Joseph Krist

Publisher

AFTER THE STORM

The Biden administration this week has awarded a total of nearly $2 billion in new grants to help harden, expand, and modernize U.S. power grids. The 38 projects that received grants are in 42 states and Washington D.C., and range in scale from $7.5 million to harden a remote grid in Alaska to $160 million for utility Georgia Power to deploy advanced power cables and ​“dynamic line rating” technologies to expand the capacity of its transmission network.

Part of the program are the up-to-$612 million in grid grants President Joe Biden unveiled earlier this week during a visit to storm-ravaged Florida. That funding will flow to utilities in Florida, Georgia, and North Carolina, as well as to the federal Tennessee Valley Authority. The money comes from the third round from the Department of Energy’s Grid Resilience and Innovation Partnerships (GRIP) Program part of the IRA.

DOE has received $50 billion in applications for the GRIP program to date, she noted, but the program has already given out about $7.7 billion of its total $10.5 billion in appropriations.

CARBON  CAPTURE

A leak in a well used to inject carbon dioxide into underground storage wells in Illinois has raised concerns over safety. Monitoring wells monitor the movement of CO2 within injection wells. These wells help ensure that the CO2 is spreading as expected and that there are no signs of leakage. Archer Daniels Midland was the first company in the country to ever put in a CO2 sequestering well. It has been operating for 13 years.

Recently, one of two such wells from ADM was found to be leaking. The timing could not be less favorable. In May, the Illinois Legislature passed the SAFE CCS Act. It makes Illinois just the second state after California to put a moratorium on approval of carbon dioxide pipelines while the Pipeline and Hazardous Materials Safety Administration decides on regulations for such projects. There are currently 22 injection well applications into the Environmental Protection Agency for sites in Illinois that are scheduled to have draft permits issued in the next six months. 

As the process plays out, concerns about issues like eminent domain continue. A recent poll surveyed registered voters across six Midwestern states. It found that eighty-one percent of registered voters say they oppose corporations utilizing eminent domain for private projects. The poll was conducted before the Decatur monitoring wells leaked. Concerns about eminent domain and aquifer protection not being included in the SAFE CCS Act remain an issue. 

As these issues are worked out, the federal government continues to push hard for carbon capture.

CARBON PRODUCTION

Th e US EPA develops an annual report called the Inventory of U.S. Greenhouse Gas Emissions and Sinks (Inventory) that tracks U.S. greenhouse gas emissions and sinks by source, economic sector, and greenhouse gas going back to 1990. Large polluters, which include power plants, belong to a subset known as “large stationary sources” and represent about half of the country’s total emissions. Recently released data for 2023 show where the carbon is coming from.

Power plants cut their emissions by 7.2 percent between 2022 and 2023. The agency said that this sector emitted 1.5 billion metric tons of carbon dioxide in 2023. Power plant emissions are down 33.8 percent since 2011. This sector represents a quarter of the country’s total emissions. in 2023, emissions from oil and gas production and processing increased by 1.4 percent, and are 16.4 percent above where they were in 2016. 

Emissions from other major pollution in industrial and waste sectors fell by 1.1 percent.

HYDROGEN

One year ago, hydrogen hubs were making news as the Biden administration announced financial support for seven of these facilities. They are designed to facilitate the production of hydrogen for fuel without producing carbon dioxide resulting from traditional production methods. These facilities were split between the production of “green” hydrogen and “blue hydrogen”. The federal dollars were designed to allow these projects to attract private capital. Now, a year into the program that private investment is not panning out.

One example is the Appalachian hub known as ARCH2. A study by a regional environmental group documents the difficulties that this facility is facing. In the year since the US Department of Energy awarded ARCH2 up to $925 million in federal grants, four project development partners have exited ARCH2 and five of the 15 originally proposed projects have been scrubbed. 

The result is that the projected economic benefits of the project are much less likely to be realized. The report on ARCH2 finds that it is expected to achieve an emissions reduction of just 2% across the tri-state region and create fewer than 3,000 permanent jobs. The end-uses proposed as part of ARCH2 by project developers – electric generation and home heating – are not currently economically competitive with other sources of fuel for these projects.

Away from the environmental consequences, the economic fallout is a bigger concern for green energy proponents. One of the basic pillars of the Green New Deal is the potential economic benefits of renewable energy as a source of employment and business activity. As proponents rely on the economic potential to offset the potentially disruptive nature of the energy transitions, failures do not auger well for long-term support.

One just has to harken back to the hit that solar energy took under the Obama Administration. Solyndra was a manufacturer of cylindrical panels of copper indium gallium selenide thin film solar cells. It was based in Fremont, California. In 2009, the Obama administration co-signed $535 million in loans to Solyndra. On August 31, 2011, Solyndra announced it was filing for Chapter 11 bankruptcy protection, laying off 1,100 employees, and shutting down all operations and manufacturing.

NUCLEAR

The municipal finance industry will finally take part in the small modular reactor space. After one failed effort by a Utah municipal utility to get involved with an SMR project, a new one has been announced. Amazon has signed three agreements to support the development and deployment of small modular reactors in the United States. The company entered into a deal with Energy Northwest, the successor to the Washington Public Power Supply System to deploy four reactors developed by X-energy that will together generate approximately 320 MW of electricity beginning in the early 2030s.

The first phase of the Energy Northwest agreement would see the deployment of four 80-MW Xe-100 SMRs at the Columbia Generating Station in Richland, Washington. Future phases could add eight more reactors, bringing the site’s total SMR generating capacity to approximately 960 MW.

EPA AND EMISSIONS

The Supreme Court will not stop regulation from the Environmental Protection Agency which requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. The E.P.A. also imposed three additional regulations on coal-burning power plants, including stricter limits on emissions of mercury from plants that burn lignite coal, the lowest grade of coal. Lignite limits would impact Texas generators.

The rules also more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants. Toxic ash ponds have long been a source of concern. There are about 200 coal-burning power plants still operating, with many concentrated in Pennsylvania, Texas and Indiana.

More than two dozen states challenged the regulation, arguing that the federal government had failed to prove that the techniques used to control emissions would curtail them to the degree that the government is seeking. It is a temporary setback to efforts to fight the rules. West Virginia, said it would continue to contest the rule.

The state’s challenge is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit. In July, a three-judge panel refused a request by the conservative-led states to stop the E.P.A. rule from going into effect while the court case continued, prompting the states and other groups to ask the Supreme Court to step in. Ultimately, this case could end up in the Supreme Court argued over different issues.

THE POST-REFUNDING WORLD

To the extent there has been any focus on the municipal bond market during the Presidential campaign, it has been on the SALT deduction. In Congress, recent disasters have focused attention on the issuance and use of tax-exempt private activity bonds. One thing lost in the era of Trump tax cuts which does not look to be resurrected is advance refunding. That has limited options for issuers in terms of reaping the benefits of favorable interest rate movements. It has renewed interest however in a different technique – the bond tender offer.

The Division of Bond Finance of the State Board of Administration of Florida (the “Division”), on behalf of the State of Florida is offering holders of up to $500 million bonds it selects the chance to sell their bonds and receive a premium for doing so through a tender offer process. This week, marks the midpoint of a tender offer which extends through October 23.

The Tender Offer is being made as part of a plan to reduce the State’s debt. The candidates for purchase were selected to maximize debt service savings through principal reduction and/or avoided future interest cost. The bonds were issued as both general obligation debt for education and transportation and revenue bond debt for the Florida Turnpike. The State has the funding to pay for the tender and it has been legislatively appropriated.

Will the offer succeed? It’s not mandatory so if you wish to keep your targeted bonds, feel free. Estimates from Barclays suggest that some $30 billion of debt will have been the subject of tender offers over this and last year. It seems that only half of the targeted bonds in these offers have been sold back. It will be interesting to see if the timing of the offer relative to the two hurricanes has any impact on the amount of bonds tendered.

PENSIONS

The Equable Institute is a bipartisan nonprofit that works with public retirement system stakeholders to solve complex pension funding challenges with data. It produces annual reports and interim results on state pension funds. It recently reported on results through 3Q24. Equable found that the funded status of public retirement systems in the U.S. has continued improving as of September 30, 2024 — thanks both to strong financial market performance and record high contribution rates.

That’s the good news. Several negative pressures on public plans include steadily growing benefit payments resulting in record high negative cash flow combined with over 1 in 5 public plans contributing less than the interest accumulating on their existing unfunded liabilities. The net result is a nearly 6 percentage point increase to the national average funded status that hovers at a fragile 81%. Why is it fragile? After investment returns of nearly 25% in 2021 the national average funded ratio had improved to 83.9%. Public plans then suffered sharp losses, strong gains again, and some flat performance as well.

Current trends support a more positive few through this year. The national funded ratio average is projected to increase from 75.6% in 2023 to 81.4% in 2024. The total pension funding shortfall will decline to $1.29 trillion in 2024, down from $1.63 trillion in total unfunded liabilities in 2023.

RENEWABLES AND PUERTO RICO

We have long advocated for a reconstruction of the public power grid in Puerto Rico on a localized basis. This reflected the ongoing failure to consistently operate a heavily centralized system in an environment does not support that approach. Now, we see steps being taken to address a portion of the capital need to support a local approach and employ resources at hand such as the sun to power the island.

The U.S. Department of Energy announced this week that it has finalized an $861.3 million loan guarantee for the development of two solar+battery facilities and two standalone battery facilities in Puerto Rico. Project Marahu, will add 200 MW of solar generation and up to 285 MW/1,140 MWh of standalone storage to the island’s grid. The Marahu solar installations are expected to produce approximately 460,000 MWh of energy annually.

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,

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

CHICAGO

Chicago Public Schools (CPS) is undergoing real governance issues as a mass resignation by the Board comes in the midst of difficult negotiations with the teachers union. The Mayor comes from the union and this has put him in a vise as he tries to pacify his former employers while facing an ever increasing City budget deficit. Tax increases seem unlikely and expense cuts will be heavily opposed. In the meantime, there was sobering news regarding tax increases.

Cook County showed that initial property tax collections were down on a year over year comparisons. It was disappointing as a new set of assessments were generated for use in this year’s tax collections. Unfortunately, the reassessment had the effect of significantly raising tax bills and the impact of those increases has slowed payments as residents find ways to afford the increases.

The area most impacted were on the County’s south side. The number of delinquencies increased by 13% on a year after year basis. In the south and southwest suburbs, collections were down by 1.5% — fueled by a 27.7% increase in the number of residential delinquencies — after reassessments in that region shifted much of the tax burden from businesses to homeowners. The shift contributed to a record 19.9% increase in that region’s median residential bill.

New pressure on the City’s water utility came in the form of new EPA rules regarding lead pipes and the water supply. (see EPA Lead Rule below). It will undoubtedly rely on significant new debt. That will require higher rates

EPA LEAD RULE

The EPA announced new rules governing the use and maintenance of lead water pipes. The new rule imposes the strictest limits on lead in drinking water since federal standards were first set. Utilities will be required to generate an inventory of their lead pipes and replace them over the next 10 years. The measure replaces less stringent regulations, adopted during the Trump administration, on lead in drinking water. The federal government banned lead pipe in new plumbing in 1986. 

The E.P.A. estimates that water utilities must replace about nine million lead pipes at a total cost of $20 billion to $30 billion over the ten year period. The E.P.A. announced $2.6 billion in new funding to support lead pipe replacement. This funding will flow through the drinking water state revolving funds (DWSRFs) and is available to support lead pipe replacement and inventory projects.  The new rule also lowers the allowable amount of lead in the before replacement to 10 parts per billion, from the current 15 parts per billion. If the water supply repeatedly exceeds the new threshold, utilities must make water filters available. 

The rule also doesn’t require utilities to pay for the portion of lead lines that are on private property, including within a home. The new rule also allows some utilities with a particularly large number of lead service lines to go beyond the 10-year deadline. Chicago, which has the most lead pipes in the nation, has that problem because city building codes required all homes (smaller than a 4-flat) to install the lead service lines until 1986, decades after other cities banned them for health reasons. It will get twice as long to comply.

Several cities have been ahead of the curve on this issue. Milwaukee Water Works is on track to replace all remaining lead pipes within the EPA’s ten-year timeframe. In 2024 alone, Milwaukee received approximately $30 million in Bipartisan Infrastructure Law funding to replace 3,400 lead service lines. 

The Detroit Water and Sewerage Department has received $90 million from the Administration and will replace more than 8,000 lead service lines this year, putting the city on track to replace all lead pipes in 10 years.

The Erie, Pennsylvania Water Works has received $49 million from EPA to enable the city to replace all lead pipes within 5 years instead of 25 years. Syracuse now plans to use state and federal financing to start replacing the approximately 14,000 service lines in the city, which expects to get to 2,400 of them next year.

Denver Water has accelerated its efforts through $76 million from the Bipartisan Infrastructure Law, allowing the city to be on track to replace all lead pipes within a decade.

In Newark, NJ. the danger from some 23,000 lead pipes was exposed in 2019 and there was no real program to provide funding for it. So, Essex County, which includes Newark, stepped up and $120 million in bonds were issued through the county’s improvement authority. We would expect to see issuance for water systems to grow as these programs move forward.

CHATTANOOGA STADIUM MOVING DOWN THE TRACKS

The latest financing for a pro sports stadium is for a minor league franchise, the Chattanooga Lookouts. The City is issuing debt payable from a variety of taxes generated from activity in and around then stadium. The plans include development of an entertainment district centered on the stadium. It is a continuation of the current trend in stadium development, especially for baseball.

It’s being stimulated, in part, by the success of the stadium developments in St. Louis and Atlanta. Ballpark Village in St. Louis was a muni financed deal. Looking at the skyline behind center field this week in San Diego, it was easy to see much of that development you see wasn’t there before Petco Park. The Tampa Bay Rays new stadium (how timely) deal is packaged as an overall development project and that is the model that proponents of a new stadium for the KC Royals are hoping to get approval for as well.

The model of pairing stadium and commercial development is extending to other sports like soccer and hockey. It is not a surprise that this happening in Tennessee. Chattanooga is taking a cue from Nashville. Nashville has been very upfront about its belief that pro sports teams are a key to achieving their economic goals. They have been pushing tirelessly for an MLB franchise to go along with the Titans and Predators.

One of the reasons there is still some doubt about where the Oakland A’s will be playing in three years is because the potential for associated development at the proposed site in Las Vegas is limited. The site was cleared this past week with the demolition of the Tropicana hotel.

As always, the details of these deals are what ultimately determine whether these projects are worth it. The results have been mixed overall. The municipalities often are at a disadvantage in those negotiations especially given the political nature of the whole process.  In this case, the process has yielded a pretty good result for the Lookouts. There will also be more of these situations as Major League Baseball continues to pressure Minor League franchise operators to modernize and/or replace stadia to maintain their working agreements with MLB franchises.

CARBON PIPELINE LITIGATION

Legal efforts to stop Summit Carbon Solutions from constructing its pipeline for captured carbon through Iowa have moved to a decisive stage. Over the last couple of years, litigation challenging Summit’s right to enter private property for the purpose of surveying land without the right of eminent domain have produced conflicting opinions.

In May 2023, a Clay County landowner along the now-abandoned Navigator CO2 Ventures pipeline brought suit against Summit on the same issues. In that case, the district judge agreed with landowners that the Iowa law in question was unconstitutional, since landowners were not compensated for intangible damages of allowing a survey on the land. 

A case in Hardin County is the one before the Iowa Supreme Court. The district court in Hardin County ruled in May 2023 that the landowner plaintiff could not interfere with Summit Carbon Solutions’ attempts to enter his land to survey for its pipeline project. The landowner is appealing the Hardin County decision on the argument that it is unconstitutional for a pipeline company to undertake land surveys and examinations before it is vested with eminent domain.

GEORGIA EV PLANT

Hyundai has begun producing electric SUVs in Georgia less than two years after breaking ground on its sprawling, $7.6 billion manufacturing plant. The official formal opening will occur in 2025 but production is underway. Hyundai has said it will produce up to 300,000 EVs per year in Georgia, as well as the batteries that power them. The plant’s vehicle production areas have been completed and are being staffed by more than 1,000 workers. Battery-making facilities remain under construction. 

ORLANDO UTILITIES COMMISSION

Within 16 years, the Orlando Utilities Commission (OUC) plans to take out of service more than 90 percent of its with generation plants that burn fossil fuels, mainly coal and natural gas, and will have erected solar panels on more than 10,000 acres. The plans will put OUC at the forefront of the changing energy production industry. Later this year, OUC will start generation at a pair of large solar plants – Harmony II and Storey Bend in Osceola County – able to provide for about 28,000 homes or roughly 10 percent of residential customers. 

While the utility moves towards creating its own base of solar power, it also wants to reduce payments under its net metering plan. That is not going over well with existing owners of residential solar. Of the utility’s nearly 250,000 residential electric customers, about 10,000 have solar panels on their rooftops. Those panels plus those of commercial customers have a combined capacity to generate 104 megawatts, or nearly 5 percent of OUC’s capacity. By 2032, according to OUC reporting to the state’s Public Service Commission, OUC “anticipates” constructing a dozen large solar plants, each covering between 500 and 800 acres, containing approximately 300,000 panels.  

DISASTER BONDS

When large scale disasters occur, Congress has authorized spending plans to assist recovery by authorizing special issuance of private activity bonds. Congress has created special tax-exempt bond categories in response to disasters over the past two decades, including Liberty Bonds following September 11, Gulf Opportunity Zone Bonds and Ike Bonds after hurricanes, and Mid-Western Disaster Recovery Bonds after severe flooding along the Mississippi River.

Each required a special act of Congress that took months before capital became available. Those processes took weeks and months to be enacted which complicated recovery. Now, large scale natural disasters are becoming more frequent and widespread. This is generating a proposal from the Council of Development Finance Agencies (CDFA). It would provide for permanent provisions governing the use of tax-exempt private activity bonds in response to natural disasters.

The bonds would not be subject to federal volume cap restrictions and would be available to the affected areas upon the declaration of a state of emergency by a state’s or territory’s governor. Disaster Recovery Bonds would be authorized for use in a Disaster Recovery Zone to finance: the acquisition, construction, reconstruction, or renovation of non-residential real property (land, buildings, and fixtures); the construction and rehabilitation of multi-family rental property for low- and moderate-income individuals; the repair or reconstruction of damaged public utilities facilities and transportation infrastructure; and the immediate repair and mitigation of severe environmental contamination to a public water source.  

DAMS

Every natural disaster creates new opportunities to learn from. In recent years, flooding has become a more widespread concern. The recent experience with Hurricane Helene has highlighted the number of dams located throughout the country. While people tend to think of the larger scale dams which provide power, water and flood control, the majority of these facilities are much smaller and localized. They primarily were designed to control flooding.

The very active summer storm season has served to highlight the infrastructure that is at the base of much of the flood control effort in the US. Some $3 billion was dedicated to dam projects under the Bipartisan Infrastructure Law, which Congress passed in 2021. So far this year, the Federal Emergency Management Agency (FEMA) has distributed a record $215 million in dam safety grants. The FEMA dam safety grant program only accepts dams that could cause loss of life if they fail and are in poor or unsatisfactory condition. 

FEMA has a limited amount of money to give out so the agency is prioritizing dams in the poorest condition that also pose the greatest risk to the public. That means that the larger hydroelectric dams in the West and dams near higher populations are the current funding priority. That has generated disparate distributions to different regions as FEMA releases funds. Eleven Midwest states will receive a total of $30 million in FEMA dam safety grants this year, just half of the roughly $60 million that 13 states in the South will receive. Another $60 million will go to 11 states in the Northeast. In the West, 11 states will receive about $45 million.

Earlier this month, the Department of Energy (DOE) announced it was handing out more than $433 million to projects that will improve safety and grid resilience for hydropower dams across 33 states. DOE will provide $63 million between seven Midwest states to improve their hydropower dams. That is half of what Northeastern and Southern states will receive and one-third of what Western states will get. DOE awarded more than $176 million to six Western states: Arizona, California, Oregon, Washington, Idaho and Utah.

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

NYC

The realities of the current situation with the Office of the Mayor of the City of New York and his merry band of long time “associates are in full view. He stood as a lonely and forlorn figure at this week’s Tuesday with Eric, alone at the podium. He didn’t get to enter to his walkup music. Yes, the Mayor had walkup music as if he was coming to bat at Yankee Stadium. It reflects the reality that since our last issue, the Governor has reminded Mr. Adams of her power to remove him.

It is clear that his survival depends on a reshuffle at City Hall. Two of his most influential and long-time associates left and it’s clear that hanging on is not a strategy. It would not be a surprise to see additional administration insiders depart sooner rather than later. The implications that more charges could be filed will likely generate some more reflection and action.

We still remain sanguine about the City’s willingness and ability to pay debt service. From the point of view of consumers of public services, the next 15 months will be rocky at best. There are significant vacancies in the city’s civil service ranks with many spots vacated in the face of the pressure from the City to return to work quickly during the pandemic. Many of the job “cuts” announced by the City over recent financial plans are actually just acknowledgement that many of those positions have become unfillable under current conditions.

Still think the rating is stable?

HOSPITAL CONVERSION

The Lee Health System operates 6 hospitals in Southwest FL, numerous specialty and service centers, and employs over 15,000 people. The healthcare system first opened its doors in 1916 as a community-centered nonprofit. In 1968, Lee Health began operating as an independent special healthcare district created by the State and governed by an elected Board of Directors. Now, the system wants to convert into a private nonprofit healthcare provider.

Moody’s announced that the proposed conversion of Lee Memorial Health System (LMHS) from a governmental unit to a private, nonprofit corporation would not, in and of itself and as of this point in time, result in a reduction, placement on review for possible downgrade or withdrawal of its current rating of A2. Lee Health System, Inc. will the sole remaining member of the Obligated Group under the existing Master Trust Indenture and solely responsible for the repayment of the outstanding bonds. 

Management has desired the change to enable the System to expand its footprint into neighboring counties. Some 20% of patients are from out of the county. This change would for example, allow the system to own and operate physician practices and the like in adjacent counties.

AUTONOMOUS VEHICLES

Cruise, the autonomous driving unit of General Motors, has agreed to pay a $1.5 million penalty for failing to properly report an accident in which one of its self-driving taxis severely injured a pedestrian last year. That accident was largely responsible for Cruise vehicles to be taken out of service in San Francisco. Cruise will also face increased oversight of its activities as it restarts testing of its technology in Phoenix, Houston and Dallas, the regulator, the National Highway Traffic Safety Administration

Waymo continues to offer autonomous rides in San Francisco, Los Angeles and Phoenix. The company is also testing its service with human drivers in Austin, Texas. Zoox, a subsidiary of Amazon, is also testing a self-driving taxi service that uses a car with no steering wheel or driver’s seat. Humans monitor vehicle operations from a remote command center. Cruise has resumed autonomous driving operations in Phoenix and Dallas, but with humans at the wheel who can intervene.

Prior to October 1, New Jersey residents who purchased an electric vehicle did not have to pay state sales tax on that purchase. This week, legislation took effect that reduces that subsidy by half. Now, a sales tax of 3.3125% will be included in the purchase price of the vehicles. The establishes that the state’s full sales tax of 6.625% is to be levied on transactions involving zero-emission vehicles, beginning July 1, 2025.

The NJ Office of Legislative Services estimates that the phaseout of the sales-tax exemption is expected to bring in $75 million in new revenue for the budget’s general fund during the 2025 fiscal year.

HELENE

The hurricane has moved on but the impact is likely to be around for a long time. We’ve been asked what we think the credit impact might be on communities damaged. In terms of debt repayment, we are not concerned in the near term. We see the greater pressure reflecting the role that local and county governments will play in any recovery going forward.

Even under these circumstances, a process needs to be followed. As issuers and overseers of a variety of regulations and procedures, localities and counties will bear the brunt of the demand for services. Managing building on this scale within a limited amount of time will create bottlenecks in the system. Government workers will be torn between their jobs and their need to rebuild and/or relocate.

The storm will also focus attention on transportation, particularly the road and bridge infrastructure. A number of local bridges were not just damaged but destroyed, and floated away In the short term, I-40 and I-26 suffered significant damage and were closed. The barriers to workers and goods moving about to respond are significant. The situation calls out for quick solutions but some of the damage points to longer term issues.

In total, according to data from PowerOutage.us, about 1.3 million electric customers remained without power on Wednesday morning, almost a week after Helene struck Florida as a Category 4 storm. About 500,000 of the outages were in South Carolina; North Carolina and Georgia each had more than 300,000 outages remaining. 

FEMA can spend as much as it needs to on disaster recovery thanks to a provision Congress approved a few days ago and special caveats for emergencies. The stopgap spending bill enacted last week, which keeps the federal government running through Dec. 20, included a provision allowing FEMA to spend money from its Disaster Relief Fund at a faster rate than would have otherwise been allowed. Provisions covering “immediate needs funding” or INF are designed to facilitate recovery. INF restrictions do not affect individual assistance, or public assistance programs that reimburse emergency response work and protective measures carried out by state and local authorities.

The role of insurance is always important in the process of recovery from natural disaster. In dozens of counties in Georgia, North Carolina and South Carolina that were flooded by Helene, less than 1 percent of households have flood insurance through the federal program that sells almost all of the nation’s flood policies. In South Carolina, just 0.5 percent of the 770,000 households in disaster counties have FEMA insurance. In North Carolina, 0.8 percent of households in disaster counties have FEMA insurance.

In Georgia, 8.5 percent of properties in disaster counties have FEMA insurance, though the figure is inflated by a large number of policies in coastal Chatham County, which includes Savannah. Excluding Chatham, 0.7 percent of households in disaster counties have FEMA insurance. In Florida, which has one of the highest rates of FEMA coverage, 24 percent of households in disaster counties are covered.

Arguably, flooding has been a greater destructive force than have wildfires. As more of these events become likely, the more attention will be paid to the issue of flood insurance. The lack of insurance purchases for flooding along with the increased likelihood of more flooding going forward may drive demand for some government insurance program for natural disaster losses. Flood insurance is something the industry has little stomach for especially in light of its recent storm and fire payout experience.

CLIMATE HAVENS

I have always been amused by the notion that climate change could drive migration to areas perceived as cooler and less exposed to things like rising seas. That things would get sufficiently difficult in Florida or North Carolina that millions would seek to relocate from say, Miami to Buffalo. Over the last few years, the strength of that notion has been tested. The storm will only stir more debate. It does remind us of some instances in that time which might rebut the concept.

One of the communities which was often mentioned by supporters of the concept was Buffalo, NY. Its location on a Great Lake was both a positive (supply of fresh water) and a negative (rising lake levels) but the lower average temperatures seemed to tip the balance. And then winter returned to explain why its so hard to live in a climate haven like Buffalo. A couple of moved or delayed Bills playoff games only highlighted extraordinary conditions which can prevail in that climate haven.

In New York, voters approved a ballot item in November, 2022 creating a “right” to a safe environment. They enshrined it in the constitution. It was meant to drive the transition to a green environment. The electric industry and cars were its primary target. Then fast forward to June of 2023 when you couldn’t walk outside up here in the climate haven mountains I live in and one needed a mask just to walk along the road because our neighbors to the north were on fire.

Now, Asheville, NC is being tested as a “climate haven”. The mountainous area and inland location were seen as being shielded from the potential worst impact from storms. The winters weren’t too bad snow wise. It was hundreds of miles from an ocean coastline. It’s easy to underestimate the flood risk in mountain communities (like theirs and mine) but every large storm leads to more “water events” in these areas.

They drive more damage to land which then undermines infrastructure. Roads quickly become unpassable and alternatives limited. Infrastructure for power tends to be more vulnerable and the distances covered make rebuilding that much harder. Water and sewer infrastructure is significantly damaged. Not much of a haven.

NUCLEAR

The Supreme Court agreed to review a ruling by the 5th U.S. Circuit Court of Appeals that found that the Nuclear Regulatory Commission exceeded its authority under federal law in granting a license to a private company to store spent nuclear fuel at a dump in West Texas for 40 years. The outcome of the case will affect plans for a similar facility in New Mexico.

The NRC contends that the states forfeited their right to object to the licensing decisions because they declined to join in the commission’s proceedings. A second issue is whether federal law allows the commission to license temporary storage sites. Texas and environmental groups, unlikely allies, both relied on a 2022 Supreme Court decision that held that Congress must act with specificity when it wants to give an agency the authority to regulate on an issue of major national significance.

On the first issue, two other federal appeals courts, in Denver and Washington, that weighed the same issue ruled for the agency. Only the 5th Circuit allowed the cases to proceed. In its ruling for Texas, the 5th Circuit agreed that what to do with the nation’s nuclear waste is the sort of “major question” that Congress must speak to directly.

HOSPITAL PRESSURES CONTINUE

In the aftermath of the pandemic, demand for hospital services has been negatively impacted. Utilization rates remain behind where they were and this has had the expected impact on revenues. It has put many of these facilities in retrenchment mode regarding staffing. Many of those positions are visible if administrative. Nevertheless, finances remain tight at many facilities. The latest example is in Oklahoma.

Norman Regional Hospital Authority (NRH) is a regional hospital system located in Cleveland County, Oklahoma (south of Oklahoma City) with 387 licensed beds and $566 million of operating revenues. NRH operates as a public trust and operates Norman Regional Hospital, Norman Regional HealthPlex, Norman Regional Moore facility, and recently opened Norman Regional Nine facility, as well as numerous outpatient locations.

This week, Moody’s announced that it had downgraded NRH’s rating to B1 reflecting a material and precipitous decline in liquidity well in excess of projections. Cash and liquidity are king in hospital ratings. A short-term line of credit is currently fully drawn, and ongoing cash flow losses continue. This and an outlook which seems unimproved over the near term keep the credit under review for further downgrade. The line of credit renewal needed to carry the status quo and failure to achieve it will further damage the rating.

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

Joseph Krist

Publisher

NUCLEAR

Constellation Energy said announced that it plans to reopen the shuttered Three Mile Island nuclear plant No. 2 in Pennsylvania. It’s easy to forget that the second unit of the plant was able to be restarted after the 1979 accident and it operated until 2019. Economics drove that decision. Microsoft, which needs tremendous amounts of electricity for its growing fleet of data centers, has agreed to buy as much power as it can from the plant for 20 years.

Constellation plans to spend $1.6 billion to refurbish the reactor that recently closed and restart it by 2028, pending regulatory approval. It is reflective of the federal tax credits available to keep operating nuclear plants open. They are supporting the extended life of Diablo Canyon. Credits are driving the effort to restart the Palisades plant in Michigan. The combination of carbon free power and the data center driven demand spikes seen in many areas are driving the effort.

If restored, the TMI reactor would have a capacity of 835 megawatts, enough to power more than 700,000 homes. This week, The U.S. Nuclear Regulatory Commission (NRC) has received a petition for rulemaking requesting that the NRC revise its regulations to include a Commission-approved process for returning a decommissioning plant to operational status. The NRC denied a similar petition in 2021. The petition was submitted in connection with the Palisades plant.

The plant owner, Holtec International remains on track to restart operations at Palisades in October 2025. NRC expects to issue a final decision on the required licensing actions by July 31. The NRC will continue to follow existing regulations while it evaluates the petition.

MEDICAID ON THE CALIFORNIA BALLOT

California’s managed-care tax comes from a levy imposed on health plans, based on monthly numbers of both Medi-Cal and commercial insurance enrollees. The money raised is matched by the federal government, doubling the spending power. That federal money is subject to reauthorization and appropriation by Congress every three years. California has had a tax in some form since 2009. It is one of 19 states to levy similar taxes.

Now, a ballot initiative up for vote in November may throw a wrench into the current system.  Proposition 35, a November ballot initiative that would create a dedicated stream of funding to provide health care for California’s low-income residents. It would change the funding structure in that it would specifically designate the purposes for which it is being levied.

The measure would use money from a tax on managed-care health plans mainly to hike the pay of physicians, hospitals, community clinics, and other providers in Medi-Cal. So far, it all sounds good. Some have focused on the risk being created in that Proposition 35 sets specific dollar amounts through 2026, which are based on the managed-care tax approved by the federal government last year. the tax requires another federal approval starting in 2027, the year the ballot measure would make funding permanent. The initiative does not provide for revenue reductions (like the federal matching funds) but mandates revenue levels.

The real concerns arise from some of the “mechanical” aspects of the proposal. The desire to be specific in purpose has raised concerns that some currently paid under the existing structure may not qualify for the new health tax program. Instead of relying on a dedicated fund for some of these costs, they would be funded out of the State’s General Fund. That would put these costs at risk of General Fund problems in future.

That’s because the ballot measure would supersede the budget, and it leaves them out of the health tax proceeds. The ballot measure contains flexibility for small changes, it requires a three-fourths majority vote in the legislature for any major changes. The Centers for Medicaid/Medicare Services also has issues with how the State currently levies its tax and what it funds. California’s tax derives revenues mainly from Medicaid services (instead of non-Medicaid services) and uses these revenues as the state’s share of Medicaid payments.

It leads to the CMS to find that the tax is not sufficiently redistributive as is required under the rules governing the federal program. Federal rules require that the commercial health plans be reimbursed for the tax they pay on their Medi-Cal membership. Since the Medi-Cal rate is around 100 times as much as the rate on commercial membership, 99% of the revenue from the tax is on the Medi-Cal side. It is a conscious choice in an effort to keep private premiums down.

INSURANCE AND TAXIS AND UBERS

The American Transit Insurance Company provides coverage for about 74,000 for-hire vehicles in New York City, or more than 60 percent of the available cars, according to city records. Recently, the company disclosed that it is insolvent. It faces more than $700 million in losses from existing and projected claims from past accidents. Were the company to collapse altogether, thousands of taxis, Ubers, Lyfts and livery cars would be immediately taken off the road until they could find other insurance.

The situation is complicated by the fact that the company is a privately held entity with a history of financial issues including misappropriation of funds. State regulators have ordered American Transit to explore all options to obtain more funding, including a potential sale of the company. The firm submitted two remediation plans, which included rate increases and setting up a blockchain platform where policies could be bought and sold as nonfungible tokens.

If it is not purchased, the company could go into receivership with the New York Liquidation Bureau, which would use American Transit’s remaining assets or a state fund to pay off active claims. Citywide, more than 780,000 trips are taken each day in taxis, Ubers and Lyfts. The firm was established in 1972, had its first public incident with the NYS Insurance regulators over finances in 1979 and managed to still be allowed to write business. Sounds like a major regulatory failure.

NYC

The indictment of Mayor Eric Adams is an unprecedented event in the history of one of the market’s largest issuers. The closest period of time since the 1975 financial crisis to this is the last Koch administration. Extensive as the corruption of the “City for Sale” era was, it did not have legal consequences for the Mayor. This is truly different. Fortunately for the City’s bondholders, the mechanisms established in the wake of the experience of the late 1970’s provide security for them.

The City’s GO debt is secured and paid by property taxes. These tax proceeds are effectively in a lock box where they remain until the collections are certified at which time moneys are released to the various sinking fund accounts for the bonds. Regardless of the outcome of the Mayor’s legal entanglements, those taxes will be levied, collected and deposited in to the lock box. We are not concerned about the full and timely payment of the City’s debt. Other related debt like that issued for the Transitional Finance Authority are also secured by revenues directed into appropriate funds for the payment of debt service. From our standpoint it is ongoing trading value rather than the issue of full payment that should be the concern of bondholders.

Functionally, if the Mayor vacates office before his term ends (12/31/25) the Public Advocate becomes the Mayor. That individual would then have to call a special election for a new Mayor. It would have to be done quickly as there are restrictions in state law as to when such a vote can be held relative to the primary dates for the 2025 mayoral election. It will be a very tumultuous time for City government at a time when it will be facing crucial funding issues.

The Mayor will have to issue a Financial Plan Update in mid-November. He will likely be looking for significant financial assistance from the State. If Adams resigns, it is unclear how badly this will hobble the City’s efforts in Albany especially in light of New York State’s fiscal year and budget timing (4/1). It will also come in competition with the ever increasing demands for state funding from the MTA.

Regardless of who is Mayor, the City’s prison system is in increasing legal trouble. Federal Judge Laura Taylor Swain ordered Department of Correction leaders to meet with lawyers for prisoners to create a plan for an “outside person” who could run the system. They must discuss whether a receiver would work with or replace a commissioner; how a receiver might be appointed; his or her tenure; and qualifications for the position

Given the upheaval in City government, it is highly likely that we see a receiver appointed. We would not be surprised if the receiver actually runs Rikers in the absence of a commissioner. It’s not clear what fiscal impact would result but reform of the City’s jail system will not come cheaply. The next court date is November 12.

NEW JERSEY TRANSPORTATION

A unanimous vote by members of the New Jersey Legislature’s Joint Budget Oversight Committee approved a plan to refinance some $3.2 billion of New Jersey’s transportation-infrastructure debt secured by the Transportation Trust Fund (TTF). Under the proposed refunding transaction, the planned share of pay-as-you-go spending will increase by about $1 billion through the end of the 2029 fiscal year. Over the same period, the projected amount of new borrowing will drop, from about $8.5 billion to $7.5 billion.

The decision comes in the wake of the latest five year reauthorization of the TTF and the taxes which support it – the state gas tax, the sales tax, and contributions from state toll-road authorities. In addition, the legislature approved a registration fee on electric vehicles established as a new source of revenue for the TTF. The gas tax will continue to see regular increases in the rate to offset declining receipts.

UPDATES

Brightline West – The $3 billion federal grant supporting construction of the Brightline train between Southern California and Las Vegas has been formally awarded. Along with a $3.5 billion private activity bond allocation, half of the projected funding need is filled. It’s expected that the other half will be debt and equity funded. Serious construction is now expected to begin in early 2025. Plans are for the high-speed rail system to be built and operating before the 2028 Olympic Games in Los Angeles.

MTA – the MTA formally submitted its capital program for the next five years. It comes in the wake of the “pause” in congestion pricing this summer. The $68 billion funding estimate accompanying the plan is only half funded. Some $22 billion in federal, state and local government funding is assumed. The MTA predicts $13 billion of new debt of its own. Here’s the rub. That only accounts for half of the plan’s needs. It will be one of the dominant items of the FY 2026 state budget.

Grid Terrorism – A conspiracy to launch an attack against five Maryland electric substations led to a sentence of 18 years in a federal prison. The plan was to try to start a race war in Baltimore. Other plots have been met with harsh sentences as well. Given the relative vulnerability of these pieces of the electric infrastructure, it’s important to discourage the threat given how hard it is to secure remote stand alone facilities.

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

NYC

You know it’s reflective of something bad when the news is dropped on a Saturday evening. The latest departure from the Adams administration (City Corporation Counsel) over “personnel matters” just piles on the trouble for the Mayor. The management of three of the most important issues – police, migrants, and education – has been hampered and executed poorly.

This all comes as the commercial sector still is conducting efforts to revive in-office work. Transit remains an issue (a state problem) hindering a full return. Attendance at many entertainment and cultural venues across a wide spectrum of offerings remains lower. The restaurant industry remains stressed.

Under those circumstances, good government is as important as fiscally sound government is. With so much change in his management team and the whiff of criminality about City Hall, instability rules. Tuesday is always an interesting day for the Mayor. His weekly press event affectionately known as Tuesdays with Eric is reviving an old sport from the Cold War. Just like on May Days of old when you looked to see who was on Lenin’s tomb, the shift and deletions from the dais each Tuesday can be watched as well. 

FLORIDA BUDGET OUTLOOK

The Long-Range Financial Outlook (Outlook) is issued annually by the Legislative Budget Commission as required by article III, section 19(c)(1) of the Florida Constitution. The Outlook provides a longer-range picture of the state’s fiscal position that integrates expenditure projections for the major programs driving Florida’s annual budget requirements with the latest official revenue estimates. The 2024 Outlook includes projections for Fiscal Years 2025-26, 2026-27, and 2027-28.

Expenditure projections, or budget drivers, are grouped into two categories: (1) Critical Needs, which are generally mandatory increases based on estimating conferences and other essential needs; and (2) Other High Priority Needs, which are issues that have been funded in most, if not all, recent budgets. This year’s Outlook identifies 14 Critical Needs budget drivers and 28 Other High Priority Needs budget drivers, with total General Revenue needs of $7.5 billion in Fiscal Year 2025-26; $6.9 billion in Fiscal Year 2026-27; and $6.6 billion in Fiscal Year 2027-28.

The revenue and expenditures estimates included in the Outlook reflect current law requirements. The budget drivers do not include any assumptions regarding the creation of new programs or expansion of current programs. Further, the Outlook does not make any discrete adjustments for potential risks, such as major hurricanes or other natural disasters. In January 2024, the Seminole Tribe of Florida resumed revenue sharing with the State of Florida. That has generated over $300 million for the State in FY 2024.

While total revenue collections exceeded expectations since last years’ estimates by $1,085.7 million (or 2.3 percent), nearly 60 percent of the revenue gain was related to two sources: Corporate Income Tax and Earnings on Investments. There are no surprises regarding the expected expense outlook. In Fiscal Year 2024-25, Medicaid service expenditures are expected to be $33.2 billion. Total Medicaid expenditures for Fiscal Year 2025-26 are expected to be $34.7 billion, an increase of $1.5 billion. Education funding tied to enrollment growth continues to grow. Pension funding will require annual increases to meet actuarial requirements. 

The stat which interested us the most was the relatively flat growth from sales tax revenue. It is as good a current indicator as anything else as to the level and trend of economic activity. This is especially true in non-income tax states. That flat growth buttresses concerns about the level of economic activity in the State as revenue drivers like tourism show signs of weakness. The best example is diminished attendance at the Central Florida theme parks. The multiplier effect can be negative as well.

NET METERING

Another effort to promote residential solar energy has been swatted down in the courts. A North Carolina court ruled that the new net metering scheme which has been operating for nearly a year been properly vetted under state law. The State Utilities Commission had approved the changes which lower payments to residential generators without conducting their own study of the plan. The plan the regulators relied on was developed by Duke Energy.

The Court’s decision results in a less than straightforward decision. The Court agreed that “The commission erred in concluding that it was not required to perform an investigation of the costs and benefits of customer-sited generation,”. Nevertheless, the Court let the decision by the regulators to stand. Here’s where the Court confuses everyone involved.

The Court goes on to find that “however, the record reveals that the commission de facto performed such an investigation when it opened an investigation docket in response to [Duke’s] proposed revised net energy metering rates; permitted all interested parties to intervene; and accepted, compiled, and reviewed over 1,000 pages of evidence.”

The fruits of legislation in Arkansas are emerging and not everyone likes the taste. Legislation passed in 2023 limited the benefits of solar installations. The new policy created by the Legislature in 2023 is called “net energy billing,” and it will lead to far lower compensation for homes and businesses. Net energy billing will allow utility companies to decide a price for the bill credits that solar customers get now based on “avoided costs,”. That will lower payments substantially.

HIGH SPEED RAIL

The latest front in the battle to establish high speed rail as a viable transportation mode is not centered where the proposed high speed rail lines are located – Texas, California, Florida. Projects which are funded through the Inflation Reduction Act include “Buy American” provisions requiring the acquisition of equipment and rolling stock. The requirement is pitting two European manufacturers against each other – Alstom a French company and AG Siemens a German company.

Alstom has been producing equipment for Amtrak’s Acela service in upstate NY for several years. The program has been the subject of multi-year delays. There have been safety issues holding up deployment. The Siemens plant is under development in The State’s Southern Tier about one hour away. That plant is being built to comply with “Buy American” provisions of the Inflation Reduction Act.

Earlier this year the In July, Alstom filed a lawsuit against the US Department of Transportation, challenging its decision to award the contract for Brightline West’s train sets to Siemens.  Alstom contends that the new Amtrak Acela fleet it’s building at its existing Hornell, New York, facility should be considered a domestic option. The contract award came despite the fact that the Siemens plant is some two years from operating.

Siemens also took an unusual approach to its potential workforce. The company announced an advance agreement with the International Association of Machinists and Aerospace Workers to allow for union representation talks at its new Horseheads facility once there are employees to organize. 

NEW YORK WEED

The initial stages of the development of a legal cannabis market in New York State have been characterized by an understaffed regulator leading to slow approval of licenses. The delay in approvals has been cited as one of the reasons the legal weed market in NYC has been so chaotic. Enforcement has been held up by legal challenges to the State’s right to regulate sales. The effect has been to lower the available revenue stream to NYC in particular that had been expected to follow legalization.

So, what is the outlook for legal cannabis in New York State broadly but for NYC in particular. The NYC Independent Budget Office (IBO) has recently released its findings about the NYC market. Based on cannabis market growth in California, Colorado, Massachusetts, Oregon, and Washington state—all of which have seen at least five years of legal cannabis sales—IBO determined New York City may eventually see annual taxable sales between $833.6 million and $1.2 billion. A market of this scale would yield between $33 million and $47 million in annual city revenue.

If the New York State Division of Budget cannabis revenue forecasts for the coming four state fiscal years are accurate, IBO estimates that the city would receive $4 million, $20 million, $31 million, and $43 million in cannabis tax revenue in fiscal years 2024 through 2027, respectively. The New York City Office of Management & Budget estimates cannabis revenue of $38 million by fiscal year 2027, which translates to $950 million in sales that year.

New York rolled out a pretty complex system since it was trying to achieve so many different goals with its programs. How does it work? Under the MRTA, the cannabis industry is subject to three taxes: (1) a potency tax; (2) a state excise tax; and (3) a local excise tax. When cannabis product manufacturers sell to distributors, the distributors pay a potency tax based on the THC content of the products they buy. The potency tax rate depends on the form of the cannabis product: $0.03/mg THC for edibles, $0.008/mg THC for concentrates, or $0.005/mg THC for flower products.

If the manufacturer sells products directly to consumers, then the potency tax is applied at the point of retail sale. At the time of sale of cannabis product to a consumer, the retailer collects a state excise tax of 9 percent of the product’s price. A local excise tax of 4 percent is also imposed on retail sales, which is collected by the state and distributed to local governments based on where the retail dispensary is located.

The botched rollout in NYS has led to additional efforts to eradicate the illegal market especially in NYC. In February 2023, Manhattan District Attorney Bragg targeted over 400 stores for potential eviction proceedings for unlawful cannabis sales. In May 2023, Governor Hochul signed a law that increased OCM’s ability to assess civil penalties against unlicensed cannabis businesses, including fines up to $20,000 per day. In August 2023, the New York City Council passed a bill that prohibits commercial owners from knowingly leasing commercial space to unlicensed sellers of cannabis and other illicit products.

MTA

New York’s Metropolitan Transportation Authority released a proposed capital budget for the next five years. The $65 billion list of projects includes buying new subway cars, fixing century-old tunnels and installing new elevators. Half of the $65 billion has already been funded through bonds, federal grants and direct appropriations from the city and state. Congestion pricing has been “paused”.

It’s hard to know how much of the list is real given the politics of transit in NY. In the wake of the congestion pricing “pause”, the MTA has targeted certain projects for slowdowns. Access facilities for the disabled were a prominent target which may not have been the most politically astute move. Nor was the potential for delay in the northern extension to the Second Avenue subway. The authority’s chairman highlights the politics of the moment when he says that the report sought to be as “comprehensive” as possible in hopes of persuading lawmakers to increase state funding to the agency. That’s a nice way of saying wish list.

The Authority now appears to be aiming at increased state funding by trying to emphasize its role as an economic driver throughout the State. It is highlighting new rolling stock for the commuter railroads being built in the state. Those cars will be on lines which serve some of the largest sources of opposition to congestion pricing. The issue of MTA funding is likely to be at the center of the FY 26 budget process. We are only three months away from that.

CYBERSECURITY

Last month, the Port of Seattle, WA was the target of a cyber-attack. Now, the Port has gone public about the situation because it is taking a step many have supported in concept. Hackers are demanding $6 million in bitcoin from the Port which operates among other things, the Seattle-Tacoma International Airport for documents they stole during a cyberattack last month and posted on the dark web this week.

The Port of Seattle has decided not to pay. Flights were able to operate, but the attack did interfere with ticketing, check-in kiosks and baggage handling. Passengers on smaller airlines had to use paper boarding passes. The same group has targeted other municipal operations. Columbus, OH was one of their targets and data was stolen. No ransom was demanded.

CALIFORNIA WATER

A California Superior Court has issued a preliminary injunction that prevents the State Water Resources Control Board from requiring fees and reports from growers who over-pump the area’s groundwater. The heavy drawdowns of underground water by the agriculture industry are at the heart of the California water debate. The use of that water during times of drought to support water dependent crops has long been an issue. According to a State Water Board staff report, water extraction had caused so much damage to certain areas that the Tulare Lake basin sunk as much as six feet from June 2015 to April 2023.

The Board put the abusing water agencies under probation which provides for farmers who pumped 500 acre-feet or more of water each year to have had to meter and register their wells at a cost of $300 each, report their pumping activities and pay $20 for each acre-foot extracted. The judge found that the Board had exceeded its authority while offering the court’s recognition of the State Water Board’s responsibility “to consider adverse impacts groundwater extraction would have on public trust resources,” while acknowledging the need “to protect such resources where feasible.”

The dispute is likely to make its way through the California courts right on up to the California Supreme Court. This ruling is effectively a hometown local court ruling in Kings County where agriculture is the economic mainstay.

MISSISSIPPI RIVER BLUES

Water levels have been dropping in the lower Mississippi since mid-July, according to federal data, reaching nearly 8 feet below the historic average in Memphis on September 12. In October 2023, water levels reached a record-low 12 feet in Memphis. Those conditions have raised prices for companies transporting fuel and grain down the Mississippi in recent weeks, as load restrictions force barge operators to limit their hauls.

The drought is in its third year. The resulting restrictions on the loads which can be shipped on barges leads to higher costs and a much less climate friendly result from other shipping modes. According to a trade association for businesses that use the Mississippi River, a standard 15-barge load is equivalent to 1,050 semitrucks or 216 train cars. So, there is an environmental cost as well.

It has been worse as unlike the two prior years, no barges have grounded themselves this year. It’s all about reduced rural incomes in the face of increasing competition. The majority of U.S. agricultural exports rely on the Mississippi to reach the international market. More than 65% of our national agriculture products that are bound for export are moved on rivers like the Ohio and Missouri feeding the Mississippi on this inland waterway system

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

CHESTER PA BANRUPTCY

The City of Chester, PA has been in Chapter 9 bankruptcy proceedings for some two years. It has been operating under a state-appointed receiver since before the bankruptcy. Now that receiver is facing opposition over a plan to put the City’s water authority up for sale to generate funds for pension funding. The City’s pensioners comprise the largest group of creditors in the bankruptcy so their needs do matter. Pensions have also been developing a more favored creditor status in recent municipal bankruptcies.

Some three years ago, a sale of the system was contemplated and an agreement was reached in which a private entity – Aqua Pennsylvania – was the purchaser. The agreement would have generated $410 million over a period of years. That agreement was not approved by the state receiver because it would have privatized the water system. Significant rate increases were likely. Subsequently, the City filed under Chapter 9.

Now as part of the plan of adjustment proposed in bankruptcy court, the same receiver is proposing the creation of a mechanism to allow a regional water authority to purchase the assets of the Chester Water Authority. A sale would be designed to fund the purchase over a period of years under a schedule which could provide a steady stream of reliable revenue to the City.

One goal would be to bring the three water infrastructure pieces – water, sewage, stormwater under one roof. Currently, three distinct entities bill for and collect revenues for each service. Chester Water Authority supplies water to 34 municipalities in Delaware and Chester Counties. Wastewater treatment is provided throughout Delaware County. The City operates a Stormwater Management Authority. Lots of overlap and bureaucracy.

A new wrinkle is a motion by the pensioner group to drive the sale of the water assets to a private concern like Aqua Pennsylvania. The unfunded benefits for the city’s retired workers amount to about $300 million, the majority of that to police alumni. The goal would be to get a buyer to put up a significant up-front payment and agree to pay substantial annual fees. The pensioners believe that the greatest amount of money would be generated through a privatization. The receiver believes that the resulting revenue requirements from the private operator would lead to substantially higher water rates. Given the poor economics and demographics of the service area, there is limited ability to support significantly higher rates.

TRI-STATE GENERATION

Tri-State Generation and Transmission Association delivers power to 41 member cooperatives across four states, 16 of them in Colorado. It has long been a fossil fuel dependent generator with a particular reliance on coal. Over the last several years, Tri-State has been engaged in disputes with some of its member utilities over that reliance. The results have enabled some members to diversify their power sources and reduce demand for Tri-State’s coal-based power threatening the association’s finances.

Those finances look to be in line for a boost in the form of federal money designated to support the clean energy transition in rural areas. The money comes from a program called New ERA (Empowering Rural America), which was funded through the Inflation Reduction Act (IRA) passed by Congress in 2022. Tri-State and one of its large former members United Power are expected to receive $671 million and $261 million respectively. United used to get 95% of its power from Tri-State but that changed in May of this year.

The federal money will be used by Tri-State to support the retirement of 1,100 megawatts of coal-fired generation. It shut down one coal plant in New Mexico in 2019 and has plans to close the three coal-burning units it operates at the Craig Generating Station from 2025 to 2027. It had originally planned to close Springerville 3, a coal plant in Arizona, in 2040, but the promise of the federal funding has given Tri-State the comfort to pay off undepreciated debt in the plant and move up its retirement to 2031. 

United Power just became its own generator and supplier this past May after it withdrew from Tri-State. The federal money will support the development and/or acquisition of nearly 500 MW of renewable power. Like Tri-State, Western was held back by its non-profit status. Tax credits available to IOUs were not for the cooperatives. The IRA provided for this program to offset the inability of cooperatives to benefit from tax credits.

A total of 16 cooperatives have applied for funding for the program. They are located throughout the country. Projects in the application process would shut down coal generation and replace it with renewables, acquire new renewable generation and support the restart of the Palisades Nuclear plant in Michigan. There is tremendous pressure to finalize all of these applications given the uncertainty of the upcoming elections.

SUMMIT CARBON

The ongoing effort by Summit Carbon Systems to get approvals for its planned carbon pipeline hit another hurdle in the South Dakota courts. The South Dakota Supreme Court ruled that Summit has not yet proven it should be allowed to take private land for public use through eminent domain. Summit needs to show that it is acting as a common carrier under South Dakota law.

The Court ruled Summit had not yet proven to lower courts that it’s “holding itself out to the general public as transporting a commodity for hire. It is thus premature to conclude that SCS is a common carrier, especially where the record before us suggests that CO2 is being shipped and sequestered underground with no apparent productive use.

The issue of common carrier status is at the heart of dispute between the company and landowners. The South Dakota legislature passed laws in 2023 that provide additional financial and legal protections for affected local governments and landowners while retaining the ability of pipeline companies to seek a state permit. The case is now returned to the lower state courts where Summit’s arguments in favor of eminent domain will be made.

The South Dakota court activities are being accompanied by growing legislative pressure in Iowa to provide protection from eminent domain. The issue of eminent domain for the Summit pipeline was a real issue in Iowa politics. The Iowa House has twice approved limits on eminent domain but they have been stymied in the Iowa Senate.

Now, a group of nearly 40 Iowa lawmakers comprising the Republican Legislative Intervenors for Justice announced their plan to sue in federal and state courts requesting them to rule that the Iowa Utilities Commission acted illegally and unconstitutionally in its approval of the Iowa portion of Summit’s proposed pipeline.

BUSY TIMES FOR JUDGE SWAIN

Presiding over the bankruptcy of a major governmental entity while overseeing litigation seeking the appointment of a federal receiver for the NYC jail system would be a daunting task for any jurist. Both of these cases have been going on for months with multiple efforts to settle them having been unsuccessful. As it works out, both of these cases may have reached tipping points. They have significance for not just the two issuers – NYC and PR – but for the municipal market as a whole.

Decisions on these two cases will be made by the same judge, Laura Taylor Swain.  She has encouraged efforts at settlement throughout and it has been frustrating to see both of them drag on for as long as they have. The decisions she makes will have significant financial impacts as well. In New York, a hearing is scheduled for Sept. 25 in which the Legal Aid Society attorneys – who represent people incarcerated at Rikers Island – will have an opportunity to argue the New York City Department of Correction should be held in contempt for failing to follow court orders to bring down jail violence. 

All of this has occurred in spite of oversight from a federal monitor.

Swain lifted a contempt order against the city and the Department of Correction on Feb. 27, saying the department has followed her directive to bolster cooperation and communication with the federal monitor. This month’s hearing will allow evidence of the judge’s prior rulings and will seek the appointment of a receiver to actually operate the facilities.

At essentially the same time, Swain extended for an additional 30 days the litigation stay through Oct. 8 which has been in effect as PREPA and its bond creditors continue to try to work out their issues. The mediation team appointed by Judge Swain to oversee the debt-restructuring negotiations requested the additional time.

A NEW RISK TO ASSESS

Over the years, various natural disaster types take their turns on center stage. When they do, they create new risks to assess which do not always have great sources of data to rely upon for their analysis. This year, landslides have been occurring frequently. In the face of warming temperatures, certain areas have become less anchored and as storms occur the resulting impacts create greater landslide frequency.

In March, a landslide closed a 40 mile stretch of Highway 1 near Big Sur. In June, a landslide wiped out part of one of the main routes into Grand Teton National Park. More local events are threatening communities along coastal California with collapse into the sea. The combination of visible locations and their impact on a more well heeled demographic have elevated attention. Until now, there has not been a lot of data for analysis of the risk of these events.

The US Geological Survey (USGS) has just released a new interactive map of potential risk from landslides. According to its data, 44% of the country is at risk from landslides. Some of the data will not be shocking. Mountainous areas are at more risk. Given the geological recency of the western ranges, those mountainous areas seem to be at the most risk. Conversely, there aren’t many landslides where the land is flat. And yes, Puerto Rico seems to be at the most risk in terms of the percentage of its land which is vulnerable.

TRAFFIC REALITIES

A combination of the congestion pricing argument in New York, a return to more normal travel post-pandemic, and the consumer preference for larger vehicles have brought debates over road use to a new level. The basic premise is that Americans are barreling around the highways and byways and being involved in lethal crashes at unprecedented levels. It makes the whole debate around transportation that much harder as the arguments don’t seem to reflect what is happening.

The National Highway Safety Board (NTSB) said an estimated 18,720 people died in motor vehicle traffic crashes over the first half of 2024, a decrease of about 3.2 percent as compared to 19,330 fatalities in the first half of 2023. NHTSA also estimated fatalities decreased in 31 states and Puerto Rico, remained unchanged in one state, and increased in 18 states and the District of Columbia.  

Preliminary data reported by the Federal Highway Administration indicates vehicle miles traveled or VMT in the first half of 2024 increased by about 13.1 billion miles, or roughly 0.8 percent more compared to the same time period in 2023. More miles driven combined with fewer traffic deaths resulted in a fatality rate of 1.17 fatalities per 100 million VMT, down from the rate of 1.21 fatalities per 100 million VMT in the first half of 2023.

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

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.

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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.