Joseph Krist

Publisher

TWO CITIES UNDER PRESSURE

Well summer is essentially over. School is back. The big winter sports are underway. It all comes with a sense of refreshment and that it’s time to get back to the normal rhythms of life return. It comes with a renewed sense of focus. In that spirit, we see two significant municipal credits facing significant issues which present risk.  

Chicago runs its finances on a calendar year basis, so big decisions are looming over the next couple of months. The Mayor is under immense pressure to balance the 2025 budget. The latest estimates see a $982.4 million shortfall for FY 2025 along with a new projection of a $223 million budget gap at the end of the current year. The Mayor is in a bind as the realities of the City’s budget become clear. The City can’t cut its way out of the problem. So that goes to property tax increases which would be politically fraught. The whole process will pose great political risks for the Mayor and if he is further weakened by the process, it will weigh negatively on the City’s credit.

Then there is New York City. If you’ve spent your life observing NYC politics, nothing about this week’s raids on multiple members of the Adams administration is a shock. It is breathtaking that the homes of the schools chancellor and the Police commissioner were raided on the first day of school. New York is being run by a close circle of individuals with long term ties to the Mayor who have long been the object of concern. They represent a 20^th century version of machine politics in a world where that no longer works.

Given the individuals involved, there are real concerns about the Mayor’s ability to run the City. He is also 15 months out from his own reelection bid and he will be challenged. His need to raise money for that (what is the source of his current troubles) and the many challenges facing the City already compete for the Mayor’s attention. The City Council seems to be based on opposition to the Mayor and any real limits on spending. 

In that environment, we reiterate our view that the City’s credit not stable and that the outlook in the near term is negative.

ELECTRIC VEHICLES

If you read enough of the hype some 8 or 10 years ago about electric and autonomous vehicles and believed it, you would be very disappointed today. Whether you are a dealer, buyer or producer, the demand has just not been there in line with estimates. The demand situation has begun to manifest itself in the form of some major decisions by the automakers regarding their production lineups. Those have implications not just for the firm’s stakeholders’ but the places counting on new or expanded manufacturing related to electrics.

General Motors and Samsung SDI announced an agreement operate a new factory in New Carlisle, Indiana to make electric vehicle batteries. The plant will open but production would not start until 2027. The plant had been expected to start making cells in 2026. The $3.5 billion plant is being built on a 680-acre site and is expected to employ 1,600 workers. It will make nickel-rich prismatic batteries that store more energy than other chemistries.

Georgia has been holding its breath over the outlook for the development of new production facilities for electric vehicles and batteries. The Army Corps of Engineers said it plans to reassess its environmental permit for Hyundai’s $7.6 billion electric vehicle plant in Georgia. It said that state and local government did not reveal water requirements for the plant eventually expected to employ 8,000 workers. The proposed water withdrawals are being challenged.

As that story unfolds, Hyundai announced that it was going to reorient the plant to increase the share of hybrid rather than fully electric vehicles. Hybrids have been emerging as a more popular short-term choice for climate minded buyers. Weaker than expected EV demand growth is leading some U.S. battery manufacturers and suppliers to delay or cancel planned capacity investments. One supplier delayed operations at a planned South Carolina facility from later this year until late 2025, while another suspended a planned Arizona facility and canceled a planned Michigan plant.

One event that has implications for the South is the successful unionization of an EV production facility at Spring Hill, TN. The region has not been easy on efforts to accomplish that. Elections have had varying results at manufacturing sites. This facility is a joint GM/LG venture which is expected to produce the Ultium. The Ultium is an electric vehicle battery and motor architecture developed by General Motors which would serve as the base platform of vehicles from the GMC electric Hummer and Cadillac Lyriq, as well as joint projects with Honda like the new electric Acura.

COAL LITIGATION

The Prairie States coal generation plant in Washington County, IL has been regularly cited as one of the largest single sources of carbon. It is one of if not the largest emitter in Illinois. The project’s two units produce a combined 1600 MW of electricity. The output of the plant is distributed through a group of primarily municipal electric utilities in Illinois in three neighboring states. As awareness about emissions has grown, the plant has come under increasing pressure.

The Sierra Club has sued the plant’s operating entity alleging the plant has been operating and emitting harmful air pollutants without necessary permits required by the federal Clean Air Act.The plant owners hoped to dismiss the lawsuit filed in the U.S. District Court in the Southern District of Illinois.Instead, the federal magistrate ruled that the allegations are sufficient to move forward with the case. She further noted that this effectively accepts the allegation that the plant has been operating for a decade without a permit “and that the state and federal governments have simply ignored the facility’s existence.”

That is astounding. At the same time the magistrate “further acknowledges that the ultimate relief sought by [the Sierra Club] — halting the operations of a power source for millions of people — is an extraordinary request, by any standard.” Legislation passed in 2021, requires Prairie State and other publicly owned plants to become 100% carbon free by 2045. 

The principal municipal utility exposure is that of the Illinois Municipal Energy Agency. It owns 15% of the plant or some 240 MW of capacity. That would also be its share of the financial risk of the plant’s operation. Last year’s climate legislation in Illinois tried to build in some protections for the project and its bondholders. Coal plants which are investor owned would be forced to shut down in 2030 while municipal utility owned Prairie States would be allowed to operate until 2045 or just after the majority of debt from the project is retired.

CARBON CAPTURE

The Iowa Utilities Commission has issued a construction permit for Summit Carbon Solutions’ proposed hazardous liquid pipeline across Iowa. The commission also required the company to secure and maintain a $100 million insurance policy, and agree to compensate landowners for any damages that result from the pipeline’s construction. Construction cannot commence without further approvals from other states.

The commission issued the permit without modifying the previously imposed conditions Summit Carbon must meet in order to begin construction – the most significant of which is that the project must be approved by regulators in North Dakota and South Dakota. Summit says it has signed voluntary easement agreements with 75% of the Iowa route’s landowners. The Iowa Utilities Commission has stated that Summit will be able to use eminent domain in Iowa to force the sale of land from property owners who are opposed to the use of the property for the project.

In Wyoming, a plan to develop one of the world’s largest direct air carbon dioxide capture and storage projects in the southwestern part of the state has been “paused”. The facility was designed to be powered by electricity from a modular nuclear reactor – the 345-megawatt Natrium nuclear reactor being built in Kemmerer, Wyoming, by the billionaire Bill Gates-backed TerraPower LLC. It turns out that the generation capacity of the reactor could only meet one-third of the capture facilities’ needs.

The capture facility makes little sense if it cannot be powered by clean energy. That is what is apparently driving the decision to pause and relocate. The company building the capture facility cited the uneconomic cost of power for the plant and cited a specific culprit – data centers and crypto miners. They are an increasing concern in many areas of the country. They often try to keep old fossil fuel plants running by buying them for themselves and they drive demand and price pressures facing utilities and their other customers.

COWBOY SURPRISE

The Wyoming Supreme Court ruled that the Wyoming Public Service Commission erred when it approved a request by High Plains Power to shift from an annual to a monthly compensation scheme with customers who intermittently contribute their excess solar-generated electricity back to the utility. The court rejected High Plains Power’s plan to compensate solar users for their excess power at a monthly wholesale rate rather than the higher retail rate.

It would have been a blow to solar development if the ruling had gutted net metering provisions. This year, net metering has been under attack in state legislatures as legacy power providers challenge the potential negative revenue and profit impacts on them from rooftop solar. In Wyoming, basic net-metering laws apply to residential and small business customers with 25-kilowatt or smaller solar arrays.

According to state statute, qualifying residential and small business net-metering customers must be credited for the excess power they generate, but don’t use, and supply back into the system. The statute was effectively reaffirmed through this decision. The compensation method struck down by the Wyoming Supreme Court allowed High Plains Power to bypass month-to-month kilowatt-hour credits at the retail rate and instead compensate customers each month at the wholesale rate. That resulted in a major reduction in overall compensation to net-metering customers.

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

COLORADO RIVER WATER

The Bureau of Reclamation announced annual operational guidelines for the Colorado River basin and the seven states that comprise it. The guidelines were developed through a 24-month study of the Colorado River basin and will apply to the 2025 water year, which extends from October 1, 2024, through September 30, 2025.

Based on projections in the study, Lake Powell will operate in a Mid-Elevation Release Tier in water year 2025 and Lake Mead will operate in a Level 1 Shortage Condition with required shortages by Arizona and Nevada. Those “required water shortages” are the reductions in the amounts of water each state can withdraw from the system. The reductions in Arizona:  512,000 acre-feet of water, which is approximately 18% of the state’s annual apportionment. The reduction for Nevada:  21,000 acre-feet of water, which is 7% of the state’s annual apportionment.  

The important news is that there is no further reduction from last years’ levels required for those two states. The Colorado River System continues to face low reservoir storage with Lake Powell and Lake Mead at a combined storage of 37% of capacity. The guidelines stem from the Supplement to the 2007 Colorado River Interim Guidelines, in all Lake Mead operating conditions, the three lower division states will target a cumulative Reservoir Protection Conservation volume of 3 million acre-feet or more of additional conserved water in total for calendar years 2023 through 2026, with a minimum of 1.5 million acre-feet physically conserved by the end of calendar year 2024. This conservation volume of 1.5 million acre-feet has already been achieved.

CALIFORNIA WATER

We have regularly observed the cyclical nature of the weather and its impact on water supplies in California. Lake Oroville has been a symbolic center of the state’s ever changing water supply conditions. During the most recent drought years, levels at the Oroville Dam plunged to under 30% of capacity. This followed a year of damage at the dam as water supplies exceeded the capacity of the lake creating significant overflows and damage to the dam’s spillways.

At the beginning of the decade, Lake Oroville was far below its capacity of 900 feet mean sea level (MSL). In May 2020, the water level was at 800 feet. However, by the end of the year, it had gone down to 700 feet. By September 2021, it was near the bottom, sitting below 650 feet. sitting below 650 feet. The atmospheric river storms of early 2023 brought the Lake out of drought and Lake Oroville literally went from below 30% capacity in the winter of 2022 to 100% capacity by the Spring.

The State has announced that for the second consecutive year that Lake Oroville is at 100% capacity.

INSURANCE

The Texas Windstorm and Insurance Association’s nine-member board voted for a 10% rate increase after a staff analysis found that the insurer has for years been unable to cover expected costs, which include paying claims on damage from storms. TWIA is governed by Chapter 2210 of the Texas Insurance Code. TWIA provides a source of insurance used as a last resort for property owners that have been denied windstorm and hail property insurance coverage in the private (voluntary) market.

It insures Texas’ 14 coastal counties and a corner of Harris County. The number of TWIA policies has grown significantly by 38% since 2020. The increase in risk exposure has driven the need for reinsurance. The cost of reinsurance has also increased driving the need for a rate increase. Reducing TWIA’s reliance on reinsurance, either by using state reserves to fund the nonprofit’s catastrophic reserve fund or otherwise propping up a state-sponsored reinsurance fund, would help lower rates. 

The consideration of legislative fixes to the problem of rising rates and reduced availability reflects the inability of the state to limit these increases. Unlike many states where the insurance industry and its rates are regulated, Texas is a file-and-use state, which means that insurance companies need only to file their rate increases before they can go into effect. The regulatory structure which might enable some state insurance regulators simply does not exist in Texas.

COLORADO TAX INITIATIVES

Colorado is no stranger to long-term opposition to taxes from conservative taxpayers. Government has long functioned under the limits of the TABOR amendment which was enacted in 1992. TABOR requires voter approval for tax increases and limits the growth of government revenues and spending. Any revenue generated over the set limit, which is calculated each year based on inflation and state population growth, must be returned to taxpayers unless they vote to let the government keep it. 

Voters have loosened TABOR restrictions on most local governments in the state. Fifty-one of Colorado’s 64 counties have chosen to waive TABOR’s strict government spending limits along with 177 of Colorado’s 178 school districts and  over 200 municipalities . Notwithstanding, anti-tax advocates have managed to place two items on the ballot – Initiatives 108 and 50 – designed to significantly limit government revenues.

Initiative 50, which would amend the state constitution, might be the more consequential of the two. It would limit property tax revenue growth to 4% statewide, with no flexibility for local governments or their voters to opt out without a statewide referendum. Initiative 108 would limit assessments to 4% of value from 6.7%. That is estimated to reduce revenues statewide by some $2.4 billion.

Now the Colorado Legislature will hold a special session to consider a new proposal designed to address initiative sponsors concerns and motivate them to ask for the ballot initiatives to be off the ballot. The proposal under consideration includes: In the 2025 tax year for taxes owed in 2026, the residential assessment rate for local government taxes would drop an additional 0.15% to 6.25%. Today the rate is 6.7%, It is scheduled to fall to 6.4% in the 2025 tax year for taxes paid in 2026. This proposal Residential assessments for schools would remain separate from those of local governments, and would fall to 7.05% from 7.15%. 

In the 2026 tax year, the residential assessment rate for local governments would rise to 6.8%, but the increase is offset by a tax break that kicks in that year, exempting up to $70,000 of a home’s value from taxation. Under current law, it is scheduled to rise to 6.95%. The school assessment rate would remain at 7.05%. Local government revenue would be limited to 10.5% growth over two years, instead of 5.5% annually under Senate Bill 233. School districts would be limited to 12% growth over two years, a new cap.

If this all can be enacted, the initiatives are expected to be removed and the sponsors must agree not to try again for 10 years. The deal would have to be completed before Sept. 9, when the November ballot is required to be certified by the Colorado Secretary of State’s Office. 

ELECTRIC VEHICLES

According to a recent survey by AAA Northeast, just 14% of more than 1,700 respondents across Rhode Island, Massachusetts, Connecticut, New York and New Jersey “definitely” plan to buy or lease electric when looking at their next vehicle. By comparison, 42% are “not interested at all.” AAA found that leading causes of EV anxiety stem from fear of driving an electric vehicle, operational differences that create “a different feel” when driving, and concerns about public charging station locations, charging times and safety. The survey did not ask if cost was a concern.

Among those surveyed who don’t own and never plan to buy an electric vehicle, 65% said they had concerns about the availability of charging stations. Sixty-six percent of respondents in this group also said they were concerned about charging station reliability; 67% were concerned about price; 65% were concerned about safety; and 61% had concerns about charging station speeds.

CARBON CAPTURE

A recent federal court decision has at least temporarily delivered a setback to the carbon capture industry. The $18.4 billion Rio Grande LNG export terminal project is currently under construction near Brownsville, TX. In 2021, the company added a carbon capture facility onto the project. That was in response to a decision in the D.C. Circuit Court of Appeals which found that FERC had failed to properly consider the project’s climate impact.

Specifically, the D.C. Circuit found regulators failed to properly consider how that terminal and another proposed LNG project nearby would impact environmental justice communities in Cameron County, Texas. FERC also hadn’t properly reviewed the impacts of the carbon capture element of the project. In light of the renewed need for approvals and cancellations of contracts for LNG due to the carbon footprint of its production, the Company has decided not to pursue approval of the carbon capture for this project.

TAX CREDITS AND ALTERNATIVE ENERGY

The US Treasury marked the second anniversary of the enactment of the Inflation Reduction Act with some data regarding the use of tax credits associated with the law. More than 1.2 million American families have claimed over $6 billion in credits for residential clean energy investments – such as solar electricity generation, solar water heating, and battery storage, among other technologies – averaging $5 thousand per family. 2.3 million families have claimed more than $2 billion in credits for energy efficient home improvements – such as heat pumps, efficient air conditioners, insulation, windows, and doors – averaging $880 per family.

Solar electricity investments accounted for the largest number of residential clean energy credit claims. In total, more than 750,000 families reporting a total of more than $20.5 billion in qualified solar electric property costs in 2023. For reported investments in energy efficient home improvements, more than 250,000 families claimed investments in electric or natural gas heat pumps, more than 100,000 families claimed investments in heat pump water heaters, and almost 700,000 families claimed investments in insulation and air sealing.

SMALL COLLEGE BLUES

Centre College of Kentucky is a small, liberal arts college situated in Danville, Kentucky, approximately 35 miles south of Lexington. Established in 1819, Centre serves an entirely undergraduate student population of 1,346 full-time equivalent students and generated fiscal 2023 operating revenue of $68 million. This week, Moody’s downgraded the College’s rating from A3 to Baa1. The usual suspects were cited for the change in the ratings’ outlook to negative.

Operating deficit in fiscal 2023, the college’s financial projections reflect expectations of further significant operating deficits through fiscal 2025. The potential for further credit pressure as ongoing student market challenges will continue to limit net tuition revenue growth and could lead to weaker than expected operating results in fiscal 2025 and beyond. At the same time, the college’s revenue diversity, with nearly half of its operating revenue derived from investment income and philanthropy, provides it with relatively more flexibility than for other similarly sized institutions.

Manhattan College today announced that, effective immediately, it will change its name to Manhattan University in order to better recognize its more than 100 majors, minors, graduate programs, and advanced certificates and degrees, and attract a more globally diverse student body. It’s that last item – globally diverse – that as much as anything drives the move. Enrollment is down to 2,800 from a peak of 3,300 before the pandemic. Much of that is attributed to recruiting difficulties related to COVID 19 travel restrictions. Those restrictions hurt many institutions which counted on demand from international students.

As we have pointed out before, international students are a much sought after demand cohort. They typically pay full fare to attend. A university is seen as a more attractive option for those students. That accounts in part for why a 2022 study in the journal Economics of Education Review said that 122 four-year colleges morphed into universities between 2001 and 2016.

FOR PROFIT HOSPITAL SALE

Santa Clara County, CA has announced its intent to purchase Regional Medical Center from its for profit owner/operator. Over recent months, the hospital has been reducing the level and range of services it provides. Its status as a trauma center was downgraded from Level III to Level II. The overall decline in services created pressure for the County to find a way to preserve the facility and maintain/restore its prior service levels.

This is not the first time that the County has stepped in to add a facility to its overall health system. This will be the county’s fourth hospital purchase since 2019, when it bought O’Connor and St. Louise Regional hospitals and De Paul Health Center in Morgan Hill that were poised to close. In 2004, HCA closed San Jose Medical Center, the city’s only downtown hospital. In 2020, the corporation shut down the maternity ward at Regional, which had an immediate effect on East San Jose residents. In 2023, HCA ended its acute care psychiatrist services and neonatal intensive care unit at Good Samaritan Hospital in San Jose.

County officials announced their intent to buy the hospital from HCA Healthcare, the nation’s largest hospital corporation, for $175 million. The deal enables HCA to walk away from a population it does not want to serve and frees it to increase its facilities serving wealthier areas in the City of San Jose. The funding is coming from a one-time reimbursement of Federal Emergency Management Agency (FEMA). The county and HCA are aiming to complete the transaction in the first quarter of 2025. Once the deal goes through, the county intents to restore prior service cuts including the trauma center and maternity.

BACK TO THE FUTURE FOR TRANSIT FARES

The Transit system which serves the Seattle-Tacoma metropolitan area is dealing with many of the issues holding back full returns to pre-pandemic passenger levels. Now, Sound Transit is proposing returning to a fare structure which any New Yorker would recognize. Currently, fares are based on distance – which range from $2.25 to $3.50. New construction expanding the Link light rail system would create new lines out into the suburbs. This created a potential for those lines to require a $5 fare based on the current fare system.

Starting Friday, Aug. 30, the regular adult fare for Link light rail will be $3. The price for an Adult ORCA day pass will drop to $6 from the current $8 as part of a six-month promotional period. The price for a reduced- fare pass will drop from $4 to $2. Youth 18 and under continue to ride free.

The change to flat fares coincides with the opening of the Lynnwood Link Extension on Aug. 30. This extension to the 1 Line will add 8.5 miles and four new stations, including the first ones in Snohomish County. Link 2 Line service to Downtown Redmond is expected to open early next year, followed later in the year by the rest of the 2 Line. The Federal Way extension is set to open in early 2026.

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

CALIFORNIA BALLOT ISSUES

Last month, a ballot initiative was qualified for the November ballot in Richmond, CA. (MCN 7.29.24) In the wake of that announcement, Chevron announced that it was moving its headquarters from California to Texas citing the regulatory environment. The initiative is also being challenged in the courts. Initial hearings in the case indicate that at least some of the ballot challenge might not meet legal requirements.

While all of this plays out, the City and Chevron continue to talk. Those talks have yielded a proposed agreement which would see Chevron make annual payments to the City. If the agreement is approved, Chevron would pay $50 million annually to the general fund for the first five years, followed by $60 million annually the last five. The city would retain its right to impose new taxes on Chevron and other businesses, but the settlement payments would be credited toward what the refinery would owe.

The refinery tax ballot measure was estimated to have cost Chevron between $60 million and $90 million annually, depending on the amount of raw materials the plant processed. The council on Wednesday could accept the agreement, pull the measure from the ballot, or opt to keep the measure on the ballot for voters to decide. Another option would be to direct staff to continue negotiating with Chevron.

Another ballot initiative to deal with housing in the Bay Area was announced in July. Regional Measure 4 would “address housing affordability and reduce homelessness by: providing an estimated 70,000 affordable apartments/homes; creating homes near transit, jobs, and stores; converting vacant lots/ blighted properties into affordable housing; and providing first-time homebuyer assistance.

The proposal calls for the issuance of $20 billion in debt, supported by an estimated tax of $18.98 per $100,000 of a property’s assessed value to pay for the bond. A two-thirds (66.67%) vote is required for the approval of Regional Measure 4. The initiative has already faced challenges. It has had to be reworded as a result.

None of that seems to be helping. Currently, polling shows that 55% of voters support the measure. Now, the Bay Area Housing Finance Authority has decided to remove the bond measure in response and attempt another vote in the future.

WISCONSIN

This was primary week in Wisconsin which also allowed voters to decide on two ballot initiatives designed to limit the ability of the Governor to spend certain state revenues. One measure would have prevented the state Legislature from delegating its authority to appropriate funds which is permitted under existing law. The second would have prohibited the governor from spending federal funding that has not been earmarked for a specific purpose without legislative approval. 

The initiatives had to be viewed through the prism of the state’s highly and ever more partisan environment. The Legislature is Republican and the Governor is a Democrat. The Governor has been reelected once. The initiative’s reflected disputes between the Governor and the Legislature over how federal COVID-related funds were spent.

The limits on spending federal dollars were a concern. Supporters of the status quo framed it as something which could hobble the ability to use federal disaster monies. The need to go through the formal legislative process was seen as an impediment to assistance and recovery.

PORTS

Last summer, the Port of Los Angeles was facing labor problems and impacts on operations which lowered throughput at the Port. During the period before negotiations on a new contract were concluded in September, shippers began diverting cargo to east coast ports. There was concern that some of the movement might be permanent.

Those concerns have not been borne out one year later. The Port of Los Angeles handled a record-breaking 939,600 Twenty-Foot Equivalent Units (TEUs) in July, a 37% increase over the previous year. It was the best July in the Port’s 116-year history and the busiest month in more than two years. Seven months into 2024, the Port of Los Angeles is 18% ahead of its 2023 pace. July 2024 loaded imports landed at 501,281 TEUs, a 38% spike compared to the previous year. Loaded exports came in at 114,889 TEUs, an increase of 4% compared to last year. It was the 14th consecutive month of year-over-year export gains in Los Angeles.

Now the shoe is on the other foot. Some of the increase in tonnage at the Port of Los Angeles reflected early arriving holiday related cargo. That occurred in anticipation of potential labor actions at east coast ports. Union negotiations covering longshore workers on the East and Gulf Coasts have been stalled since June 10, bringing the union closer to a potential strike at the September 30 contract expiration. 

The five major ports facing a strike potential are New York/New Jersey, Savannah, Houston, Virginia, and Charleston. The last East-Coast-wide strike was in 1977, lasting seven weeks. 

WIND

The federal Bureau of Safety and Environmental Enforcement (BSEE) updated its suspension order for Vineyard Wind, allowing it to resume the installation of turbine towers and nacelles. The company is still prohibited from installing additional blades – all of which are in the process of being reinspected – or power production from the 24 turbines that have been completed since last October.

This incident has not diminished activity by potential providers to develop new wind generation. This week, the Department of the Interior held an offshore wind auction in the Central Atlantic for two lease areas; one 26 nautical miles from the mouth of Delaware Bay (Delaware and Maryland) and the other 35 nautical miles from the mouth of Chesapeake Bay (Virginia). Wind turbines off the coast of Delaware, Maryland, and Virginia could generate up to 6.3 GW of clean, renewable energy and provide power for up to 2.2 million homes.

ERNESTO

Once again, Puerto Rico and the US Virgin Islands had to contend with a hurricane. This one, Ernesto, left half of Puerto Rico without power. Luma Energy, which transmits and distributes electricity in the territory, was reporting that more than 718,000 customers were still without power there as of Wednesday. The emergency management director for the U.S. Virgin Islands said that as of Wednesday morning that the power was out across the entirety of St. John and St. Croix. There was some power being generated in St. Thomas.

This all served to remind people that the electric systems in both Puerto Rico and the USVI are embarrassingly unreliable. At the same time, the operations of the VI Water and Power Authority have been impacted by the replacement of the CEO by a more politically connected individual. The agency still faces all of its long standing issues as well as the cleanup from this storm.

As over half a million people went without power, the parties in the PREPA bankruptcy proceedings were reduced to arguing essentially over the meaning of words. The bondholders have been fighting efforts by the Oversight Board to restrict their rights to revenues only to those collected. The contention is that any future revenues are receivables not revenues and that the bondholders should only get revenues. It’s all over the meaning of the word account.

FIRES AND INSURANCE

With every new wildfire igniting in California, you can almost hear one more commercial insurance carrier withdraw from the fire insurance market. With fires becoming larger, more frequent and location repetitive, the cost of available coverage rises and the number of providers shrinks. This parallels the issue of insurance in the southeastern US against damage from hurricanes. So do some of the responses/solutions undertaken by impacted states.

In California, the theory is the same as in the case of hurricane coverage.

The FAIR Plan was established more than 50 years ago as the state’s insurer of last resort. It was designed to serve as a source of insurance primarily to meet mortgage requirements. Considering the amount of growth as well as the expanded footprint resulting from that growth, one can see how much the demand for insurance has increased. Unfortunately, it paralleled the growth in the absolute risk of fire.

In the midst of one of the largest wildfires in the state’s history, California has adopted a plan to address near term shortfalls in the availability of fire insurance. The commercial insurers have sought more flexibility in their underwriting process and higher rates. In return, companies will be required to offer policies to 85% of homeowners in places categorized as wildfire-distressed areas. In those areas, localities would be encouraged to employ mitigation policies like clearance requirements for vegetation.

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

Joseph Krist

Publisher

We are a bit more brief this week in deference to the weather. Here at the mothership, we are dodging falling trees while many of you will be bailing out, drying out or cleaning out. Be careful, especially travelling. And oh, yeah, this is what climate change looks like.

__________________________________________________________________

JOBS AND PERCEPTIONS

Some recent data points have produced some food for thought as people try to understand the clash between favorable macro data on the economy and less favorable perceptions on the ground. One example is in the oil and gas industry. Production is at record levels. This has not translated into higher job numbers. Oil production is up 5 percent since 2019, the last peak before the pandemic. The industry set a new record for crude production last week, according to the U.S. Energy Information Administration, pumping an average of 13.4 million barrels a day.

Employment in the industry has not followed along. In 2014, more than 600,000 people worked to produce oil and gas. Today, it’s more like 380,000, producing 45 percent more gas and 47 percent more oil. Gas production in Pennsylvania has settled in at about 630 billion cubic feet a month. Production had previously peaked at 670 billion in December 2021. The current level of production remains strong but 30 percent fewer people are working to produce it compared to before the pandemic. Bureau of Labor Statistics data shows that a little more than 12,000 people worked in the state’s gas industry in 2023.

In other industries, there is the issue of layoffs. One example is at John Deere, a major employer in the Quad Cities region of Illinois and Iowa. It has announced layoffs in two segments totaling nearly 1,000. In this case, the layoffs include white collar salaried jobs in addition to typical production layoffs. Some suppliers have also announced layoffs so you can see where life may not look so great in the Quad Cities. Then there is the auto industry which has seen layoffs at each of the Big Three automakers. Like the situation at Deere, they include both production positions as well as white collar jobs. While some of the layoffs were announced as temporary, the uncertainty is just as bad for voter psyches.

The tech industry is in its own bind. The race over AI has not produced the sort of profitability which was hoped for and now those outside of that area have become more vulnerable. Intel plans to lay off 15,000 employees, or more than 15% of its total workforce. This follows a clear 2024 trend as this year has already seen 60,000 job cuts across 254 companies, according to one industry analyst.  Companies like Tesla, Amazon, Google, Tik Tok, Snap and Microsoft have conducted sizable layoffs in the first months of 2024.

BAY AREA TOLLING

According to a recent report from the Bay Area Infrastructure Financing Authority, toll lanes across the region generated over $123 million in revenue last year. The largest amount, $50 million came from Interstate 880 express lanes and more than $22 million (first three quarters of FY 2024) from the Highway 101 corridor in San Mateo County. The different agencies that operate these express lanes say they’re generating more revenue than they originally projected. The revenue from these express lanes primarily funds operations, road maintenance, enforcement, and debt payments. In San Mateo County, a portion of the revenue from the 101 Express Lanes is used to support lower-income residents, including providing free toll lane trips or public transportation rides for those earning $80,000 a year or less.

NEW YORK OFFICES AND TAXES

NYS Comptroller DiNapoli released an analysis of the New York City office market in terms of property values and revenues. There has been great concern as headlines feature buildings being sold at deep discounts and investors worry about the potential impact on property tax revenues. Commercial real estate in New York City accounts for 21.9 percent of all property market values as of fiscal year (FY) 2025.

Office buildings comprise the largest share of Class IV billable values at 45.5 percent of the total in FY 2025, followed by retail properties (18.2 percent) and hotels (9.7 percent including condo hotels). The City did reassess office properties downward significantly after the first year of the pandemic, from which office properties have slowly recovered. The City first reflected the decline in assessment roll values beginning in FY 2022 to reflect changes in office buildings’ income-generating power. Total office market values declined by 16.6 percent between FY 2021 and FY 2022, a loss of approximately $33.6 billion in value. FY 2021 and FY 2022, a loss of approximately $33.6 billion in value.

Market values returned to growth the following fiscal year, increasing by 9.9 percent in FY 2023 and have continued to grow since then, though the rate of increase has been slow, with FY 2025 seeing a 3.1 percent growth year over year. Total office market values grew by about $8.7 billion between FY 2020 and FY 2025. While the overall office market has record high vacancies, the effect is significantly different when comparing submarkets and property types, with high-quality, amenity-rich office space still in demand. That growth has been concentrated as Hudson Yards has contributed an inordinate amount of the valuation increases. Older buildings are not faring nearly as well in terms of occupancy.

Many observers also do not understand the City’s property tax system. Valuation declines on a year by year basis don’t happen. The City uses a five year average valuation formula which has tended to reduce volatility in collections. For residential high rise buildings, co-ops and condominiums find their valuation which relies on rental data from comparable units to derive a value. Rents are one thing which continued to rise through the pandemic. There’s little indication that this trend will slow.

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

Joseph Krist

Publisher

NUCLEAR START UP

An entity backed by several venture capital investors announced plans to develop a fleet of traditional nuclear generating plants. The Nuclear Company will initially target sites with active combined operating licenses (COL), early site permits (ESP) or limited work authorizations from the Nuclear Regulatory Commission. The Company is looking at locations in the southeastern U.S., the PJM Interconnection and the Midcontinent Independent System Operator territory.

One example – active COLs for Turkey Point units 6 and 7 in Florida and William States Lee III units 1 and 2 in South Carolina. They use the same basic technology which was used at Plant Votgle’s recent expansion. The idea is that lessons from previous plants will be applied to prevent significant delays and cost increases. As for new sites, the Company targets former coal-fired generation sites for potential conversion.

The development of generation at existing sites is also one way to overcome the issue of transmission capacity. Existing generation plant has the benefit of significant transmission connection capability. It might also make future plants more attractive to utilities which need to replace the coal power but would like to avoid the clear financial risks associated with nuclear construction. Repurposing also avoids transmission upgrades associated with new plants. The Company has also said that it is open to developing plants on a turn key basis.

We’ll see if this approach works any better than have prior efforts to learn from past mistakes to gain efficiency or cost savings.

COLLEGE TUITION

Michigan is the most recent of at least 30 states to offer a version of free community college. Those eligible for Michigan’s program must enroll in college full-time and fill out federal student aid forms. The program is not dependent on a student’s household income. The Whitmer administration estimated that its free community college program will save money for over 18,000 students, up to $4,800 per student each year.

The idea is gaining support across the country. In addition to Michigan, Minnesota and New Hampshire will begin free community college tuition programs in FY 2025. Colorado will begin its program in FY 2026. Ironically, it is some of the more populous states which do not have such programs. Those include Texas, Ohio, Pennsylvania, Illinois, Wisconsin and Florida.

A 2020 study produced by the Federal Trade Commission found free community college increases enrollment by 26 percent, welfare for all students, and degree completions by 20 percent. Programs that only cover tuition after accounting for other sources of grants increase enrollment by 10 percent and degree completions by 10 percent, but provide no benefit to low-income students. Need-based programs that make community college free for low-income students increase enrollment by 12 percent.  

OAKLAND CHILDRENS HOSPITAL

The Regents of the University of California recently approved a major expansion of one of Oakland’s primary medical facilities, the Oakland Children’s Hospital. The hospital is a level 1 trauma facility as well as a “safety net” hospital. That is reflected in the fact that the hospital derives 70% of its revenues from Medi-Cal. The hospital had struggled financially for years before it merged with UCSF Benioff Children’s Hospital in San Francisco in 2014 following a $100 million gift from billionaire Salesforce founder Marc Benioff.

UCSF plans to pay for the construction through a combination of $891 million in debt financing, $350 million in gifts, $163 million in hospital reserves and $87 million in grants, according to the plan approved by the regents. The project will double the safety net facility’s emergency department space and triple the number of single-patient hospital rooms. 

Parkview Health System is a regional hospital system, anchored by a tertiary facility in Fort Wayne, Indiana. In total, Parkview operates 14 acute and specialty service hospital campuses, several ambulatory sites, and numerous physician offices throughout its market in northeastern Indiana and northwestern Ohio. In fiscal 2023, the organization reported $2.8 billion in operating revenue and saw over 59,000 admissions.

This week, Moody’s changed its outlook on some $800 million of outstanding debt from Parkview to negative from stable. The Aa3 rating had benefitted from a more stable operating environment in terms of reimbursements from the states under Medicaid. Now, the system is facing reduced cash flow which is always key to a rating. Moody’s notes that “lower cash flow will keep debt to cash flow elevated at about 3.0x after years of measuring 2.0x – 2.5x, and the rising expense base will constrain days cash to under 250 days, down from over 300 days prior to current financial challenges.”

A RELIC

Simmons University is a private, nonsectarian university with an all-women’s undergraduate college and coeducational graduate programs. That single-sex tradition and orientation has been a financial stumbling block for many schools of that category. Simmons reflects that trend. Located in Boston’s historic Fenway district, Simmons currently serves around 5,103 FTE students and generated roughly about $172 million of operating revenue as of fiscal year end 2023. 

The university had approximately $264 million in debt outstanding as of fiscal year end 2023. Moody’s recently downgraded Simmons from Baa2 to Baa3. That move was not enough to stabilize the outlook which was held at negative. The downgrade to Baa3 also considers the university’s material debt burden, up 88% over the past five years, exacerbated by declining operating revenue, down 13% over the same period. 

The near-term answer from management is to rely on reserves but that can only be sustained for so long. The hope is that draws on reserves can continue through fiscal 2027. That is a red flag for the rating.

STADIUM DEAL

Pinellas County and the City of St. Petersburg have reached an agreement over how to fund the construction of a new baseball stadium for the Tampa Bay Rays. The stadium is expected to cost about $1.3 billion, of which the Rays will cover $700 million. This week, Pinellas County approved some $300 million of support for the facility. The key to that is based in the effort to tie the stadium to the revitalization of the surrounding community.

The concept of a stadium anchoring a larger real estate development scheme is increasingly the go to tactic employed by teams seeking new stadia. Successful examples are to be found in St. Louis and Atlanta. In this case, the Rays also envision year-round non-baseball events at the stadium, as well as a planned mixed-use development in the area that will include 5,400 residential units, 750 hotel rooms, 1.4 million square feet of office and medical space, 750,000 square feet of retail space, a new Woodson African American Museum of Florida, a concert/entertainment venue of 4,000 to 6,000 seats and 14 acres of green space.

BAY AREA TRANSIT

An initiative that would place a new tax on Uber, Lyft and Waymo to fund the San Francisco Municipal Transportation Agency has qualified for the November ballot. The Community Transit Act, the proposed ordinance would the revenues earned by these companies from their rideshare and robotaxi services in San Francisco. It would be levied at a graduated rate that would rise from 1% to 4.5% as that revenue increases.

The measure would use the money raised — which its authors estimate to be $20 million to $30 million annually — to maintain or expand Muni service and the agency’s discounted-fare programs. The ride share customers are already paying for transit as the result of the passage in 2019’s Proposition D, which placed a 1.5% to 3.25% tax on all ride-hailing fares in The City. Muni is facing a massive deficit as ridership and fares haven’t recovered to the levels they were at before the COVID-19 pandemic and also to the end of federal pandemic-related financial support.

In Santa Clara, the Santa Clara Valley Transportation Authority (VTA), the transit agency designing and building the BART extension to San Jose and Santa Clara, announced the federal government will contribute $5.1 billion to complete the long-awaited project. The award from the Federal Transit Administration (FTA) is the second largest transit-related grant from the agency in history and the largest amount of federal money ever given to a West Coast transportation project.

Phase I of the BART extension brought service into Santa Clara County from Alameda County, with stops in Milpitas and North San Jose opening in 2020. The grant is for a four-station BART extension that will run from the Berryessa Transit Center in North San Jose through downtown and up to Santa Clara. The estimated cost of the project was originally $4.4 billion and scheduled to begin service in 2026. The opening date for this segment of the extension has now been extended to 2037.

P3 GOES PUBLIC

The Texas Transportation Commission voted to authorize spending more than $1.73 billion to terminate a 52-year agreement with Blueridge Transportation Group, which began constructing the 10-mile stretch of toll lanes in 2016. That segment of State Highway 288 opened in 2020 and has since been managed by the private operator. The operator sets the fluctuating toll rates.

It is the only such public-private partnership for a toll road in Houston. The agreement calls for TxDOT to take ownership of the tollway in early October, after which point TxDOT will be able to set its own toll rates and use the revenue along the south Houston corridor and for other infrastructure projects in the region.

“The agency believes the cost of the ‘buyout’ provision in the contract is substantially below the value of future toll revenues on the corridor. It is expected that the ‘buyout’ payment would be repaid with future toll revenue bonds, but would allow future toll rates to be significantly less than what are allowed under the current concession agreement.” Drivers currently pay up to $29.23 round trip during peak commuter times on a weekday, which is more than double the cost when the toll lanes opened in 2020.

After the takeover, TxDOT would be able to expand the road without imposing tolls on the new lanes. Under the existing agreement, any expansion would require that tolls be imposed on those lanes.

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

CALIFORNIA FOREVER BUT NOT NOW

The sponsors behind the California Forever proposal have run into some obstacles in terms of public support. The entity had planned to qualify a measure for the upcoming November ballot to allow the project to advance outside of the usual development approval process. (see MCN 6.17.24) The hope was that the initiative would be approved for the ballot this week.

Now, California Forever has announced that it would instead be taking the normal route of going through an Environmental Impact Report and then seeking approval.  “…announcing last year that California Forever would seek a vote on the November 2024 ballot, without a full Environmental Impact Report and a fully negotiated Development Agreement, was a mistake.”

It is no longer seeking to place an item on the 2024 ballot. California Forever will now apply for a General Plan & Zoning Amendment, and proceed with preparation of a full Environmental Impact Report and the negotiation and execution of a Development Agreement. The project would still have to go before voters to win final approval.

AUTONOMOUS VEHICLES

General Motors said that it has restarted test operations in three Sun Belt cities, using self-driving cars (Cruise robotaxis) with human safety drivers. Cruise is now providing autonomous ride services in Dallas, Houston and Phoenix. Different vehicles are being used versus the models used in San Francisco. The stoppage of test operations in California was implemented after some well publicized incidents in San Francisco.

As a result of the suspension, there were major management changes at Cruise. Cruise booked a loss of $500 million before taking into account interest and taxes, an improvement from the $600 million it lost in the same period a year earlier.

CHICAGO PUBLIC SCHOOLS

Mayor Brandon Johnson suggested a plan for Chicago Public Schools to borrow up to $300 million to help pay for increased salary and some pension costs next year. CPS is in negotiations with the Chicago Teachers Union over a new contract. The Mayor has strong ties to CTU and there was always concern that negotiations would be a problem given that CTU is among the more militant unions in the country. Now, the Mayor’s idea is being exposed to significant scrutiny and support has been slow to coalesce.

An internal CPS memo outlines the risks of borrowing to pay for hypothetical 4% raises for teachers and principals and cover a $175 million pension payment that was shifted to the school district as part of the City of Chicago’s effort to stabilize its finances. If the district financed those raises and pension payments with debt, the district’s projected deficit would grow to $933 million for next fiscal year.

CPS has approved a $9.9 billion budget for 2025. The proposed budget does not include any new borrowing, or factor in the costs of new bargaining agreements that are being negotiated now, including with CTU. The proposal would close a $505 million shortfall — driven largely by the end of federal COVID money — through cuts at the district’s central office and staffing, as well through restructuring some existing debt and federal grants.

When the district faced deficits between the 2014 and 2017 fiscal years, CPS borrowed money to cover operating expenses since administrations at the time didn’t want to cut costs. The district owes $3.7 billion in principal and interest payments for that borrowing. The CPS credit will be mired in sub-investment grade territory for a long time.

BAY AREA WATER

The Bay Area’s five largest water agencies — the Contra Costa Water District (CCWD), the East Bay Municipal Utility District (EBMUD), the San Francisco Public Utilities Commission (SFPUC), the Santa Clara Valley Water District (SCVWD) and Zone 7 Water Agency (Zone 7) — are jointly exploring a regional desalination project that would provide an additional water source, diversify the area’s water supply, and foster long-term regional sustainability.

The project concept relies on available capacity in an extensive network of existing pipelines and interties that already connect the agencies, as well as existing wastewater outfalls and pump stations in the region. The only new infrastructure envisioned for the project would be a treatment plant and connections to the network of interconnections that would already be in place.

The goal is to provide a reliable water supply source available during contract delivery reductions, extended droughts, and emergencies such as earthquakes or levee failures. It would also allow other major facilities such as treatment plants, water pipelines, and pump stations, to be removed from service for maintenance or repairs.

The biggest issue facing this and any other desalinization project is the high cost per gallon of producing the water. Desalinization is the most expensive alternative by far producing a cost per gallon roughly double versus other ways to maintain and develop water supplies.

FOSSIL FUEL TAX ON THE BALLOT

An initiative placed on the Richmond, CA ballot in November would tax the Chevron refinery, one of the largest in the state, $1 for each barrel of oil processed within city limits. The City estimates that the tax would generate some $90 million and would be available to the City’s General Fund. As a general tax, the initiative would only require a majority of the vote not a supermajority.

Carson, California, enacted its own refinery tax in 2017 that helped move the city’s finances the city into surplus by adding tens of millions of dollars to its annual budget.

PUERTO RICO AND ELECTRIC RESILIENCE

The U.S. Department of Energy (DOE) has announced a $325 million funding opportunity for the new Programa de Comunidades Resilientes (Community Resilience Program). The funding is derived from DOE’s Puerto Rico Energy Resilience Fund (PR-ERF). It is designed to provide funding for solar and battery storage installations in community healthcare facilities and subsidized multi-family housing properties.

The plan calls for between $70 million and $140 million to be allocated to federally qualified health centers, dialysis centers, and diagnostic and treatment centers to improve their energy resilience. The loss of power for extended periods to facilities such as these had significant negative impacts on health on both long and short term bases.

Other funds of between $93 million and $185 million will be dedicated to enhancing energy resilience in community centers and common areas within public or privately owned multi-family housing properties subsidized by the U.S. Department of Housing and Urban Development. This includes powering shared building infrastructure and common spaces, such as elevators, in addition to community centers located on public housing properties in Puerto Rico.

That dedication of funds for public housing projects is a neat way to get around historical Congressional hostility to funding public housing on either a new construction or maintenance basis. In December 2022, a law providing $1 billion for the PR-ERF was signed. It is part of an overall effort to invest in renewable and resilient energy infrastructure in Puerto Rico. in February 2024, the DOE launched the Programa Acceso Solar on the island. It is designed to connect low-income Puerto Rican households with subsidized residential solar and battery storage systems.

NEW YORK STATE

The State Legislature ended its session in late June finally bringing an end to an extended budget cycle. The fiscal year started April 1. The ultimate stumbling block was not transportation or migrant related costs. Rather it was the issue of affordable housing. A long standing program known as 421-a had been the main tool used in NYC to generate new affordable housing.

421-a was created in 1971 as a 10-year as-of-right tax break (plus three years during construction) for new multi-family residential construction.  It went through many iterations during its half century of existence. They were all designed to enhance a program which many contend did not actually achieve its goals. One thing was certain – the cost to NYC in terms of lost tax revenue associated with the program was a larger amount than any other single New York City housing budget item.

The New York City Independent Budget Office (IBO) found that developments already under the 421-a program would receive $25.7 billion from fiscal year 2023 through fiscal year 2056, when the last of the 421-a exemptions would cease (all amounts are in 2022 dollars). In fiscal year 2024, the Department of Finance reported that the City provided almost $1.9 billion in tax breaks to 421-a properties. At the same time, the issue of affordable housing in the state became more difficult.

In 2022, there was a consensus that 421-1 a was no longer appropriate. In an atmosphere of upended Albany politics and poor City-State relations, the program was allowed to expire. This year’s budget was seen as a point of leverage by housing advocates and that came to pass. The Legislature and the Governor were able to agree on a new plan.

In the 2025 State Enacted Budget, the 421-a program was revised, renamed Affordable Neighborhoods for New Yorkers, and placed under a different part of the tax law, 485-x. The 485-x program was made retroactive back to June 15, 2022, when 421-a expired, and applies to all qualifying new construction residential housing with construction starting by June 15, 2034. There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 

There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 485-x limits affordable units to 100% Area Median Income (AMI) while 421-a allowed affordable units up to 130% AMI. Most rental buildings under 485-x will be required to set aside 25% of units as income-tested affordable units, compared with 25% to 30% of units under the 421-a.

485-x requires permanent rent stabilization for affordable rental units but does not require any rent stabilization for market-rate units. The prior 421-a program required both affordable and market-rate units to be rent stabilized for the duration of the compliance period, limiting how much rents could increase year-to-year for all units.

To help make office-to-residential conversions more financially feasible, the 2025 State Enacted Budget includes a new tax exemption for office-to-residential conversion projects, called the Affordable Housing from Commercial Conversions Program, housed in Section 467-m of the Real Property Tax Law. This is the first tax incentive program for office-to-housing conversions since the 421-g incentive program, which from 1995 through 2006 specifically benefited conversions in an area of lower Manhattan.

467-m offers a full property tax exemption during construction, and a partial property tax exemption for up to 35 years after completion. The exemption is more generous for projects located south of 96th Street in Manhattan (referred to in the legislation as the Manhattan Prime Development Area). To receive benefits, at least 25% of the rental units must be affordable, with the affordability levels of those units averaging at 80% AMI or lower.2 These units are subject to permanent rent stabilization.

NUCLEAR

Terra Power, the Bill Gates backed entity, announced groundbreaking in Kemmerer, Wyoming on the nation’s first advanced nuclear reactor. The company is building the nuclear facility at the site of an abandoned coal generating plant. The new technology uses liquid sodium as a coolant instead of water, which can absorb much more heat and doesn’t require pumps to circulate. 

The plant is a public-private partnership with the U.S. Department of Energy’s (DOE) Advanced Reactor Demonstration Program (ARDP). The plant will also include a molten salt energy storage system. This is designed to enable higher output and provide an ability to operate on a dispatchable rather than a base-load schedule. It is projected to commence commercial operation in 2030 reflecting an extended testing period and approval process.

On the traditional side, the restart of Michigan’s Palisades nuclear plant seems to be proceeding apace. This week, the outlook got a boost when the Chair of the Nuclear Regulatory Commission told Congress that the plant is on track to restart in August 2025. This assumes completion of the environmental review process by May, 2025.

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

FEDERAL INFRASTRUCTURE GRANTS

Since 2017, the idea that there was a new and better way to finance infrastructure seemed to always be just around the corner. As infrastructure day dragged into infrastructure week and month through the Trump administration, those ideas languished. Or maybe they never existed. Yet recent months have shown that good old fashioned federal funding for these large projects is emerging as the main catalyst for execution of some of these projects.

The biggest example is the federal grant funding for the Gateway Tunnel project in the NY metropolitan area. While initially stalled by New Jersey state action, the project received no support from the Trump administration. Once new administrations took over in NY and NJ, federal funding emerged.

Alabama Gov. Kay Ivey announced the U.S. Department of Transportation has awarded a $550 million grant to the Mobile River Bridge and Bayway Project. Initially conceived in the late 1990’s, the project had previously suffered from local objections to user-based funding. According to a 2019 public hearing survey conducted by U.S. Department of Transportation and ALDOT, 86% of people said they did not believe there is a need for this project, mainly because of a proposed toll.

The money comes from the Bridge Investment Program, which Congress created in 2021. It is a discretionary program of the U.S. Department of Transportation allowing states to compete for projects of national importance.  The Alabama Department of Transportation has acquired all of the land and completed preliminary steps, such as environmental impact statements and archaeological reviews. That put the project in a favorable competitive position.

The cost is now estimated at between $3.3 and $3.5 billion. The state already has $125 million from a grant awarded in 2019 under that Nationally Significant Multimodal Freight & Highway Projects program. The state has pledged at least $250 million, which is on top of $200 million already spent on preliminary measures. The latest federal grant brings the committed funding total to $1.075 billion. The state will apply for a TIFIA loan from the federal government as well.

The federal money does not mean that there will not be tolls on the new bridge. There is however, a pledge from the state that tolls will be limited to $2.50 for “frequent users”. The toll revenue will pay off any TIFIA loan as well as any additional borrowing undertaken by the State.

The Mobile project is the fifth such to be a grant recipient since the enactment of the IRA. It joins grants of $1.35 billion to the Brent Spence Bridge project to rehabilitate and reconfigure the existing span between Kentucky and Ohio over the Ohio River; $400 million to increase the Golden Gate Bridge’s resiliency against earthquakes; $158 million to for the Gold Star Memorial Bridge, which is part of the Interstate 95 corridor over the Thames River between New London and Groton in Connecticut and $144 million to rehabilitate four bridges over the Calumet River in Chicago.

Another grant will benefit two states with one project. The Tennessee Department of Transportation announced in May of this year that they were studying plans for a new bridge to replace the current 75-year-old bridge that connects Memphis and Arkansas. The current I-55 bridge is “not designed for modern interstate standards.”

The Tennessee and Arkansas Departments of Transportation have now been granted over $393 million by the federal government for the new I-55 bridge. It will be combined along with the Tennessee Department of Transportation, and the Arkansas Department of Transportation which have each committed up to $250 million to the project.

CLIMATE LITIGATION

A Baltimore Circuit Court Judge dismissed the City of Baltimore’s lawsuit against the big oil companies saying that the case belongs in federal rather than state court. The decision is at odds with how other courts have ruled in similar cases, including a Maryland state court that allowed climate deception lawsuits that the city of Annapolis and Anne Arundel County separately brought against fossil fuel companies to proceed to trial. 

The U.S. Court of Appeals for the Second Circuit issued a similar ruling in a case called City of New York v. Chevron. Courts in Hawaii, Massachusetts, Colorado ruled the opposite and said that the cases could move forward. The US Supreme Court declined to hear in January of this year an appeal of a decision by the St. Louis-based 8th U.S. Circuit Court of Appeals. That court found that Minnesota’s lawsuit accusing the energy industry of engaging in decades of deceptive marketing to undermine climate science and the public’s understanding of the dangers of burning fossil fuels belonged in state court, where it was originally filed.

Eight U.S. appeals courts have affirmed lower court decisions remanding similar climate cases to state courts, finding generally that the lawsuits exclusively raise state law claims and thus federal courts do not have jurisdiction.

HOUSTON CLIMATE TROUBLES

The last decade has been tough on the City of Houston. There was Hurricane Harvey in 2017. The state’s electrical grid failure during the winter of 2021. Nearly one week without power in May of this year. Now, over a week without power from Hurricane Beryl. More than 2.2 million customers of the local utility, CenterPoint Energy, were without power at the peak of the outages last week.

Before the storms, Harris County, which includes Houston, had been experiencing net negative migration from other parts of the country.  Since 2016, according to U.S. census data, more people have left Harris County for other counties than have moved in from elsewhere. That trend continued after 2017 when Hurricane Harvey flooded large areas of the city.

STATE BUDGETS

In June, Hawaii Governor Josh Green (D) signed into law the largest income tax cut in that state’s history—totaling $5.6 billion in lost revenue by 2031. Meanwhile, the Kansas Legislature went into a special session to decide on tax relief, ultimately passing property and income tax cuts totaling $2 billion over five years. Nebraska is headed into a special session later this month to debate property tax cuts. Arkansas passed its third income tax cut in less than two years, lowering top corporate and personal rates by half a percentage point each and making the cut retroactive to the beginning of 2024.

FY 2024 is the last to see any more fiscal help related to the pandemic. Now, the impacts of policy decisions made during the pandemic when there was a lot of extra money sloshing around government budgets are becoming clear. Revenue growth is slowing but so are expenditures. One area receiving attention is employee compensation. It has been markedly harder for governments to adequately meet their staffing needs both through recruitment and retention.

Thirty-one states, the District of Columbia (DC), and Puerto Rico reported proposed across-the-board (ATB) pay increases for at least some employee categories in fiscal 2025. Additionally, 14 states, DC and the U.S. Virgin Islands proposed at least some merit increases. These moves come as thirty-three states reported that general fund collections for fiscal 2024 from all revenue sources (including sales, personal income, corporate income, and other revenues) were coming in higher than original estimates used in enacted budgets.

Collections were on target with original estimates in seven states and lower than projected in ten states. Compared to fiscal 2024 current estimates, fiscal 2025 revenue forecasts in governors’ budgets project 2.4 percent growth in sales and use taxes, 2.9 percent growth in personal income taxes, a 0.8 percent decrease in corporate income taxes, and 2.0 percent decrease in all other general fund revenue.

DATA CENTERS AND POWER

According to the Energy Information Administration, U.S. commercial sector electricity use grew 1% last year from 2019 levels. That is the headline. The reality is that the growth in commercial demand for electricity is concentrated in a handful of states experiencing rapid development of large-scale computing facilities such as data centers. Electricity demand has grown the most in Virginia, which added 14 BkWh (billion kilowatt hours), and Texas, which added 13 BkWh.

Commercial electricity demand in the 10 states with the most electricity demand growth increased by a combined 42 BkWh between 2019 and 2023, representing growth of 10% in those states over that four-year period. By contrast, demand in the forty other states decreased by 28 BkWh over the same period, a 3% decline.

Virginia has become a major hub for data centers, with 94 new facilities connected since 2019 given the access to a densely packed fiber backbone and to four subsea fiber cables. Demand for electricity by the commercial sector in some large states such as New York, Illinois, and California has been flat or has declined compared with 2019.

Nationally, EIA projects that U.S. sales of electricity to the commercial sector will grow by 3% in 2024 and by 1% in 2025.  The South Atlantic and West South Central census divisions together account for 40% of U.S. commercial electricity demand. EIA now expects that commercial consumption in the South Atlantic will increase by 5% in 2024 and 2% in 2025 and in West South Central by 3% this year and 1% next year. 

The U.S. electric power sector generated 5% more electricity in 1H24 than 1H23 because of a hotter-than-normal start to summer and increasing power demand from the commercial sector. EIA expects a 2% increase in U.S. generation in 2H24 compared with 2H23, with solar power, the fastest growing U.S. source, generating 36 billion kilowatt hours (BkWh) more electricity in 2H24 than in 2H23 (an increase of 42%).

Solar power is the fastest growing source of electricity in the United States. We expect 36 billion kilowatt hours (BkWh) more electricity to be generated in the United States from solar in 2H24 than in 2H23, an increase of 42%. We forecast 6% more U.S. wind generation during 2H24–12 BkWh more than in 2H23—driven by more wind turbines coming on line, and we forecast 4% (5 BkWh) more hydropower, as a result of slightly improved water supply conditions this year.

ELECTRIC VEHICLES

Electric vehicles, including plug-in hybrid vehicles are taken into dealerships at a rate three times higher than that of gas-powered cars. That comes from the J.D. Power 2024 Initial Quality Survey. According to the study, battery electric vehicles averaged 266 problems per 100 vehicles, about 48% more than gas- and diesel-powered vehicles, which averaged 180 problems per 100 vehicles. The good news is that the issues do not reflect electric cars breaking down as much as they reflect issues with the technology inside the vehicle.

The failures tended to involve things like issues with infotainment systems, which was the most problematic area in the study. Issues with in-vehicle features and controls like windshield wiper or turn signal display buttons, false warnings from advanced driver assistance systems, difficulty connecting to the vehicle with popular apps like Apple CarPlay and Android Auto drove negative ratings.

These findings won’t help to reverse current sales trends in the electric vehicle space. General Motors said it now expected to make 200,000 to 250,000 battery-powered cars and trucks this year, about 50,000 fewer than it had previously forecast. In Oakville, Ontario, a production facility recently stopped making the gasoline-powered Ford Edge S.U.V.

It was slated to shift to new electric versions of the Ford Explorer and Lincoln Aviator, both three-row S.U.V.s. Instead, Ford will turn the factory in Oakville into a third production location for its Super Duty pickup trucks, which are among its most profitable models. It also positions Ford and the others to mitigate against likely Trump administration moves to eliminate tax breaks currently benefitting EV sales. It would seem to increase concerns (if not doubts) about projects announced but as yet undeveloped.

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

CALIFORNIA URBAN WATER REGULATION

The California State Water Resources Control Board approved regulations that will set long-term limits on the amounts of water the state’s urban utilities can use on an annual basis. The goal is to generate about 500,000 acre-feet in water savings each year by 2040. The new rules arose as the result of legislation from 2018. The regulation is expected to apply to 405 urban suppliers, which collectively provide water to about 95 percent of California’s population, according to the Water Board.

Each year a water utility will be required to generate an “urban water use objectives” plan and will require compliance beginning in 2027. The limits will be phased in over the ensuing 13 years. The expectation is that ultimately annual water savings will approximate 500,000 acre feet. The mechanics of how each regulated utility achieve these goals – legal, regulatory, education, enforcement – are left to each utility. What will apply across the board is that in the event that a water utility exceeds its usage limits, it will be fined $10,000 a day until usage returns to required levels.

According to the board’s estimates, cuts greater than 30 percent will only affect six suppliers (two percent of all suppliers in the state affected by the regulation) by 2025 and 46 (12 percent) by 2040; this means that 118,370 people will be affected by the largest cuts by next year, and 1,733,569 in 15 years. The regions where water suppliers will be asked to make the biggest cuts to water delivery (greater than 30 percent) by 2040, are South Coast, San Joaquin Valley, and Tulare Lake.

The reductions needed to meet the objective based on 2040 standards, relative to the subset of urban uses subject to standards, will be of 92 percent for the City of Vernon; 58 percent for City of Atwater; 50 percent for Oildale Mutual Water Company; 45 percent for the West Kern Water District; and 43 percent for the City of Glendora.

Sixty-five percent of suppliers serving 29,157,064 people will initially be unaffected as of next year. By 2040, 31 percent of suppliers serving 12,459,736 residents would have avoided a reduction in water delivery entirely. Eight percent will see a reduction of less than 5 percent; 13 percent will have to cut water delivery between 5 and 10 percent; 21 percent between 10 and 20 percent; and 15 percent between 20 and 30 percent.

The new rules must still receive the final approval of the Office of Administrative Law. If approved, the regulation will come into effect by January 1, 2025. 

KEY BRIDGE COLLAPSE IMPACT

The financial impact of the Key Bridge in Baltimore was always going to be about more than the cost of replacement. It is expected that the Federal government would pick up much of the cost of that project. In the meantime, the impact on operating revenues is a different story. The Maryland Transportation Authority operates 7 other facilities – three bridges, two tunnels and two turnpikes – funded by tolls covering operations and maintenance and debt service.

The Authority’s Board was recently advised that a $153 million decline in toll revenues throughout the 2024 through 2030 forecast period is expected. While mostly attributed to the Key Bridge, the forecast sees a decline of usage across the entire Authority portfolio. That will likely cause tolls to rise sooner than initially planned.

It is noted that the Authority emphasized its need to not only meet operating needs but also to respect its various bond covenants.   “Beginning in fiscal year 2028, a systemwide total increase will be necessary to maintain two-times debt service coverage throughout the remainder of the forecast period.”

PENSION FUNDING

Earlier this year, the City of Houston reached a long sought labor agreement with its firefighters. The hurdle that proved the highest to climb was the issue of funding levels. It was important to the unions that pension funds be adequately funded. The high levels of underfunding and the increasing cost of funding had been a long time negative weight on the City’s credit. Now, the City has turned to the capital markets to help it meet obligations it incurred in reaching the labor agreement.

The key component is the provision of some $650 million to increase the fun ding level of the pension funds. The plan is to issue debt to fund the expenditure. The wrinkle is that many municipalities have turned to pension funding bonds (pension obligation bonds or POB) to increase funding. The usual mechanism however is to issue POB which are not backed by the taxing power of the issuing municipality.

Houston is choosing to use debt but is also issuing that debt in the form of general obligation debt. That is a pledge of taxing power in support of this debt for an operating cost. In this case, the bond issue would provide the $650 million to be turned over to the pension fund. It also comes as the City seeks to fund the cost of salary increases agreed to as a part of the overall contract package.

The plan has earned pressure on the City’s ratings.  S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. “The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases.” 

The City also faces increasingly frequent flood and hurricane events generating increased expenses. It also faces legal issues from an April Texas court ruling in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. The Court found that the amount subject to transfer is limited under state property tax laws. The estimated revenue hit if that survives all the way through the state court system is $110-120 million annually.

The City of East St. Louis has long been a depressed credit. It has often underfunded its pension funds as a way of maintaining current budget balance. Under state law, pension boards which oversee the funds can request that the State Comptroller intercept state aid to a city and direct those funds to the pension funds. For months, the City and its pension boards have been negotiating over how much the City needs to put in during its current fiscal year. The Police Pension Fund has now decided to request that the State Comptroller intercept some $3.5 million to be deposited into that fund.

Now the City has chosen to challenge the intercept provisions in court. The City is suing the Police Pension Board and the Comptroller claiming that the intercept program is unconstitutional. The city is asking the court for a permanent injunction that would block the comptroller’s office. “The enforcement of this statue exacerbates existing inequalities by reducing the City’s ability to provide essential services that these communities rely on. The reduction in state funds due to the intercept will lead to decreased public safety, health services, and other vital municipal functions, disproportionately affecting minority residents.

The City stopped making monthly payments to the Police and Fire pension funds after September of last year. The Funds indicated in January that they would seek impoundment without funding. Since then, the Fire and Police Funds have taken slightly different approaches. The Fire pension fund negotiated an agreement with the city in March. Under that deal, the city government agreed to put $4.5 million into the fire pension fund by the end of May.

The East St. Louis Police Pension Board says the city owes $3.5 million to the fund, covering fiscal years 2016, 2019 and 2021. The city says it received less than that – about $3.3 million – from the state during the first quarter of this year. It takes some 60 days to process an intercept request which would put a decision into August. A local judge has issued a temporary restraining order that stops the intercept from proceeding, for now. A hearing will be held on August 5 which is six days before an intercept could occur.

MUNICIPAL FINANCE AND HOMELESSNESS

One of the more intractable problems which is also the most visible is that of homelessness and its intersection with mental illness. The lack of facilities, the reluctance to fund or locate needed facilities and current politics have all stood in the way of dealing with the issue. Now a recent financing and a project groundbreaking are showing what can be accomplished through the municipal market.

The Mead Valley Wellness Village is a 450,000 sq. ft. behavioral health campus with five main buildings: a Community Wellness and Education Center, a Children’s and Youth Services building, Urgent Care Services, Supportive Transitional Housing, and Extended Residential Care. It includes residential as well as outpatient facilities. There are provisions for families as well. They reflect the state of the art in terms of holistic treatment of the overarching problem.

The facilities will be operated by Riverside University Health System–Behavioral Health (RUHS-BH), a county agency.  The County owns the land – an 18 acre site near Perris, CA – and created an entity specific to this project to act as landlord. Through this structure, the County has affected a P3 with the developer and builder/designer at risk through construction. Upon acceptance of the facility, the County’s obligation to make lease payments kicks in.

The location of the facility isn’t exactly a garden spot off I-215. That reflects the difficulty in siting projects like this. There isn’t much around to object to it. The facility is anticipated to open in 2026 and is estimated to have an annual impact of more than $78 million and will lead to more than 800 jobs.

PIPELINES ON THE BALLOT

The South Dakota Secretary of State has certified a ballot item which could repeal legislation seen as supportive of the Summit Carbon Systems proposed pipelines. Senate Bill 201 was enacted in 2023. Pipeline opponents were able to gather signatures in numbers well above the requirement. This puts the law in the classification of a “referred law.” It’s uncommon, The last referred law vote was in 2016.

Senate Bill 201 allows counties to collect a pipeline surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion. It provides that commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. That means local rulemaking still exists, and the decision to make a carbon pipeline company comply with those setbacks still rests with the Public Utilities Commission.

FEMA FLOOD RULES

Since August 2021, FEMA has partially implemented the Federal Flood Risk Management Standard (FFRMS). Prior to the FFRMS, FEMA required non-critical projects to be protected to the 1% annual chance (100-year) flood to minimize flood risk. Critical projects, like the construction of fire and police stations, hospitals and facilities that store hazardous materials, had to be protected to the 0.2% annual chance (500-year) flood. This standard reflected only current flood risk.

The FFRMS will increase the flood elevation — how high — and floodplain — how wide — to reflect future, as well as current, flood risk. Until now, implementation relied on existing regulations to reduce flood risk, increasing minimum flood elevation requirements for structures in areas already subject to flood risk minimization requirements, but not horizontally expanding those areas (widening of a flood plain). That was a problem exposed when prior storms revealed that much development was occurring in flood plains in Harris County, TX.

One of the major distinctions between partial and full implementation are the expansion of the floodplain to reflect both current and future flood risk and the requirement to consider natural features and nature-based solutions.  Less reliance on sea walls and the like and more on softer more absorptive natural areas with greater spacing between development on the shore or the riverbank.

Given the last 10 days or so of weather up here in the NYS woods, the argument over climate change is pretty much over. So, it’s only rational to face reality and mitigate risk. No reason for the government not to apply at least some insurance industry common sense. In this case, it’s at least based on some evidence. The efforts at flood mitigation in the Rockaways for housing and other smaller areas on Staten Island and in New Jersey in the wake of Superstorm Sandy provided that. It does hit values no doubt but we haven’t seen evidence of real fiscal problems.

It’s appropriate that the release came as a spate of storms has been brewing. The predictions have been for a more dangerous than normal storm season. It’s clear that the issue of managed retreat is going to gain prominence. Just this week the situation in Houston has been pretty severe so this is becoming almost a regular occurrence there. There was already a realization that planning maps needed to be adjusted in Harris County. The same is true in rural Vermont where it’s two years in a row for one town.

Eventually, the insurance market will tighten and the pressure against building back will increase.

PREPA BANKRUPTCY

The never ending process we know as The Puerto Rico Electric Authority bankruptcy may be closer to an ending but not a solution. The bankruptcy court has given the Oversight Board, PREPA and its creditors some 60 days to come up with a workable Plan of Adjustment. The parties have been negotiating but to no avail. Now, the judge has raised the potential for the bankruptcy to be dismissed if a solution cannot be found.

Mediation efforts have come up short with the mediator expressing a pessimistic view. “I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.” The judge noted that a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”

Both sides in the process were admonished for taking unrealistic positions in their negotiations. Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available. The judge noted that none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit on appeal.

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

This week we celebrate the nation’s 248^th birthday. Enjoy whether you’re off for the week, long weekend, or just the day. We will take a mid-year break next week. The next issue will be dated July 15.

__________________________________________________________________

CARBON PIPELINES

The Iowa Utilities Board gave its approval for the controversial Summit Carbon Solutions pipeline and for the company to use eminent domain to acquire landowners’ property. In giving its approval to the project, the Iowa Utilities Board ruled that Summit cannot begin construction in Iowa until the necessary permits are secured in South Dakota and North Dakota. 

The Iowa House approved legislation the past two sessions that would have given landowners more leverage over pipeline negotiations. In 2023, the House passed a bill requiring pipeline companies to obtain voluntary easements for 90% of their routes before they could use eminent domain for the rest. This year, the House voted to allow landowners who are subject to eminent domain requests by carbon dioxide pipeline companies to challenge the legitimacy of those requests in court earlier in the permit proceedings. Neither bill advanced in the Senate.

COAL REGULATION

The Supreme Court temporarily put on hold an Environmental Protection Agency plan to limit air pollution that drifts across state lines. The “good neighbor” plan would require factories and power plants in Western and Midwestern states must cut ozone pollution that drifts into Eastern ones. Under the Clean Air Act, states are allowed to devise their own plans, subject to approval by the E.P.A. In February 2023, the agency concluded that 23 states had not produced adequate plans to comply with its revised ozone standards. The agency then issued its own.

Resulting litigation ultimately left 11 states subject to the new rules. Ohio, Indiana and West Virginia, along with energy companies and trade groups — challenged the federal plan directly in the United States Court of Appeals for the District of Columbia. When a three-judge panel of that court refused to suspend the rule while the litigation moved forward, the challengers asked the Supreme Court to step in.

That is the basis of the suspension of the rules. It comes as a larger case is due to be decided on the larger issue of whether courts must defer to the reasonable interpretations by agencies like the E.P.A. of ambiguous statutes enacted by Congress. It was a true split decision with the liberal wing aligning with Justice Barrett in a strong dissent. “The court today enjoins the enforcement of a major Environmental Protection Agency rule based on an underdeveloped theory that is unlikely to succeed on the merits.” She notes that the plans “have been temporarily stayed,” and, “no court yet has invalidated one.”

TAXES AND TRANSIT

The decision to stop the implementation of congestion pricing in Manhattan drove quick consideration of replacing the revenue to be generated with taxes on business. That alternative was just as quickly rejected. Now, the MTA is left with threatening projects designed to comply with the ADA and other projects. The idea that those benefitting from the transit system should help pay for it has fallen on deaf ears in Albany.

In the meantime, New Jersey is showing New York how to do it. An agreement has been reached with the 600 corporations in the state that make at least $10 million a year in profits. Those firms will pay a 2.5% tax on all earnings for five years. The state in turn will not pursue restoring the sales tax to 7% from to 6.625%.

The announcement comes after a difficult couple of weeks for NJ Transit commuters who come into NYC through Penn Station. Power was lost on tracks (owned by Amtrak) which forced thousands to be stranded in the excessively hot conditions plaguing the region last week.

CALIFORNIA BALLOT

The California Supreme Court issued a ruling to invalidate the Taxpayer Protection Act, which would have made it harder to pass or raise taxes in California. The Act was part of a proposed ballot initiative scheduled for November. The ruling comes as the deadline for removing ballot initiatives occurs this week. A second announcement concerned a 2004 law which allowed workers to sue their employers on behalf of the state and other employees.  An agreement between organized labor and business groups will remove the initiative to repeal the Act.

The Bay Area Housing Finance Authority (BAHFA) today adopted a resolution to place a general obligation bond measure on the November 5 general election ballot in each of the nine Bay Area counties to raise and distribute $20 billion for the production of new affordable housing and the preservation of existing affordable housing throughout the region. 

The proposed bond measure calls for 80 percent of the funds to go directly to the nine Bay Area counties (and to the cities of San Jose, Oakland, Santa Rosa and Napa, each of which carries more than 30 percent of their county’s low-income housing need), in proportion to each county’s tax contribution to the bond. The remaining 20 percent, or $4 billion, would be used by BAHFA to establish a new regional program to fund affordable housing construction and preservation projects throughout the Bay Area.

Most of this money (at least 52 percent) must be spent on new construction of affordable homes, but every city and county receiving a bond allocation must also spend at least 15 percent of the funds to preserve existing affordable housing. Almost one-third of funds may be used for the production or preservation of affordable housing, or for housing-related uses such as infrastructure needed to support new housing. 

The BAHFA bond measure currently would require approval by at least two-thirds of voters to pass. Voters throughout California this November will consider Assembly Constitutional Amendment 1 (ACA 1) — which would set the voter threshold at 55 percent for voter approval of bond measures for affordable housing and infrastructure. If a majority of California voters support ACA 1, the 55 percent threshold will apply to the BAHFA bond measure.

AUTONOMOUS AND ELECTRIC VEHICLES

When GM’s Cruise autonomous taxis were forced off the streets of San Francisco, it led to questions about the division’s management. Now, a new CEO has been appointed. Since the California AV operation was halted, Cruise has since laid off a quarter of its work force and removed nine executives. As much as there were issues with the technology, good old fashioned management execution failures shared at least equal blame.

In the interim, AV competitors have had more favorable if limited experiences. Waymo, a subsidiary of Alphabet, has had driverless taxis operating in the Phoenix area since 2020 and San Francisco since late 2022 without serious incidents. It recently began service in Los Angeles. Zoox, an Amazon subsidiary, has been testing a steering-wheel-free robot taxi in Las Vegas since last June.

Cruise currently conducts limited testing of its supervised autonomous testing, with two safety drivers per vehicle. Those tests are underway in Phoenix.

The electric car movement has had a rocky time lately. Slowdowns in new electric car sales and announcements of delays in the development of planned production facilities had raised concerns. One example of the phenomenon is Georgia. Rivian the electric truck maker planned to construct a new production facility with substantial state support including subsidies. Rivian already had a production facility in Illinois.

Earlier this year, Rivian announced a pause in the development of its Georgia plant. Because it reflected lower than expected sales, there was a concern that the delay might be a sign of greater problems which could threaten the existing plant space. Amazon is still a significant Rivian shareholder and is one of its biggest customers.in Normal, IL. This week, a deal was announced which served to dampen those fears.

Volkswagen announced that it would invest up to $5 billion in Rivian and that the companies would cooperate on software for electric vehicles. Volkswagen said it would initially invest $1 billion in Rivian, and over time increase that to as much as $5 billion. If regulators approve the transaction, Volkswagen could become a significant shareholder. Rivian said the cash from Volkswagen would help the launch of a midsize S.U.V. called the R2 that will sell for about $45,000, and to complete the factory in Georgia. 

This represents more big money coming into the electric vehicle space. Amazon retains a significant ownership piece in Rivian and is Rivian’s largest truck customer.

WIND

The Vineyard Wind 1 project is now delivering more than 136 megawatts (MW) to the electric grid in Massachusetts. (New York’s South Fork Wind, the US’s first complete utility-scale offshore wind farm, is 132 MW.) This makes Vineyard 1 the largest operating offshore wind farm in the U.S. In February 2024, Vineyard Wind delivered approximately 68 MW from five turbines to the grid.

Vineyard Wind 1 now has 10 turbines in operation, enough to power 64,000 homes and businesses. The installation of a 22nd turbine is underway. Once completed, the project will consist of 62 wind turbines. It began offshore construction in late 2022, achieved steel-in-the-water in June 2023, and completed the US’s first offshore substation in July 2023.

OPIOIDS

It took years of painstaking negotiations to achieve a settlement to resolve the bankruptcy of Purdue Pharma and its owners, the Sackler family. One of the main features of the bankruptcy proceedings was the agreement that the Sacklers themselves would be protected from personal liability related to opioids. That resulted in $6 billion being pledged to states, local governments, tribes and individuals.

This week, the Supreme Court decided that the federal bankruptcy code does not authorize a liability shield for third parties in bankruptcy agreements. As a result, members of the Sackler family, who controlled Purdue Pharma, the maker of the OxyContin, will no longer be subject to a condition of the deal that granted the Sackler family immunity from liability in opioid-related lawsuits, even as they had not declared bankruptcy.

The first opioid lawsuits were filed against Purdue Pharma a decade ago. In 2019, Purdue filed for bankruptcy restructuring, which ultimately paused the lawsuits. The ruling effectively prevents the release of billions of dollars to plaintiffs from that settlement. That hold up has generated division within the ranks of plaintiffs. Some believe that the immunity provisions were worth the availability of payments. Now, what was seen as the longstanding primary obstacle to a deal has been placed at the center of any negotiation.

HOSPITAL TAXES

The Denver City Council approved putting a 0.34% sales tax increase on the Nov. 5 ballot to aid Denver Health, Colorado’s sole safety net healthcare provider. Uncompensated care totaled $140 million last year. That was an increase from $120 million in 2022 and $87 million in 2021. Those costs coincide with the arrival of migrants shipped into Denver primarily by the State of Texas.

The tax increase is estimated to produce $70 million annually. Under an annual operating agreement with Denver, the health system was allocated $73 million in funding for fiscal 2024. Colorado lawmakers this year passed $5 million in one-time funding, the same supplemental payment provided to the health system last year.

STADIUMS ARE BACK

The City of Charlotte has decided to continue to apply hotel and restaurant generated sales taxes to support the home of the NFL Carolina Panthers. It approved some $650 million of financing supported by existing hotel and restaurant taxes. The normal controversies around stadium renovations were in play here. They centered around the Panthers’ eccentric and impetuous owner. A combination of some poor public conduct choices and a poor won/loss record during his ownership tenure pressured the approval process.

In the aftermath of a failed referendum item to support taxes in greater Kansas City, MO to fund a new baseball stadium and improved foot ball stadium, proponents are looking west across the Missouri River for alternatives. The Kansas Legislature held a quick session to debate a financing package to join the Kansas Speedway as major sports venues in the state.

STAR Bonds are used to assist the development of major entertainment or tourism destinations in Kansas. State and local sales tax revenue generated by the attraction and associated retail development are used to pay back the bonds. In metropolitan areas, STAR Bonds can be used only for projects with an anticipated capital investment of $75 million and with at least $75 million in projected gross annual sales.

The professional sports facilities STAR bonds, which could be issued by a city, county, or the Kansas Development Finance Authority, will be backed by the incremental increase in sales taxes collected in a district created for the project and up to 100% of liquor sales within that district. The law also includes the potential for shares of sports betting and state lottery revenue. Besides expanding STAR bond-financed project costs to 70% from the current 50%, the law extends the maturity of the debt to as much as 30 years, up from 20 years. 

The economic rivalry between the Kansas and Missouri sides of the KC metropolitan area is longstanding. Tax policy and business locations have been flexible to say the least over the years as taxpayers tried to keep up the with the best deals. The situation with the two pro sports franchises just highlights the phenomenon at a significantly larger scale.

No professional sports franchise in the U.S. should ever ‘need’ public money for their stadia. The incredible appreciation of value of sports franchises continues as evidenced by recent team sales. We again are about to embark on a new cycle of stadium finance. We are already seeing the irrationality of the whole process. One difference now as opposed to the last cycle is that the cost of sports attendance is out of control. Now, the public is being asked to pony up funds for facilities they will likely never attend due to cost.  

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

CALIFORNIA HOUSING

One of the approaches to solving California’s affordable housing shortage has been the use of Accessory Dwelling Units (ADUs). As was the case after the post-war expansion in the second half of the 20^th century, many of California’s communities enacted restrictive zoning codes in the 1940s, 50s, and 60s to limit population density. Like the other jurisdictions across the country, the laws designated large areas for single-family residences and enforced minimum lot sizes, effectively controlling urban sprawl. 

A combination of demographic issues along with tax policy that discourages the transfer of homes over the generations have kept homes off the market. To address this, homeowners hoped to be able to create housing on oversize lots. The concept behind the move was historically reflected in “mother-daughter” houses, the conversion of space for an apartment (granny flats) and other structures converted to residences.

The well-known housing market issues were already driving some use of ADUs when legislation was enacted to support and advance the concept. Assembly Bill 68, passed in 2019, reduced ADU permit approval time from 120 days to 60 days and prevented municipalities from imposing lot size or parking requirements. Assembly Bill 881 further allowed property owners to build ADUs without living on the same property, enabling ADU investments.

In 2020, one in 10 new homes built in California was an ADU. ADUs accounted for 20% of new home construction 2023. That is likely to continue and increase as a trend supported by additional legislation. In October 2023, the Legislature addressed the issue of restrictions on the ability of ADU owners to rent the homes.  Assembly Bill 1033, allows Californians to buy and sell them as condominiums.

Property owners in participating cities will be able to construct an ADU on their land and sell it separately, following the same rules that apply to condominiums. A key provision of the law gives cities to opt out and continue to require rental. In terms of tax issues, ADUs will be treated as discreet units for purposes of taxes and utilities. A property will also have to form a homeowners association to assess dues to cover the cost of caring for the property’s exterior and shared spaces, such as the driveway, a pool or a common roof.

FLORIDA GAMING COMPACT STANDS

The Supreme Court rejected an appeal of a suit challenging the compact between the State of Florida and the Seminole Tribe. (see 11.6.23 MCN). The case has been making its way through the federal judicial system since the compact was executed. The plaintiffs – two competing betting companies – had failed to see the deal overturned through two appeals court panels including an en banc appeal. The companies in February filed a petition seeking review at the Supreme Court after the full appellate court refused to reconsider the panel’s decision.

Under the terms of the 30 year compact, the Seminoles agreed to pay Florida about $20 billion, including $2.5 billion over the first five years. The deal also authorized the Seminoles to offer craps and roulette at their casinos and to add three casinos on tribal property in Broward County. It also allowed pari-mutuels (like the plaintiffs) to contract with the Seminoles and share revenue from sports betting. In November the Tribe rolled out a sports-betting app and in December launched craps and roulette at its casinos.

The Seminoles began making payments to the state in January and have paid more than $357 million under the revenue-sharing agreement, including a payment made Monday. A rule was adopted by the U.S. Department of the Interior earlier this year that allows states to enter compacts similar to Florida’s with Indian tribes.

ELECTRIFICATION

The Pasadena (CA) Water and Power municipal utility announced the approval of two contracts for renewable power. A 10-year $47.1 million contract wind energy contract with CalWind Resources Inc., begins on May 1, 2025.  is for a 20-megawatt wind turbine facility named Wind Resource II Project located in Tehachapi, California.  A 15-year, $55.3 million contract with Glenarm BESS LLC, a special purpose entity created by EPC Energy Inc., is for a 25 MW battery energy storage system. Pasadena Water and Power’s 2023 Integrated Resource Plan which recommends installing substantial solar and battery resources within Pasadena.

This year’s budget/legislative season saw three fronts open up in the effort to restrict or eliminate gas stoves. California, Illinois, and New York considered bills which would have required warning labels on gas stoves. Legislative proposals in New York failed to gain support and the Illinois effort was equally unsuccessful. In New York, the originally proposed bill was based on U.S. EPA pronouncements that components of natural gas, nitrogen dioxide and carbon monoxide, are “poisonous” and could “lead to the development of asthma, especially in children.” 

California continues to look at a labeling requirement after the courts ruled that efforts by California municipalities to ban gas stoves were not legal. California’s proposed label originally cited the U.S. Environmental Protection Agency and a state environmental health agency saying stoves emit pollutants indoors at concentrations that exceed outdoor air quality standards. A pending bill was amended to remove those references.

COLLEGES

There has rightly been much focus on the operating difficulties plaguing smaller colleges. At the same time, many of the large state systems are under pressure as well. The University of California system has been dealing with a variety of job actions by faculty and staff. Now, Penn State is dealing with staffing and expense issues as well. In May of this year, it announced the University’s Voluntary Separation Incentive Program (VSIP).

It has announced that a total of 383 employees, or about 21% of those who were eligible, opted for the VSIP. Roughly 77% of the employees who took the offer were staff. The university said the dollar value of the salaries and fringe expenses associated with these 383 employees is $43 million. A budget deficit had climbed to $49 million. In exchange for their voluntary departure from the university, employees received a lump sum payment equal to a year’s salary.

Employees that were eligible for the program included tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. 

WATER

The Southwest Kansas Groundwater Management District was established by the State of Kansas to manage the use of groundwater pumped from the Ogallala aquifer. This massive underground water source has driven agriculture in the eight Ogallala states (Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming). It has long been recognized that groundwater is a finite resource and some areas have taken to concepts supporting reduced water use.

The District oversees groundwater usage and development in a 12 county area which is overwhelmingly agricultural. It has been a laggard in terms of encouraging conservation. Last year, Kansas lawmakers passed legislation squarely targeting the Southwest Kansas Groundwater Management District.

Crop irrigation accounts for 85% of all water use in Kansas—even more in western Kansas. Other districts have offered financial assistance to farmers investing in water-efficient irrigation systems and championed large-scale restrictions on pumping. GMD only spent 13% of its conservation-related budget between 2010 and 2022. This has raised concerns about District management.

Last year, in response to the criticisms, the district changed its financial statements, reporting fewer, broader categories. The new financial structure did not distinguish travel costs from other expenses. The travel is related to management efforts to build support for a pipeline to deliver Missouri River water from the east side of the state to its far west. The organization twice has trucked water 400 miles from the Missouri River to western Kansas in an effort to generate support for the idea.

As for conservation, Oklahoma allows farmers to use up to two feet of water each year on every acre they own. But usage is not monitored. Farmers report annual estimates of water usage. The state has not banned the drilling of new irrigation wells. Legislation passed this year that would require irrigators to meter their water use was vetoed by the Governor.

ROAD FUNDING AND DELIVERY FEES

In 2023, the Washington State Legislature enacted HB 1125, which included a budget proviso for a study on how a retail delivery fee could be implemented in Washington. The study must: Determine the annual revenue generation potential of a range of fee amounts; Examine options for revenue distributions to state and local governments based upon total deliveries, lane miles, or other factors; Estimate total implementation costs, including start-up and ongoing administrative costs; and Evaluate the potential impacts to consumers, including consideration of low-income households and vulnerable populations and potential impacts to businesses. The study should document and evaluate similar programs adopted in other states.

The study has now landed some two weeks before its deadline. Among other things the study found that the impacts will reflect the fact that households with an income above the statewide median tend to spend more on e-commerce than those below the statewide median, regardless of location. Generally, individuals from urban areas spend significantly more in the aggregate on e-retail purchases. Those who live in urban areas tend to spend more on online retail purchases than those from rural areas. New businesses or small businesses with gross revenues/sales less than $1 million in the previous calendar year will be exempt.

There are only two current comparables. Colorado, which enacted its fee in 2022, charges 28 cents on every delivery regardless of value. It generated $75.9 million in its first year for local and state uses, and clean transportation priorities. Businesses with $500,000 or less in sales are exempt. Minnesota enacted its fee in 2023 and it will be levied starting this July. The state will charge 50 cents only on deliveries of $100 or more. It will raise an estimated $59 million for cities and towns. The state exempts businesses with $1 million or less in annual sales.

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.