1.9 percent from 2020 to 2021, the first year-to year drop since 2009. All of the city’s major tax sources are expected to shrink this year with the exception of the unincorporated business tax (5.4%) and the property tax (4.2%).

At the end of calendar year 2020, New York City had 557,000 fewer jobs than at the end of 2019, a decline of 11.9 percent. From calendar years 2015 through 2019, total employment increased by an average of 93,300 jobs each year. In 2020, the city lost 557,000 jobs, including 201,800 jobs in leisure and hospitality. In 2021 through 2025, IBO projects increases of 102,700 jobs per year on average, leaving city employment 43,000 jobs shy of its pre-pandemic peak. IBO projects additional resources of more than $1 billion in 2022, the estimated surplus is $490 million. For 2023 through 2025 IBO expects gaps of roughly $4.0 billion each year. In 2025, the number of jobs in the city will still be below the level at the end of 2019.

Property tax revenue is expected to fall by $1.0 billion (3.3%) from 2021 to 2022 brought on by major declines in assessments of commercial property, including large apartment buildings. The city’s financial plan assumes $1 billion in unspecified labor savings for each year from 2022 through 2025. It is still uncertain how the planned savings will be achieved in the upcoming fiscal years and what impact such actions could have for the provision of city services.

The review notes that the Biden Administration had authorized a 100% reimbursement of the city’s costs for combating the pandemic, as opposed to the typical 75%. This means the city will receive reimbursement for a total of $4.6 billion in Covid-related costs eligible for reimbursement from the Federal Emergency Management Agency—nearly $1.2 billion more than had been budgeted. So far, the Mayor has indicated he intends to use the newly available city funds to restore two cuts to the schools budget, leaving about $900 million unallocated.

The fiscal management issues are manageable but that is not meant to understate the current peril the city is in. The next mayor will have to complete dealing with the city economy, the transit capital needs, the capital needs of the housing agency, and the post-pandemic issues for the City’s public school students which the  Department of Education will face.

ANOTHER HOSPITAL CLOSES

The fact that its parent, Trinity Health, is one of the largest hospital systems in the country has not saved one Chicago hospital from the ongoing pressures in the healthcare space. Mercy Hospital and Medical Center was founded in 1852 and is Chicago’s first chartered teaching hospital. Nevertheless, the hospital was challenged in the current environment and its board had adopted a plan whereby a plan for Mercy that included the discontinuation of inpatient acute care services at Mercy and the wind-down of Mercy as a licensed full-service acute care hospital due to declining utilization rates.

The hope was that the service changes could be executed beginning at the end of May. The hospital required approval from the State of Illinois to make those changes. When the permission was not received, the path of bankruptcy and more immediate cessation  of activities became a strategy to eliminate the costs being covered by Trinity Health. For investors in Trinity Health (AA-) bonds, this is not a significant credit event. It cuts the losses (even after a $100 million plus capital investment since 2015) so the impact upon the overall Trinity credit from that standpoint is positive.

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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The announcement by GM that it will not sell internal combustion powered vehicles has increased the focus on electric vehicles. In combination with other automakers, this makes the adoption of electric vehicles ever more likely and sooner rather than later. The electric vehicle age will place pressure on utilities both investor owned and publicly owned to be in a position to facilitatethefull implementation of the technology. It also raises issues for state legislatures as the current system of road funding is  not compatible with widespread electric vehicle use.

So much of our focus this week is on the various issues raised by the move to EVs.

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MUNICIPAL UTILITIES AND ELECTRIC CARS

The announcement by General Motors that it will no longer sell vehicles powered by internal combustion engines by 2035 clearly establishes the future course of the industry. As revolutionary for the auto industry as the decision is, it puts the utility industry at the center of the effort to decarbonize. Between the demand for decarbonization and the looming demand burst related to electric vehicles, it is likely that substantial expansion of both the generation base and the transmission and distribution grid will challenge electric utilities. Municipal electric utilities will be no different from their investor owned counterparts.

As electric vehicles become prevalent, the need for reliability of the electric grid to be enhanced grows. The full implementation of electric vehicles will rely on the resolution of issues surrounding charging. The vehicles will alter demand patterns for electric consumption. It will impact the things like time of day pricing, the unique demands of “fast” electric vehicle chargers, and will come at the same time as the drive for renewable generation continues.

Demand charges are a component of commercial and industrial electric bills that assesses a fee based on the highest amount of energy used in any 15-minute period throughout the month. They are designed to make sure customers are paying their fair share to keep the grid ready to deliver even in times of high demand.  It is feared that fast charging for vehicles will artificially drive are a component of commercial and industrial electric bills that assesses a fee based on the highest amount of energy used in any 15-minute period throughout the month.

If demand charges are generated through the use of electric vehicle charging infrastructure, it could make electric a less economic choice. Charging infrastructure has become more of a chicken/egg issue with low initial demand making the service more costly. There are alternatives. In Virginia, fast-charger customers of Dominion Energy that have low demand can qualify for a general service rate without a demand charge.

In Connecticut, Eversource converts the demand charge into an equivalent per-kilowatt-hour rate. Southern California Edison offers time-of-use rates, which charge different rates at different times of the day, for five years, with demand charges phasing back in over the following five years. 

PUBLIC UTILITY AT THE FOREFRONT OF CHANGE

We have in the past cited the Tennessee Valley Authority as an example of how government can fill the breach when the private sector and the market do not. Whether it has been electrification, broadband, or other services public entities like the TVA and municipal utilities have successfully filled the need. Now, the TVA has another chance to put a publicly owned utility at the forefront of change.

Tennessee will have at least three manufacturers building electric vehicles by year end. Current electric vehicle ownership in the state is about 11,000, according to the TVA. It is well known that one of the major obstacles to fuller electric vehicle acceptance is range anxiety, or the fear that a vehicle will run out of charge and the driver will become stranded.

To address that concern, the TVA has announced that it will develop a network of charging stations. It is expected to include about 50 stations, primarily along interstates and U.S. and state highways. The idea is to have chargers available at least every 50 miles, “from the mountains of East Tennessee to the banks of the Mississippi,” according to the TVA. It is expected to cost about $20 million and should be built out over the next three to five years.

Funding will come from a portion of the State of Tennessee’s share of the Volkswagen settlement ($5 million) and from $15 million of TVA funding. It is expected that local utilities will actually operate the equipment. So the role of municipal utilities is clear. The TVA and the consortium Drive Electric Tennessee have a goal of 200,000 electric vehicles in Tennessee by 2028. 

ELECTRIC VEHICLES AND ROAD FUNDING

The South Dakota legislature is considering A bill that would charge an annual fee for electric car owners. The issue has been previously rejected twice when the proposal called for a $100 fee. Reflecting that history, the current bill would impose a $50 fee. The tax will go toward the state’s road maintenance fund, which is currently funded through a gas tax, at $0.30 per gallon.

In neighboring North Dakota, the legislature is considering a bill to raise the state’s gas tax by 6 cents per gallon. The amended bill also would require electric and hybrid vehicle drivers to pay a road use fee more than double the existing level.  The proposal would apply to gasoline and special fuels such as diesel,  biodiesel and compressed natural gas used in vehicles. Those fuels are taxed at 23 cents per gallon, a lower rate than in surrounding states.

In Utah, the Legislature is considering a bill which would raise the fees for electric vehicles  from $120 to $300, up 150%. Registration fees for plug-in hybrids  would quintuple from $52 to $260. Fees for hybrid electric vehicles would rise from $20 to $50, up 150%. This would make the Utah fees the nation’s highest.  Utah offers a pilot program that could allow electric and hybrid car owners a chance to pay less if they drive less, called the Road User Charge program. It charges a monthly fee per mile driven, up to an annual maximum of what the registration fee would be otherwise. If the car is driven less than that amount, he or she pays less.

VEHICLE MILEAGE TAXES

While much of the discussion currently revolves around whether the gas tax needs to be raised, the announcement by GM that it will only sell electric vehicles as of 2035 may make much of the gas tax discussion moot. The announcement comes as an unusual alignment of political interests coalesces around the issue of vehicle mileage taxes. Increased investment in electric vehicles, Democratic control of Congress, bipartisan interest, and President Joe Biden’s opposition to increasing the gas tax could jump start a push to a user-based fee.

A vehicle mileage tax goes a long way to addressing the fairness issues around VMT versus a gas tax. By adopting a universally applicable tax in place of separate fees based on whether a vehicle is an internal combustion powered one or an electric one, the issue becomes one of equity versus the current efforts to use registration fees as a way to deter interest in electric vehicles.

The logic behind the VMT is clear and that is reflected in the opposition to it. The biggest objection seems to be around issues of privacy. It is the same argument that has been raised against electronic tolling and against electronic fare collection on public transit. The reality is that electronic tolling and fare paying has been accepted. The reality is that there are plenty of technologies in use today that effectively track movements and whereabouts. The privacy issue seems to be a closing the barn door after the livestock has gotten away.

ENERGY TECHNOLOGY AND MUNICIPAL UTILITIES

The City of Longmont, CO owns its own electric distribution utility as well as a broadband utility. Recently it announced that it was going to continue a program which merges energy with technology directly. The program is called Building Energy Benchmarking . It allows the owner of a building or industrial structure to compare their building to similar building types in similar climates, so that it may be determined whether its energy use is above average, below average or on par. A participant inputs basic building data and 12 months of electric and natural gas usage information into the Environmental Protection Agency’s ENERGY STAR® Portfolio Manager to calculate a score, and submits the results to its electric provider.

It’s advertised as a source of savings for consumers of electricity. The fact is that it is also a source of longer term savings for the utility by reducing the dependence upon power generated from fossil fuel plants and larger scale technologies. By managing load, generation requirements are minimized and the ability to add renewables based generation is enhanced for the electric provider. 

In Pennsylvania, the University Area Joint Authority operates a regional sewage treatment system for several municipalities around State College. Yet it is becoming better known for a plan that would see the utility using solar power for 85% of its operating needs. It is doing that by constructing solar arrays on its own property. It also seeks to do so by using power produced at individual small scale solar arrays.

The situation highlights some of the legal obstacles slowing the move to renewables. In Pennsylvania, state rules limit the size of solar arrays. Part of the economics of solar in Pennsylvania, is the use of credits for the reduction of pollution from agricultural lands.  The cost benefits for installing solar are reduced by current state limits on the size of solar arrays.

This municipal issuer is taking a unique approach. To deal with the limitations on how much solar power generated on Authority property, the Authority has come up with a creative plan. The Authority plans for a pilot project of about 300 homes, businesses and nonprofits to install their own individual solar panels. Under the plan, UAJA will finance the up-front costs for a contractor to install the solar panels. For customers who opt in, a separate line on their UAJA bill will be for the solar panels. 

It’s another example of municipal issuers stepping into the breach when a market approach is not able to satisfy demand. We expect to see more of this as renewable power generation gains greater acceptance.

CANNABIS DEBATES CONTINUE

Idaho is one of only three states that does not allow possession of even low amounts of THC, the psychoactive chemical in marijuana. The state is landlocked pot-wise. Washington, Oregon, Montana and Nevada, while Utah allows medical marijuana. Wyoming allows CBD products containing less than 0.3 percent of THC. And Canada is legal weed territory.

Now, an Idaho state senate committee has approved a resolution to move action on a constitutional amendment seeking to prevent the legalization of marijuana and other psychoactive drugs not already legal in the state. 

South Dakota Gov. Kristi Noem (R) has issued an executive order allowing a legal challenge to the constitutionality of a November voter-approved amendment to legalize recreational marijuana in the state. Amendment A passed with 54% support in the Nov. 3 election, while a separate question on legalizing medical marijuana received nearly 70%. Opponents of the voter approved amendment are using narrow legal points to challenge and hopefully overturn the vote.  

PENNSYLVANIA BUDGET

The Governor has proposed his budget for fiscal 2022 and it looks like it will be a hard sell in the Legislature. The budget calls for an attempt to graduate income tax rates. Pennsylvania currently has a flat income tax and the Governor has long sought to increase the rate at the highest end of the income spectrum. Just as steadily, the Legislature has turned him down. Increasing the rate to 4.49% from 3.07% to raise what the Governor estimated to be $4 billion over a full-year, or about 25% more. So the Commonwealth is left with a less flexible tax structure that also makes school funding very dependent upon local property taxation.

This year the budget process will no doubt be influenced by the increasingly poisonous politics of the Legislature. In 2022, the Governor is term limited and the remaining Republican senator Pat Toomey has announced his retirement from the Senate. The aftermath of the Presidential election and Pennsylvania’s center stage presence in the effort to overturn the election will likely bleed over into the budget process. We would be surprised to see support for the Governor’s proposed tax increase.

The question is whether the State will return to the past and a long history of contentious budget battles and delayed budgets. The intransigence on the part of anti-tax legislators has left the Commonwealth facing real pressures to fund the schools without any real prospect of generating additional resources for education. The Commonwealth has already made significant cuts to the state higher education system including reduced course offerings and headcount reductions. There still remains substantial opposition to severance taxes on natural gas which could address the revenue concerns.  

PANDEMIC CASUALTIES – HOTEL/CONFERENCE CREDITS

One of the more prominent cases in which revenues for debt service were reliant on an annual appropriation and the required appropriation did not happen has been in the Village of Lombard, IL. The village sold debt for a hotel/ conference center in the Chicago suburb in 2005. A decline in demand for such facilities after the 2008 financial crisis doomed the hotel to underperformance. In the event of inadequate revenues from the facility, the Village committed to make up any shortfalls subject to annual appropriation.

When the project experienced a shortfall in revenues for debt service, the Village declined to appropriate funds for debt service (as was their right). This led ultimately to a Chapter 11 bankruptcy filing and a refinancing of the old debt through the Wisconsin Public Finance Authority. Now with the hotel limited by lock downs and operating restrictions, the facility does not have revenue for debt service. So, a payment default now has occurred.

It is a clue when a project cannot find issuer support within its own jurisdiction. The Wisconsin Public Finance Authority has participated in other out of state financings when it was clear that there was little local appetite for the risk. So we are not surprised when one of the Authority’s deals has problems. The real question is how will the pandemic permanently alter the demand for business based events. This economic environment is far different than was the case in the recovery from 2008. It is unclear how much of the shift to remote work will be permanent.

PUERTO RICO BENEFITS FROM NEW ADMINISTRATION

The Biden Administration is releasing $1. 3 billion in aid allocated by Congress to help the U.S island territory protect itself against future climate disasters.  It is also taking steps to remove restrictions on an additional $5 billion which can be applied to housing infrastructure. Those restrictions were policy decisions by the prior administration.

So far, Puerto Rico has only received $18 billion of the $43 billion Congress committed to the rebuilding on the island. There have been concerns cited about how the money will ultimately used which were the basis of decisions not to release the funds. As has always been the case, there will be concerns about efficiency and transparency whenever such a large amount of federal funding is injected at once.

In the end, it is another example of how the historic resistance to timely and full reporting about its finances hurts the Commonwealth. The concerns are, at the core, legitimate over a long period of time. It has not been a partisan issue. The disclosure was universally inadequate regardless of which party was in power. It served as a convenient excuse for those who simply did not want to support the Commonwealth’s residents. Nonetheless, it is a self inflicted wound.

COAL

“There is not a regulated coal plant in this country that is economic today, full period and stop.” That is from the CEO of NextEra Energy. Coal-fired power is unprofitable everywhere in the country because of competition from less expensive sources like wind, solar and natural gas. The national average capacity factor for coal plants dropped below 50 percent last year for the first time on record in 2019.

Alliant Energy of Wisconsin announced what it called “the end of an era” with a plan to close the Columbia Energy Center, with a capacity of about 1,100 megawatts, in 2025. The point of all of this is that it is no longer a political issue. The decline of coal is market based yet there are efforts being made by legislatures to intervene in markets.

The Indiana legislature is considering legislation to keep coal plants open. North Dakota is looking at legislation to tax wind energy production and use that money to subsidize coal generation. A bill introduced in Wyoming’s Legislature would also tax solar energy in an effort to make it less economic.  The $1 per megawatt tax would not apply to small-scale energy producers, like homeowners but would apply to commercial scale solar generation.

ACA REVIVAL

The Biden Administration has announced a three month extension of the enrollment period for health insurance under the ACA. The special enrollment period will run from 15 February through 15 May and open the federal exchange to those who have either lost or are unable to obtain health insurance through their employment. This has taken on extra significance in light of pandemic induced limits on employment. It also relieves pressure on healthcare providers. Insured patients are more likely to get more regular and less expensive care versus the uninsured who access the system through the emergency room.

Patients who lost health insurance during the pandemic generally shifted to Medicaid or uninsured/self-pay status. Uninsured and self-pay patients are also associated with higher levels of bad debt. The impact on hospital revenues and margins will be positive. It will also be positive for states and counties which will likely face lower levels of Medicaid enrollment. States have already been looking for ways to reduce their Medicaid costs so anything that reduces that burden is good.

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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P3 IN THE SPOTLIGHT

The troubles which have plagued the long delayed Purple Line P3 rail system in Maryland now appear to be influencing the development of another P3 to expand I-270. Maryland hopes construction would start with the replacement and expansion of  the American Legion Bridge. Work would continue around the Beltway to the I-270 spur, before moving up I-270. It would include tolled express lanes which would be the source of revenue to support the financing of the project. The existing free lanes would also would be rebuilt.

As one of the more favorable states for P3s, it was not unexpected that a P3 would be a likely option for Maryland. However, the impact of the ongoing Purple Line experience shows up in the first proposed contract to deal with “pre-development’ components of the project. In reality, it calls for the winner of the contract to deal with a myriad of issues over design, permitting, and acquisition in association with the needed right of way. Those all have the potential to increase costs and delay the project.

It was due to factors like those that the Purple Line P3 cratered. To address some of those potential liabilities, the State of Maryland is proposing that the state would have to reimburse upfront “predevelopment costs” if the project is delayed for a list of reasons. Among potential delay points are that  land costs more than expected, the federal government withholds environmental approval or the state board that approves major contracts does not do so.

The State would have to compensate the private partner with up to $50 million in the event any of the triggering events occur. The needed environmental permits are not in hand. These are often the most successful vehicles for project opponents to employ to stall or halt projects. There remains significant opposition to the project from a variety of interests.

MORE THAN MEETS THE EYE IN GDP REPORT

The fact that the economy fared so poorly in the fourth quarter relative to the third quarter is not surprising. The reinstatement of lockdown conditions and extensions of existing service limits and suspensions could be anything but positive. What interests us is what the data tells us in terms of what the economy might look like going forward once “normal” life resumes. And that positive spending now could have negative impacts later.

The data reflects current trends. The increase in real GDP reflected increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. It is the underlying detail that draw attention.

The increase in nonresidential fixed investment reflected increases in all components, led by equipment. That is a nice way of saying that manufacturers were able to take advantage of pandemic induced downtime to rethink their use of labor and automate where they could. The pandemic exacerbated that existing trend and portends that while the economy may resume, manufacturing employment gains may not be as robust.

The increase in Personal Consumption Expenditure was more than accounted for by spending on services (led by health care); spending on goods decreased (led by food and beverages). Disposable personal income decreased $372.5 billion, or 8.1 percent, in the fourth quarter, compared with a decrease of $638.9 billion, or 13.2 percent, in the third quarter. The decrease in PCE in 2020 was more than accounted for by a decrease in services (led by food services and accommodations, health care, and recreation services).

That puts the travel/hospitality/entertainment/culture space at the center of  true recovery. No other sector may have been as impacted and the ability of the sector to reemploy staff let go as these facilities closed will be key to determining the pace and extent of the post-pandemic economic growth. Municipal bond credits supported by entities in this space still provide a source of risk as it is not clear as to the timing of a full recovery. It is the reliance of this space upon disposable income that highlights the risks facing these credits.

NATURAL GAS BANS

One of the more recent fronts in the movement to end dependence for energy and fuel from fossil based sources. Fronts against oil have been opened up with carmakers accelerating efforts to develop electric vehicles. Market realities are driving coal out of the electric generation fuel source menu. Now, efforts are turning towards what has been until know a go to alternative to those fuels – natural gas. While cleaner than oil or coal, natural gas carries with it its own set of environmental baggage.

That environmental baggage has driven several municipalities – primarily in California – to enact laws and/or regulations which would not allow the use of natural gas as a fuel source in new construction. While the number of such bans is few, the industry and its policy allies are moving quickly at the state legislative level to enact laws reserving regulation of the use of natural gas in buildings to state regulators. Indiana is about to vote on one such bill even though there are no known existing or pending natural gas limits in the state.

Kansas and Missouri are set to contemplate similar legislation. There are two broad views of these regulations. Proponents would say “No one is talking about removing existing infrastructure in place, ripping that out and forcing people to go electric. These bans are all about new construction, new development. Furthermore, most of these bans I’ve read about include significant exemptions especially for the manufacturing and industrial sector. This is a one-way bill. This bill is not about choice, it’s about the utility’s right to furnish service regardless of the energy source. … There’s nothing in this bill that protects the rights of private property owners to generate their own energy, or to lease their land to third parties who wish to invest in renewable energy on their property.”

Opponents (energy and development companies) would say builders and manufacturers arguing that it is crucial to ensure competitiveness in Indiana’s manufacturing and construction sectors. Tennessee, Kentucky, and Oklahoma are said to be looking at similar legislation. And similar is the key word as the hand of The American Legislative Exchange Council  (ALEC) is thought to be behind the structure of the legislation as they are so often in conservative state legislatures.

POLICY SHIFTS FROM NEW ADMINISTRATION

One example of the impact of a change in administrations is the clear change in attitude towards infrastructure and its role in resiliency. Federal officials aim to free up as much as $10 billion at the Federal Emergency Management Agency to protect against climate disasters before they strike. The money would be applied to projects like building seawalls, elevating or relocating flood-prone homes and taking other steps as climate change intensifies storms and other natural disasters.

Currently, much preventative work is done through local funding and financing. The FEMA plan would use a budgeting maneuver to repurpose a portion of the agency’s overall disaster spending toward projects designed to protect against damage from climate disasters. Initially, the agency believes that the planned budgetary maneuver could generate as much as $3.7 billion to be available for the program, called Building Resilient Infrastructure and Communities, or BRIC. 

The BRIC program was created in the aftermath of the disaster season of 2017, when the United States was struck in quick succession by Hurricanes Harvey, Irma and Maria, as well as wildfires in California that were then the worst on record. the National Institute of Building Sciences  found mitigation funding can save the nation $6 in future disaster costs, for every $1 spent on hazard mitigation.

The program would not be funded by federal dollars completely. State and local governments must provide 25% of the cost of any projects. The consideration comes in the wake of a bipartisan Congressional request that the monies be used in this manner in 2020. That request was rejected by the Trump Administration OMB. With a different philosophy and personnel in place in a Biden Administration, it is much more likely that this funding could be used.

A second sector to see change is the private prison space. Towards the end of the Obama Administration, the department of Homeland security began moving towards ending contracts with private prison operators to house federal prisoners.  The prisons are a source of jobs to the primarily rural communities where they operate. For many of these facilities, the federal contracts are the difference between financial failure and success.

That policy was reversed by the Trump Administration. Now, in keeping with the policies the Obama/Biden Administration was seeking to impose, the President signed an executive order ending contracts between the Department of Justice and private facilities. The policy does not extend to Immigration and Customs Enforcement contracts. The Bureau of Prisons currently holds approximately 11,000 prisoners in 12 facilities. Three are in Texas and two are in Georgia.

TRANSPORTATION FUNDING ALTERNATIVES

Impact fees are a one-time charge assessed only against those who create additional impacts to the transportation system by virtue of a new development or change of use. Their purpose is mitigate the impacts of development on municipal and county infrastructure systems, and to ensure those who are creating the impact, rather than existing tax payers, foot the bill for the cost of new transportation facilities necessary to serve new development.

The Seminole County FL Road (Transportation) Impact Fee was put in place in 1985. Since its adoption, funds collected under this program have been used to construct roads facilities or provide road improvements to accommodate the demands of new growth. The fee has not been updated for a quarter century. Since its adoption, funds collected under this program have been used to construct roads facilities or provide road improvements. Over that time, what constitutes transportation in the minds of users and providers alike, has undergone significant change. 

Now the County is proposing to levy a mobility fee on new development. Mobility fees were legislated 12 years ago by the State. The mobility fee will replace Seminole County’s current Road (Transportation) Impact Fee and will allow for additional transportation modes, to include roads, sidewalks, and multipurpose trails. Seminole calculates that a new mobility fee could raise as much as $6.5 million annually. The county’s current road impact fee raised about $2.64 million last fiscal year.

The proposal serves to highlight many of the issues emerging in the transportation funding space. Proponents of the fee have structured it in such a way that encourages urban development and adds additional relative cost to rural development. The current fee reflects those same concerns. The new fee does anticipate significantly greater increases in the fee for rural  versus urban development.

SANTEE COOPER

The South Carolina House voted 89 to 26 to continue to receive offers for a sale of the state-owned electric utility Santee Cooper (South Carolina Public Service Authority). The bill, which now goes to the South Carolina Senate provides that lawmakers would vet proposed suitors for the utility, a responsibility previously given to a third-party consultant working with a state agency. A six-person committee comprised of three senators and three representatives would consider offers to purchase all or parts of Santee Cooper directly from potential buyers, rather than having a preferred bidder selected by a state agency.

The House legislation also includes reforms for the Santee Cooper, including shortening the terms of board members, putting in education requirements, and having increased oversight from the Public Service Commission and the Office of Regulatory Staff over the utility’s operations and long term agreements. The legislation also provides for the sale evaluation process to be available for 10 years.

That 10 year time frame is a clue to what is really expected to result if the proposed legislation is enacted. A sale is not anticipated soon reading between the tea leaves. Recent comments point towards a reorganization and restaffing of the management of the utility and the ongoing consideration of the sale is a clear shot across the bow of Santee Cooper management. It has all come down to an issue of control.

The debate comes as Santee Cooper has been identified as one of the nation’s utilities with the largest amount of coal fired generating capacity planned to remain open beyond 2030. Among municipal utilities, Santee Cooper has the largest share and is only one of two municipal utilities to be on the top 20 list. That issue will not go away as the control debate unfolds.

ENERGY TAX INCENTIVES GETTING A NEW LOOK

Louisiana’s severance tax on oil – the amount the state charges on oil extracted in the state – is 12.5%. That rate is higher than any other state except Alaska and triple the rate charged for natural gas. Now, the legislature will consider a proposal under which severance taxes for oil would be lowered to 6%, while the severance tax rate on natural gas would go up from 4% to 6%

The proposal seeks to equalize the rates for oil and natural gas. State tax breaks for drilling certain types of wells would be phased out, including one for horizontal drilling widely used in Louisiana’s highly productive Haynesville Shale natural gas play. Louisiana is the site of the most productive natural gas play in the nation and is the only shale play in the country to add rigs over the past year. Louisiana currently ranks third behind Texas and Pennsylvania for natural gas production. 

The proposal comes as officials are projecting $293 million in excess revenue for the current budget year that ends June 30, which legislators can use to make supplemental appropriations when they are back in session. The state also has a $270 million surplus left over from last year, though the state constitution limits the use of those dollars to one-time expenses such as construction projects, paying down debt and shoring up the “rainy day” fund.

The budget debate will unfold as the damage done by pandemic limits on activities is measured. One example is that Louisiana’s casino revenue was down more than 21 % in December compared to December 2019. Under current restrictions meant to control the spread of the coronavirus that causes the illness, casinos are limited to half of their normal capacity and must end alcohol service at 11 p.m.

Virginia is among the 15 states (out of 23 that produced coal in 2018) that offer tax credits to the coal industry. Virginia offers two major tax credits aimed at boosting coal mining in Virginia. The state has spent $225 million between 2010 and 2018 on the Coalfield Employment Enhancement Tax Credit and the Coal Employment and Production Incentive Tax Credit. A report from the Virginia Joint Legislative Audit and Review Commission (JLARC). That report concluded that the tax credits no longer serve their purpose and should be eliminated.

The coalfield tax credit was adopted in 1995 to encourage coal production and coal employment and provides a tax credit to “any person who has an economic interest in coal” mined in the state, which generally is the mining company that extracted the coal. Coal mining companies and electricity generators saved $291.5 million in income taxes because of the coal tax credits between FY10 and FY18. Both of the coal tax credits are among the state’s 10 largest incentives, with the coalfield tax credit being the second-largest incentive. 

The Credit is no longer warranted to maintain competitiveness because Virginia’s coal mining productivity has met that of other nearby coal-producing states. The Coal Employment and Production Incentive Tax Credit, which is designed to encourage electricity generators to use Virginia coal, no longer serves a purpose because all but one of Virginia’s coal-fired plants will close by 2025, and the remaining plant is already dependent on Virginia coal. Legislation to scrap the tax credits next January is moving through the Virginia legislature.

A 2012 JLARC report that said coal production declined at the same rate or faster even with the state-issued credits designed to slow the demise of Virginia’s coal industry. Even industry groups like the Metallurgical Coal Producers Association and Virginia Coalfield Economic Development Authority did not object to the proposal to end the credits 18 months before their scheduled sunset.

The debate is driving a  number of proposals to offset the economic impact of the decline of coal. One would set up a fund to provide grants to renewable energy companies to clean up previously developed but contaminated land and place renewable energy sources there. There is more than 71,000 acres of land affected by coal mining and brownfields in Southwest Virginia that could be redeveloped.

OIL LEASE SUSPENSIONS

The state which looks to be most affected by decisions like this week’s by the Biden Administration which suspended new oil and gas leasing on federal lands is the Cowboy State. In Wyoming, about 51% of oil is drilled on public land, along with an overwhelming 92% of natural gas. In 2019, , according to the Petroleum Association of Wyoming, the oil and gas industry provided $1.67 billion to state and local governments.

A University of Wyoming study projects that if a full leasing moratorium went into effect, the state could be out $304 million in annual revenue. According to the Wyoming Department of Education, the state relies on roughly $150 million each year in oil and gas federal mineral royalties to fund K-12 schools. 

The U.S. Bureau of Land Management auctions parcels of this land to oil and gas companies for development, typically four times a year. If a company obtains the lease, it still needs to secure a permit to drill. Lease terms vary, but typically range from five to 10 years. Permits to drill last two years. The industry “stockpiled” permits in the end of the Trump Administration in anticipation of the possibility of a Democratic administration. The real policy test will come when the leaseholders apply for drilling permits.

The change in federal leasing policy comes as the state is dealing with the long term decline of coal as a generating fuel and the realities of its natural gas industry. The Wyoming State Geological Survey, which is a state entity, recently released its view of the fossil fuel industry in the state. In reality, rise in natural gas production during the Trump years was an aberration. “Wyoming’s natural gas production has been in a gradual decline since the collapse of the coal bed natural gas industry in 2009. Despite Wyoming’s advantages— some of the nation’s largest natural gas reserves, two of the nation’s 10 largest gas fields (Jonah and Pinedale), demonstrated success using horizontal drilling technology in these large fields, and abundant associated gas production from unconventional oil wells.

From 2010 to 2019, Wyoming’s natural gas production declined an average of 4.4 percent each year, with a 13% decline in the first nine months of 2020. Although some of the 2020 decline is due to short term reactions to the pandemic, the overall drop is a result of longer-term trends, including fewer new gas wells being drilled and the natural production decline of older wells.” So the reality is that economics and not ideology are driving Wyoming’s fossil fuel outlook. It is a reflection of national realities.

HEALTHCARE PRESSURES

Labor shortages and higher wages are leading hospitals to employ various strategies to attract and retain clinical talent. Higher salaries and signing incentives, paying more overtime and/or using contract labor at hourly rates that are at all time highs will all contribute to spending pressures at a time when the consumer is looking for every way to reduce their outlays for healthcare.

The insurers will continue to encourage additional procedures to be performed outside the hospital as ambulatory surgery centers (ASCs), urgent care facilities, and the home become the preferred venues for patients to receive care. Even when these service modalities are provided through hospital owned facilities, they are not as profitable as reimbursements are lower for services outside of the acute care setting.

Policy changes and an aging population could increase governmental insurance coverage at the expense of hospitals’ commercial insurance coverage. As retirees migrate to Medicare from commercial insurance, hospitals will receive lower rates of reimbursement for services. Elevated unemployment will also lead to lower patient volumes, as consumers who lose employer provided insurance defer non-urgent care. The same factors driving seniors to Medicare (cost) will also exist should a public option be legislated and that will create the same pressure on revenues that the shift to Medicare does.

If anything, already existing hospital credit trends will continue. Large hospital systems will be better positioned to deal with changes than will stand alone facilities from a financial standpoint. Rural hospitals will continue to be under pressure and more vulnerable to changes in payer mix towards public rather than commercial insurers. The pandemic has not changed that.

MOODY’S UPDATES SCHOOL DISTRICT RATING CRITERIA

Moody’s has published updated methodologies for how it rates US public school districts that provide public education directly to students, typically from pre-kindergarten or kindergarten through 12th grade (K-12) or a subset of grades within this range. School districts rated under this methodology are operationally independent from a city or county government and have the power to issue debt on their own behalf or through a dedicated financing vehicle.

The methodology is used to create a “scorecard” for each rating.  The factors it uses and weights are the school district’s underlying economy (30%), financial performance (30%), its institutional framework (10%), and leverage (30%). Institutional framework refers to at what level of government funding mechanisms are established. Some states rely on a local basis for funding topping off shortfalls from local sources to meet state requirements versus districts where the state sets the basis.

The change has put some 637 school district rating under review. 304 US K-12 public school districts are now on review for possible upgrade, 236 on review for possible downgrade, and 97 on review direction uncertain . The general obligation unlimited tax (GOULT) ratings of 85 US K-12 public school districts were upgraded.  These actions affect issuers with approximately $65 billion in debt . Final reviews under the new methodologies will occur over a course of several months.

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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ALL FORMS OF PUBLIC TRANSIT SEE DECLINES

The latest example of the impact upon all forms of mass transit of the pandemic comes out of the Pacific Northwest. Annual ridership aboard Washington State Ferries plunged by nearly 10 million customers in 2020 – a drop of 41% from the previous year – to roughly 14 million. Stay-at-home orders, remote work and decreased tourism because of COVID-19 are the main reasons for the system’s lowest yearly count since 1975.

The impact of empty offices was very clear. For the first time since it began operations in 1951, WSF carried more vehicles (7.6 million) than passengers (6.4 million) last year. This shift in ridership was fueled by a dramatic decline in walk-on customers on routes that serve downtown Seattle and more people choosing to drive on board because of the pandemic.

We find the latter comment to be interesting. The assumption is that the empty streets in big cities will remain the norm. That idea may be misplaced. If the private vehicle is seen as a “safe space” in comparison to traditional public transit or even Lyft and Uber. the constituency for space for private vehicles could be larger than anticipated. In recent months, state ferry ridership has returned to about 60% of pre-pandemic levels. Total vehicles are near 70% of 2019 numbers, while walk-ons are around 20% of last year. 

The increase in remote working continues to impact the ferries. The largest year-to-year dip came on the Seattle/Bremerton run, where ridership was down 64%. The Seattle/Bainbridge Island route had the second biggest decrease at 59%, falling out of the top spot as the system’s busiest for the first time since 1958. The pressure on office space will continue as firms extend remote work options.

In New York, the Metropolitan Transit Authority said it would delay fare increases until the local economy showed signs of a recovery and there was greater clarity about how much federal aid the agency could expect.  MTA is hoping that it could receive additional direct operating aid of up to $8 billion to offset revenue losses stemming from the pandemic.  The Biden Administration is seeking $20 billion for the country’s “hardest hit public transit agencies” in its stimulus proposal. Subway ridership has levelled off at around 30% of pre-pandemic levels, traffic on the M.T.A bridges and tunnels has rebounded to about 84% of normal.

MUNICIPAL BROADBAND

As the Biden Administration takes shape and policy priorities are established, potentially challenged private interests are already challenging those which are seen as challenging their interests. One which amused/annoyed us was an opinion piece in The Hill from an analyst at the Technology Policy Institute. Municipal broadband is a bad idea for cash-strapped towns is the name of the piece. The piece is based on data derived from a research report commissioned from the TPI in 2019.  

The piece comes with it a pile of data and equations and assumptions and a variety of statistical data manipulations seeming to indicate that a serious conclusion will result from the report. At the end of the day, though the really telling conclusions won’t be a shock. They won’t be a shock because the Institute is funded by the Koch family and the telecommunications industry. “The presence of a municipal network did not appear to generate a statistically significant improvement on broadband adoption or in economic conditions. My findings do not show that municipal broadband will necessarily fail. ”

 

In short, a thesis offered and the thesis fails to be proven. That is the amusing part. The annoyance comes from the following comment. “The private sector should continue to support universal broadband, and governments should aid them in doing so.” And “a municipal network might yield benefits on the margin, such as in areas without other coverage.” As the great philosopher Homer Simpson said, “duh”.

What you don’t see is that some of the same entities sponsoring this research are some the worst offenders in terms of providing slow overpriced broadband service. That’s the case even when these providers are granted an effective monopoly in a given service area. (Full disclosure: I am a Spectrum customer in upstate NY. Enough said.) What is also annoying is that these are many of the same arguments advanced against public broadband reflect prejudices leveled against the TVA some 90 years ago. 

We’ve been down this road before. Like the electric distribution industry, both the municipal and private sectors have roles to play in the expansion of rural broadband.

NEW YORK STATE BUDGET 

Governor Cuomo released his formal budget proposal for FY 2022 beginning April 1. The expectation that a Democratic Congress and President would be able to deliver significant additional aid to states and localities underpinned the proposal. The budget statement said that in April, it projected a $63 billion, four-year revenue loss. At the time, 1.8 million New Yorkers had lost their jobs as the virus’s spread was peaking. But in the third quarter of 2020, the economy recovered faster than expectations. While the economic improvement is beneficial, it has not been enough to offset dramatic revenue loss and revenues are estimated to remain down $39 billion over four years, including losses of $11.5 billion in FY 2021 and $9.8 billion in FY 2022.

It came in two forms which depend on two scenarios: one assuming a federal aid package of $6 billion, and another with the full $15 billion that the State is seeking. The latter figure is the estimated shortfall being faced. If the federal government provides a $6 billion aid package the state would be unable to fill its budget gap. This would require, under the Governor’s plan,  cuts of about $2 billion in school funding, $600 million in Medicaid funding and $900 million in general reductions.

On the revenue side of things, a legalization of recreational cannabis could raise about $350 million. Bowing to political realities, some 100 million would be directed to a “social equity fund”. Issues related the reparative economics and justice movements have held up prior legalization which is supported by a majority of residents. The fund is an effort to address those concerns.

Tax receipts have shown sustained strength through December 2020 and into the important first week of collections in January 2021. PIT collections, the largest source of State tax receipts, were $2.25 billion above the estimate in the Enacted Budget Financial Plan through the first three quarters of FY 2021. Sales and use tax collections through the same period were $512 million higher than expected. At the same time, business tax collections, principally related to audits, have been weaker than expected, which party offset the significant improvements in PIT and sales tax collections.

COURT DROPS THE HAMMER ON LONG BEACH, NY

The City of Long Beach last week found itself on the losing end of  a damages decision from a Nassau County Supreme Court in the 31-year-old case of Haberman v. Zoning Board of Appeals of City of Long Beach. Yes, a zoning dispute has managed to survive in the courts  since the 1980’s. The Long Beach City Zoning Board revoked building permits to construct condominium towers  in the oceanside community. The revocation was based upon its determination that the builder had not abided by a previous stipulation of settlement between the parties.

The developer sued to overturn the revocations and won his case. Appeals by the City made their way through to the State’s highest court where they did not succeed in 2017. Over the ensuing years, the parties have litigated the damage claim portions of the case. It is this litigation which resulted in a $131 million judgment from the County Supreme Court.

While the City has consistently argued in court that no monetary damages were appropriate, its financial disclosures have been more realistic. : in Long Beach’s latest official statement from August 2020, the city estimated the judgment would cost it $55 million. At this point the City may appeal although the ever accruing interest on the damage amounts should motivate a settlement as well as a consistent record of ultimate losses on appeal.

The City’s credit was already facing enough pressure. It’s Baa2 rating was assigned a negative outlook in August, 2020. Those pressures include very weak financial position and a history issuing debt for operational expenses. local government has a high level of turnover which complicates a negotiated settlement in the zoning case as well as the City’s efforts to collect recovery monies from Superstorm Sandy damages. The City’s debt was described as above average but manageable in August but a final settlement could create what will effectively become a long term liability.

CLIMATE CHANGE LITIGATION

The U.S. Supreme Court heard arguments this week in a case brought by the City of Baltimore against the major oil companies seeking compensation from oil and gas companies for damages to public lands, buildings, infrastructure like roads and bridges; as well as for the cost of mitigation measures. Baltimore is one of 24 jurisdictions which have filed similar actions.

The argument until now has been over whether the litigation is a state or a federal matter. The energy companies fear that they will not fare as well in state courts as they would in federal court. The question presented is whether federal law permits a court of appeals to review all of the grounds for removal encompassed in a remand order where the removing defendant premised removal in part on the federal-officer or civil-rights removal statutes.

The district court remanded the case to state court, and petitioners appealed. The court of appeals affirmed. Now the energy companies are appealing that decision. What is different now is that the energy companies are asking the Court to rule on issues not previously argued.

The companies want the Court to rule on not just the specific  jurisdiction issues raised in this case but to also rule on the issue of whether or not any of the pending climate change litigation of this sort must be heard in federal rather than state courts. If the Supreme court agrees to decide not just the individual jurisdiction issue in the Baltimore case but also the question of whether any climate change cases like this must be heard in federal rather than state courts, the efficacy of the use of litigation to fight climate change will be lessened.

Not every environmental cause will be lost in the federal courts. A federal appellate court ruled against the Affordable Clean Energy rule. The rule was an effort to relax emissions limits with an eye towards making the economics of coal generation more favorable.  The limits were part of the Obama  administration’s Clean Power Plan which had mandated that power plants make 32% reductions in emissions below 2005 levels by 2030.

AIR TRAVEL AND AIRPORTS

The U.S. Department of Transportation released its January 2020 Air Travel Consumer Report (ATCR) on reporting marketing and operating air carrier data compiled for the month of November 2020. The 10 marketing network carriers reported 389,587 scheduled domestic flights in November 2020 compared to 374,538 flights in October 2020 and 655,072 flights in November 2019. That is a year over year decline of just over 40%.

Of those 389,587 scheduled flights, 0.5%, 2,106 flights, were canceled. Factoring in the cancellations, the carriers reported operating 387,481 flights in November 2020, compared to 372,544 flights in October 2020 and the all-time monthly low of 180,151 flights in May 2020. Airlines operated 649,511 flights in November 2019. That still nets a 40% decline in flights.

This data comes as North America (ACI-NA), the trade association representing commercial service airports in the US and Canada, has reported its financial projections that US airports will lose at least $17bn between April 2021 and March 2022. The $17bn loss was in addition to another $23bn deficit that US airports were expected to incur between March 2020 and March 2021.

None of this is a surprise. The It will take time for airport and related credits to recover. The timing of that recovery is vaccine dependent.

ROAD FUNDING DEBATES

This year it looks like road funding will be at the center of many state budget debates. It may yet be that the negative impact of the pandemic on traffic levels and revenues (tolls and fuel taxes) becomes the mother of invention in state legislatures. And it is happening in all areas of the country.

In Texas, in spring 2020, the Texas Comptroller certified that state motor fuel tax, Proposition 1, and Proposition 7 revenue was a total of $13.9 billion for the 2020-2021 biennium. In July 2020, in the midst of the COVID-19 pandemic, the Comptroller’s certified revenue estimate reduced this figure to $11.96 billion. The $1.9 billion cut in revenue amounts to 14% of the TxDOT budget. Right now, Texans pay 20 cents of state motor fuel tax on every gallon of gasoline or diesel. 15 cents is deposited into the SHF, and 5 cents goes toward education. Texas has the lowest motor fuel tax among the ten most populous states, while Texas also has significantly more lane miles than any other State. The State is responsible for maintaining over 197,000 lane miles.

The state motor fuel tax has not been adjusted since 1991.53 As a result, the tax has lost half of its purchasing power since then. If Texas had indexed the tax to the CPI in 1991, the tax would have grown to approximately 40 cents, and the state would be collecting twice the state motor fuel tax as it currently is today. The state motor fuel tax is the second largest revenue source for transportation, next to FHWA reimbursements. The Texas A&M Transportation Institute has indicated that peak motor fuel revenue will be around 2030.

So the committee explores several alternatives. It offered some surprising commentary on the use of P3s, especially since Texas is one of the larger implementers of P3s to develop road infrastructure. It addresses head on one issue which troubles some namely the transfer of revenues and profits to foreign entities. one of the things holding back widespread P3 use is the issue of the fact that many of these proposals are driven by foreign companies.

Comprehensive development agreements (CDA) are the Texas form of public-private partnership for roadway projects. “While Texas is in the early stages of its currently authorized CDAs, and they have been effective at alleviating traffic in highly congested areas, it should continue to be reviewed if the transfer of locally collected Texas toll or tax dollars to international and often foreign based firms is in the best interest of the public when building future projects. Specific contract clauses embedded within a CDA, such as the duration of the agreements, use of public subsidies, non-compete clauses and termination for convenience provisions, should also continue to be reviewed to ensure these agreements protect the interest of the citizens of Texas.

MUNICIPAL UTILITIES AND NATURAL GAS

With oil no longer a serious source of fuel for power generation and coal on a steady economic decline as well, natural gas is in line to next face the same pressures which are impacting other fossil fuels. While cleaner than oil or coal, the production of natural gas raises its own set of environmental concerns. This is leading to a turn in public opinion regarding natural gas and creating a political environment which supports limits on the use and production of natural gas.

To date, only a small number of communities have enacted legislation to limit and/or ban the use of natural gas. These limits take the form of regulations which no longer allow natural gas to be used in new construction. That raises the issue of what the longer term impact will be on the demand for natural gas going forward. We think that the movement against natural gas raises issues for those utilities which have locked in long term natural gas supply contracts.

Municipal utilities had initially sought to take advantage of the favorable economics of gas in recent years. They did this via the use of prepaid gas contracts. Typically, a municipal gas prepayment bond involves tax-exempt bonds issued by a conduit entity, such as a large financial institution or the commodity subsidiary or a large financial institution. The proceeds from the bonds are channeled through the conduit entity, which buys the gas and immediately resells it to the utility. The conduit entity is set up as a non-profit and is, therefore, able to issue tax-exempt bonds.

The utility or utilities participating in the transaction are offered locked-in gas prices discounted to the market price for terms of up to 20 or 30 years. Utility participants can also benefit from receiving priority treatment in the event of shortages or curtailments. Public power utilities are also able to participate in more than one prepayment transaction simultaneously as a way of diversifying their sources of natural gas supplies. Starting in 2018, some gas prepayment transactions were structured to include a pool of smaller public power utilities.

Typically, gas prepayment transactions are not viewed as debt of the public power utility participants but rather as an operating expense because the utility’s only obligation is to pay for gas received. There is no claim on municipal revenues on behalf of gas prepayment bondholders. Municipal utilities are also permitted to reduce participation in the prepayment transaction by providing notice, usually a few weeks or days. That allows utilities to lessen or eliminate the amount of gas they are required to buy, if their needs fluctuate or they can find better pricing.

So the investor needs to pay close attention to the details of the transaction to understand who their ultimate obligor is in the event that a utility, through economics and/or regulation withdraws from a prepayment agreement. The pressure on natural gas continues. In Connecticut, Gov. Ned Lamont made his opposition to new natural gas generation quite clear this week. He publicly opposed the proposed Killingly Energy Center, a 650-megawatt natural gas power plant.  He implied his intention to slow walk the permitting process.

MICHIGAN

Michigan has been in the news for all kinds of negative reasons over the last year but we have not been able to see the fiscal impact of the pandemic. At the onset of the pandemic, Michigan had nearly completed a full recovery from the Great Recession. Michigan endured more than a decade of job losses during the early 2000s, during which time wage and salary employment in Michigan dropped by almost 18% relative to January 2000. As the labor market began recovering from the Great Recession, steady job growth continued each year through 2019, although by the end of the decade annual gains were slowing. Still, by the end of 2019, total employment was within 5% of the January 2000 level.

The State has released the results of its Consensus Revenue Estimating Conference. The State Department of the Treasury, and the House and Senate Fiscal agencies contributed to the findings. It updates estimates made in May and August 2020. Total FY 2020 General Fund and School Aid Fund revenue was approximately $762 million above the August forecast. The impact of store closings and stay at home orders is reflected in sales tax data. In FY20, sales and use tax collections from online shopping and mail order businesses totaled over $493 million, an increase of over $318 million from the FY19 level of only $175 million.  Since the beginning of the pandemic, collections from online retailers have averaged $65 million per month, up from about $17 million per month in the twelve months prior to the pandemic.

Revenues will be impacted by the income tax rate reduction under MCL 206.51(1), which limits revenue growth to inflation from FY 2021 levels. Michigan had a real stake in the results of the effort to deliver additional federal funds to states. The State estimates that each additional $100 per week in federal unemployment benefits increase withholding and income tax by $4.6 million, assuming current levels of unemployment. Increasing the stimulus payments to $2,000 would increase Michigan personal income by almost $14 billion and may increase sales and use tax by $375 million.

Michigan will remain at the mercy of the overall economy. It will need additional federal help. The pandemic arrived in Michigan just as the auto industry was truly beginning to grapple with the realities of  a future dependent on electric vehicles. This creates an air of uncertainty as well as anticipation as the move to EVs accelerates. It will require adaptability not only by the auto companies but among all the ancillary businesses which support the industry.

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

Joseph Krist

Publisher

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Ideology moves front and center in many of the issues we explore this week. The Biden stimulus reflects an ideology in favor of government. The Medicaid block grant announcement reflects an opposite ideology. The New York City budget reflects the long term influence of ideology on the part of the Mayor. Proposals to limit the activities of public power entities reflects the ideological battle over green energy. Now that the national election is out of the way, the ideological wars will now move to the state level.

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STIMULUS PROPOSAL – THAT’S MORE LIKE IT

The stimulus proposal from President Biden to provide state, local and territorial governments with $350 billion in emergency aid, along with billions of dollars in assistance for schools and transit was welcome news for budget makers at all levels. In terms of indirect aid, it would provide $1,400 one-time payments to many Americans whose earnings are below a certain amount, while also extending unemployment insurance programs adopted in response to the pandemic and boosting them with a $400 per-week supplemental payment. All of that is positive for municipal credit.

The plan also is calling for $130 billion to help K-12 schools reopen safely and $35 billion for a higher education relief fund directed at public institutions, including community colleges.  It includes$20 billion for public transit agencies.  

From the municipal bond standpoint, there could be more to come. This proposal focuses on operating funding. An infrastructure package is yet to be announced. So the potential for additional resources exists. More important than the actual dollars is the change in philosophy behind the plans. It is hard to see the proposals as anything but positive for municipals.

MEDICAID BLOCK GRANT

The Trump Administration and its legislative allies have spent the last four years trying their best to limit Medicaid through work and reporting requirements. As the courts have consistently ruled against those plans, conservatives have more quietly worked to achieve one long held goal – the conversion of the program to one of block grants to the states.

Now in the death throes of the Administration, one of its medical culture warriors has achieved one of its goals at least temporarily. In a Friday night news drop, the Centers for Medicaid and Medicare services (CMS) approved a waiver for the state of Tennessee to receive its Medicaid funding in the form of a block grant. If Tennessee spends less than the block grant amount, it will be allowed to keep 55%  of the savings to spend on a broad array of services related to “health.” If it spends more, the difference will need to be made up with state funds. 

Tennessee will be allowed to renegotiate prices with drug makers and can decline to cover drugs if it deems the prices too high.  The state also has a troubled history of administering Medicaid under the existing structure which provides less administrative freedom.  States that saw the largest increases in uninsured children — like Tennessee and Texas — were those that created rules to check the eligibility of families more frequently or that reset their lists with new computer systems. 

CMS is run by one of the more ideological members of the Administration who has made the conversion of federal funding programs to block grants a centerpiece of her efforts. The Trump administration has tried to slow the reversal of its Medicaid experiments. Traditionally, such waivers are agreements between H.H.S. and states that can be severed with minimal fuss. But CMS has sent letters to state Medicaid directors, asking them to sign, “as soon as possible,” new contracts that detail more elaborate processes for terminating waivers. Under the contract terms, the federal agency pledges not to end a waiver with less than nine months of notice.

CALIFORNIA BUDGET

California Governor Newsome has released his proposed FY 2022 budget proposal. The budget reflects two basic realities. Revenues have come in much higher than anticipated. The skewing of both the tax structure and the income structure of the state  towards higher income jobs saved the day. In California, this taxpayer cohort was in a much better position to generate income and did so. They tended to be higher paid individuals who could work remotely.

The Budget reflects $34 billion in budget “resiliency” (their term not ours) – budgetary reserves and discretionary surplus – including: $15.6 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $3 billion in the Public School System Stabilization Account; an estimated $2.9 billion in the state’s operating reserve; and $450 million in the Safety Net Reserve. The state is operating with a $15 billion surplus.

The budget proposes the use of some of those “resiliency” resources for things like $2.4 billion for the Golden State Stimulus – a $600 state payment to low-income workers who were eligible to receive the Earned Income Tax Credit in 2019, as well as 2020 Individual Taxpayer Identification Number (ITIN) filers; $575 million to more than double this year’s funding for grants to small businesses and small non-profit cultural institutions disproportionately impacted by the pandemic; $70 million to provide immediate and targeted fee relief for small businesses including personal services and restaurants; $2 billion targeted specifically to support and accelerate safe returns to in-person instruction starting in February, with priority for returning the youngest children.

The Budget reflects the state’s highest-ever funding level for K-14 schools – approximately $90 billion total, with $85.8 billion under Proposition 98. Some $2 billion is proposed for immediate action to support and accelerate safe returns to in-person instruction beginning in February. $4.6 billion is proposed for action this spring to expand learning opportunities for students, including summer and after-school programs and $400 million is proposed for school-based mental health. The Budget proposes a General Fund increase of $786 million for the University of California and the California State University systems based on an expectation of flat tuition and fee levels.

FINAL DE BLASIO BUDGET

The process to enact the final budget of the deBlasio Administration has begun with the submission of the Mayor’s FY 22 budget proposal. The proposal reflects the current state of flux in terms of the pandemic, the economy, and national politics. The Mayor’s presentation featured on the fly changes as proposals which would benefit the City were being announced as part of a proposed stimulus. Proposed cuts were literally crossed out and the slides changed as information came in.

This proposal was as much a statement of political philosophy as it was a serious budget document. It depends on a lot of political goodwill from a legislature that looks on the Mayor with skepticism at best. The mayor seems to believe that a new tax on the wealthy will be the answer to the problems of the state and city. The cutbacks included in the Mayor’s plan are a continuation of his use of threatened job cuts to try to generate more state aid.

The mayor continues to tout already existing headcount reductions of 7,000 while threatening an additional 5,000 potential reductions. That still leaves the City’s headcount some 12,000 higher than it was at the start of the deBlasio administration. And it comes as the framework of the upcoming campaign to replace the term limited mayor begins to emerge. That campaign will focus on a lot of spending ideas including the provision of a universal basic income.

The idea of a universal basic income is the centerpiece of the policies behind the newest candidate to enter the mayoral race, Andrew Yang. He would target annual cash payments of about $2,000 to a half million of the poorest New Yorkers, in a city of 8.4 million. Mr. Yang said his proposal would cost the city $1 billion a year. His entrance into the race has led a number of other candidates to embrace the idea.

This is a huge difference from his proposal to fund such a program nationally. That plan called for giving every American citizen over 18 years of age $1,000 a month in guaranteed federal income. It would have been funded by a national value added (sales) tax. In the case of the City, he would only be able to create a universal plan if there was “more funding from public and philanthropic organizations, with the vision of eventually ending poverty in New York City altogether.”

TEXAS REVENUE ESTIMATES

To kick off the budget season, the Texas Comptroller has released his revenue estimates for the State for the upcoming biennium beginning September1. For 2022-23, the state can expect to have $112.5 billion in funds available for general-purpose spending, a 0.4 percent decrease from the corresponding amount of funds available for the 2020-21 biennium. The reports projects $119.6 billion in total collections of general revenue-related (GR-R) funds.

These collections are offset by an expected 2020-21 ending GR-R balance of negative $946 million. In addition, $5.8 billion must be reserved from oil and natural gas taxes for 2022-23 transfers to the Economic Stabilization Fund (ESF) and the State Highway Fund (SHF); another $271 million must be set aside to cover a shortfall in the Texas Guaranteed Tuition Plan, also known as the Texas Tomorrow Fund.

The projected negative ending balance in 2020-21 is a direct result of the COVID-19 pandemic, which caused revenue collections to fall well short of what was expected when the 86th Legislature approved the 2020-21 budget. The projected shortfall does not account for any GR-R expenditure reductions resulting from the state leadership’s instructions for most state agencies to reduce spending by 5 percent of their 2020-21 GR-R appropriations. Nor does it incorporate the effects of substituting federal funds provided as pandemic-related assistance for some GR-R pandemic-related expenditures.

Tax revenues account for approximately  87% of the estimated $119.6 billion in total GR-R revenue for 2022-23. Sixty-two percent of GR-R tax revenue will come from net collections of sales taxes, after $5 billion is allocated to the SHF, as authorized by the Texas Constitution. Other significant sources of general revenue include motor vehicle sales and rental taxes; oil and natural gas production taxes; the franchise tax; insurance taxes; collections from licenses, fees, fines and penalties; interest and investment income; and lottery proceeds.

FLINT WATER

Former Michigan Gov. Rick Snyder has been charged with two counts of willful neglect of duty. The charges are for misdemeanors punishable by imprisonment of up to one year or a maximum fine of $1,000.  It all stems from the implementation of Michigan’s emergency manager statutes in the State’s takeover of the financial affairs of the City of Flint. The Governor was one of nine state officials charged with a total of 41 counts — 34 felonies and seven misdemeanors.

At the core of the issue is the decision by the emergency manager team which switched the city’s water source to the Flint River in 2014 as a cost-saving step while a pipeline was being built to Lake Huron. The problem is that managers and operators did not account for the differences in water from the two different sources.  The water supplied when the switch was made was not treated to reduce corrosion.   State regulators determined that this caused lead to leach from old pipes and spoil the distribution system used by nearly 100,000 residents. That required distribution of bottled water and other non-municipal sources to avoid additional health issues related to elevated levels of lead in the water.

The criminal charges against even Governor will draw renewed attention to the use of the emergency manager statutes in Michigan specifically but also more generally. The environment in which outside overseers might be appointed under statute has changed significantly since these laws were enacted. Anything seen as potentially disenfranchising – which some of these schemes are clearly viewed as already – will operate under an ever more volatile body politic. That makes the outcome of the case even more meaningful and not just in Michigan.

We do not expect that anyone will go to jail in this case. It does however, establish some level of accountability for public officials operating under statutes like those governing Michigan’s emergency managers.

MUSEUMS EXPLORE FINANCIAL ALTERNATIVES

The impact of the pandemic on museums is well documented. We have previously reported on the growing phenomenon of ” deaccessioning” or the sale of art from their existing collections to provide funds to pay off debt or operating expenses.(See the November 2, 2020 issue). Those efforts generated widespread publicity and reactions and it is fair to say that those reactions were not favorable.

Since we covered the topic in the Fall, developments have moved ahead. In Baltimore, the plans to sell at least three major pieces from its collections were withdrawn after local and national blowback. Some institutions continued to investigate the potential for sales of their own. This has led to some cities taking preemptive action to prevent such efforts from moving forward.

The latest example is the move by the City of San Francisco to prevent the San Francisco Art Institute from attempting to sell one its best known works. The Institute has floated the idea of selling a mural painted by Diego Rivera. The works of Rivera and others he influenced produced a raft of murals for public buildings across the country as a part of the economic recovery from the Depression.

Now. after public outcry both locally and nationally, the San Francisco Board of Supervisors voted 11-0 to start the process to designate the mural as a landmark.  Designating the mural as a landmark would severely limit how the 150-year-old institution could leverage it as removing the mural with landmark status would require approval from the city’s Historic Preservation Commission.

The City believes that private donations as well as more creative financing actions could address the concerns of the Institute. It’s not the first time that a sale has been contemplated. In the Fall, a bank sought to sell the mural as collateral for some $19 million of debt.  That plan was halted by the intervention of the University of California Board of Regents stepped in to acquire the Institute’s $19.7 million of debt from that private bank.

A 2016 loan funded the construction of its new Fort Mason campus. Collateral for the loan included the school’s older campus on Chestnut Street and 19 artworks.  The public university system acquired the institute’s deed and became its landlord. Administrators at S.F.A.I. have six years to repurchase the property; if they don’t, the University of California would take possession of the campus. The situation highlights the risks associated with certain kinds of collateral. Many a lender has fooled themselves into thinking that collateral in and of itself provides security. It flows from a fundamental misunderstanding of how fungible an asset that collateral actually can be.

In the end, it is about economic viability. This is yet another example of relying on legal provisions rather than operating sustainability for successful management of a credit. A dose of realism is always a good thing for credits like this.

NEBRASKA PUBLIC POWER DISTRICT

One of the long established public power providers in the nation is at the center of a dispute over transmission lines. As the effort to address climate change moves forward, the need to expand and reinforce the transmission grid nationwide is gaining more attention. Transmission lines are controversial even when they are designed to transmit power from green sources.

Efforts to stop some of these projects takes many forms. In many jurisdictions, litigation has been a primary tool in the effort. Now, the Nebraska Public Power District finds itself the target of proposed legislation in the Nebraska State Legislature. The proposed bill would forbid “a public power district, public irrigation district or public power and irrigation district” from starting or continuing construction on transmission lines at least 200 miles long through Jan. 1, 2023.

The bill targets NPPD’s 225-mile-long R-Project. The project has been slowed by litigation in the federal courts but this bill would block power or irrigation districts from spending “any funds relating to such project during such time period and prior to obtaining any required federal permits.”

The R- project was proposed in 2013. It is believed by opponents to be driven by a desire to facilitate the development of wind generation in the western part of the state.  The proposal highlights the elements that get in the way of the shift to green energy. It is co-sponsored by a legislator from a district that houses a coal generation plant. In a 100% public power state, NPPD is  now at the center of the ideological battle.

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