Joseph Krist

Publisher

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What a difference a day makes. Now it is possible in the wake of the Georgia Senate runoff to look forward with a lot more visibility about the outlook for municipal credit. One would hope that the Democrats will take the opportunity to take advantage of their electoral hat trick and actually pursue an agenda. It was the squandering of such a majority in the first two years of the departing administration that contributed to the recent electoral outcome.

Clearly, the outlook for additional aid to state and local government has improved  as has the outlook for better funding for mass transit and public housing. The most important change may simply be a change in the atmosphere. The incoming Biden Administration featuring mayors and governors bodes well for an improved attitude towards government.

It did not take the events of Wednesday to convince this observer that his view of the fallacy of an ideological approach to governing is valid. We have now seen on both the state and local level of the dangers of an ideologically based approach to government. It failed on the state level in Kansas where the budget is still recovering from the Brownback era and yesterday showed how such an approach failed on the national level. It is hard to argue that the country’s healthcare system, infrastructure, or education systems are better off than they were four years ago.

Now that the Capitol building has been cleared that does not mean that all of the terrorists are out of those halls. There remain a significant number of legislative terrorists who will do all that they can to obstruct and delay any Biden Administration agenda. Nonetheless, the outlook for municipal credit generally just got a little better.  And the potential for things like the repeal of the limit on the SALT deduction and limits on advance refunding should be easier to accomplish. But the impact of four years of policy and funding neglect leaves many rivers to cross for many municipal issuers.

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MORE LEGAL TROUBLE FOR SUTTER HEALTH

In late 2019, Sutter Health and the California Attorney General settled an antitrust action against Sutter. The State sued Sutter for anticompetitive activity and Sutter eventually settled for $575 million. That litigation was well known. It was widely covered in the press and was specifically cited by rating agencies as one of the factors weakening Sutter Health’s ratings this past fall. It seemed that Sutter was positioned to move forward from the litigation.

Now however, a new case is moving forward in the federal courts.  Sidibe v. Sutter Health was actually filed before the state action. The complaint raises many of the same issues in the state case. The plaintiffs, purchasers of commercial health insurance from certain health plans that contracted with Sutter, claim they paid inflated premiums, co-pays, and other charges as a result of Sutter’s anticompetitive conduct. 

The conduct in question is the use of so-called “all or nothing” contracts with insurers. Sutter included “all-or-nothing” clauses in its contracts that required plans to contract for all of Sutter’s services if it were to buy any of those services.  If an insurer wanted to serve patients at some of Sutter’s hospitals it had to serve patients of all Sutter hospitals. The idea was to force insurers to cover facilities where Sutter had more pricing power.

The complaint also the plaintiffs alleged that Sutter used a second anticompetitive contractual strategy called an “anti-steering” clause, which prevented health plans from encouraging their members to seek care from other lower-cost, in-network providers. Under the contracts, the health plans would be penalized with higher rates for failing to “actively encourage” members to use Sutter services, as opposed to cheaper alternatives. This all works as Sutter dominates the northern California provider market.

The case differs from the state action in that the plaintiffs represent different groups. In this case, the ultimate beneficiaries of a decision in favor of the plaintiffs would be payments to offset higher premium charges to individuals. This sets up a potential class of some 2 million. The affected class includes anyone living in nine specific areas in Northern California who paid premiums to Anthem Blue Cross, Aetna, Blue Shield of California, Health Net or UnitedHealthcare since 2011. 

The complaint was initially dismissed summarily but an appeals court judge overruled and set an October 2021trial date. Sutter will have many motivations to settle the case so we believe that judging the credit impact should be more a matter of how much it will cost rather than a bet on the outcome of a trial.  

JACKSONVILLE – WE HAVE A DISCLOSURE PROBLEM

The Special Investigatory Committee on JEA Matters was convened in February, 2020 in the wake of a spectacularly failed effort to sell the city-owned utility system (JEA). On July 23, 2019, the JEA Board of Directors authorized it’s senior leadership to start a process, the Invitation to Negotiate (the “ITN”), to sell JEA.  At that same meeting, the JEA Board also authorized senior leadership to implement a long-term incentive plan, the Performance Unit Plan, that would compensate participants based, in part, on the amount of proceeds the City received from the sale of JEA (the “PUP”).  

The Committee has now released a report that affirms the worst fears of investors and customers. The public customer base was at best skeptical of the plan to privatize the utility. In the late summer of 2019, JEA imposed what has come to be known as the “Cone of Silence” about the ITN process, purportedly prohibiting members of City Council (and others) from talking about the merits of the ITN.  

In the next month the Mayor got the City Council to approve legislation resulting in the transfer to the City liability for JEA’s unfunded employee pension plan upon the occurrence of a JEA “Recapitalization Event” (a sale). That seems to have been a bridge too far and the Council hired its own counsel to investigate the sale. This culminated in actions in November which led the JEA CEO to “postpone indefinitely” the PUP after the City’s Office of General Counsel (“OGC”) determined the PUP violated Florida law and the Council Auditor’s Office asked JEA probing questions about the PUP. 

Those questions resulted in a report which showed that disclosed the PUP would provide JEA senior executives with grossly excessive compensation.  According to the Council Auditor, the PUP could result in payouts to PUP participants in excess of $600 million dollars. Support for the plan crumbled and by year end the sale process was terminated.

Here is where the disclosure issue arises. The investigation revealed that the Curry administration and JEA engaged in a multi-year effort, from at least 2017 through 2019, to explore selling the City’s municipally-owned utility.  Knowing that public sentiment disfavored transferring JEA to private ownership, the City’s effort to market JEA was conducted with a purposeful lack of transparency. You would never know it from the Authority’s disclosure postings and that is a problem.

Lately we have heard much criticism of borrowers not making payments under the terms of a particular issue that they are not legally obligated to make. Here, the Authority had a real obligations not just to the customers and constituents  but to their investors. It is an obligation they took on at issuance and in this case failed to live up to. JEA should pay a price for the weak governance and oversight structure that allowed it to occur. It should be penalized with the same vigor as when it was penalized when it sued to get out of its power purchase agreement.

Given that this level of nondisclosure was easy to accomplish under the current rules governing the market, we are less optimistic about the potential for things like formal quarterly disclosures from issuers.

MBTA BUDGET CUTS

The impacts of the pandemic and the lack of an effective federal response can’t wait for the regime change in Washington at some agencies. Without a likely source of outside aid, the MBTA in Boston’s Fiscal and Management Control Board approved virtually all of the service cuts that MBTA staff had proposed. The cuts will be phased in over the coming weeks. They include a halt to weekend commuter rail service on all but five lines starting in January, as well as reduced Hingham and Hull ferry service and cuts to all Charlestown and Hingham direct ferry service to Boston.

The lack of service also has employment impacts. The “T” will ask one-sixth of the MBTA’s workforce, including its general manager and other top executives, will be forced to take up to five furlough days in the remaining fiscal year 2021. MBTA drivers and operators will not be required to take furlough days.

If Congress cannot come up with additional funding for agencies like the “T” by March, 20 bus routes will be eliminated; frequency will drop 20% on non-essential bus routes and 5% on essential bus routes; gaps between Red Line, Orange Line and Green Line trains will increase 20 %; Blue Line trains will run up to 5% less frequently.

PANDEMIC LIMITS LINGER

Massachusetts will extend its lockdown provisions and pressure is rising in connection with rising positive test levels in NYC to reimpose limits and closures on schools. Southern California remains fully locked down. Nationwide we see continuation of school closures. This is imposing real constraints on the ability of the economy to recreate jobs. Lower income employment groups who saw gains in the last four years have been the most heavily impacted.

As the economic limits of the pandemic continue, states are beginning the FY 2022 budget process. We have previously opined that this year’s budget cycle will create incentives for expansions of state revenue bases. One of the first signs of that comes from news that the NYS Governor’s proposed budget due this week will include a proposal for state run mobile sports betting. It comes as the handle for New Jersey’s sports betting market has increased to $5 billion.

That provides motivation for New York to consider it. New Jersey estimates that some 20% ($1 Billion) comes from New York bettors. It is that revenue flow that the State of New York would like to capture. In comments to the press the Governor said “At a time when New York faces a historic budget deficit due to the COVID-19 pandemic, the current online sports wagering structure incentivizes a large segment of New York residents to travel out of state to make online sports wagers or continue to patronize black markets.”

We would not be surprised to see a similar dynamic apply to the legalization of cannabis in NY given that New Jersey is now a legal marijuana state. The restricted NY market makes less sense from an economic standpoint as legalization makes its way to surrounding border states.

COAL CONTINUES ITS DOWNWARD TRAJECTORY

You know it’s for real when you see stories about American Electric Power, one of major symbols of coal generation, announcing that its considering retiring one of its coal fired generating plants in West Virginia before the end of its useful life. It comes as the South Carolina Public service Commission has ordered Dominion Energy to conduct a comprehensive coal fleet retirement analysis and assess replacing its South Carolina plants.  

Dominion had submitted a resource plan which failed to include a demand side management resource option or power purchasing options. The plan did not include any renewable energy additions prior to 2026, nor any coal retirements prior to 2028. the same plan proposed raising solar customers’ basic service charge to $19.50 a month, adding a “solar subscription fee” of $5.40/kW a month.

The tie to municipals? Dominion purchased South Carolina Energy & Gas and the partner with the muni utility South Carolina Public Service Authority (Santee Cooper). It is now absorbing the revenue impact of the failed Sumner nuclear expansion that has cast the future of Santee Cooper into great doubt.  

Washington State has established new rules governing the development of power generation resources in the state. They require the state’s electric utilities to eliminate coal-fired electricity by 2026, transition to a carbon-neutral supply by 2030, and source 100% of their electricity from renewable or non-carbon-emitting sources by 2045. These rules, in tandem with those promulgated by the State’s Commerce Department, will cover both investor owned as well as public municipal utilities.

GREEN JOBS BEGIN TO SPROUT

A quick look at a variety of headlines shows that green practices and job growth are not mutually exclusive. One is an announcement that the world’s largest lithium producer, Albemarle plans to invest between $30 million and $50 million to double production at an existing Nevada site by 2025.  The company is the only U.S. lithium producer and it attributes the increased production to the need for electric vehicle batteries.

General Motors Co. reportedly will build two new electric vehicles for Honda at its Spring Hill, TN assembly plant. In Massachusetts, a wind power contractor has announced that its proposed facility will result in cheaper rates than projected as the result of a new federal tax credit included in the recent COVID-19 stimulus package. With the bigger tax credit, Mayflower Wind will cut its price to 7 cents a kilowatt hour, which will save ratepayers roughly $25 million a year. Mayflower expects its 804 megawatt offshore wind farm to be operational by the mid-2020s.

These announcements come as data on declining coal production shows production from the Powder River Basin coal, year on year, declined 15.9%. Central Appalachian production declined from the year-ago week 23.9%. Output in the Illinois Basin was down 15.9% year on year. In Northern Appalachia, production was down 23.9% from the year-ago week.

SEATTLE TRANSIT COST REVISION

While the Purple line in Maryland begins to make progress on its effort to complete its light rail facilities and manage the cost problems which have plagued  other planned projects are having cost problems. These sorts of developments are one of the problems which mass transit advocates need to overcome.

The latest example comes from Seattle’s mass transit system. Sound Transit management has admitted that cost estimates for extending Sound Transit light rail to both Ballard and West Seattle have risen by about $5 billion — more than 50%. For the West Seattle and Ballard light rail lines, more than half of the increase is due to higher prices for land than assumptions made in 2015, before the $54 billion transit ballot measure was approved by voters.

That is the kind of change that erodes support for these projects. Projected costs for those two lines went from a total of $7.1 billion to between $12.1 and $12.6 billion, depending on where stations are located and how they are built. Voters in 2016 approved the $54 billion Sound Transit 3 tax measure to expand regional rail and bus service. The agency had promised West Seattle stations in 2030 and stations in Seattle Center and Ballard by 2035. 

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 year begins with efforts to subvert the November 2020 election. That effort comes after numerous incidents of intimidation and violence against elected officials. I publish this from Sullivan County, NY in a hamlet of 750 people. And yet in neighboring municipalities of similar size in the county we have seen resignations of officials in the face of physical threats. The point is that even the most local political processes have become unable to avoid the vicious display in Washington as we go to press.

Governments at all levels face a populist wave of anger reaching historic levels.  That creates an atmosphere where decisions are made in reflexive response to short term pressures. Those circumstances often lead to decisions with negative long term implications.  An example of this is in our first item this week. Nonetheless, populist anger rules the day at present so we may see more actions taken along  those lines.

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APPROPRIATION DEBT – IT IS WHAT IT IS

In the Show Me State, the trustees for a defaulted issue of bonds ultimately secured by funding from a County which was subject to annual appropriation are not going to be given the opportunity to show their case to the Missouri Supreme Court. To refresh, the case was rooted in a decision in 2018 not to appropriate County funds to cover shortfalls in revenues supporting debt related to a retail development located in Platte County, MO. 

In an effort to preempt legal moves by the trustee for the bonds, the county filed a lawsuit against  the bond trustee in November 2018 seeking court affirmation that it was not obligated to cover shortfalls.  A Platte County Circuit Court judge agreed with the county in a May, 2019 ruling. The trustee appealed and an appellate court panel on Aug. 25, 2020 upheld the lower court decision that the county bears no legal obligation. The trustee in September sought a rehearing that was rejected and it then asked the Missouri Supreme Court to take the case. 

We always were of the view that the effort to force the County to pay would fail. The legal details do not lie. The County was not absolutely obligated to appropriate.   The reality of 21st century municipal finance is that the failure to fund in situations where the requirement to do so is not clearly established in the transaction is no longer the crippling financial stain that it has oft been portrayed as. It helps if you are a smaller and infrequent issuer.

In the case of the bonds in question, interest is being paid but the existing principal amortization is not occurring on a timely basis. The decision by the Court should serve as a basis for more serious negotiations of a restructuring of the debt. It will occur in a changed significantly over time. Zona Rosa is an approximately 500,000 square feet, mixed-use lifestyle center located in Kansas City, Platte County, Missouri. The project opened in 2004 and was expanded by an additional 500,000 square feet starting in 2008. That facilitated a large department store’s relocation.

Ironically, while the litigation played out, the developers announced a plan demolish some storefronts to make way for a new outdoor green space as the first part of a major redevelopment effort. The mall, currently has dozens of vacancies and that is reflected in the financial underperformance of the parking facilities expected to generate revenues for the defaulted bonds. Over time, Zona Rosa hopes to add new multifamily residential development, hotel, office and restaurant space.

We have no quarrel with the idea that an effort to simply walk away from the project and its role as a participant in the financing is troubling. It should be disqualifying as a borrower in the public markets. The reality is that memory fades. If you do this long enough, you see too many examples of defaulting borrowers not only being able to reenter the market but to do so with ratings. But like most any other transactions secured by obligations, there are responsibilities on the investor’s part as well. It reported that this is the ninth transaction involving annual appropriation debt in Missouri to suffer some form of impairment since 2009. So it should not have been a shock.

That goes to reinforce one of our basic tenets of investing and credit risk management. That is the idea that a project should be economically sound and if there is a question about that, then the investors should demand significant financial compensation for that risk. Reliance on legal support as a primary replacement for economic viability simply does not work. Lease rental and other forms of appropriation backed debt are always in a more vulnerable position in bankruptcy. This trend has been reinforced in the restructuring of debt in Detroit and Puerto Rico. Like it or not, the risk of non-appropriation is the new reality.

OHIO NUCLEAR

The Ohio Supreme Court has issued an order stopping utilities from collecting a monthly fee to subsidize two nuclear power plants, part of the state’s scandal-scarred nuclear plant bailout law approved in 2019. A Franklin County judge last week issued a preliminary injunction to stop collection of the subsidies.  The Cities of Columbus and Cincinnati sued to block the law from taking effect January 1st.  That law, and the lobbying process which led to its enactment, were the subject of federal investigations leading to the indictment and resignation of the Speaker of the Ohio House. It is alleged that $60 million changed hands during the legislative process between and among the accused.

The law, HB 6, entitles the plant’s new owner, Energy Harbor, to receive as much as $150 million a year and nearly $1 billion in total. Another $20 million a year from the fees are earmarked for five large solar projects, none of which are operational. Ownership was transferred from First Energy to the Energy Harbor entity as part of its restructuring from bankruptcy. First Energy is at the center of the legal scandal.

The company and its predecessors have been long time guarantors of tax exempt pollution control revenue bonds. So what happens to their successors and the management and operation of the legacy projects can have implications for other investor owned utilities who support municipal bond debt. We also take it as a sign that the utilities know what is economically viable and what is not. As far as we are concerned – message received.

PURPLE LINE MOVES FORWARD

Among the nation’s prominent P3 arrangements, the Purple Line in Maryland has stood out for its delays related to opposition and resistance which led to crippling litigation. Ultimately, the construction member of the partnership pulled out citing unacceptable losses stemming from delays. It is one of the messiest P3 breakups we have seen. It came after the failed P3 renovation project at the Denver Airport. So the P3 concept was under a bit of pressure as we approached year end.

So it was good news to see that the Maryland’s Board of Public Works approved a $250 million legal settlement which requires the State to pay the companies managing the construction to resolve delay-related contract disputes dating to 2017.  The initial ask from the State by the departing partner was $800 million.  So the project has reduced one major cost and source of litigation while providing a basis for moving forward.

Purple Line Transit Partners, now consists of infrastructure investors Meridiam and Star America.  Meridiam and Star America agreed to spend up to an additional $50 million to keep construction moving until a new contractor is on board.  That process has a one year deadline and the hope is that a new contractor will be hired much sooner so that construction can resume. In the interim in the absence of a construction manager,  the Maryland Transit Administration is managing some work, including moving utilities, completing the design and obtaining environmental permits.

NOW THAT THE BALL HAS DROPPED

The New Year will provide some early indicators of the sorts of hurdles and uncertainties states will face as they begin the annual budget cycle. Three large states – New York, California, and Pennsylvania – will each have specific budget issues to deal with. They reflect the general pressures faced by all states but they also reflect issues peculiar to each one.

As the initial epicenter of the pandemic, New York was bound to be in the unenviable position of having to break trail for the others. While a bit of pressure has been taken off the MTA, there remain numerous sources of pressure. The NYC economy is and will remain under extreme duress. The ultimate level of outside funding remains highly uncertain. And the state continues to try to balance the interests on both sides of the landlord/tenant relationship. The current eviction ban will run until the end of February.

California has actually seen substantial revenue growth for the State’s General Fund. For FY 2021 through November, GF revenues were 20% higher than estimated. It was personal income and retail sales taxes driving those gains. Here the State’s income tax structure which had traditionally been a source of volatility actually caused revenues to over perform. Because so much of the State’s income tax revenues come from the highest bracket taxpayers, historic economic slowdowns which impacted that group severely curtailed revenues. In the case of the pandemic, that cohort was least impacted in terms of their ability to generate income by restrictions on the economy resulting from the pandemic.

That does not ensure easy budget sledding for the State. The recent reimposition of lockdowns will serve as an additional pressure on revenues especially as they were imposed through the holidays. The process will be important to watch.

Pennsylvania decided to delay a potentially contentious funding debate which emerged at the end of the last legislative session until this month. Just as a compromise budget for the Commonwealth was about to pass, the state transportation agency (PennDOT) asked for funding to cover a $600 million revenue shortfall related to the pandemic. The debate will come in the wake of the effort to involve the Legislature in the attempt to invalidate the results of the election. And then, they can move on to the FY 2022 budget.

The results of the budget processes in these three states will be good indicators of what the overall budget environment is like.  

TAX CHALLENGE AT THE SUPREME COURT

New Jersey, Connecticut, Hawaii and Iowa have filed an amicus brief in a Supreme Court case that challenges the ability to tax nonresidents’ income while they’ve been working remotely. Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania rely on the “convenience rule which allows states to tax income earned in the state by non-residents. The case in question was filed by New Hampshire against Massachusetts in October after Massachusetts enacted a temporary tax based on the rule.

Historically, the issues regarding potential double taxation have been resolved through agreements between states. It is a real issue even if an aggressive stand is more a reflection of the fact that 2021 is an election year. It is not a clear cut argument. If one state’s residents are prohibited by a shelter in place order from working in another state, what is the appropriate remedy?

The exact impact of a decision in favor of New Hampshire is unclear as estimates of the ultimate liability range depending upon the states involved. Should it be decided in favor of New Hampshire, it would force the states to attempt to recalibrate their tax relations with other states. We have seen estimates ranging from $1.2 to $3.5 billion in the case of New Jersey taking money back from New York. These are unprecedented times so we are not surprised to see actions taken which reflect the short term conditions imposed by the pandemic.

CHINATOWN REDUX

The Colorado River Compact was drafted in 1922. It allocates the river’s annual flow, dividing the water among seven states. The Colorado provides water to 40 million people and 5.5 million acres of farmland in Colorado, Wyoming, Utah, New Mexico, Nevada, Arizona and California as well as to 29 Native American tribes and the Mexican states of Sonora and Baja California. 

Colorado, Utah, New Mexico and Wyoming must deliver 7.5 million acre-feet a year to Lake Powell for use by the lower-basin states (Arizona, California and Nevada). If the upper basin doesn’t make this delivery, the lower basin can “call” for its water, triggering involuntary cutbacks in water use for the upper basin. The long term drought currently impacting the West has driven flows down 20% over the last 20 years. 

Now the seven states are conducting a new negotiation to manage the Colorado’s flows in the face of that reality. The reduced amount of water has brought renewed attention to one of the most enduring conflicts between agricultural interests and development interests. That conflict has renewed attention to the history of historical water disputes in the region. The easiest example is the dispute over water which pitted interests of farmers in California’s Owens Valley against those of real estate developers in Los Angeles in the 1920’s.

Now the negotiations over the Compact are complicated by the emergence of a significant bloc of private institutional investors. These investors are buying up the rights to water from farmers throughout the region. They won’t use it. Instead, they hope to turn water into a commodity, a basis for speculation tradable on futures markets. They do not seek water for agricultural use but rather as an asset which can be held and manipulated. 

The effort would raise the cost of water especially for users in metropolitan areas. It would not increase supplies. The investors seek to be able to create “accounts” for their water allocations within existing water supplies. Under their plan, an account could be created within one of the region’s federal reservoirs (Lake Powell for example). This would allow the private water owners to hold their water until demand drives the price up. In the case of Colorado, it could theoretically find the State in the position of having to buy back its own Colorado River water. In September, Nasdaq and CME Group, announced a plan to establish a futures market for California water.

Such an arrangement will put some large municipal water systems under pressure. The Metropolitan Water District of Southern California is the largest water utility in the U.S. It has a significant interest in the price of Colorado River water. Should there be a “call” of water, the agricultural water owners would be in a position to profit.

It comes after a year when water utility credits were among the most stable performers. So the introduction of private water markets is a concern and something to watch as the process of renegotiation unfolds over the next five years. It would be a shame to see this sector turned away from its long history of stable financial results and strong credit quality

MORE ANALYTICS FOR THE MUNI MARKET

As is the case with so many other things, in the age of data analytics have become king. Whether its sports, financial management or a variety of other sectors, the available data base and tools to utilize it continue to grow. The rating agencies are developing and acquiring data and using it to implement new ratings criteria. Moody’s explicitly cites environmental, governmental, and social issues when it announces rating changes.

Now there is another data contribution coming from the Federal Emergency Management Agency (FEMA). FEMA has calculated the risk for every county in America for 18 types of natural disasters, such as earthquakes, hurricanes, tornadoes, floods,  volcanoes and even tsunamis.  The risk equation behind the National Risk Index includes three components: a natural hazards component (Expected Annual Loss), a consequence enhancing component (Social Vulnerability), and a consequence reduction component (Community Resilience). 

Expected Annual Loss represents the dollar loss from building value, population and/or agriculture exposure each year due to natural hazards.  Social Vulnerability is the susceptibility of social groups to the adverse impacts of natural hazards, including disproportionate death, injury, loss, or disruption of livelihood.  Community resilience is the ability of a community to prepare for anticipated natural hazards, adapt to changing conditions, and withstand and recover rapidly from disruptions. 

FEMA’s index scores how often disasters strike, how many people and how much property are in harm’s way, how vulnerable the population is socially and how well the area is able to bounce back. That results in a high risk assessment for big cities with high proportions of poor residents and expensive property that are ill-prepared to be hit by once-in-a-generation disasters.

FEMA’s 10 riskiest counties list is led by Los Angeles, followed by the Bronx, New York County (Manhattan) and Kings County (Brooklyn), Miami, Philadelphia, Dallas, St. Louis, Riverside, and San Bernardino counties in California. The bias generated by property values is clearly reinforced in the individual disaster risk indexes.

One example is the fact that Oklahoma City gets a better tornado risk score than does New York City. This reflects the wide disparity in the value of potentially impacted property bases. It does not take into account historic frequencies of events.  It’s flaws are recognized even by FEMA who’s spokesman was quoted in the press as advising “that people shouldn’t move into or out of a county because of the risk rating.”

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

Joseph Krist

Publisher

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This is our last issue for calendar 2020. We wish you a hopeful Christmas and a brave New Year. The Muni Credit News will  return for the first week in January.

As the year has worn on, it has become increasingly difficult to keep politics from influencing our judgment. We are not concerned about the ultimate ability of the U.S. economy to recover and eventually thrive. That reflects our view of the enormous resources we have as a country and faith that its workforce will continue to be the most innovative and productive in the world.

Having said that, the politics of the country especially on the national level should give one pause. This is far from the first time that the country has been divided. It’s not the first time that a generational clash of values has happened. But it does come at a time, unlike others,  when truth has become subjective. Having dealt with politicians from both parties over the years I can honestly say that I cannot remember a time when the differences were over the interpretation of facts, not the existence or veracity of facts.

We also see troubling trends. When I was in my early years as a sell side analyst, I would get asked regularly about Puerto Rico bonds and the potential for an insurrection that would result in efforts to repudiate debt. I could write that off to ignorance or racism and move on. Now, one has to wonder when we see photos of armed protesters in the halls of legislatures whether an investor could ask the same question about Idaho, Michigan, or Virginia.

As we go to press on Sunday night, it appears that Congress will enact a relief bill providing stimulus checks up to $600 per adult and child, meaning a family of four would receive $2,400 up to a certain income. The size of that benefit would be reduced for people who earned more than $75,000 in 2019, similar to the last round of stimulus checks.  The bill would also extend federal unemployment benefits of up to $300 per week, which could start as early as Dec. 27.

What the package does not include is aid for states and localities. The budget year begins for many on January 1 and many smaller credits will have to budget on what they have. This has potentially significant impacts on employment and economic activity just as many jurisdictions are entering lockdown periods.  It makes for a more uncertain credit outlook if additional funding is not provided especially during the distribution phases of an immunization program. 

That said, the market did very well in meeting the challenges of the pandemic. It was able to finance all of its issuers’ needs in an orderly and economically effective way.

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I’ve been asked a lot what I think will be the important driving factors credit in 2021. The biggest change will be the fact that a Biden administration believes in government while the current administration did not. As we write this, the biggest remaining variable is a huge one – control of the U.S. Senate. It’s clear that the Senate elections in Georgia are even more meaningful than they already were. If the Senate is not under Democratic control, the policy gridlock and ideological drive to stymie any additional aid to states and cities will limit available resources.

It was one thing when Ronald Reagan made his joke about “I’m from the government and I’m here to help.” He then turned around and accepted a tax increase to fund Social Security and ran deficits which were for their time huge. But they did not set out to consciously undermine state and local finances. Now, we see overt efforts to undermine state finances combined with a significant offload of national responsibilities to states.

It makes no logical sense from either side of the partisan divide. Clearly it’s ideology. If you don’t want to give states and cities cash (which would probably be the most useful form of aid to these entities), at least restore the SALT deduction and advance refunding. The Fed chair made it pretty clear that low interest rates will be around for a while.  Yes, advance refunding and the SALT deductions are expenditures but they don’t require Federal cash expenditures. It would be a shame if ideology got in the way of commonsense fiscal management.

The slowing labor market recovery, significantly reduced pandemic-related state and federal government transfers, and a resurging wave of corona virus infections and hospitalizations will slow the pace and challenge the durability of the economic recovery of many U.S. states. Timing matters. New York and California both begin their budget processes in earnest before Inauguration Day.

The budget makers at all levels will be forced to make assumptions as to economies and revenues during the most uncertain period in memory. The level of stimulus provided by Congress will be the biggest source of uncertainty. This is especially true given that moratoriums on evictions, utility payments, and rents are not assured into the new year. Those potential negative pressures on local budgets will come just as FY 2022 budget decisions must be made.

Having set the backdrop, we examine some individual sectors.

Mass transit has arguably been the most visible loser in terms of the impact of the pandemic on credit. The situation in New York is telling. Subway ridership and fare revenue bottomed out in April and recovery has been slow. The share of MetroCard swipes in Manhattan remains depressed, reflecting declines in commuting to work and the collapse of tourism. Similar phenomena are observable in all of the major urban areas. The transit sector is right up there among the most vulnerable if office utilization remains below pre-pandemic levels.

For mass transit, the lifting of ideological opposition to funding can only be good. With three of the largest and oldest subway systems in the country in dire need of repair and expansion, the lack of federal funding has been a major hurdle. At the same time, mass transit is facing another crossroads which will have clear implications for the sector. What is the real expected level of utilization with other factors in the equation like changes in demand for centrally located office and housing space post pandemic? With the inclusion of some $4 billion in the current relief package, the MTA has received time to figure this all out?

It won’t just be about money. The drive by the Trump administration to privatize transportation will not continue. That philosophical basis for the development of policy relied on a model which simply has not worked that well. We think that New York is a good example of P3 projects working out favorably and that other state models are examples where it does not. The difference which leaps out is that models which involve concessions to operate as well as develop seem to have more problems than design build P3 models.

In New York, design build has generated three prominent bridge replacement/expansions and two airport renovations. They have generally received favorable reviews and support for the design/build P3 concept has grown in a strong union state. Where road projects have been leased to developer/operators, public support has been substantially less. Concessionaires have sold out both under duress or for other reasons.

All of this contributes to our view that P3s will continue to have their place but there will be no headlong rush to fully utilize the concept.

Energy Outside of pandemic related issues, the sector underwent significant change in 2020. The year saw unsuccessful efforts to convert investor owned electric generation and distribution assets to public ownership. The Jacksonville Electric Authority abandoned efforts to privatize the JEA which led to criminal investigations. In South Carolina, the legislature punted a decision on the future ownership and structure of the South Carolina Public Service Authority in the wake of the cancellation of the Sumner nuclear plant expansion.

 Many saw the troubles and bankruptcy of Pacific Gas and Electric in the wake of significant forest fires in California in recent years as an opportunity for public entities to take over PG&E’s troubled operations. It became clear that the process would be more difficult and time consuming than many thought and supporters of a public utility could not get a proposal together before PG&E was able to emerge from bankruptcy.

Boulder, CO considered converting the City’s electric distribution system to public ownership in an effort to support environmental goals. A proposal was put on the ballot this past November but residents instead voted to extend the city’s current arrangements for another 20 years with Xcel Energy.

The JEA saga continued as it announced that its new permanent CEO will be someone with utility experience. The announcement follows the firing of the previous CEO who did not have experience running a utility but did have experience privatizing public assets. The new CEO has a long history of operating local public utilities as well as experience with the TVA.

The market realities leading to closure after closure of coal fired generating facilities will continue. The pace of closures may slow as many remaining coal plants are newer and comparatively more economic. Nonetheless, the drive to decarbonize will continue. And plants will have to perform efficiently (environmentally and economically) to continue to operate.  

The change in philosophy alone at the White House will be a significant change catalyst and municipal utilities will be right in the center of them..

Congestion Pricing was held hostage to the ideological leanings of the Trump administration which refused to move forward on required federal approval processes for New York City’s application to levy congestion charges. It is likely that a Biden administration will look more favorably on congestion pricing proposals. This will be offset  by the economic realities of the pandemic and the desire to facilitate as much commerce as possible as the economy recovers.

Infrastructure  Infrastructure Day, Week, Month, Year. We’ll take whatever form it comes in as long as the process moves forward. A lack of federal policy beyond privatization has stymied all sorts of development whether it’s the repair of public housing stock or regional projects like the Gateway Tunnel. That does not even begin to include the significant number of smaller local projects which often are based in federal policies. It is nonetheless impressive that municipal issuers have managed to finance as many projects as they have during the last four years. Imagine what could happen with real support from the federal government.

Housing This was another sector where investment was held back by policy. The effort to shift projects into private hands as a price to be paid for needed renovations did nothing for some of the neediest projects. The best example is the New York City Housing Authority. The well known massive maintenance needs of these projects remained largely unaddressed while the Trump Administration promoted various schemes to convert public assets to private hands.

The looming eviction deadlines take on more relevance at year end given the pending expiration of a pair of temporary aid programs to individuals. The pending relief legislation will provide only short term fix. The Federal Reserve Bank of San Francisco studied what happened when unemployment insurance ended for workers who lost their jobs during the recessions of 2001 or 2007-9. Household income declined $522 a month on average, they found. There are real concerns that renters will be forced out of their homes without additional assistance.

On the other end of the spectrum, the ability of many to work from home has tended to benefit those in professional fields and other office workers. This has driven up prices for single family housing especially in major metropolitan area suburbs. If the prognostications about the likely level of return to the office on the part of workers are correct, than this state of affairs will likely continue.

This will all contribute to a willingness on the part of municipalities to reexamine their zoning laws. While not a direct fiscal issue, rezoning as a method to address affordable housing shortages will be an increasingly utilized tool. It serves to improve housing stock, preserve ownership, and support existing communities. These are often better connected to transportation and employment opportunities. Changes in zoning will have various impacts on assessed values and tax revenues which we believe would be positive.

Senior Living is far from a one size fits all sector. The American Health Care Association and National Center for Assisted Living, which represents more than 14,000 nursing homes and assisted living facilities across the U.S., found 90% of the 953 nursing homes that responded said their profit margins are 3% or less, and 65% said they are currently operating at a loss. The biggest increase in cost was staffing.

Digging deeper we find that the realities for skilled nursing credits are far different than for continuing care senior living credits. The IL and AL segments of integrated senior living projects have been able to generate revenues to support skilled nursing beds as those beds generate increased costs and real concerns about people’s willingness to move to nursing homes. It all combines to improve the outlook for senior living.

Transportation Technology Toyota plans to unveil a prototype electric car with a solid state battery in 2021, a long-sought technological breakthrough that would dramatically increase range and longevity while cutting charging time. Mercedes-Benz announces six new electric vehicles, including two SUVs that will be built at an Alabama plant. The police department in Redding, CA is seeking city approval for a specially equipped Tesla and other electric or vehicles for its fleet. The request follows a successful pilot program in Fremont, CA.

Three simple stories which neatly cover three important legs to the acceptance of electric vehicles story. The Toyota announcement addresses commonly cited concerns with EVs over range and charging time. The Mercedes announcement is about jobs related to EV production at an existing plant. That’s one fewer group of workers “losing” in the process of transition. The police car announcement shows that entities with fairly unique and stringent operating requirements are able to satisfy them with electric power.

We have noticed that as localities go through their budget processes for 2021, the issue of electric vehicles has moved forward in the debate. Even where cities are not moving towards widespread adoption at present we have noted that those debates seem to center around the issues of when and how much. Governmental users are in a unique position to advance technological change in transportation simply through the investment and purchasing decisions they make. Now that the idea of employing electric vehicles is seen as viable for vehicles associated with public safety, the next step to full adoption for municipal vehicle fleets is not far behind.

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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MEDICAID WORK RULES REACH SUPREME COURT

Arkansas was one of the first states to receive permission from the federal government to require Medicaid recipients to meet minimum requirements to work in order to receive Medicaid benefits. More than 18,000 people lost coverage in Arkansas due to work requirements once the requirement was enforced. In February, a federal appeals court had found that the approval of the requirements in Arkansas was “arbitrary and capricious.” The court said the administration did not adequately account for loss of coverage that would stem from the requirements to work or volunteer. The D.C. Circuit reached a similar conclusion in May when New Hampshire’s work requirements were challenged.

The decisions reflected the operating realities of these programs which in large part need recipients to self-report on line their employment or volunteer efforts. Given that the program serves the poorest, access to the internet is far from a given for that cohort making it likely that those individuals would lose coverage. The philosophical legal issue is whether Congress intended for a law designed to increase access to health coverage to be used coercively to motivate work or volunteerism.

To date, the courts have found that that tying the issues of work and health coverage are not consistent with Congressional intent.

PANDEMIC CASUALTIES – CULTURAL FACILITIES

The New York Philharmonic projects that the cancellation of its 2020-21 season will result in $21 million of lost ticket revenue, on top of $10 million lost in the final months of its previous season this spring. Now, in light of these losses as well as the likelihood of a slow return to indoor events, The Philharmonic has reached an agreement with its musicians that includes substantial salary cuts.

The musicians will see 25% cuts to their base pay through August 2023. Pay will then gradually increase until the contract ends in September 2024, though at that point the players will still be paid less than they were before the corona virus pandemic struck.  It’s not clear how much this agreement will set a trend as the pandemic occurred coincident with the expiration of the existing labor contract. It is easier to negotiate these sorts of cuts within the context of an expired agreement versus reopening an existing contract.

It is nonetheless a sign of what may be to come for many of these institutions.  They will be under pressure even in the immediate aftermath of the pandemic. The Metropolitan Opera (the Philharmonic’s next door neighbor, is seeking 30% cuts in pay from several of its major unions until box office reaches pre-pandemic revenue levels, at which point the cuts will be reduced to 15%. 

These maneuverings reflect the larger reality that the economic recovery from the pandemic will be gradual and the magnitude of that recovery highly uncertain at present. The non-profit sector, especially its arts based component, is undergoing an unprecedented set of pressures which will dampen overall creditworthiness.

CONVENTION CENTERS

King County will look to bail out the Washington State Convention Center with a $100 million loan as sufficient private sources of funding have not materialized for the $1.9 billion expansion project in downtown Seattle.  The County had previously indicated the expansion project was $300 million short of its funding target and, without federal aid, could run out of money by the end of the year. The money would come from the county’s $3.4 billion investment pool, which invests funds for county agencies and school, water, sewer and fire districts.

Since the pandemic began, 67 conventions have been canceled, according to the Downtown Seattle Association. Downtown hotels have held only 10% to 20% of their normal guests, according to the Downtown Seattle Association, and revenues have been down more than 90% from last year. This directly impacts the credit supporting municipal bonds issued to finance construction as they are payable from local and county hotel taxes.

It is another way of funding the project without asking the taxpayers (currently) to fund it through increased tax revenues. That does not mean that all of the county’s stakeholders will be happy. Some will question the prioritizing of the convention center over things like transit and affordable housing. It will allow the project to continue so the facility is best positioned for any post-pandemic demand.

CLIMATE CHANGE AND CAR DEALERS

In September of this year, General Motors informed its 880 Cadillac dealers that they would be required to invest some $200,000 in their dealerships to accommodate electric car sales. The dealer network had until Nov. 30 to make the decision if they wanted to take a buyout. Some 150 dealers out of the 880 opted for the buyout. The impact on potential sales is not clear.

The choice comes as GM looks to sell more vehicles powered by electricity than by fossil fuels by the end of the decade.  Cadillac will be its primary outlet for electric vehicles initially. An electric crossover model is expected to be available in the first quarter of 2022. The investment GM is asking for would cover charging stations, training of employees and lifts that can carry the heavy batteries powering the vehicles.

Dealers are important sources of local tax revenue and a source of employment for non-college graduates. This is especially true in more rural areas so the loss of jobs and tax revenues is important. Now that the industry is coalescing behind a move to follow California’s increasingly heavy regulation of internal combustion powered vehicles, it is likely to accelerate acceptance of the Golden State’s pending restrictions on their sales.

It is just the largest most visible example of the trend. If they haven’t already, all of the carmakers will be undertaking similar efforts with their dealer networks. That is the reality of California’s policy ending internal combustion vehicles sales in 2035.

CLIMATE CHANGE AND PUBLIC POWER

Nebraska’s two large public utilities are moving forward on goals to get their operations down to net-zero  carbon emissions. The Lincoln Electric System has voted to achieve net-zero carbon emissions by 2040. Lincoln has been purchasing wind power from three facilities in Nebraska and two neighboring states since 2015. Since 2010, LES has reduced its carbon emissions 42%.

The other major public electric utility in the state – the Omaha Power District – has adopted a goal of net zero generation but by 2050.  The OPPD adopted its goal one year earlier than did Lincoln and it seems to have established a starting point for Lincoln. The 2040 date adopted there is a compromise between a 30 year goal favored by established businesses and a 20 year goal favored by newer energy based businesses.

In both cases, public utility ownership seems to be fostering a more direct public process in decision making that is hindered by the need to generate “profits”. This is in contrast to IOUs owned by a holding company parent dependent upon dividend generation by the local US utility.

FOSSIL FUEL FUTURE

For utilities public and IOU, the potential for having to deal with stranded assets under aggressive plans to move generation to renewables can be a real impediment toward achievement of climate goals. So we saw with interest research making a case that a 2035 electricity decarbonization deadline, as proposed by President-elect Biden and the 2020 Democratic party platform, would strand only about 15% of fossil capacity-years and 20% of job-years.

In 2018, 10,435 fossil fuel–fired generators produced 63% of U.S. electricity with 841 GW of capacity. They also emitted 1.9 billion tonnes of carbon dioxide, 1.3 Mt of nitrogen oxides, and 1.4 Mt of sulfur dioxide, while consuming 3.2 billion m³ of water for plant operations and fuel extraction. These facilities operated in 1248 of 3141 counties, directly employed about 157,000 people at generators and fuel-extraction facilities.

So the basis of the economic fear associated with decarbonization is obvious. The research shows that the end of coal generation may simply be rooted in operating reality as much or more than policy decisions. Look at the current landscape to see why this is the case. Of operable U.S. fossil fuel–fired generation capacity (630 out of 840 GW), 73% reaches the end of its typical life span by 2035 (810 GW, or 96%, by 2050; 100% by 2066). About 13% of U.S. fossil fuel–fired generation capacity (110 GW) operating in 2018 had already exceeded its typical life span. 

Those numbers make the case that blind political resistance to the move away from fossil fuels simply ignores reality. A key finding of this research is that a 2035 deadline for completely retiring fossil-based electricity generators would strand only about 15% (1700 GW-years) of fossil fuel–fired capacity life, alongside about 20% (380,000 job-years) of direct power plant and fuel extraction jobs remaining as of 2018.

Does this mean that there is no disruption associated with decarbonization? No. Requiring fossil generators to close by 2035 would result in limited, although sometimes locally impactful, asset stranding relative to typical life spans. 

PANDEMIC CASUALTIES – G.O. RATINGS

The second wave of the pandemic is underway in New York City. The closure of the schools last week and the threat of renewed restrictions on gatherings and economic activity like indoor dining have renewed pressure on the City’s finances. So, S&P has lowered its outlook on the City’s ratings from stable to negative.

S&P made it clear that this is a move related to the virus rather than a criticism of management. “The negative outlook reflects (S&P’s) opinion of uncertainties, such as a recent uptick in the virus transmission rate that could negatively affect the city’s financial forecast, the trajectory for global tourism trends and additional federal stimulus funding for state and local governments, service reductions at the Metropolitan Transportation Authority that could affect the economic recovery within the region, and weakness in property tax values that will not be evident until fiscal 2023.” 

That last point is important. Regardless of the difficulties currently underway in the City’s real estate sectors, the fact that property values for tax purposes are adjusted over a five year period rather than within the FY that valuation impacts occur has a supportive effect on property tax collections.  

Fitch also downgraded to rating on NYC general obligation debt to AA- from AA. “The downgrade of the city’s IDR to ‘AA-‘ from ‘AA’ and one-notch downgrade on associated securities reflects Fitch’s expectation that the impact of the corona virus and related containment measures will have a longer-lasting impact on New York’s economic growth than most other parts of the country. This view is informed by the weak rebound to date in employment, real estate transactions, tourism and mass transit usage. Very low rates of employees returning to offices and the potential for a longer-term trend of lower office usage could exacerbate current economic pressures on the city’s credit profile.”

Another city to see its rating impacted negatively is Milwaukee. The pandemic was seen as an impediment to the placement of a sales tax initiative on the ballot. Without the additional revenue from a sales tax, higher state aid, or substantial expenditure cuts, the concern is that the city’s currently adequate reserves will deteriorate. This led Moody’s to downgrade the rating to A2 from A1 on the city of Milwaukee, WI’s outstanding general obligation unlimited tax (GOULT) bonds. The lack of additional revenues comes as the City faces pension costs which are scheduled to significantly increase under the city’s current pension funding ramp up period.

SALT RIVER NUCLEAR DEAL

One public utility has found away to increase its nuclear generating capacity without the accompanying construction risk in Arizona. The Salt River Project announced that its board has approved the purchase of part of Public Service Co. of New Mexico’s ownership share of the Palo Verde Nuclear Generating Station in Arizona. SRP was already one of the owners of the plant. Its purchase of 114 megawatts of Palo Verde’s output will increase SRP’s share of the plant from 17.5% to 20%.

The purchase of most of the power is expected to be completed in January 2023, followed by the remainder in 2024. SRP specifically cited the lesser risk of purchasing a share in an existing facility versus the cost and risk of new nuclear generation.  SRP needs to lower its carbon emitting generation capacity to meet its 2035 Sustainability Goals which call for a reduction of CO2 emitted by generation by 65% by 2035 and 90% by 2050. 

For SRP, it achieves several short term goals while approaching  nuclear in a far more cost and risk effective way versus the strategies being followed by MEAG and SCPSA in the southeastern U.S.

MUNICIPALS AND FOSSIL FUEL INVESTMENT

A couple of recent announcements show that the drive to force divestment in the fossil fuel industry which had hit financial and educational institutions is beginning to have its impact on municipal investment activities. The latest examples are Summit County, CO and New York State.

While the scope and timing of the two divestment programs are substantially different, the underlying factors driving the decision are similar. The County formally passed an ESG resolution which provided mechanisms for divestiture. This after the County passed its Climate Action Plan in 2019. The Treasurer’s Office has completed the sale of its last holdings of fossil fuel stocks from the County’s managed portfolio of investments.

In the case of New York State, the continuing pressure on the earnings of fossil fuel entities has made it easier to make a case for divestiture. The State had been loathe to make the decision purely on a policy basis. Now, the State will require companies to meet new standards requiring them to show “future ability to provide investment returns in light of the global consensus on climate change.”  The Fund is committing to sell its investments in any oil, gas, oil-services and pipeline companies that do not have clear plans to abandon the fossil fuel business. 

The fund is committed to selling its stakes in firms – including utilities, manufacturing, transportation  – if they do not eliminate such emissions by 2040. This phase of climate related investments came in  the face of an effort by the legislature to mandate changes in the investment policy. The announcement by the Comptroller comes under a formal agreement with the Legislature under which pending legislation on this issue was withdrawn.

ILLINOIS DEBT CHALLENGE GOES ON

The effort by a hedge fund investor to take advantage of a short strategy using credit default swaps by having some $16 billion of State of Illinois general obligation debt invalidated will have its day in the Illinois Supreme Court. While the fund investor has dropped out of the appeal, a state political activist who was the straw plaintiff is pressing on.

The case has so far been decided on matters of plaintiff standing rather than on the “merits” of the plaintiffs case. The Illinois Supreme Court will now deal with the facts of the case. The complaint alleged that Illinois’s 2003 and 2017 GO Bond issuances violated a provision of the Illinois Constitution that requires long-term debt to be for a “specific purpose” (Il. Const. art. IX, § 9), arguing that “specific purposes” include only “specific projects in the nature of capital improvements, including roads, buildings, and bridges.”

The complaint further alleged that the 2003 issuance of “Pension Funding Bonds” failed to satisfy this “specific purposes” requirement, because it allocated bond proceeds to be used to reimburse the State’s General Fund for past contributions to the State’s retirement systems. The complaint similarly alleged that the 2017 issuance of “Income Tax Proceed Bonds” failed to satisfy this “specific purposes” requirement, because it allocated bond proceeds to be used to pay past due bills related to general operating expenses.

We believe that the bonds validity will be upheld. The real problem with the case is that the standard for granting leave to file taxpayer suits has been reduced , as the court focused specifically on whether the proposed complaint was “frivolous” or “malicious” and on whether the petitioner’s claims were merely “colorable,” rather than placing the burden squarely on the petitioner to establish that reasonable grounds existed for filing the suit. This makes it more likely that suits such as this might be brought primarily for the facilitation of investment strategies which pay off in the case of invalidation.

ROAD TO RECOVERY

California State University (CSU) was the first state university to decide to conduct its full fall 2020 semester on line. Now, CSU announced that it is planning for an anticipated return to delivering courses primarily in-person starting with the fall 2021 term. It cited ” light at the end of the tunnel with the promising progress on vaccines.”  The announcement comes as high school and transfer students have until December 15 to complete their applications for fall admission. 

In as much as the system was an “early adopter” in the pandemic response, we think that it is significant that the move is being announced during the ongoing pandemic surge in California. CSU is, after all, is the largest system of four-year higher education in the country, with 23 campuses, 53,000 faculty and staff and 486,000 students. is the largest system of four-year higher education in the country, with 23 campuses, 53,000 faculty and staff and 486,000 students. It serves as an excellent indicator for how many systems are likely to respond.

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 ECONOMIC BACKDROP

The Federal Reserve has released its latest Beige Book with its view of the economy as the nation neared Thanksgiving. Most Federal Reserve Districts have characterized economic expansion as modest or moderate since the prior Beige Book period. However, four Districts described little or no growth, and five narratives noted that activity remained below pre-pandemic levels for at least some sectors. Moreover, Philadelphia and three of the four Midwestern Districts observed that activity began to slow in early November as COVID-19 cases surged.

Banking contacts in numerous Districts reported some deterioration of loan portfolios, particularly for commercial lending into the retail and leisure and hospitality sectors. An increase in delinquencies in 2021 is more widely anticipated. Providing for childcare and virtual schooling needs was widely cited as a significant and growing issue for the workforce, especially for women – prompting some firms to extend greater accommodations for flexible work schedules.

Contacts are concerned that when unemployment benefits and moratoriums on evictions and foreclosures expire, an avalanche of bankruptcies will emerge among other small and medium-sized businesses, as well as households. hiring plans for the year ahead were generally modest. About a third of contacts expected they will still be below pre-pandemic staff levels 12 months from now.

This creates a backdrop for the upcoming budget season for the states which will be difficult even if there is a stimulus.

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PANDEMIC FUNDING NEEDS

At least when the northeastern states bore the brunt of the first wave of the corona virus pandemic,  Congress stepped up and provided aid to institutions like hospitals and to many state and local entities. While it was not enough, it did allow some of the hospital credits to be shored up against the financial impacts of the pandemic response. Now the atmosphere in Congress is different and the consensus supporting an additional fiscal response is much less apparent. That makes for a far more difficult environment for healthcare credits in the areas of greatest demand. It is not clear as to whether sufficient support will be available to these credits especially in the center of the nation.

Another major sector on the precipice of fiscal disaster are the nation’s major mass transit agencies. While the troubles of New York’s MTA have been most prominent,  transit agencies across the country are facing draconian cuts in service without additional federal fiscal aid. (see article) While current utilization rates are historically low,  these agencies face the dilemma resulting from the fact that service cutbacks could permanently alter demand impacting revenues and debt service coverage. The States are muddling through as best they can. This is being used by some to make an argument that additional aid is not needed.

There is one problem. The current federal “plan” for distribution of a vaccine against the corona virus relies on the States to distribute the vaccine to providers. What it does not provide is any funding for this crucial step in the process. Estimates of the cost to the States have ranged up to $8.5 billion. Given the potential for increased economic pressure from emerging lockdowns, it is unfair to expect the already impacted state budgets to absorb more imposed fiscal demands.

Regardless of one’s individual politics, the failure to fund vaccine distribution through to final consumers makes no sense. It is consistent with the resistance to limits on activities in terms of a national strategy against the virus. But logically, the cost should be borne at the national level even if the actual physical execution of the plan is at the state level. Given where the virus is currently least under control, it makes no sense on a partisan basis.

These three sectors – hospitals, mass transit, and states – should be the primary targets of any additional federal support.

PUERTO RICO

The US Supreme Court declined to hear an appeal from bondholders seeking higher recovery on approximately $3 billion of defaulted C-rated Puerto Rico Employees Retirement System (ERS) bonds, issued in 2008 to fund pension liabilities. The “plan of adjustment” offered a 13% recovery on their claim. ERS bondholders’ debt service payments have been suspended since the Title III proceeding began in May 2017.

The US district court overseeing Puerto Rico’s bankruptcy-like case ruled in June 2019 that employer pension contributions to ERS do not qualify as special revenues under US bankruptcy law, a distinction bondholders sought in hopes of forcing Puerto Rico to resume debt service payments during the Title III proceeding. Special revenue backed debt holders have historically fared well during prior Chapter 9 proceedings.

The court further ruled that ERS bondholders’ lien on employer pension contributions does not “attach” to any contributions made after the system’s May 2017 bankruptcy-like petition, leaving them with an entirely unsecured claim. An appeal of that decision in the US Court of Appeals for the First Circuit upheld the lower court decision. The decision by the Supreme Court not to hear ERS bondholders’ appeal confirms of the First Circuit’s ruling as the final word.

Another shoe to drop was the news that the Puerto Rico Oversight Board approved a proposal that would include cuts in pensions.. Under the proposal, the board would cut by 8.5% pensions above $1,500 a month. This is an increase from $1,200 a month, as had been the case in the February 2020 proposed plan of adjustment. Clearly, asking pension bond investors to take huge haircuts without some impact on pensioners does not make sense. And then there is the Christmas bonus.

Over time one becomes immune to shock when the lack of a realistic outlook of the part of Puerto Rico’s ruling class becomes such an ingrained feature of the political landscape. The latest is the news that the Gov. Wanda Vázquez administration is requesting an authorization from Puerto Rico’s Financial Oversight and Management Board (FOMB) to use “excess” funding that had been earmarked for monthly payments to government retirees to cover a $23 million gap in this year’s allotment for payment of the annual Christmas bonus to public employees. 

It is just so indicative of the blind spot that Puerto Rico’s governments  have had over the years when it comes to the perception of investors. What is one supposed to think about a plan to take money for pensions away from pensioners and give it to current employees at the same time the financiers of the pensions are being asked to take 13 cents on the dollar.

MUNICIPAL LENDING FACILITY

The decision by the Trump administration to end the Federal Reserve’s Municipal Liquidity Facility program at the end of the year has caused some consternation. We believe that the market will survive the loss of the program. Recent months have shown that the market has the ability to finance the needs of even some of its most troubled borrowers.

The issue comes down to that of cost. The market clearing rates charged to borrowers from the facility do represent a significant spread above general rates. What they do not represent is a huge burden for potential borrowers on an absolute basis. Prior crises for municipal borrowers generated double digit interest rates even with credit support. That’s not desirable but the point is that it has been handled before.

The fact of the matter is that utilization of the facility has been much less than was expected. That is not indicative of any policy or programmatic flaw. There still is time for additional borrowing through December 31 but there only seem to be a couple of candidates likely to tap the facility. Illinois announced that it will access the program for a second time for $2 billion. The favorable market reception for some of the most prominently mentioned borrowers supports the more conservative view.

PENNSYLVANIA ELECTRIC CAR FEES

It took a party line vote but the Pennsylvania House has approved legislation enacting a fee on the registration of electric and hybrid vehicles. The fee is ostensibly designed to address the issue of owners being “free riders” on the Commonwealth’s roads by virtue of electric and/or hybrid car ownership. The fee would be $75 per year for a hybrid gas-electric vehicle, $175 a year for an electric vehicle and $275 for an electric vehicle with a weight rating of more than 26,000 pounds, such as a city bus.

The majority of the Legislature is supportive of the energy industry broadly in the Commonwealth. They saw the issue as an opportunity to impose a penalty on owners of greener cars. It’s consistent with the history of undertaxation of the natural gas fracking industry. The situation is one where the issue of equalizing user costs for roads may have taken a step forward (green) while clearly establishing an adversarial stance about non-internal combustion transportation (not green). It is hard to make the case that electric vehicles do not impose costs on the transportation infrastructure.

Mileage fees would address that concern as they would be agnostic as to the sort of motor for vehicles generating the utilization of roads. They are not as far along the political curve as these annual fees are. Twenty-eight states have laws requiring a special registration fee for electric vehicles while 14 states impose a fee specifically on hybrids. Mileage taxes are currently in their beta phase on a limited voluntary basis in other states.

This is not the only transit issue causing debate in the Keystone State. The Pennsylvania Department of Transportation (PennDOT) waited until the end of the budget process to announce a need for some $600 million of debt issuance to cover revenue shortfalls due to reduced driving. Because the issue was not part of the recently concluded state budget process, the state legislature would have to reconvene to approve the funding. Without the funding, PennDOT said construction on hundreds of road projects would stop on Dec. 1st, and those working on the projects could be laid off.

This led to an agreement between the Governor and the Legislature that allowed PennDOT to continue road and bridge work after lawmakers pledged to tackle PennDOT’s funding crisis when they return to session in January.

MORE TRANSIT FUNDING WOES

The operating agency running the Washington, D.C. Metro is proposing a new operating budget with a nearly $500 million deficit. The proposed 2021 budget includes closing Metrorail at 9 p.m., ending weekend service, closing 19 rail stations and reducing the number of trains, which would result in longer wait times. Current data shows the return of 20-25% of the pre-pandemic ridership. The system would look for $500 million in aid from any package enacted by Congress.

Without further federal action and major additional budget relief, MTA management now preliminarily projects total deficits attributable to COVID-19 pandemic impacts for the November Plan period of approximately $15.9 billion. As of November 6th, ridership was down 69% on the subway, 49% combined on bus service provided by MTA New York City Transit and MTA Bus, 73% on the MTA Long Island Rail Road, and 77% on MTA Metro-North Railroad. Traffic. MTA intends to borrow the maximum it is allowed to borrow under the program, $2.9 billion, before the lending window closes at the end of 2020. MTA expects to issue long-term bonds in 2023 to repay the MLF loan.

MARYLAND P3 SURVIVES

Deadlines have passed and in some areas of the project management was offloaded to the State in the face of the apparent breakup of the P3 developing the Purple Line in Maryland. Now, an agreement has been reached which will preserve the P3 nature of the project. Gov. Larry Hogan announced the state will pay $250 million to settle with the private consortium, Purple Line Transit Partners,  to settle “all outstanding financial claims and terminates the current litigation between the parties.”

Meridiam, Star America and Fluor were the corporate partners comprising Purple Line Transit.  The project will continue with Meridiam and Star America remaining as developers and equity partners. The group will then find a design-built contractor to finish the project , substituting for Fluor.  Some work on the project has continued under supervision by the state, including light rail car manufacturing, bridge work, stormwater drainage, paving, utility and pump station construction. That work will continue awaiting the selection of a new design-builder partner.

The project publicly maintains an estimated 2024 completion date. We’ll see as any potential design-build partner will be making its own assessment. It is a positive to see that a resolution has been reached removing a significant hurdle slowing project completion. Now the risk is more focused on ultimate execution of the project.

HARRISBURG PARKING

The debt problems in Pennsylvania’s capital city continue, this time with the city’s parking revenue bonds issued through the Pennsylvania Economic Development Financing Authority. Moody’s Investors Service has downgraded to Ba2 from Baa3 the rating on the Authority’s (PEDFA) (The System) Senior Parking Revenue Bonds (Capitol Region Parking System) The outlook has been changed to negative from stable. Roughly $117.5 million of outstanding par is affected.

The credit generated sum sufficient coverage but was always challenged to generate greater revenues. Operations were characterized by high leverage and total cost obligations, minimal liquidity, limited capital funding, and uncertain willingness and rate-making flexibility to raise rates. A primary source of revenue is a long term lease with the Commonwealth (70% of the system’s spaces) which locks in revenue levels which only generate at best thin coverage. These charges cannot be readily raised.

Under the circumstances of the pandemic, the credit required increasing drawdowns of capital reserve funds. That raises issues regarding good maintenance and upkeep and how they will be funded in the face of current demand trends. For bondholders, the unfavorable economics are backed up by an unfavorable legal structure that enables a covenant default as well as payment default on the subordinate bonds to trigger an acceleration of the senior bonds.

CLIMATE CHANGE, MANAGED RETREAT AND MUNICIPALS

Over time we have commented on a number of issues surrounding responses to climate change and their implications for municipal credits. One of those responses is the concept of managed retreat. In practice to date, much of that discussion has been theoretical. Now we have an example of a real municipal project designed to facilitate a managed retreat.

State Route 1 along the Sonoma County coast in California has been damaged by multiple erosive forces and the existing two-lane roadway continues to be undermined by coastal erosion and is vulnerable to future storms. Caltrans has responded by initiating emergency projects to reinforce the roadway, including constructing a retaining wall in 2004, which was later undermined by coastal erosion. Since 2017 Caltrans has issued emergency work orders to repair and stabilize the worsening roadway, but these are all short-term solutions.

Now Caltrans has announced a plan to relocate a section of State Route 1 in the area of Gleason Beach, north of San Francisco. The Gleason Beach Realignment Project would construct an approximately 3,700-foot, two-lane roadway and 850-foot long bridge span over Scotty Creek. This would move State Route 1 away from areas of erosion, preserve access to the existing homeowners. This allows the State to address one of the obvious risks from climate change, that of rising sea levels.

Continued coastal erosion and other conditions has undermined the existing SR 1 at a rate of 1 foot annually and could increase to approximately 1.5 feet per year by 2050 and 4.6 feet per year by 2100. The project is scheduled to begin in 2021 and be completed in 2023. Its projected cost is $73milion. Whether it is road relocations like this or road raising projects as have been seen Florida, the concept is gaining greater currency and we expect to see more debt issuance for these sorts of mitigation and resiliency projects.

On the East Coast, other projects will be funded on a smaller scale in coastal communities in the Northeast. In Maine, ten such communities will develop the State’s first comprehensive resilience plan. This planning will highlight the sorts of projects which are likely able to be financed in the municipal bond market. A role for municipalities is clear. Physical infrastructure-based projects such as elevating roads and expanding culverts are the market’s bread and butter,  The cities also will seek to highlight policy issues which can be more currently be addressed such as land use decisions, municipal policies, and land conservation efforts. 

MIDWEST NUCLEAR DRAMA UNFOLDING

The idea that private operators of nuclear generating plants could receive subsidies to continue to operate unprofitable nuclear generating facilities is not new. In New York and Illinois, operators have been successful in receiving such subsidies. The operators cite the lack of greenhouse emissions from nuclear generation and the role of these facilities as sources of employment. The efforts to obtain these subsidies have been steeped in politics and the desperation of the operators have led them to push the ethical envelope as they seek support for these subsidies.

In Ohio, these efforts have come under harsh scrutiny. HB 6, a $1 billion bailout for Ohio’s two nuclear power plants was signed into law in July 2019. Shortly thereafter, an investigation by the FBI was announced into an alleged $60 million public corruption scheme led by Republican Speaker Larry Householder. The Speaker and several associates are alleged to have been paid tens of millions of dollars to pass HB 6 and to prevent a referendum against the law from coming before Ohio voters. If proven, it would be the largest corruption and money-laundering scheme ever in Ohio. 

Now legislation is being introduced which would repeal House Bill 6. Without any change, residential customers will be billed an 85-cent fee each month on their electric bills starting Jan. 1.  Those fees, and larger ones assessed on businesses, would raise about $150 million a year for two nuclear plants originally owned by the IOU First Energy. It’s a contentious issue as it pits supporters of the energy/climate status quo and those who wish to move to renewables. The outcome of the ongoing legal and investigative proceedings will influence the ultimate resolution of the issue of legacy generating assets in an era of environmental change.

In Illinois, former Commonwealth Edison officials pleaded not guilty to charges that they engaged in a years-long bribery scheme that federal prosecutors allege was aimed at influencing Illinois House Speaker Michael Madigan. Com Ed is another utility saddled with unprofitable nuclear generating plants. The 2016 Future Energy Jobs Act provided ratepayer-funded subsidies to two nuclear power plants owned by ComEd’s parent company Exelon.

The employees are charged with agreeing to provide no-work jobs and lobbying contracts to close associates of Madigan as part of an effort to maintain his support for legislation helping Com Ed. A deferred prosecution agreement was announced by prosecutors in July in which current ComEd officials admitted to the scheme and agreed for the company to pay a $200 million fine in exchange for cooperating with the investigation and assurances that the company would reform its internal controls.

As climate change responses are proposed many believe that nuclear power will get another serious look as a source of carbon free energy production. These examples of extraordinary political actions taken to overcome the unfavorable economics of nuclear power tell us that the utilities know that nuclear does not make economic sense.

ATLANTIC CITY

Given the impacts of the pandemic and related closures and limitations, one might not readily expect that the locale of a major center of casino gambling would be an improving credit. Nonetheless, Moody’s Investors Service has affirmed the City of Atlantic City, NJ’s long-term issuer rating at Ba3 and revised the outlook to positive from stable. The positive outlook reflects Moody’s expectations that, despite the pandemic, Atlantic City will continue making strides in improving its governance and finances. 

The City has successfully entered into a program for payments in lieu of taxes (PILOT) with the  casinos. The pandemic has not been a total wipe out for the casinos with the growth of online gambling. This has enabled PILOT payments to be made adding certainty to the City’s revenue base. This has occurred as financial practices have improved under the continued, strong oversight by the State of New Jersey. That oversight occurs under legislation dealing specifically with Atlantic City which effectively expires toward year end 2021. 

The rating assumes that oversight will continue. Without any additional legislative action, the State Supervision Act will remain in effect. This act grants the state certain oversight powers over all New Jersey municipalities and additional supervisory powers over distressed municipalities such as Atlantic City.

THE POLITICS OF WATER

Westlands Water District is the largest agricultural water district in the United States, made up of more than 1,000 square miles of prime farmland in western Fresno and Kings Counties. Water is delivered to Westlands through the Central Valley Project (CVP), a federal water project that stores water in large reservoirs in Northern California for use by cities and farms throughout California. Water is delivered to farms through 1,034 miles of underground pipe and more than 2,924 water meters.

It is one of a number of water agencies who secured their water from the federal system under renewable contracts. This created a risk for the agencies in terms of long term planning and operations. So they looked as they have historically to their political connections to attempt to create an opportunity for long term commitments for water.

The 2016 Water Infrastructure Improvements for the Nation Act, known as the WIIN Act, allowed for reclamation contractors across the West to get permanent contracts if they repaid what they still owe U.S. taxpayers for construction of a federal water project. The distribution of water from the federal water project is managed by the US Bureau of Reclamation which is part of the US Department of Interior.

 Interior Secretary David Bernhardt for years represented Westlands as a Washington lawyer and lobbyist before joining the Trump administration. Now his decision to make permanent Westlands Water Districts water allocation is reported to provide a permanent entitlement to annual irrigation deliveries that amount to roughly twice as much water as the nearly 4 million residents of Los Angeles use in a year. The overwhelming bulk is for agricultural use.

The Administration has chosen to fully wade into the California water wars. While granting long term allotments to big agriculture interests it has also proposed raising the height of the Shasta Dam to increase supplies available for allotment under agreements favoring agriculture. It simply insures that the long running water wars in California will continue.

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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GETTING ON OUR SOAPBOX

I saw an opinion piece this week that suggested that any additional stimulus aid to states and localities be contingent on accepting requirements as to how the state and local governments spend the money. That is fine as states and localities have handled grant, aid, and leveraging programs in the past. These include matching fund and other financial requirements. Those are normal policy decisions are made ostensibly for economy and efficiency. Tying healthcare funding under the ACA to funding by states for healthcare make sense, for example.

In particular, the article suggested that Congress require states to build and maintain rainy days funds of certain sizes and proportions. It is further suggested that the reason that states have needed aid to fight the worst and most mismanaged pandemic in history is not because of that but because of their unfunded pension obligations. We find that view ridiculous.

All of the argument seems to revolve around only two parts of the actual public fiscal management equation. Pension funding is a function of good management, responsible legislation, and a supportive electorate. The arguments seem to revolve around whether one should blame the legislatures or the workers. The fact that the pension funding difficulties currently in the spotlight developed over decades under the administrations of both parties and under a variety of economic and fiscal theories does not seem to matter.

What we are seeing today is a reflection of the starve the beast, cut revenue philosophy which has broadly characterized Republican fiscal policy for four decades. Its anti-revenue stance contributes as much as the allegedly greedy public workers backed by the Democratic side. The body politic has been convinced that the only good spending by government is no spending. In this case, it is reasonably easy to identify pandemic related spending and direct any monies generated by Congress to remedy the extraordinary expenses of the pandemic.

Conflating a long history of bad pension management with the problems caused by the extraordinary conditions of the pandemic is ridiculous. The pension expenses plaguing government at present would be the same with or without the pandemic. What is a variable in the equation is the role of the federal government in managing (or more correctly mismanaging) the pandemic response. States could only take steps within their own states to manage restrictions on activity. I’m sure that people in New York State would have loved to have been able to cancel the annual rally in Sturgis, SD which many believe was a catalyst for the ongoing disaster underway in the Plains.

Taken to its logical conclusion, there is as much a case to be made to deny the states currently under a pandemic siege due to the refusals of their governors to impose preventive restrictions any aid as there is to deny states with underfunded pensions assistance. Connecticut. Illinois. New Jersey – blue states. South Carolina, Kentucky, Kansas – red states. They all have badly managed and underfunded pension systems. Chronically so. Going further down a logical path, are pensions more of a problem than irresponsible development subsidized by federal flood insurance? Would FEMA have to pay less if development was restricted in flood zones and wildfire areas? Would states and cities be penalized for issuing ineffective but expensive tax breaks to subsidize business?

In the end, the conflation of current expense demands generated by extraordinary circumstances with the pension funding problem is ludicrous. It’s the sort of ideologically based argument that we have long cautioned against from either party. It’s not constructive and most importantly doesn’t contribute to solving the problem. The states and local governments are asking for help with the pandemic, not for a pension bailout. Let state and local government get through the pandemic and get the red herrings out of the way.

ACA OUTLOOK IMPROVES

We are always wary of trying to read the tealeaves when it comes to issues before the Supreme Court. Nonetheless, it would be a mistake not to note the overwhelming consensus reaction to the arguments heard this week at the Court in the California v Texas case challenging the ACA. By all accounts, the notion of severability – the idea that one portion of a law may be invalidated without invalidating the whole law – seems to be one that will save the Act.

At least two justices clearly expressed the view that the mandate provisions of the law were severable from other provisions of the act. Now that the political firestorm over the appointment of the most recent justice is receding, it is easier to more objectively prognosticate about the expected final result of the case. If we have to make a prediction, we believe that the mandate may be invalidated but that the basics of the ACA including the expansion of Medicaid will be upheld.

Such a result would be credit positive for the major governmental players. The likelihood that the basic terms of the ACA are upheld is increased lessens a significant source of uncertainty for not just providers but also for providers as well as state and local government funders.

ELECTION TAKEAWAYS

So much of the focus has been rightfully on the implications of the Presidential election in the days after its completion. It is true that certain expected federal policy changes will have implications for state and local government. We take the view that local decisions as expressed through the ballot box will have more of a current impact than changes in federal law or policy will.

In Arizona, Proposition 208, an income tax increase to fund teacher salaries increases income taxes through a surcharge on taxable income for single earners who make more than $250,000 and dual earners who make more than $500,000. The Arizona Joint Legislative Budget Committee estimates the surcharge will raise $827 million in revenue, with approximately $702.95 million to be distributed to schools, another $99.2 million available in grants for schools with career technical education programs and $24.8 million that will go towards teacher education throughout the state. The direct funding to districts represents a funding increase of 12.6% in the state’s $5.6 billion general fund expenditure on K-12 education in 2021.

In Los Angeles, Measure RR authorized the Los Angeles Unified School District to issue up to $7 billion in general obligation (GO) bonds. Voters in the SF USD approved Proposition J, which introduces a $288 per parcel tax starting in fiscal year 2022. The tax will generate around $48.1 million annually (equivalent to around 5% of fiscal 2021 budgeted general fund revenue) and allow the district to maintain 7% salary increases negotiated in 2018. The increased revenue is needed as the district drew $40.0 million and $20.0 million, respectively, from its share of the city’s rainy day reserve to fund the pay raises.

In Maryland, voters in Montgomery County approved a charter amendment on property tax limitations that enables the county to raise property tax rates without revenue constraints. The ballot item replaces the existing limit and enables a unanimous vote by County Council to adopt a tax rate on real property that can exceed the rate from the previous year. The county’s previous charter limit, a self-imposed tax cap that was enacted in 1990, limited property tax revenue growth to the rate of inflation (CPI index) and an amount based on new construction. Reinforcing the support for County operations, second charter amendment on the ballot (Question B) was rejected: it aimed to remove the county’s ability to increase revenue above inflation.

THE REAL IMPACT OF PROPOSITION 22

Much will be written and said about the success of the transportation network companies (TNC) in defeating a ballot initiative aimed at reclassifying gig workers as employees. While so much focus on that aspect of the initiative is driving debate, one troublesome aspect of the initiative should draw much more concern. Other initiatives have attempted to make it hard for a legislature to override a voted change by requiring supermajorities for repeal.

I have trouble with supermajority requirements philosophically but to date the required percentages have not exceeded two thirds. That’s manageable. In the case of Proposition 22, the initiative included language which requires a 7/8 majority in the legislature in order for the initiative to be overridden. That effectively prevents any change in the law going forward. It would be dangerous to see a significant body of voter initiatives include such excessive supermajority requirements.

In this case, an exceedingly well funded campaign supported overwhelmingly by the TNCs was more successful than a more thought out and debated legislative process. From our standpoint it’s yet another example of the TNCs adversary approach towards government which hinders its long term goal of replacing public transportation. It also reinforces the view that their long term profitability relies on fully autonomous vehicles. And when that comes, Proposition 22 will be why the unemployed drivers can’t claim unemployment insurance. 

NEW JERSEY

S&P Global Ratings has lowered its rating on the State of New Jersey’s general obligation (GO) bonds to ‘BBB+’ from ‘A-‘, as well as lowered its long-term and underlying ratings to ‘BBB’ from ‘BBB+’ on various other bonds secured by annual appropriations from the state. “The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other postemployment benefit liabilities.”

The path back from the credit declines experienced under the Christie administration became longer and more twisted as a result of the pandemic. S&P looks at the history of pension underfunding by the State, the decline in available revenues, and the continued need to increase pension funding and concludes that the state will have a large fiscal 2021 structural deficit of 15.9% of budgeted appropriations. 

MBTA

As the most significant example of the difficulties in which large city public transit agencies, we have rightly devoted significant space to the ongoing troubles at the New York MTA. Nevertheless, other northeastern agencies are beginning to reveal their plans for coping with pandemic related declines in ridership and revenues.

Boston’s public transit agency – the Massachusetts Bay Transit Authority – is the latest to announce plans to cope. The plan would take $130 million from spending on service. The reductions in service would be 15% on buses, 30% on subways and 35% on commuter rail.  The proposal includes the elimination of all weekend commuter rail service, 25 bus routes, ferry service, or any rapid transit after midnight.  The T already exhausted about $827 million from the CARES Act to close gaps in fiscal years 2020 and 2021.

The proposal represents the impacts of eight months of state of emergency restrictions on ridership. Current levels of ridership reflect huge declines compared to pre-pandemic crowds — an average of about 40% on buses, 25% on subways, and 13% on the commuter rail. Those declines significantly reduced fare revenue, which typically makes up about a third of the agency’s budget. Officials now expect they will face a $579 million gap in fiscal year 2022, if you believe the most pessimistic end of earlier estimates.

P3 CHANGES HANDS

In 2012, two major players in the public/private partnership arena, Skanska and Macquarie, partnered with Virginia in 2012 to rebuild and expand the Downtown and Midtown tunnels between Norfolk and Portsmouth. The entities were paid to expand the capacity of the tunnels and an extension of  Martin Luther King Boulevard to Interstate 264. These private partners contributed $1.6 billion of project costs with $550 million paid by the Commonwealth of Virginia. A concession was awarded allowing the operator to collect tolls to an entity owned by the partners known as Elizabeth River Crossings.

Toll collections commenced in 2014 and the private operator immediately ran into criticism over its collection of tolls and financial penalties assessed to non-payers. Within three years, the agreement between the concessionaire and the Commonwealth was renegotiated. Macquarie and Skanska offered to settle for lower amounts and to pay $500,000 annually for 10 years toward a toll-relief program for eligible residents of Norfolk and Portsmouth, among other changes.

Tolling and their collections remain a political sticking point.  Gov. Ralph Northam tasked the Virginia Department of Transportation to “evaluate opportunities to mitigate the financial burden on the commuting public.” Work on the study began in May 2019 and was nearing completion this summer. So the private partners clearly reevaluated their investment.

Now the partners have announced that that the legal entity which operates the facilities, Elizabeth River Crossings, has been sold to a Spanish toll road operator and the John Hancock Life Insurance Co. for more than $2 billion. The sale will generate an annual  5.4% return on asset over the eight year period of ownership to the Macquarie/Skanska partnership. That just doesn’t cut it for these investors relative to their perceived risk.

The new buyer is Abertis, a Spanish toll road company, and Manulife Investment Management, which did so on behalf of John Hancock Life Insurance Company, a division of Manulife Financial Corp. If approved, the project would be Abertis’ first toll road operation in the United States. Under the existing terms governing operation of the facilities, the operator would have the concession for another 50 years. It would be limited to annual increases of 3.5% for tolls.

MORE ON TOLL ROADS

More traditionally financed and operated toll roads are facing issues related to their toll collection practices, especially the use of accumulating additional penalties in the event of non-timely payment of delinquent fees. The Transportation Corridor Agencies, operator of the San Joaquin toll roads, has made a motion in the California courts to settle litigation regarding Transportation Corridor Agencies and its tolling practices.  The Transportation Corridor Agencies and 3M have approved a deal worth nearly $176 million to end a lawsuit filed by a class of millions of motorists who traveled the toll roads. The settlement includes nearly $41 million in cash awards and $135 million in penalty forgiveness.

The lawsuit alleges that Southern California toll companies for tolls on state Routes 73, 133, 241, 261, and the 91 Express Lanes improperly shared personally identifiable information of motorists to third parties. The agencies will provide $135 million worth of penalty forgiveness to members with outstanding penalties. Those eligible will receive the lesser of the total of their outstanding penalties or $57.50. Any remaining funds will go toward those with the oldest outstanding penalties to the newest.

Who gets the money? Class members include anyone whose personally identifiable information was provided by the Transportation Corridor Agencies to any other individual or entity between April 13, 2015, and 30 days after the court issues a preliminary approval order.

In the Bay Area, The Golden Gate Bridge, Highway and Transportation District oversees the bridge, buses and ferries in the Bay Area. It has been relying on federal stimulus assistance to keep paying its employees even in face of significantly reduced traffic. Now those funds are essentially gone and no subsequent stimulus appears on the horizon.

This has led the District to pose a choice to its stakeholders in the absence of any additional stimulus. The District faces a $48 million revenue shortfall. To deal with that gap, the District has proposed either reducing headcount by half or raising tolls. The transit district has experienced about a $2 million a week drop in tolls and fares throughout the pandemic

Golden Gate Bridge traffic is still down 30%, bus ridership dropped 75% and ferry ridership plummeted 96%.  cutting staff would save an ongoing $26.7 million a year until the positions are refilled. One option, which would avert layoffs, is to temporarily raise the toll by $2, from the current range of $7.70 to $8.70 for a car depending on whether a driver pays with FasTrak or by mail. Another option is a hybrid model that would raise the toll by $1.25 and furlough staff one day a week. 

CLIMATE

The powerful derecho that swept through the Midwest in August, focusing its destruction on central Iowa, is officially the most costly thunderstorm event in recorded U.S. history. According to NOAA, an estimated 90% of structures in Cedar Rapids were damaged by the storm, and more than 1,000 homes were destroyed. the U.S. Department of Agriculture estimates that 850,000 crop acres were lost — 50% more than originally estimated.

As of November 2, 2020, more than 200,000 claims have been reported.  Of those claims, nearly 160,000 claims totaling more than $1.6 billion have been paid already.  Insurance companies are holding more than a billion in reserves to be used for the remaining claims. Iowa Gov. Kim Reynolds requested nearly $4 billion in federal aid to help the state’s agricultural industry.

This all comes as the state has come later to the pandemic’s wrath but is now facing its full pressure. The daily case tally has just reached nearly 5,500 and 27 deaths. The total is 162,000 sick and some 1900 dead. It all adds up to additional pressure on the State.

On the positive climate front, green jobs can even spring from the auto industry. One of the fears of local economies is that existing manufacturing locations may not survive the ultimate conversion to electric vehicles. Ford just announced it will add 150 workers at its Kansas City Assembly Plant in Claycomo, Missouri, to build the new E-Transit full-size van that will go on sale late next year. Another 200 workers will be hired at Ford’s Rouge Electric Vehicle Center in Dearborn, Michigan, which will build an all-electric F-150 pickup starting in mid-2022.

Ford will spend about $150 million at a transmission plant in Sterling Heights, Michigan, to make electric motors and transaxles for new electric vehicles. No new jobs will be added but the investment will help keep 225 positions. Automakers sold just over 236,000 fully electric vehicles in 2019, up 36% from 2018. That is a mere 1.4% of all new vehicles sold in the country.

This news comes as the Federal Reserve made its clearest statement to date regarding the potential impact of climate change on the global financial system. “Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly…slow increases in mean temperatures or sea levels, or a gradual change in investor sentiment about those risks, introduce the possibility of abrupt tipping points or significant swings in sentiment.” Lost in much of the politics driven debate over climate change is the fact that two of the more objective entities in the federal government – the military and the Federal Reserve – have made clear policy statements in support of a view that climate change is real and is happening. That moves the debate forward.

PUERTO RICO

This week’s news that nearly 200 boxes of uncounted votes have surfaced in Puerto Rico is just the sort of thing that makes statehood a pipedream. Officials acknowledged that the votes could change the results of particularly narrow races that had already been preliminarily certified. Two city mayoral elections are currently decided by margins of under ten votes.

In spite of the hopes of activists and others, the election was already marred by the fact that the winning gubernatorial candidate won with only one-third of the vote.  The president of Puerto Rico’s State Electoral Council, Francisco Rosado Colomer, acknowledged that it could be between 3,000 and 4,000 votes which have been “found”.

The exact circumstances behind the “loss” and “discovery” of the votes are not clear. What is clear is that the perception of the government and politics of Puerto Rico as being incompetent is only enhanced by events like these. It weakens the value of the vote on issues like status. Add this to the narrowing of the partisan breakdown of the U.S. Congress and the outlook for statehood significantly weakens.

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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As we go to press on this Friday morning, a certified election result will not occur for the presidential election. Nonetheless, elections for state offices have produced some trends. There was the smallest shift in the partisan make up of state legislators in many election cycles. The implications of these results is that in spite of the apparent loss by President Trump, Republicans still dominate statehouses.

This has significant implications for the decennial redistricting process which could further entrench the party at the state level and keep the makeup of the House relatively closely split. This has implications for spending by the federal government and how it will deal with things like healthcare, especially if the Supreme Court rules against the ACA. So the uncertainty that confronts sectors like transportation and healthcare is likely to continue. With that as context, here are what we see as the significant issues from the week.

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MTA

The MTA announced that it is preparing to borrow the final $2.9 billion available to it from the Federal Reserve’s Municipal Liquidity Facility (MLF). The decision comes in  the face of continuing impacts on ridership and pressure on its ratings from the limits imposed by the pandemic. Unsurprisingly, the decision has been received negatively by the rating agencies but that seems to more on the basis of the long term view of the Authority’s finances. In announcing its view that the move to borrow was credit negative, Moody’s noted that their view is rooted in their assumptions about the post-pandemic ridership trends.

Moody’s sees a scenario where even when the economy returns to a more normal performance. It expects MTA ridership to permanently remain 10% below its pre-corona virus level – establishing a “new normal” – largely because of an increase in work-from home flexibility. Restoration of demand to 90%of pre-pandemic levels would be a significant improvement from the currently diminished demand. On  October 28, the MTA’s estimated subway ridership was down 69.7% from the same day in 2019 and Metro-North ridership was down 78%.

It should be noted that the new round of borrowing will be secured by secured by dedicated taxes and paid before the outstanding transportation revenue bonds. Eventually, these borrowings will become a part of the Authority’s long term debt structure as the likely source of the note repayment will be a long term refinancing.

The election has reduced the likelihood that the MTA will get as much as it needs in any future stimulus given the resulting split in the Senate. Should the Republicans retain their majority, another stimulus is likely but the mood against aiding state and local governments directly does not seem to have improved. Broadly generalizing, Republicans have backed roads over mass transit and the Democrats have favored mass transit in previous funding debates.

ELECTIONS

The bid to convert Illinois’ income tax regime from a flat rate to a progressive rate went down to defeat. Revenues would likely have increased under such a plan at a time when the state could certainly use them in its quest for structural balance. The defeat of the proposal is credit negative for the State and Chicago as well. The defeat reflects the continuing resistance to taxes to address the State’s structural budget problems. The results were definitive with 55% against and 45% for in a vote which required 60% approval to meet the constitutional threshold for amendments.

Moody’s outlined some alternative revenue steps which might be taken by the Legislature. They would only require a simple majority and include Alternatives include increasing the 4.95% flat tax that applies to individual income or broadening the state sales tax to more services. Raising the flat income tax by 70 basis points, to 5.65%, would generate about $3 billion of additional revenue, the same as had been projected for the first full year under graduated income tax rates that the state had devised in connection with the proposed constitutional amendment.  

In California, Proposition 22 which would have altered the status of “gig” employees went down to defeat after a $200 million investment in support of the proposition. Uber and Lyft had said that they could not operate in the State if they were forced to treat their drivers as employees. Proposition 22 would have shifted local property tax burdens from the residential sector to the commercial sector by lifting the limits on property taxes imposed by Proposition 13 for commercial property. It was seen as a potential significant revenue generator for localities. Proposition 19, a generous new property tax break for older California homeowners, partly paid for by removing a low-tax guarantee for those who inherit a home from a parent or grandparent was winning as we went to press but the outcome was still in doubt..

Legal recreational marijuana was approved by voters in New Jersey, Montana,  and Arizona. In South Dakota, voters legalized medical use. Mississippi did as well but on a more limited basis. Arizona voters approved a ballot question (Proposition 207 ) to legalize recreational pot for people ages 21 and older with a 16% excise tax on retail sales. Montana approved two measures. One (Initiative 190 ) to legalize recreational marijuana with a 20% tax and let people convicted of marijuana offenses apply for resentencing or records expungement, and the other (Constitutional Initiative 118) to let the Legislature set the age for buying, using, and possessing marijuana at 21.

South Dakota voters passed Constitutional Amendment A and Initiated Measure 26 to legalize recreational and medical cannabis. New Jersey said yes to Public Question No. 1 to legalize recreational cannabis for people ages 21 and older and subject it to state sales tax. Local taxes would have to be approved by the Legislature.  Mississippi voters passed Initiative 65to legalize medical marijuana and rejected an alternative added by legislators to let lawmakers regulate a more restrictive program.

Arizona voters looked likely to approve Proposition 208, a measure that would raise revenue for education by applying a 3.5% surcharge on taxable annual incomes above $250,000, for individuals, or above $500,000 for joint filers.

The wildfires in Colorado should probably get some credit for generating support for a 1/4 cent increase in the local sales tax in Denver. The stated purpose of the tax is to reduce the City’s carbon footprint. The City has goals for reducing C02 emissions by 40% by 2025, by 60% by 2030 and by 100% by 2040. In combination with a similar increase to be dedicated to homelessness issues, the local sales tax in Denver will reach 8.81%.

Austin voters overwhelmingly approved Proposition A, which would raise property taxes in the City of Austin to help pay for the Project Connect transit improvement plan. The plan includes two new light rail lines, a new commuter rail line, and a new bus rapid transit line  that would run in its own right-of-way so it doesn’t mix with traffic. A new downtown transit tunnel would also be built. Proposition B, which would allow the city to borrow $460 million for a host of infrastructure improvements, including new sidewalks, bikeways and street repairs was also approved by two thirds of the voters.

Seattle voters have approved a six-year measure which enacts a tax of 0.15%, or 15 cents on a $100 purchase, to generate $42 million a year. That money, to be collected starting April 1, replaces existing taxes that expire this Dec. 31, of .10% plus a $60 car fee. Total sales tax within Seattle will reach 10.15% including state, county and transit-agency shares. To the south, Portland metropolitan area voters rejected Measure 26-218 which proposed a tax of up to 0.75% on private employers with 25 or more workers. Similar efforts to impose such a tax had been attempted in Seattle unsuccessfully as well.  

PUERTO RICO

First the debt restructuring news. U.S. District Judge Laura Taylor Swain denied a motion asking the court for an independent investigation into trading activity and possible violations of the confidentiality order by several creditors including bond insurer National Public Finance Guarantee Corp. in the mediation process of the Puerto Rico debt’s restructuring. The judge also decided that by Feb. 10, the Commonwealth’s Financial Oversight and Management Board (FOMB) must submit “at a minimum an informative motion comprising of a term sheet disclosing the material economic and structural features of a Commonwealth and PBA [Public Building Administration] plan of adjustment [POA].”

The proposal for an investigation would have an independent investigator look into insider trading claims rather than the New York Attorney General and the SEC. Judge Swain stated that Promesa “does not explicitly authorize the Court to order to initiate an independent investigation” like the one in National’s motion and added that National did not provide a viable option. An additional motion made by the PSA creditors, which comprises the Ad Hoc Group of Constitutional Debtholders, the Ad Hoc Group of General Obligation Bondholders, the  Lawful Constitutional Debt Coalition (LCDC) and the QTCB Noteholder Group was also rejected.

The court actions highlight the divide between the creditor groups. National contends that some creditors have used their participation in the restructuring process to trade certain contested bonds from the Commonwealth and obtain profits for themselves. National was concerned that it would be left “holding the bag” to cover any losses to investors in bonds it insured.

As for the election, the former two-term resident commissioner—from 2009 to 2016 – Pedro Pierluisi was elected Governor by the narrowest of margins. The percentage difference in votes between the two top candidates for governor was less than 1 percent. The election also included a yes-or-no plebiscite on whether Puerto Rico should be admitted as the 51st state of the United States. Statehood prevailed in the political status referendum, with 52.29 percent voting “yes” to statehood, and 47.71 percent voting against, with 88.34 percent of units reporting.

One of the difficulties with the debate over statehood vs. the status quo is the consistent history of a true split in the electorate. There has never been a question on the ballot regarding Puerto Rico’s status that generated a clear and convincing result one way or another. It’s one of the prime hurdles for statehood proponents to overcome. That lack of political consensus continues to hold back efforts to resuscitate the Commonwealth economy.  And low voter participation of just over 50% of eligible voters reduces the value of these status votes.

Proponents of statehood are already making their case in the mainland press. The problem is that while a majority of voters opted for statehood, it was a small majority. In essence, proponents are claiming a mandate on the basis of the expressed view of 25% of eligible voters. Opponents can seize on that to say that new real mandate in support of either the status quo or statehood resulted.

CASINOS ON THE BALLOT

In Virginia, voters in four cities – Bristol, Danville, Norfolk, and Portsmouth  voted to allow for the construction of proposed casino developments in those cities. The casinos are tentatively slated to open in 2023. In the meantime, they are expected to add construction employment and repurpose old industrial and commercial sites in the respective cities. Each city will benefit from the payment by the casinos of all applicable local fees and taxes, including property, sales, hotel occupancy and meal taxes and each city will receive a portion of the gaming tax revenue to be collected by the state.

The Commonwealth will levy a gross receipts tax on casino activities, a portion of which will be allocated to host cities according to a formula. With the exception of Bristol, the cities will keep their full share of local revenues. Bristol is one of the significant stops on the NASCAR circuit. Races can draw some 165,00 spectators who then generate significant local revenue in the City especially in connection with race days. Bristol’s local revenues would be directed to a Regional Improvement Commission which would distribute them evenly among the city and the 12 counties within the Virginia Department of Transportation’s Bristol service district which includes Bland, Buchanan, Dickenson, Grayson, Lee, Russell, Scott, Smyth, Tazewell, Washington, Wise and Wythe counties.

Moody’s views the approvals as credit positive for the localities. They cite the potential to generate increased local tax revenues and create significant numbers of jobs. Norfolk estimates that the development will bring it $25- $45 million in recurring tax revenues when it is open. Bristol projects it will generate about $16 million in new recurring local tax revenue. Danville would be able to transfer ownership of a blighted industrial site and get a $20 million upfront payment. Virginia was one of nine states that prohibited casino gambling. Gaming taxes will be imposed at rates of 18%, 23% and 30% for casinos’ adjusted gross receipts of the first $200 million, between $200 and $400 million, and in excess of $400 million, respectively.

These gaming taxes will be held for appropriation by the General Assembly pursuant to formula host cities will receive 6%, 7%, and 8% of adjusted gross receipts. 0.8%  would go to the Problem Gambling Treatment and Support, 0.2% would go to the Family and Children’s Trust Fund. For the one casino operated by an Indian tribe (the one in Norfolk), 1% will go to the Virginia Indigenous People’s Trust Fund. Any residual would be available for appropriation for programs established to address public school construction, renovations or upgrades throughout the state.

UTAH NUCLEAR

A nuclear generating facility actually planned to be physically located in Idaho but to be paid for by sales to Utah municipal utilities is losing participants. The decision to withdraw follows announced cost increases by the Utah Associated Municipal Power Systems (UAMPS), which was the primary intended buyer for capacity from the proposed plant. Completion of the project would be delayed by 3 years to 2030. It also estimates the cost would climb from $4.2 billion to $6.1 billion.

NuScale is an entity which was spun out of Oregon State University in 2007. It is their plant design that will be used for the plant. It’s efforts to promote nuclear power have benefited from DOE support cost sharing agreements whereby DOE would cover some $1.4 billion of construction and development costs. The attraction of the facility is its small modular design the company says will be safer, cheaper, and more flexible that a conventional gigawatt power reactor. Each of NuScale’s little reactors would produce 60 MW. A plant would contain 12 of the modular reactors, which would be built in a factory and shipped to the plant site. 

This would allow the generator to serve as a peaking facility much in the way a similar sized fossil fueled facility might serve. The proposed project still has many rivers to cross even as it passed a key milestone in the NRC review process, receiving its safety evaluation report. It expects to receive a final “design certification” to come next year. 

UAMPS contends, in an effort to deal with a poor track record for nuclear generating development and construction, that construction will not be commenced until the full output of the plant is sold. That process is a long way from completion. It’s a concern that another municipal utility is being challenged to participate in not just a nuclear facility, but a nuclear facility of a new design. Too often our market is taken advantage of because of our lower cost of financing and need for yield. This could become another example of this phenomenon.

INTERNET SALES TAXES

Once the Supreme Court ruled in favor of states seeking to tax sales of products through the internet, many states began imposing such taxes. Now we are beginning to see data about how much revenue these taxes generate. Recently, Arizona completed its first year of collections and released updated collection information.

Under a state law that took effect on October 1, 2019, out-of-state businesses that do not have a physical presence in Arizona and meet certain economic thresholds must collect and remit transaction privilege tax in Arizona. The Arizona Department of Revenue has seen a steady rise in transaction privilege tax collection. Since October 1, 2019, the Arizona Department of Revenue (ADOR) has brought in more than $467 million in transaction privilege tax from over 4,500 remote sellers and marketplace facilitators. In fiscal year 2020 (September 1, 2019 – June 30, 2020), the department collected over $278.7 million and over $128.6 million towards the General Fund.

Now it’s not clear as to whether these sorts of results will be sustainable. It is likely that collections of sales taxes from internet sales in 2020 may be a bit of an aberration as the impact of the pandemic on local economic activity drove significant demand to purchase on line rather than in person.  So it is difficult to use this past performance under unusual conditions as a basis for predicting future results.

OPOIOD LITIGATION

I have fielded many inquiries about whether ongoing litigation against manufacturers and distributors of opioids would be the next securitization candidate for the municipal bond market. Settlement talks have been ongoing for at least the past year. A proposed settlement was rejected in 2019 due to a variety of factors.

Now it looks like a settlement of the litigation may be at hand. According to press reports, a settlement involving a $26 billion payout is likely to be approved. Three major drug distributors and a large drug manufacturer – McKesson, Cardinal Health, AmerisourceBergen and Johnson & Johnson – have indicated that they would support such a settlement.  The distributors will collectively pay about $21 billion over 18 years, with $8 billion paid by McKesson alone. J&J would contribute $5 billion. The move is being motivated by the existence of two suits – one in New York and one in West Virginia – scheduled to begin in January, 2021. The WV case is being brought by the local governments in the state as prior settlements in WV were only with the State.

Each state would determine how it would distribute settlement money. The amount each state would receive is expected to be determined by four factors: state population, overdose deaths, diagnoses of substance use disorders and volume of pills sold. The distribution formula has been the source of much conflict among the plaintiffs and has been hampered by arguments over attorney compensation.  The settlement would provide $2 billion for the lawyers which is expected to be paid out over seven years.

Significant differences between this and the tobacco settlement. First, there is much less money involved and the payments in this suit will occur under a fixed timeline with a final date certain. The tobacco settlement provided for payments in perpetuity. That allowed for longer amortizations and greater flexibility in terms of managing cash flows in support of any bonds issued. Other differences include the fact that annual payment amounts are not based on ongoing consumption or sales of the product as is the case with tobacco bonds.

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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PORTS REBOUND

I was taken aback a couple of weeks ago to see that many retailers already were putting out their Christmas related inventory. It made sense in that Christmas did represent retailers best hope of recovering some of their losses. Now we are seeing the impact of the great Christmas inventory build of 2020 on the port sector of the municipal credit spectrum.

The nation’s busiest port, the Port of Los Angeles, set a September record, processing 13.3% more 20-foot-equivalent units (TEU), totaling 883,625 containers compared with 779,902 last year. Officials also said the third quarter was the best in the port’s 113-year history as 2,701,847 TEUs were processed.

The adjacent Port of Long Beach also had a solid September, handled 795,580 cargo TEUs, breaking the record for a month set just two months ago. September’s figure is up 12.5% compared to 2019’s 706,955 TEUs. Long Beach processed 2,274,271 TEUs during the third quarter, a 14.1% increase from the third quarter of 2019. The port enjoyed its busiest quarter on record, topping the previous mark set in the third quarter of 2017 by 160,000 containers.

The Port of Oakland reported a 9.3% year-over-year increase in September, processing 225,809 TEUs compared with 206,539 in 2019, making it the best September in its history. Seattle-Tacoma, the Northwest Seaport Alliance reported September was its best month of 2020, processing 308,682 TEUs. Still, that was down compared with 347,278 in 2019. On the Atlantic, the Port of Virginia had a record September, processing 256,439 TEUs, up 6.2% from 2019’s 241,416. Savannah facility recorded an 11.4% uptick, moving 412,138 TEUs, compared with 369,999 last year. Port Houston reported a 1.1% year-over-year increase, handling 254,405 TEUs compared with 251,524 in the prior-year period. 

The activity numbers support the view that port revenue bond credits are holding up well on both an absolute and relative credit basis.

MUSEUMS

The Board of Trustees of the Association of Art Museum Directors (AAMD) in April passed a series of resolutions addressing how art museums may use the restricted funds held by some institutions. Primarily, AAMD decided to refrain from censuring or sanctioning any museum—or censuring, suspending or expelling any museum director—that decides to use restricted endowment funds, trusts, or donations for general operating expenses. The resolutions place a moratorium on punitive actions through April 10, 2022. 

The measures were a direct response to the pandemic based closures of these institutions. They came at a time when some were criticized for employment reductions without use of endowments. It has taken some time for museums to decide to sell art from their collections but a few are poised to do so.

For investors, you can get used to the word deaccessioning (the sale of art). An institution may consider the following sources for general operations, including necessary expenses such as staff compensation and benefits: Income (not principal) from endowment funds or trusts held by a museum and that are normally restricted to purposes other than general operations such as art acquisition, conservation, or research; Income (or principal) from donations or trusts held by outside entities in support the of museum, and that are also restricted to purposes other than general operations such as art acquisition, conservation or research; and the income (not principal) from funds generated by deaccessioned works of art, regardless of when the works were deaccessioned.

The Brooklyn Museum is putting 12 works up for auction. The Museum of Art in Baltimore is selling three of its prized pieces. These decisions however put other sources of funding at risk. In the wake of the decision to sell, two former museum board chairmen say they’ve rescinded planned gifts totaling $50 million.

TRANSPORTATION TECHNOLOGY

“Moving a complex technology with many variables requires more testing in a deployed situation than in the laboratory.” Therein lies the rub in terms of trying to anticipate the real emergence of a fully connected transportation system. Over recent years, proponents of fully smart transportation systems have tried very hard to make the need for significant connected infrastructure investment by governments a more immediate priority. Our view has been that the technology is not mature enough for use currently and that there are more pressing current road infrastructure demands.

The quote is from a recent analysis of a connected vehicle pilot test in Tampa, Florida, conducted by the U.S. Department of Transportation’s Intelligent Transportations Systems Joint Program Office. It found that the complexities of field testing and technology integration were “significantly underestimated.” The gap between performance in the laboratory and “real world’ performance is significant.

Vendors demonstrating their technologies at their own facilities “had a much higher degree of success” than those demonstrating on the expressway – leading one to infer that the “demonstrations at vendor facilities were more controlled” than those vendors who tried to demonstrate at expressway in an unknown environment. “More effort had to be put into testing applications that were believed to be ready for deployment

[meaning]

certain applications may be falsely marketed as deployment ready, when they in fact still require additional research and development to work effectively.”

That is the problem in a nutshell. Public transportation agencies cannot be expected to produce technology based transit infrastructure without the ability to assess the relative costs and benefits of the projects. For the foreseeable future, there are still many bridges to cross until the connected vehicle infrastructure future is realized.

HEALTHCARE CONCENTRATION CONTINUES

The pandemic may be wreaking havoc with the healthcare system in the upper Midwest but that has done nothing to slow the long term operating trends facing providers. To the end, we note the announced agreement to pursue a merger between two regional powerhouses, Intermountain Healthcare and Sanford. The two have signed a letter of intent for a partnership. The merger is expected to close next year pending state and federal approval.

The combined entity will employ more than 89,000 people and operate 70 hospitals. It will also provide senior care and services in nearly 370 locations and insure more than one million people. Intermountain operates 24 hospitals and 215 clinics in Utah, Nevada and Idaho. Those facilities will retain the Intermountain name. Sanford employs 47,757 at its 46 medical centers and 210 clinics which will retain the Sanford brand. Sanford employs 47,757 at its 46 medical centers and 210 clinics. Each system is the largest private employer in their respective home states of Utah and South Dakota.

COLLEGE ENROLLMENTS

Undergraduate enrollment is running 4.0% below last year’s levels. The usually upward trend in graduate enrollments remains so but at a slower 2.7% increase this fall. Overall postsecondary enrollment is down 3.0%. The declines reflect the fact that first time students are the cohort with the largest decline.  The overall national rate of decline is 16.1% while community college enrollments declined some 22.7%.  

Community colleges continue to suffer the most with a decrease of 9.4% percent. Community colleges’ enrollment decline is now nearly nine times their pre-pandemic loss rate (-1.1% for fall 2019 compared to fall 2018). Even more concerning, the number of freshmen also dropped most drastically at community colleges (-22.7%). Public four-year and private nonprofit four-year colleges show a much smaller drop (-1.4% and   – 2.0%, respectively). Freshmen are down far more steeply (-13.7% and -11.8%, respectively).

As the only exception, for-profit four-year colleges are running 3% higher than last fall. At primarily online institutions, where more than 90% of students enroll exclusively online even before the pandemic, enrollments are growing at both the undergraduate and graduate levels (+6.8% and +7.2%, respectively), regardless of student age. Particularly, adult students age 25 and older, who make up most of the undergraduates at these institutions increased 5.5%, after a 6.3% decline in the year prior to the pandemic.

Students and families, facing skyrocketing unemployment, have been loathe to pay full tuition charges for largely online instruction. The American Council on Education and other higher education organizations estimated that the virus would cost institutions more than $120 billion in increased student aid, lost housing fees, forgone sports revenue, public health measures, learning technology and other adjustments.

Since February, colleges and universities have eliminated over 300,000 mostly non-faculty jobs according to federal data. Now that the pandemic is here for the long haul, the institutions face serious decisions impacting even tenured faculty. The furloughs of tenured faculty are occurring at both state and private institutions. ate enrollments are running undergraduate enrollment is running 4.0 percent below The pandemic and its direct effects  has arrived to entities with several “co morbidities – years of shrinking state support, declining enrollment, and student concerns with skyrocketing tuition and burdensome debt.  Overall demographic trends are not currently favorable for the schools with too many institutions chasing after an insufficient number of enrollees.  A slow winnowing out of weaker institutions is now accelerating.

PUERTO RICO

While the effort to restructure the outstanding debt from the Commonwealth of Puerto Rico continues, the future of the Commonwealth’s government will be on the ballot on November 3. The six candidates running for Governor have a diverse set of views and plans. This is the first time since Hurricane Maria that Puerto Ricans have had a chance to express their views at the ballot box. The choices made will potentially have significant impacts as the Commonwealth deals with the pandemic, the rebuilding of the power system, and a potentially contentious debate over statehood.

For example, the rebuilding of the power system has been fraught with difficulties including hurricanes, earthquakes, and politics. In the wake of Hurricane Maria, the federal government got some questionable entities awarded large contracts to rebuild the electrical grid. After the Whitefish contract was eliminated, a new contracting process happened with a new contract being awarded to a different firm named LUMA Energy.

That contract has been controversial. Gov. Wanda Vázquez’s administration announced the chosen company in June 2020.  Four out of the six candidates competing for governor have vowed that they will cancel that contract if elected. The other two have said they will not cancel it, but modify it instead. One of the controversies surrounding the contract is that while the transaction is being presented as a public/private partnership (P3), LUMA does not anticipate that it will invest money. In fiscal year 2021, it will be the opposite: payments to the company during the transition will trigger a deficit of up to $132 million at PREPA, according to the public corporation’s Fiscal Plan approved by the Fiscal Control Board.

Proponents can cite the long history of poor management at PREPA. Since 2017, it has had six executive directors. Opponents include ratepayers and employee unions who contend that the contract is designed to benefit LUMA. They cite the fact that the Fiscal Control Board submitted a motion for Judge Laura Taylor Swain, who oversees PREPA’s bankruptcy process under the PROMESA law in court, to consider that any payment to LUMA during the transition process be considered an administrative expense that it is obliged to pay. The judge approved that motion on October 19, meaning that if the public corporation’s debt adjustment plan is approved, LUMA would get paid before any creditor.

WAS WISCONSIN FOXCONNED?

Recently, the State of Wisconsin rejected requests from the Taiwanese multinational electronics contract manufacturer Foxconn for tax credits resulting from development of manufacturing facilities in southern Wisconsin. The Wisconsin Economic Development Corporation (WEDC)  is unable to calculate either Job Creation Tax Credits or Capital Investment Tax Credits because the Recipients have not met the requirement that the FullTime Jobs created and Significant Capital Expenditures made within the Zone – or in the case of Full-Time Jobs, outside of the Zone, but within the State of Wisconsin, and for the benefit of the Recipients’ operations within the Zone – be related to the Project.

That is the formal way to document what is becoming a potential disaster for southern Wisconsin. Foxconn isn’t producing the large-sized TV display panels outlined in the original contract, hadn’t invested the pledged amount in the plant and failed to employ even the minimum number of people needed to get subsidies. The proportion of the much smaller projected employee headcount devoted to manufacturing jobs versus R&D jobs is another disappointment.

It was the manufacturing jobs that were the hook to gain state participation as well as the infrastructure investment under taken by the host municipal entities. Now “the Recipients have acknowledged that they have no formal or informal business plans to build a 10.5 Fab within the Zone.” That would be the primary manufacturing facility to be developed. As the State points out, ‘the Agreement and Application provide that, by the end of 2019, 2,080 Full-Time Jobs were anticipated to be created and $3,307,000,000 in capital expenditures would be invested. WEDC’s initial review of the 2019 Annual Project Report reveals that, by contrast, the Recipients employed fewer than the minimum required 520 Full-Time Employees and had invested roughly $300,000,000 in capital expenditures.

We are completely unsurprised by the idea that Foxconn was not prepared to meet their obligations. This deal was thrown together driven by an ideologue Governor and President Trump. They ignored the numerous red flags attached to this project including Foxconn’s past in Pennsylvania where it similarly failed to follow through on commitments made to procure tax benefits.

MTA

The palpable sense of fear about the future of the public transit system in New York continues in the variety of analyses available about the future f the MTA. The data lays out starkly a vision of significant cuts in service and expenses as revenues are slow to recover.

Their major concerns stem from the  impact of cuts in MTA operations on the economy of New York City and the twelve-county region served by the Metropolitan Transportation Authority. Closing the projected gap in the MTA’s operating budget for 2021 could require a reduction of the agency’s workforce by 8,000 positions, directly and indirectly resulting in a loss of 13,380 jobs, with more than $1.4 billion in earnings, in the MTA region in 2021 according to the study.

A reduction in capital spending by $4.8 billion below the level previously planned for 2021 would directly and indirectly result in a loss of 23,264 jobs, with nearly $2.0 billion in earnings, in the region in 2021. Reductions in capital spend beyond the $4.8 billion planned for 2021 would directly and indirectly result in even greater job losses.

It’s one side of the transportation debate already underway in New York before the pandemic. The reality is that the mass transit system in greater New York has been one of the best examples of infrastructure subsidizing business. The concerns of business interests regarding the MTA’s future are real even if those concerns are motivated by enlightened self interest. These sorts of studies supply good ammunition in the argument over an additional federal stimulus. It’s becoming obvious that public transit.

GDP – BEHIND THE HEADLINES

Unsurprisingly, the Administration is touting the third quarter GDP numbers as signs that everything is on track for a recovery from a pandemic based world. There is no denying that the revival in GDP is positive but like so many other times, the President focuses on the headline number with no appreciation for the details.

Disposable personal income decreased $636.7 billion, or 13.2%, in the third quarter, in contrast to an increase of $1.60 trillion, or 44.3%, in the second quarter. Real disposable personal income decreased 16.3%, in contrast to an increase of 46.6%. Personal saving was $2.78 trillion in the third quarter, compared with $4.71 trillion in the second quarter. The personal saving rate—personal saving as a percentage of disposable personal income— was 15.8% in the third quarter, compared with 25.7% in the second quarter.

The impact on personal disposable income bodes poorly for those sectors of the economy which have served as foundational blocks for many revived cities. Declining disposable income hurts the entertainment/culture/arts, hospitality, and travel. Increasingly the path to recovery lengthens. This has implications for many revenue backed credits. The current wave of new corona virus cases will put the economy under pressure again. This comes as GDP has not fully recovered from the second quarter impact.

Already, the data was showing a decline from second quarter growth rates. This trend is likely to continue as the revival of the virus is already leading to reimposition of limits on activities. This will further pressure those sectors which had anticipated benefitting from a reviving economy. The potential negative impact on the Christmas shopping season of the pandemic has significant implications for state and local revenue streams.

One must also keep in mind that the fourth quarter will be the first to fully reflect the end of supplemental unemployment payments, the end of regular unemployment payments, and the lack of any additional stimulus. The combination of reduced disposable income and limited or closed retail venues will really be felt for the holiday shopping season. Without these sorts of seasonal boosts, many small businesses which have held out but depend on the holidays for a significant share of their profits may not be able to continue in the new year.

These issues are reflected in the findings of an analysis done by the National Association of Counties. Among economic priorities, individual and small business relief were by far the primary concern of county financial officials. These were followed quickly by unemployment which was cited by 51% of the counties. Many counties are seeing increases in Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) applications.

All of this points to a difficult budget making process in 2021.

NEW YORK AND THE PANDEMIC

Sales tax revenue for local governments in New York state dropped 9.5% in the third quarter compared to the same period last year, according to State Comptroller Thomas P. DiNapoli. Sales tax collections from July to September totaled $4.3 billion, or $452 million less than last year. New York City’s steep year-over-year decline of nearly 22% in sales tax revenue for the third quarter was the main driver behind the overall drop in local government collections. Nearly every other region of the state saw at least some increase over the third quarter of 2019, although these increases were not as strong as in the pre-COVID first quarter.

For September, New York City saw a 43.9% decline in collections compared to the same month in 2019, while the rest of the state rose 19%. Statewide, local sales tax collections declined by 11.8%, or $225 million, for the single month of September 2020 compared to the same month in 2019. So far in 2020, year-to-date (January through September), collections declined 11% or $1.5 billion compared to the same period last year.

CHICAGO RATING BLUES

Moody’s Investors Service has affirmed the Ba1 rating on the City of Chicago, IL’s outstanding general obligation (GO) unlimited tax bonds, the Ba1 rating on outstanding motor fuel tax revenue bonds, the Baa2 rating on outstanding water revenue bonds, the Baa2 rating on outstanding senior lien sewer revenue bonds and the Baa3 rating on outstanding junior lien sewer revenue bonds. That is some $6.2 billion of debt. The outlook however, was lowered to negative.

The change in the outlook to negative from stable reflects the expectation that the sudden and substantial decline in certain economically sensitive revenue will intensify the city’s challenge to reduce the persistent structural gap between revenue and expenses. Any negative variances arising from the uncertain operating environment could intensify and prolong the challenge. The city’s high and growing leverage from debt and pensions will also continue to weigh on its credit profile.

The move comes in the middle of the City’s budget making process for the fiscal year beginning July 1. None of the structural issues cited are new but the pandemic has put the City in an even more difficult situation than was the case prior to the pandemic.

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 LAST SNAPSHOT BEFORE THE ELECTION

The last Federal Reserve Beige Book was released at mid week. Economic activity continued to increase across all Districts but, changes in activity varied greatly by sector. Manufacturing activity generally increased at a moderate pace. Residential housing markets continued to experience steady demand for new and existing homes, with activity constrained by low inventories. Increased demand for mortgages was the key driver of overall loan demand.

While businesses figure out how they will conduct their office operations amid the pandemic, commercial real estate conditions continued to deteriorate in many Districts. The role of office utilization is reflected in the fact that warehouse and industrial space construction and leasing activity remained steady. For commercial businesses the news was mixed as consumer spending growth remained positive, but there was some reported leveling off of retail sales and a slight uptick in tourism activity. Demand for autos remained steady, but low inventories have constrained sales to varying degrees.

Reports on agriculture conditions were mixed. Some Districts are experiencing drought conditions while in places like Iowa, crop damage from weather was excessive. Districts reported generally optimistic or positive outlooks for the sector, but with a considerable degree of uncertainty. Restaurateurs expressed concern that cooler weather would slow sales, as they have relied on outdoor dining.

The report essentially confirms what one can see on a daily basis. Much of the economy is in a state of suspended animation. Some obvious sectors like travel and entertainment (broadly defined) find many teetering on the precipice as they try to hang on until an additional stimulus comes. In much the same way, state and local government find themselves having to consider headcount reductions which would only exacerbate local economic conditions.

CHICAGO BUDGET

The fiscal position of the City of Chicago has been under assault as Illinois was one of the states hardest hit by the pandemic in the Spring. With much of its commercial life hindered, offices empty, and its world famous convention and hospitality industries were crushed. With a new fiscal year for the City beginning January 1, the budget process now begins in earnest.

Mayor Lori Lightfoot issued her proposal for a fiscal 2021 budget. The $12.8 billion budget proposal includes closing a $1.2 billion Corporate Fund budget deficit in FY2021 – 65% of which is directly tied to the economic impacts of COVID-19. There would be a $94 million property tax increase. That would work out to $56 more a year for Chicago’s median home value of $250,000. The plan would also index property tax increases to the Consumer Price Index. A three cent hike in the local gas tax is envisioned.

About 350 city employees would be laid off. More than 1,900 vacant positions would be eliminated and nonunion workers would be required to take five unpaid furlough days.  Debt refunding and restructuring would be used to generate current budget savings.

SEATTLE TRANSIT GETS A REPRIEVE

The Washington State Supreme Court has ruled on a challenge to the formula used to calculate the value of automobiles for the purpose of calculating the tax due to Sound Transit, the public transit agency in and around Seattle. Taxpayers who are plaintiffs in the lawsuit contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax. That value is used to establish the amount of what is known as the car tab.

Vehicle owners in urban parts of Pierce, King and Snohomish counties pay the tax through their annual vehicle registration or car tab. The suit relied on an interpretation of procedural aspects of how a law is enacted. One provision says no law shall be revised or amended by mere reference to its title. The revised or amended law must be laid out “at full length.” The plaintiffs contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax.

Puget Sound area voters approved the car-tab tax rate increase in 2016. The car tab dates back to 1990, when the Legislature approved a new valuation schedule for the statewide car-tab tax that had been levied for decades. It overvalued the worth of a vehicle to raise more revenue for transportation projects. Six years later, the Legislature enacted a law which authorized Sound Transit to collect a car-tab tax. Voters that year approved a 0.3 % car-tab tax to help pay for light-rail projects. Sound Transit used the state’s valuation schedule adopted in 1990.

This is the second time that a determined group of activists has litigated their anti-tax viewpoint to the Washington Supreme Court.  in 2002, voters statewide approved Initiative 776, which repealed the state law authorizing locally imposed car-tab taxes, Sound Transit’s car-tab tax and the valuation schedule it used. That initiative was overturned in the Washington Supreme Court in 2006. The Legislature then approved a bill authorizing local governments to create regional transportation districts to build roads, in part through car-tab taxes. 

In 2015, a bill passed giving Sound Transit authority for a voter-approved car-tab tax not to exceed 0.8 % — on top of the 0.3 % approved in 1996 — for a total of 1.1 % of the vehicle’s value. That bill did not use the schedule with the lower values for vehicles that lawmakers approved in 2006. That formula would have meant less revenue for Sound Transit. The bill said the higher valuation schedule that Sound Transit had used since it began to collect car-tab taxes in 1997 temporarily would be in effect until its 30-year bond debt incurred in 1999 for light-rail projects is retired. The transit agency has said that will happen in 2028, when its 0.3 per cent car-tab tax is set to end.

The decision is a win for public transit financing in the Puget sound region.

MEDICAID EXPANSION – THE SONG REMAINS THE SAME

They keep swinging and missing but one more state is going to try Medicaid expansion with work rules. These provisions have regularly failed to be successfully upheld once they face the scrutiny of the federal courts. Nonetheless, Georgia is the latest state to receive federal approval to expand their program with work rules.

Governor Brian Kemp introduced his “Pathways to Coverage” plan that expands Medicaid but to a limited cohort. This would cover adults who meet the work requirements and who earn no more than 100 percent of the federal poverty level — $12,760 a year for an individual. It is estimated that 65,000 currently uninsured could qualify for coverage. That compares to estimates of the number of people who could be insured under a full expansion of some 600,000.

Because it does not qualify for federal funding, this partial expansion will have to be 100% funded by the State whereas a full expansion under the ACA would be 80% federally funded. The proposed work rules would require  Medicaid beneficiaries to complete at least 80 hours of work, community service or other qualifying activities per month. Most individuals who earn between 50 percent and 100 percent of the poverty level will also be required to pay monthly premiums. had.

The program will likely have the same experience that the programs in states like Arkansas and Kentucky have had. So the legitimate question is: what are these states trying to accomplish? It’s not about healthcare access and it’s not about sound long term fiscal policy.

SOUTH CAROLINA PUBLIC SERVICE (SANTEE COOPER)

The resolution of a class action lawsuit related to the 2017 abandonment of construction at the V.C. Summer nuclear power plants Units 2 and 3 (Summer), which places an upper limit on the financial obligations associated with the lawsuit between the Authority and Central Electric Power Cooperative Inc. (“Central”), Santee Cooper’s largest customer has led Moody’s to upgrade its outlook on the credit of the South Carolina Public Service Authority to stable from negative. The litigation was just one of the issues serving as a drag on the Authority’s ratings to result from its participation in the ill-fated power plant expansion.

To refresh, terms of the settlement involve a $200 million payment from Santee Cooper payable over the next three years beginning in 2020. Santee Cooper is also required to hold base rates for the substantial majority of its customers to levels reflected in the Reform Plan it submitted to the General Assembly in January of this year through the end of 2024. Clearly, this will impact the utility negatively in terms of revenues and cash flows. The Authority believes that it can offset at least some of the foregone revenue through lower operating costs related to lower fuel costs will help mitigate the rate freeze impact over the next several years. The favorable environment for issuers should provide multiple opportunities to refund debt.

One thing in favor of the long term outlook for Santee Cooper is a significant service area and a strong monopoly position relative to other power distributors. That monopoly received recent legal support when a state court ruling ended a dispute between Santee Cooper and the City of Goose Creek over which utility was legally entitled to serve an industrial customer. The ruling that Santee Cooper’s right to serve the facility in the current location was established by the state’s General Assembly many decades ago is seen as reducing concerns about the ability of competitors to snatch away customers as the Authority recovers from the Sumner debacle.

There is uncertainty still remains as to whether Santee Cooper will be reformed or sold. The pandemic complicated many legislative issues in the 2020 session of the State Legislature. It is expected that the issue of Santee Cooper’s future will be a central issue during the 2021 session. 

I’VE BEEN WORKING ON THE RAILROAD

The last week brought mixed news for the Brightline high speed rail developer. The good news came in the form of the announcement that the US Supreme Court had declined to review an appellate court finding against the lawsuit by Indian County, FL challenging the issuance of municipal bonds to finance construction. Investors had already made the judgment that the County’s legal challenge would be unsuccessful. This was probably the greatest potential legal challenge to the credit.

The bad news came in the form of the postponement of the sale of $3.2 billion of bonds, the proceeds of which would be used to finance construction of Brightline’s high-speed rail service between southern California and Las Vegas. The sale has faced a variety of headwinds related to the proposed route (Victorville is 85 miles from L.A. which is over 25% of the distance between L.A. and Las Vegas), concerns about the impact of the pandemic, the potential for litigation, and uncertainty regarding the success of Brightline’s  Florida train. The deal has been restructured to reflect a higher equity contribution which will lower debt to 68% of total financing.

As was the case in Florida, the effort to finance the Las Vegas project faces a deadline to issue its debt. Brightline has until Dec. 1 to sell the bonds under a deadline from California officials, who approved the company’s request to sell tax-exempt debt. In September, Brightline sold $1 billion in short-term securities to preserve its federal allocation of so-called private activity bonds that it will refinance next year. It’s not clear whether the postponement reflects an insufficient number of buyers or if it is an issue of price. The analysis is also complicated by the ongoing shutdown of the Florida operation due to the pandemic.

Meanwhile in Texas, the governor has landed himself in the center of a storm over the Texas Central Railroad, the company handling the construction. Recently, the Governor sent a letter to Japan’s prime minister offering strong support for the project which will use Japanese bullet train technology. It created a bit of a storm as landowners resistant to selling their land for the proposed right of way.

Those landowners have been fighting eminent domain proceedings seeking to obtain their land for right of way. The state has a long history of resistance to the concept of eminent domain and the property owners have now generated enough pushback to cause the governor to waver. His staff has made it known that “the Governor’s team has learned that the information it was provided was incomplete. As a result, the Governor’s Office will re-evaluate this matter after gathering additional information from all affected parties.”

Texas Central has yet to file an application for the project with the Surface Transportation Board, the federal agency with jurisdiction over the project. It does claim that the proposed rail line recently received the necessary permits to begin construction. Opponents note that the regulatory process is far from complete.

The company hopes to begin construction in the first half of 2021. It has acknowledged that expected partners who operate rail lines overseas have seen their financial positions damaged by the pandemic. Opponents of the line have tried to portray the issue as being one of taking Texan’s land for the benefit of a foreign entity.

MASS DOT PROJECTS THE FUTURE

The Massachusetts Department of Transportation recently presented three scenarios in support of efforts by Mass DOT and the MBTA to plan for the recovery of transit in the wake of the pandemic. While designed for the greater Boston metropolitan area, the exercise highlights the issues which will face most, if not all mass transit systems in the nation’s urban areas.

Each of them covers the 2021-2023 time period. The first scenario portrays an almost full recovery. Under this scenario, travel patterns diverge from economic recovery as consumers and employees adapt to a new normal – especially in light of new and emerging remote meeting and e-commerce technologies. Travel and business restrictions are lifted and consumer spending slowly increases but consumers have increasingly shifted previously in-person activities like shopping to digital and e-commerce.

Telehealth appointments are common and higher education is increasingly online.  In those industries that have historically supported teleworking (pre-COVID), half of employees choose to work exclusively from home an average of three days per week as employers are more comfortable with enterprise-wide tools for remote meeting space and cloud-based file access; flexible work arrangements become more common.

The second reflects an environment where travel patterns diverge from economic recovery as consumers and employees adapt to a new normal – especially in light of new and emerging remote meeting and e-commerce technologies. Travel and business restrictions are lifted and consumer spending slowly increases but consumers have increasingly shifted previously in-person activities like shopping to digital and e-commerce.

Telehealth appointments are common and higher education is increasingly online. In those industries that have historically supported teleworking (pre-COVID), half of employees choose to work exclusively from home an average of three days per week as employers are more comfortable with enterprise-wide tools for remote meeting space and cloud-based file access; flexible work arrangements become more common.

The third is based in a world where the economic impacts of COVID continue to depress travel and mobility for a longer period of time, especially on the MBTA. Telecommuting becomes the standard practice for the foreseeable future. The period in which at least some travel and business restrictions remain in place is longer in this scenario. In addition, discretionary spending including spending on travel remains lower.  Half the workforce in tele-workable industries continues to work remotely but does so much more often than they did pre-COVID (on average, three days per week) because teleworking habits have had more time to form and employers see productivity benefits and savings in downtown real estate costs.

Which scenario proves out will have significant implications. For the MBTA, the first scenario would return ridership to just under 90% of pre-COVID levels. The second would produce ridership at about 75% of pre-COVID levels. The third would leave ridership at 60% of those levels. It is important to note that these percentages reflect the period ending in June of 2022 when the full recovery impact on ridership will be seen.

MBTA ridership and revenue is at a fraction of its earlier levels. Bus ridership is at about 40% of pre-pandemic levels, while the subways have seen about 25% of former crowds and commuter rail remains the lowest around 12%. According to favorable estimates, the MBTA FY21 loss could be $18 million and losses in FY 2022 could be $114 million. The pessimistic view puts the losses at $46 million and $271 million respectively. With many other transit agencies face bleak current and short term environments, it is easy to make the case for additional support in an stimulus being considered.  

COLLEGE MODELS MOVE IN OPPOSITE DIRECTIONS

Two universities received opposing views of their outlooks as revealed by ratings actions by S&P. S&P Global Ratings revised its outlook to positive from stable and affirmed its ‘A’ rating on New Hampshire Health & Educational Facilities Authority’s revenue bonds issued for Southern New Hampshire University (SNHU). The ubiquitous TV advertiser found itself well positioned to take advantage of pandemic related demand for online learning.

One of the earliest providers of online learning, SNHU has seen its enrollment increase significantly in the last two years after some 20 years of steady growth. This has enabled the university to maintain its financial position to a greater degree than would otherwise be the case. It all led to the upgrade of S&P’s outlook for the credit to positive.

S&P Global Ratings lowered its long-term rating to ‘BB’ from ‘BBB-‘ on La Salle University, Pa.’s bonds, issued through the Philadelphia Authority for Industrial Development and the Pennsylvania Higher Educational Facilities Authority. The outlook is negative. In fall 2019, full-time-equivalent enrollment dropped by 5.4%, compounded by another 7.2% decline for fall 2020. Based on audited fiscal 2020 results, the university predicts a $1.3 million adjusted operating deficit (- 1%) and has budgeted for a larger deficit for fiscal 2021. 

This reflects operating pressures prior to the pandemic. The university has already been operating for three years in a cost cutting mode in an effort to reflect the lower demand. The university has increased its reliance on endowment draws to maintain balance. The institution is not positioned nearly as well to accommodate a move away from traditional college learning structures.

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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It was dismaying to hear that after weeks of efforts to pass another stimulus which could benefit state and local government, the view still holds that additional help for states is a pension bailout. When one hears the continuing focus on pensions by the Administration, it lets you know that the whole negotiating process has been a bit farcical. This all reflects one less well thought out proposal from one Congressperson that specifically cited Illinois’ pension problem. Since May, the Administration and its supporters have hung their hat on the hook of stonewalling based largely on that one comment.

The impasse has seen mostly Senators cite pensions as their basis for stonewalling an additional stimulus. They cast the issue of pensions as a red state/ blue state issue. The reality is that pensions are a color blind issue. For every blue state opponents can cite, one can point to somewhere like Kentucky (sorry Senator McConnell) which has been a historical poster child for pension underfunding.

The inability to come to an agreement actually works against the goal of fully opening the economy. Neither government nor individuals can be expected to jump start the economy so long as the pandemic continues. One has to wonder what the policy goal is from the Republican side. Unemployment claims have leveled off at a steady 800 to 900 thousand a week and millions continue to collect benefits. At the same time, those benefits will begin to expire as we move into the late autumn and early winter setting the stage for a more prolonged and slower economic recovery.

No matter where you fall on the political spectrum, the current state of affairs makes no sense.

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THE GREAT WHITE WAY REMAINS DARK

The recent announcement that Broadway shows will not reopen until May 31 is a significant blow to the NYC economy. It also highlights the special circumstances that the entertainment/cultural sectors face as they try to deal with the pandemic. All Broadway theaters closed on March 12 as part of an effort to slow the spread of the corona virus by limiting large gatherings; at the time there were 31 shows running, including eight still in previews, and another eight were in rehearsals getting ready to start performances.  In 2019, the industry’s theaters drew 14.6 million theatergoers and sold $1.8 billion worth of tickets. 

Sports and the performing arts occupy a niche along with restaurants in that they depend on in person attendance or patronage. Their unique characteristics have left these businesses in an especially disadvantaged position as the pandemic unfolds. In cities like New York which made sustained concentrated efforts to make tourism an economic pillar, the lack of entertainment, cultural, and sports draws will have a real impact.

There has always been a risk that a tourist based economy would be impacted by exogenous events. Unlike other events whether they be natural disasters or things like terrorism, the pandemic carries with it a lot more uncertainty regarding a municipalities fiscal outlook. The ongoing nature of the pandemic and the lack of easy fixes, makes it extremely difficult to predict a timeline for recovery which makes the fiscal outlook even more difficult to assess.

GREEN MOUNTAIN CANNABIS

Vermont will become the 11th state in the nation to allow sales of marijuana for recreational use after Gov. Phil Scott (R) said he would not veto a measure passed by the state legislature. The law will take effect without his signature however. The legislation creates a cannabis control board that will establish the regulatory framework around sales, along with a significant 14% excise tax on all marijuana products.

The significance of the action is that legalization has largely been through voter initiative. This year there are four states where legalization initiatives will be on the ballot. There the legislative role has been crafting regulatory legislation rather than establishing legality. That has always been a heavier political lift. The move could also have knock on effects for bordering states like New York where legalization would have to occur legislatively. The press for new revenues in a post pandemic world will likely see the Empire State reconsider its previous unwillingness to legalize.

PANDEMIC CASUALTIES – PRIVATE STUDENT HOUSING

The pandemic and its impact on the ability of colleges and universities to hold classes on campus continues to negatively impact ratings. The latest example is Kanawha County Commission, West Virginia’s Student Housing Revenue Bonds (The West Virginia State University Foundation Project).  a 10% enrollment decline at WVSU for Fall 2020, has resulted in weak Fall 2020 occupancy of 71% at the student housing project (Judge Damon J. Keith Hall).

The low occupancy has impacted financial operations to the extent that it will likely trigger required payments from West Virginia State University (WVSU or the University) under the Contingent Lease Agreement, in order for the project to maintain a minimum fixed charges coverage ratio (FCCR) of 1.0x. Under more “normal” operating conditions, fiscal 2019 saw the project generate a 1.17x FCCR prior to payment of subordinated expenses. Given that those coverage levels were achieved with 98% occupancy for Fall 2018 and 82% occupancy for Spring 2019, there has never been much room for error in terms of meeting covenant requirements.

All of this led Moody’s to downgrade bonds issued for the project to B1 from Ba3. The rating downgrade reflects the pandemic’s impact on university housing demand and overall project performance. The rating is still on negative outlook which “incorporates the project’s materially weakened financial position at current occupancy levels, which raises the possibility of future reliance on payments from the University (rated B1/Negative) under its Contingent Lease Agreement, due to reduced rental payments at the project.”

Another downgrade impacted $118,250,000 Maryland Economic Development Corporation’s (MEDCO) Student Housing Refunding Revenue Bonds (University of Maryland, College Park Projects) . The project’s reduced current year revenue expectations due to COVID-related lower occupancy, the project’s diminished trustee-held fund balances, and the lack of any direct financial support to date from the University of Maryland, College Park or the University System of Maryland all contributed to a downgrade to Ba1 from Baa2.

Fall 2020 physical occupancy of the project was 79.6% as of October 1, 2020. Once “normal” campus operations are restored, the likelihood is that historic full occupancy of the facility will be achieved. Even so, the rating remains on negative outlook reflecting “the unknown length of the COVID outbreak and its effect on project occupancy. If project occupancy were to decline further, a significant drawdown of the debt service reserve fund may be required, thus further weakening the credit.”

PANDEMIC CASUALTIES – TRANSPORTATION

As the pandemic drags on, the timeline for recovery continues to be extended. Recent announcements from companies point to the summer of 2021 as the more likely date for a more fully fledged return to offices. The move to remote working has led to clear impacts on those sectors which rely on primarily office based workers. A PricewaterhouseCoopers Remote Work Survey that found 77% of U.S. office employees are currently working from home at least one day a week, with 55% projected to continue doing so once the COVID-19 crisis passes.

Another survey, conducted by StreetLight Data, showed the impact of remote work on commuting patterns. Vehicle miles Travelled (VMT) is the basic metric at the core of the research. StreetLight based its study on an examination of VMT data from five major U.S. metropolitan areas – New York, Los Angeles, San Francisco, Washington D.C., and Chicago.  It found significant impacts on commuting patterns as the result of the pandemic.

The data revealed that the impact of the pandemic has been uneven on a regional basis. Northeast states fall into a group with a larger drop in VMT and a slower recovery. This trend correlates with demographic factors including higher income, higher average population density, and higher share of professional services employment. States with a faster recovery trend have lower income levels, less population density, and fewer professional services jobs. COVID-induced VMT decreases were less pronounced in rural areas. This trend was especially true in counties heavy with essential industries.

The continuing realization by companies that a remotely based workforce does not have negative impacts on their operations complicates the outlook for transit. Just this week, two major mass transit agencies saw negative outlooks assigned to their S&P ratings. The Port Authority of Allegheny County is the mass transit provider in the greater Pittsburgh region. The authority relies on substantial state subsidies for its operations and the commonwealth collects, distributes, and governs the pledged revenues. The Regional Transportation Authority, Ill. finances mass transit in the greater Chicago metropolitan area. The sales tax revenue collections which secure the bonds are likely to be pressured in the coming months, and potentially beyond, due to recessionary pressures stemming from the pandemic.

Two more airports saw negative credit moves from S&P as the airline travel industry continues to suffer. S&P lowered its long-term rating and underlying rating (SPUR) on College Park, Ga.’s customer facility charge (CFC) revenue bonds, issued by the city of Atlanta to fund the consolidated rental car facility (CONRAC) project at Hartsfield-Jackson Atlanta International Airport (ATL), to ‘BBB+’ from ‘A’. The rating remains on negative outlook. Ontario International Airport Authority, Ca. saw its rating affirmed but the negative outlook on the bonds was maintained.

MTA

NYS Comptroller Thomas diNapoli has released his annual report on the finances of the Metropolitan Transportation Authority. It highlights the dire position in which the MTA finds itself in the face of Congress’ inability to generate an additional stimulus bill. The budget gaps are huge: $3.4 billion in 2020, $6.3 billion in 2021, $3.8 billion in 2022, $2.8 billion in 2023 and $3.1 billion in 2024. The 2021 budget gap is more than half (53 percent) of the MTA’s annual projected revenue. 

Although ridership has begun to recover as parts of the economy reopen, fare and toll revenues for 2020 through 2023 are projected to be $10.3 billion lower than expected in the February Plan. The MTA projects ridership — and the revenue it brings — will return to pre-pandemic levels by 2023. Other revenue, from dedicated taxes and subsidies, are forecast to be $5.5 billion lower for 2020 through 2023, before achieving full recovery.

The data on debt is a concern for bondholders. The current burden, which has averaged 16.1% of total revenue for the past decade, is projected to reach 25.7%  in 2021 before declining to around 23% in 2022 through 2024. The portion of fare and toll revenue funding debt service would reach 78.9% in 2020 and 64.6% in 2021 before declining to 47.2%in 2022.

Outstanding long-term debt issued by the MTA more than tripled between 2000 and 2019, rising from $11.4 billion to $35.4 billion. The MTA expects debt outstanding to reach $50.4 billion by 2024, without any potential additional borrowing. If the MTA borrowed $10 billion as allowed by the state, debt service could rise by $675 million annually starting in 2023, bringing it to more than a quarter of every dollar of revenue.

CALIFORNIA BALLOT

The balloting has already begun so let’s get right to the initiatives on the California ballot that municipal bond investors will care about. We see three out of the twelve on the ballot to fit that bill.

Proposition 15, the Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative is a constitutional amendment to require commercial and industrial properties, except those zoned as commercial agriculture, to be taxed based on their market value, rather than their purchase price. This would be a substantial change for commercial owners who have been seen to benefit from the limitations of Proposition 13. Proponents see it as an opportunity to remedy what they see as a defect in Proposition 13 that limited tax burdens for commercial property relative to that of homeowners.

The change from the purchase price to market value would be phased-in beginning in fiscal year 2022-2023. Properties, such as retail centers, whose occupants are 50 percent or more small businesses would be taxed based on market value beginning in fiscal year 2025-2026 (or at a later date that the legislature decides on). Proposition 15 would define small businesses as those that that are independently owned and operated, own California property, and have 50 or fewer employees.

Proposition 19, the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment would allow eligible homeowners to transfer their tax assessments anywhere within the state and allow tax assessments to be transferred to a more expensive home with an upward adjustment; increase the number of times that persons over 55 years old or with severe disabilities can transfer their tax assessments from one to three; require that inherited homes that are not used as principal residences, such as second homes or rentals, be reassessed at market value when transferred; and  allocate additional revenue or net savings resulting from the ballot measure to wildfire agencies and counties.

It is a way to address the already massive dislocation caused largely by wildfires over recent years. This would represent the second attempt at the same goal after no success in a 2018 effort. It has been recast with The ballot measure would require the California Director of Finance to calculate additional revenues and net savings resulting from the ballot measure.

The California State Controller would be required to deposit 75 percent of the calculated revenue to the Fire Response Fund and 15 percent to the County Revenue Protection Fund. The County Revenue Protection Fund would be used to reimburse counties for revenue losses related to the measure’s property tax changes. The Fire Response Fund would be used to fund fire suppression staffing and full-time station-based personnel.

The third item could have huge ramifications for the future of Mobility as a Service (MaaS). Proposition 22, the Exempts App-Based Transportation and Delivery Companies from Providing Employee Benefits to Certain Drivers Initiative. This initiative is the industry’s reaction to AB 5, the state law which established a three-factor test to decide a worker’s status as an independent contractor. The three-factor test requires that (1) the worker is free from the hiring company’s control and direction in the performance of work; (2) the worker is doing work that is outside the company’s usual course of business; and (3) the worker is engaged in an established trade, occupation, or business of the same nature as the work performed.

Uber, Lyft, and Door Dash are the drivers behind the initiative. It continues their strategy of resistance when it comes to its relationship with labor. Proposition 22 would consider app-based drivers to be independent contractors and not employees therefore, state employment-related labor laws would not cover app-based drivers. The three companies have poured some $145 million into their campaign. In the meantime, on August 10, 2020, the Superior Court of San Francisco ruled that Uber and Lyft violated AB 5 and misclassified their workers. 

BORDER PRESSURES ON CREDIT

As the pandemic drags on, those entities which are facing extended regulatory limits designed to slow the pandemic are beginning to show some wear in terms of their credit profile. One example we saw this week is the downgrade of Cameron County, Texas. The county is the home of Brownsville, an important entry point on the US-Mexico border.

The County saw its AA general obligation rating put on negative credit watch by S&P. Brownsville is the only port of entry from Mexico that provides all four methods of transportation: sea, air, highway, and rail. This puts international trade and travel at the center of the County economy. The continuing closure of the US-Mexican border is a significant drag on the County economy. There is a one-in-three chance that S&P could lower the ratings if reserves deteriorate to levels we feel are no longer commensurate with the current rating level, and if the county’s economy weakens as a result of the challenges presented by the COVID-19 pandemic.

Border cities have benefitted greatly from the expansion of cross border economic activity in the NAFTA era. This has encouraged locally based cross border activity for commercial purposes, especially small businesses. The benefits of the warehousing and expediting sectors in the local economy is obvious. The closure of the U.S.-Mexican border to nonessential traffic in response to COVID-19 will continue to affect the local economy and the county’s finances. 

ANOTHER ONE BITES THE COAL DUST

“OUC Management recommends significantly reducing coal-fired generation no later than 2025 and eliminating it no later than 2027, using coal-to-gas conversion as a technology bridge, positioning solar as the main source of new energy, investing in energy storage, and leveraging other future clean technologies.”  With that, the Orlando Utilities Commission moves to the forefront of municipal utilities dealing with CO2 emissions.

The OUC plan includes the end of coal-fired generation, with a significant reduction no later than 2025, and eliminating it no later than 2027. The Stanton coal units, with 940 MW of generation capacity, while being converted to natural gas, will “ultimately be retired no later than 2040. OUC also owns a 40% share of the 340-MW Unit 3 at the C.D. McIntosh plant in Lakeland, Florida; that unit is expected to shutter by the end of 2024.

The announcement comes amid a changing regulatory environment for power generation. The Federal Energy Regulatory Commission (FERC) proposed a policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. Currently, 11 states impose some version of carbon pricing. FERC, as a regulator of regional power market activities

We note comments by the FERC chairman about carbon pricing. “If states continue to pursue carbon pricing — and I fully expect this to be the case — RTOs and their stakeholders can and should explore the feasibility and benefits of market rules that incorporate the state-determined carbon price.” The fact that the likelihood of an increased role for carbon pricing is accepted by the major federal regulator even in the face of the Administration’s unending efforts to promote fossil fuel use is noteworthy.

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