Joseph Krist

Publisher

NYS BUDGET

It took two extra weeks and lots of negotiations but New York State finally has a budget. It maintains effectively the status quo on taxes for individuals and corporations. It also replaces the complicated potency tax on cannabis. It will be replaced with a flat tax of 9 percent. Efforts to reduce school funding came up short. The state put aside $2.4 billion to help manage the ongoing migrant crisis in New York City.  Mayor Adams’s initial request was for $4.6 billion. The biggest win for the Mayor maybe the two-year extension of mayoral control over the city’s schools.

This budget was as much about what did not make the final cut as it was about significant policy changes. Environmental issues did not get the boost they have gotten in other years. The NY HEAT Act would have slowed the expansion of gas infrastructure by not automatically providing gas to all new customers who request it. The Climate Change Superfund Act would have required companies that contributed to the buildup of greenhouse gases to contribute to the cost of infrastructure upgrades so that the state could adapt to the various challenges brought on by climate change.

Tax increases did not have support. Another effort to impose some form of “millionaire’s tax” failed. The Assembly and the Senate were asked to support raising personal income taxes by half a percent for those who earn over $5 million until 2027. They said that such a move would increase revenue by nearly a billion dollars per year. This and another Legislature-supported bill to increase the state’s corporate tax were not included.

The far left had fought for a measure known as “good cause eviction,” which was intended to greatly limit annual rent hikes and aggressively restrict the reasons for which landlords could evict tenants. It passed in the final budget, but in a largely diluted form. There were a number of exemptions from good cause, including luxury buildings and landlords with 10 units or fewer. Outside New York City, localities may opt in to good cause instead of being required to do so.

NYC BUDGET – LOOK WHAT I FOUND

The Mayor released an updated budget proposal which is doing nothing to dispel the idea that the Mayor is not interested in meaningful financial disclosure. At the start of the year, the Mayor painted a fairly dire picture of the City’s finances. A disrupted office market, a still recovering economy and the ongoing migrant problem led the Mayor to propose a budget cutting the types of services which were sure to generate pushback from the electorate.

Throughout the first quarter of the year, the Mayor’s estimates of the City’s financial position have been questioned. The Citizens Budget Commission (CBC), the State and City Comptrollers, and the City Council have each published reports that estimate the City’s financial plan for fiscal year 2025 understates the cost of continuing current programs between $3.0 billion and $3.9 billion.

CBC found the Fiscal Year 2025 Preliminary Budget was $3.6 billion short of what would be needed to continue current services. The State Comptroller and City Comptroller reported the underbudgeting as $3.2 billion and $3.9 billion, respectively. The City Council, in its response to the Preliminary Budget, recommended setting aside $3.0 billion next year for this shortfall.

In the wake of those observations, Mr. Adams proposed a revised $111.6 billion budget, identifying an additional $2.3 billion of revenues. He cited better than expected tax revenue and his administration’s fiscal management. The varying revenue numbers reflect varying perceptions of the City’s financial outlook. In January, the City was in danger of being fiscally overwhelmed by the migrant crisis and a slow return to the office.

Now, the Mayor says “we made smart choices, trimmed agency and asylum seeker budgets and made conservative revenue forecasts. This, combined with better than expected revenues and a booming economy, resulted in a balanced budget.” So, which is it – boom or bust. The fact is that many city service levels have been slowed significantly by the fact that many departments remain understaffed. The budget “savings” are often derived simply from not filling positions.

BOEING AND AIRPORTS

The impact of ongoing safety issues with Boeing 737 aircraft is now beginning to flow through to operators and the airports they rely on. Southwest Airlines flies nothing but 737 aircraft. That has hurt demand from passengers and has also reduced Southwest’s ability to maintain and expand its fleet. This has driven the airline to announce service cuts.

Those cuts will result in eliminated service at four U.S. airports: Bellingham International Airport in Washington State, Cozumel International Airport, George Bush Intercontinental Airport in Houston and Syracuse Hancock International Airport. Reductions in service at Chicago-O’Hare and Hartfield Jackson Airport in Atlanta were also announced.

Southwest said it expected to get 20 new Boeing jets this year, down from the 46 it previously anticipated. The timing of the deliveries depends on the Federal Aviation Administration, which has limited Boeing’s production while it gets quality issues under control. The changes will reduce the airline’s personnel needs. The airline said it would limit hiring and end the year with 2,000 fewer employees.  It comes at a time when demand for travel has rebounded but increased costs and factors like the 737 Max grounding have not led to profitability for the airlines. Delta Air Lines was the only major airline to report a profit in the first quarter.

RURAL BROADBAND

Through the Bipartisan Infrastructure Law, the Federal Communications Commission (FCC) was tasked to develop and maintain the Affordable Connectivity Program (ACP) – a federal program that offers eligible households a discount on their monthly internet bill and a one-time discount off the purchase of a laptop, desktop computer, or tablet. Over 23 million eligible households are currently enrolled and receiving the monthly discount.

The $14.2 billion Congress initially made available for the ACP is running out. Due to the lack of additional funding for the ACP, the Commission has announced that April 2024 will be the last month that the ACP households will receive the full ACP discount, as they have received in prior months. ACP households may receive a partial discount in May 2024. After May 2024, unless Congress provides additional funding, ACP households will no longer receive the ACP benefit and the ACP will end.

BRIGHTLINE

Florida’s Brightline high speed rail service has progressed to the point where the credit was finally deemed ready for its ratings’ closeup. Unsurprisingly, investment grade ratings were assigned albeit at the lowest level. The credit would not have sought a rating if an investment grade rating was not expected. Several factors still weigh on the ratings. S&P noted that it believes that revenue will be less than Brightline projects; 38% to 55% in the best-case scenario and 52% to 71% in the worst.

S&P believes that ridership will take longer to stabilize than Brightline projects; by 2028, not 2026. Brightline may attract 11% of the long-distance travelers between Miami and Orlando, and 0.5% of short-distance travelers between the five South Florida stations. After the Miami-Orlando service stabilizes, it will account for over 80% of total ridership and 87% of total revenue. Long-distance ridership was 51% in January and February, with 236,577 riders.

Prices will increase throughout 2024 as promotional introductory offers are phased out. Long-distance ridership was 3.4% less than S&P forecast for the last three months of 2023, but 24.7% more than it forecast for January. Revenue was 19.3% and 9.8% less, respectively. Short-distance revenue was higher than S&P forecast, with lower ridership and higher ticket prices being “consistent with Brightline’s strategy as it rolls out long-distance service.” Total daily bookings increased 50% from 2,819 in October to 4,224 in January. Repeat customers doubled from 715 in October to 1,437 in January.

Against this backdrop, the refinancing of the debt issued for the existing Brightline service began this week. In addition to the aforementioned investment grade debt insured debt was also issued. One tranche of debt was issued for the expansion of Brightline to Tampa from Orlando. That debt was sold on an unrated basis at yields of 12% on 29 year paper. That’s not a typo.

ROAD FUNDING

On the May 21, 2024 ballot, voters in Portland, OR will vote on whether to renew a 10 cent-per-gallon gas tax for road repairs next month. The gas tax was first approved by voters in 2016 with a 53% majority and renewed in 2020 with a 77% majority.  According to the City if the measure passes, the average driver would continue to pay roughly $5 per month for the tax. This figure is based on driving 12,000 miles a year in a vehicle with a fuel efficiency of 20 miles per gallon, with all fuel purchased within the city of Portland. If passed it is estimated the $0.10 gas tax would generate $70.5 million over four years for street maintenance and safety projects.

ARIZONA HOMELESSNESS ON THE BALLOT

The Arizona Property Tax Refund for Non-Enforcement of Public Nuisance Laws Measure is on the ballot in Arizona as a legislatively referred state statute on November 5, 2024. A “yes” vote supports allowing for property owners to apply for a property tax refund if the city or locality in which the property is located does not enforce laws or ordinances regarding illegal camping, loitering, obstructing public thoroughfares, panhandling, public urination or defecation, public consumption of alcoholic beverages, and possession or use of illegal substances.

A property owner can apply for this refund once every tax year. The amount of the refund under this measure would be equal to the documented expenses incurred by the property owner, but cannot exceed the amount the property owner paid in property taxes in the prior tax year. If the total refund is more than this amount, the refund will be equal to the amount the property owner paid in property taxes in the prior tax year. The property owner can apply to the department for the remaining portion of the refund in following tax years.

Under this measure, after the property owner applies for a refund, the town, city, or county has 30 days to accept or reject the refund. If the refund is accepted, the refund will be paid to the property owner. If the refund is rejected, the property owner can file a cause of action in the superior court of the county to challenge the rejection of the refund. If the town, city, or county does not respond after 30 days, the property owner will receive a refund. This measure provides that if the city, county, or town continues to not enforce existing public nuisance laws in the following tax year, a property owner is entitled to another refund.

ELECTRIC VEHICLES

Workers at a Volkswagen plant in Chattanooga, Tennessee made history last week when 73% of its workers voted to join the United Auto Workers. The expansion of the auto industry into the Southeastern US was aided in many ways by the fact that the region is much less supportive of unions. Over that approximately half century of gradual movement to the South, a number of factors changed which provided workers to revisit the issue of unionization.

When the auto industry continued to decline, job security trumped wage growth. Over time, auto workers saw plants closed, jobs reduced and a steadily weakening economy away from autos. The financial crisis in 2008 and the financial collapse of legacy US automakers changed the dynamic. The auto rescue was a product of all stakeholders making sacrifices. For the workers those sacrifices involved wages and benefits.

Since that time, many of the dynamics of the industry have shifted. The return to financial health and the shift to the production of electric cars created a new set of circumstances. The successful strikes against the legacy manufacturers in the Fall of 2023, provided for the first time in years an example of the benefits of unionization. That success came at the same time that the development of new manufacturing capacity is creating demand for workers. Much of the new plant is being built for non-US producers. Those companies have significant experience with organized labor in their home countries. It is not a surprise that a company like Volkswagen was targeted for organizing given the role of unions in company management in Germany.

Japanese automakers announced new manufacturing capacity to support electric vehicle production in the US. Toyota announced that it would expand a factory in Princeton, Ind., to produce a large electric S.U.V. The company, the world’s largest automaker, will spend $1.4 billion on the Indiana project and create as many as 340 new jobs. Honda announced plans to retool its flagship factory in Marysville, Ohio, near Columbus, to produce electric vehicles in 2026. Honda is investing $4.4 billion in a new battery factory in Jeffersonville, Ohio Along with LG Energy Solution, a South Korean company.

WIND HEADWINDS

Last fall, the New York Public Service Commission rejected a request for higher prices from several offshore wind developers. The PSC decision is seen as having served as an effective limit that likely constrained the New York State Energy and Research Development Authority’s (NYSERDA) negotiations because it said no price increases for competitively awarded projects.

Now NYSERDA announced that no final agreements could be reached with three projects that received provisional awards in October of last year. The projects that were negotiating contracts are the 1,404 MW Attentive Energy One project being developed by TotalEnergies, Rise Light and Power and Corio Generation; the 1,314 MW Community Offshore Wind project developed by RWE Offshore Renewables and National Grid Ventures; and the 1,314 MW Excelsior Wind developed by Vineyard Offshore with backing from Copenhagen Infrastructure Partners.

Those projects all had in common the fact that they depended on major supply chain investments by General Electric including a larger turbine it planned to build. In February, it was reported that GE had decided not to proceed with development of an 18 megawatt turbine. A smaller turbine means a project would need more individual turbine locations to deliver the same power — and the costs would have been higher. NYSERDA confirmed that was the main reason no final awards were made.

NYSERDA had also tentatively awarded $300 million to GE Vernova and LM Wind Power for investments in nacelle and blade manufacturing at new facilities along the Hudson River near Albany. That money will be made available through a new competitive solicitation. New York also has pending contracts still in the works for the two early projects that were the subject of contract renegotiations which resulted in significantly higher costs. The two projects are the 810 MW Empire Wind 1 developed by Equinor that is south of New York City and the 924 MW Sunrise Wind developed by Orsted and Eversource off the northeast tip of Long Island.

NYSERDA’s schedule calls for those contracts to be finalized by the end of June. Those projects are expected to be online by late 2026.

COAL REGULATION

The US EPA has released long awaited regulations for the continued operation of coal fired generating plants. The regulation from the Environmental Protection Agency 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. Three additional regulations include stricter limits on emissions of mercury from plants that burn lignite coal, more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants.

There are about 200 coal-burning power plants still operating in the US. In 2023, coal-fired power plants generated 16.2 percent of the nation’s electricity. EPA estimates that the rule would cost industries $19 billion to comply between now and 2047. Under the plan, coal plants that are slated to operate through or beyond 2039 must reduce their greenhouse emissions 90 percent by 2032. Plants that are scheduled to close by 2039 would have to reduce their emissions 16 percent by 2030. Plants that retire before 2032 would not be subject to the rules.

NORTH AMERICAN TRADE

The US Department of Transportation Bureau of Transportation Statistics recently reported Total Transborder Freight by Border in February 2024, Compared to February 2023.  Total transborder freight: $128.9 billion of transborder freight moved by all modes of transportation, up 7.5% compared to February 2023. Freight between the U.S. and Canada: $61.9 billion, up 4.4% from February 2023. Freight between the U.S. and Mexico: $67.0 billion, up 10.6% from February 2023.

Trucks moved $83.4 billion of freight, up 9.9% compared to February 2023. Railways moved $17.1 billion of freight, up 2.8% compared to February 2023. Vessels moved $10.0 billion of freight, up 15.7% compared to February 2023. Pipelines moved $8.1 billion of freight, down 15.2% compared to February 2023. Air moved $4.6 billion of freight, up 16.1% compared to February 2023

So, which are the localities which benefit from cross border activity? Detroit and Port Huron MI, and Buffalo are the top truck ports for U.S. freight flows with Canada. Laredo and El Paso TX and Otay Mesa, CA are the top truck ports with Mexico. Detroit, Port Huron, and International Falls, MN are the top rail connection ports for U.S. freight flows with Canada, while Laredo, Eagle Pass, and El Paso in Texas are the top rail connection ports with Mexico.

Chicago, Port Huron, and Minneapolis are the top pipeline connection regions for U.S. energy freight flows with Canada. El Paso, Hidalgo, and Laredo, TX are the top pipeline connection regions with Mexico. Port of Boston, Arthur, and Portland are the top water port connections for U.S. energy flows with Canada. Port of Houston, Arthur, and Texas City are the top water port connections for U.S. energy flows on the Southern border.

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

ILLINOIS PUBLIC POWER CHALLENGE

A legislative proposal would require Illinois’ municipal power agencies to regularly conduct transparent energy planning. It specifically requires that municipal utilities file integrated resource plans with the state every three years. The process would involve assessing demand and supply resources to meet electricity needs at the lowest cost, while meeting reliability requirements, evaluating how energy markets and prices are going to evolve and managing that risk moving forward. 

Illinois does not currently require electric cooperatives, municipal power agencies or municipal utilities to have these plans. It is driven primarily by greater Chicagoland local municipal providers. The dependence of these utilities on a predominantly coal based provider (Illinois Municipal Power is the main owner of the Prairie States generation facility) is generating customer challenges to their local asset mix.

CALIFORNIA NET METERING

This week was the one year anniversary of the California Public Utility Commission’s (CPUC) decision to revise the state’s net metering scheme in ways highly unfavorable to rooftop solar. Those rules are seen as the primary culprit contributing to a huge slowdown is sales of rooftop solar. Now, two pieces of legislation are making their way through the California legislature to address the impact of last year’s rulemaking.

AB 2256 would require that the CPUC consider a number of values these groups say were left out of its net-metering analysis, including improved local air and water quality, avoided land use impacts and other ​“non-economic” benefits.  AB 2619 is designed to ​“ensure that incentives are restored for residents who generate clean power for the grid,” according to a statement from Assemblymember Damon Connolly (D), the bill’s author. It would repeal the ​“damaging” decision — commonly known as ​“NEM 3.0” to distinguish it from the state’s two previous net energy metering (NEM) regimes — and force the CPUC to create new rules aimed at keeping rooftop solar growth on the trajectory needed to meet California’s long-range climate goals.

California’s three investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, are the primary opponents of these bills.

NEW YORK STATE BUDGET

New York State leaders have agreed on the outline of a $237 billion state budget. If it is approved by the Legislature, the budget represents an $8 billion increase from last year’s spending plan. The plan includes $2.4 billion to help New York City address its migrant crisis.  A token portion of that funding includes $500,000 of which is drawn from state reserves. The plan, however, includes provisions for the state to have increased its reserves by more than 10 percent from when Ms. Hochul took office.

The state’s botched rollout of legal recreational cannabis received some attention. For the first time, localities will have the authority to act against illegal cannabis vendor which have been a source of contention especially in NYC since the state legalized recreational marijuana in 2019. The taxation scheme used in the program will be significantly altered. It relied on taxing based on its potency. Instead, taxes will now shift to a flat percentage tax.

Local smaller and rural school districts had been facing significant state aid reductions to many of those districts. The Governor had proposed to repeal a provision called “hold harmless” that ensures all schools receive as much in funding each year as they did the year before. The governor has argued that the provision leads the state to spend too much in districts with falling enrollment, even as other districts are growing. As we went to press, the issue of the renewal of mayoral control of the NYC school system was still unsettled.

The issue of housing development was at the center of the over two week delay beyond the start of Fiscal year 2025 in the enactment of a budget. The trends in housing across all sectors of the state have all been negative from both supply and affordability points of view. The legislature has agreed to a plan which would make the process of increasing rents more difficult for landlords. Landlords of many market-rate units will be forced to justify rent increases beyond certain thresholds. They would also be required to offer lease renewals in most cases.

WEST COAST PORTS

The Port of Portland says it cannot afford to keep the state’s only shipping container terminal open past September after negotiations with a third-party operator fell through. Despite more favorable utilization metrics, costs have gone up. This has driven operating results of the port’s container facility into negative territory. Portland will be the largest city on the West Coast without close proximity to container service.

Throughout much of the last decade, a labor feud coupled with the logistical challenges of navigating container ships some 100 miles upriver to a relatively small market have made Portland’s Terminal 6 less competitive as a transit point for container goods. Container operations have stopped at Terminal 6 in previous years due to labor issues. Most recently, in 2015 the then two main carriers representing more than 95% of the port’s container services announced they would no longer call on Portland. The carriers complained that labor issues made operations less efficient and mor costly.

In 2019, a jury found the International Longshore and Warehouse Union (ILWU) engaged in unfair labor practices. The private operator at the time was awarded $93 million. The award was reduced on appeal to $19 million. The union subsequently declared bankruptcy. The private operator of the terminal “reached a settlement of all legal claims” with ILWU in February for $20.6 million.

The Port has notified the governor and legislative leaders of the closure, in addition to carriers, dock workers and staff. Earlier this year, Port leaders had asked the Oregon Legislature for $8 million in state support, but the legislature did not make an appropriation. The next closest shipping container terminal is in Tacoma, Washington. The overall Port credit is rated AA-. Marine operations accounted for about 25% of overall revenues which are driven by the City’s airport. The rating should be fine.

The Port of Los Angeles is on an entirely different path. Like Portland but to a lesser degree, labor relations have been problematic. Since a new contract was reached last year, the Port has been able to focus on operations. The Port of Los Angeles handled 743,417 container units in March, a 19% increase over the previous year. It was the eighth consecutive month of year-over-year growth. For the first quarter ending March 31, local dockworkers moved 2,380,503 Twenty-Foot Equivalent Units (TEUs) across Los Angeles marine terminals––nearly 30% more than 2023. It was among the Port’s best first quarter starts, behind only the pandemic import surge in 2021 and 2022. 

CARBON CAPTURE

The Illinois State Legislature is considering several bills designed to strengthen the State’s regulatory abilities over carbon capture, both pipelines and sequestration. The proposals come in the wake of efforts by two pipeline developers to secure local permits to develop projects. Other efforts are expected from sequestration providers. Companion bills are in front of each house. Separate bills (HB 4835, SB 3441) would place a moratorium on carbon dioxide pipelines for four years or until new federal safety regulations are adopted by the Pipeline and Hazardous Materials Safety Administration (PHMSA).

Two other bills would create a regulatory framework for the sequestration industry. Overall, the newly proposed legislation is intended to cover issues including: “pipeline setbacks for safe evacuation, limits on eminent domain, expanded monitoring at carbon sequestration sites, provisions for long-term liability in the event of disaster, a ban on the use of captured carbon dioxide for enhanced oil recovery.”

It would also mandate that when sequestration sites are proposed, regulatory agencies review life-cycle greenhouse gas emissions and consider alternatives to carbon sequestration. The legislation bans injecting carbon dioxide through the Mahomet Aquifer, labeled by the U.S. EPA as the area’s only sole-source aquifer. And it would mandate halts in sequestration if certain magnitudes of seismic activity are detected.

There have been other efforts to deal with these issues. As it becomes clear that proposed federal tax credits are driving project developments, the State finds itself in the position of not having an established regulatory framework for the evaluation of projects in the carbon pipeline and sequestration spaces. One example is that currently there are no requirements that companies create or release models showing how a carbon dioxide plume would likely spread in case of a rupture. The new bill would require such modeling for a necessary Illinois EPA permit. And it would mandate companies put up funds for future cleanup and maintenance of sequestration sites.

Another bill (SB 2860), backed by the Illinois Farm Bureau, would prohibit the use of eminent domain to secure carbon dioxide pipeline rights of way. One bill (HB 0569) in support of the industry would allow sequestration operators to use underground pore space even if landowners are opposed, while setting procedures for land access and compensation for damage to land. Pore space is a concern particular to Illinois and its unique geology.

In Florida, Hillsborough County (Tampa) approved a pilot project at its waste-to-energy facility in Brandon, FL. The facility currently produces some 600 tons of carbon dioxide a day. A South Korean company wants to install equipment which would remove 1 ton per day carbon and convert it to calcium carbonate. That byproduct could be sold to the concrete and construction industries. The company is required to sell the calcium carbonate and give the records (but not the proceeds) to the county so it can assess how valuable the product is.

A permanent facility was proposed by the company, LowCarbon. It was initially rejected by county staff. It would have cost nearly $25 million and captured 40 tons of carbon dioxide. In a revised proposal submitted on March 28, the company offered to build a permanent facility that could capture 100 to 400 tons of carbon. The pilot project would provide 60 days’ worth of data for the county to evaluate.

CALIFORNIA AND UNEMPLOYMENT

The emphasis on issues like homelessness, the environment and natural disasters in California has allowed some significant issues to be overlooked. As is the case in many states, the current budget cycle is the first to force states to fully absorb the cost of programs funded in response to the pandemic. In some cases, it was direct federal funding that covered recurring expenses. In others, it was substantial borrowing undertaken to respond to the economic impact of the pandemic limits on economic activity.

One of those issues is the funding of unemployment payments to individuals. California is now coping with an accumulated debt to the Federal government of $21 billion from borrowing to fund unemployment. Since the end of the pandemic, the tech industry has also undertaken significant layoffs. Payroll taxes paid by employers cover payouts to unemployed workers but also a state surcharge and a gradually increasing federal surtax to help pay off the principal on the debt. 

There are also certain things about the California unemployment situation which are state specific. The state currently accounts for about 20% of the nation’s jobless claims, far in excess of its 11% share of the labor force population. Unemployed workers in California tend to remain on unemployment significantly longer than the national average. California’s employers added 28,300 nonfarm payroll jobs in March 2024 and the unemployment rate held steady at 5.3 percent.

California’s unemployment insurance fund became insolvent during 2020. The federal government via the CARES Act and the American Rescue Plan Act waived interest through September 6, 2021. Therefore, no interest was due on September 30, 2020. However, interest started accruing on September 7, 2021, and the first interest payment of $29.2 million was paid on September 30, 2021. California paid a second interest payment of $333.5 million on September 30, 2022, a third interest payment of $301.6 million on September 30, 2023, and a $550 million payment on September 30, 2024.

The state had hoped to devote $1 billion to loan repayment but the unexpectedly weak fiscal position of the state has taken that option off the table. The state’s unemployment insurance program will instead would rely on increased federal taxes on employers to pay down the debt. Currently California employers pay a federal unemployment insurance tax of 1.2% on the first $7,000 of wages per employee, but that will rise incrementally every year so long as California is in debt, to more than 3.5% after 10 years. 

The state collects an unemployment insurance tax on the first $7,000 of wages per employee per year. Many states have a much higher wage threshold — New York at $12,500; New Mexico at $31,700; and Washington state, at $68,500. Changes in the rate and/or wage threshold are being looked at in the ongoing state budget process in CA.

WHAT WAS THE LESSON?

The South Carolina legislature is considering legislation designed to facilitate the construction of a gas fired generation plant to be owned by Dominion Energy and state-owned utility Santee Cooper. It would allow the utilities to build a natural-gas fired power plant in the Lowcountry. It would provide for faster approval of pipelines needed for the project. The bill also includes items like reducing the Public Service Commission which oversees utilities from seven members. It attempts to influence regulation by requiring regulators to consider the health of utilities as well as the needs for ratepayers as they make decisions and allowing utilities to release less information about some projects from the public before they are approved.

The issue the legislation seeks to address is arguably how the State managed to take a strong asset like South Carolina Public Service Authority (Santee Cooper). Customers who are now shouldering the bills for the failed effort to expand nuclear capacity would likely say that eased oversight and less disclosure are not the answer to their problem.

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

RECONDUCTORING

It is a word which you are likely to hear more about. Transmission access and capacity are increasingly viewed as obstacles to the adoption of renewable energy generation. The development of new transmission infrastructure faces extended regulatory processes. This motivates electrification advocates to seek answers which can provide some relief from existing infrastructure. One technological advance which is receiving a lot of media attention is reconductoring.

Reconductoring is the process of replacing conventional aluminum conductor steel reinforced cables with advanced conductors. It does not expand the footprint of the wiring infrastructure. This reduces the relative cost versus the construction of new transmission lines. The suggestion comes as the already lowering costs of clean energy.

GridLab is a Berkeley, CA based clean energy technology advisory entity. It does research and provides access to individuals with expertise in the many issues associated with clean energy. A new report from GridLab highlights the potential of reconductoring to provide a significant capacity addition to the nation’s transmission system within the existing corridors.

The report found that the declining costs of clean energy and growing power demand from electrification, manufacturing, and data processing have made grid capacity one of the primary constraints in the energy transition. Transmission capacity across the U.S. has grown only 1%/year over the past decade. Over 2 terrawatts (TW) of available generation and storage resources today remain untapped, awaiting grid access in interconnection queues. When advanced conductors are used, reconductoring in existing rights-of-way (ROW) can substantially increase transmission capacity in the current grid.

Among the conclusions the report reflects: not only can advanced conductors increase power density by up to 100% along existing ROW, but also that these technologies are being widely and successfully deployed in many nations around the globe. considering the challenges of building new lines, reconductoring can increase interzonal transmission capacity by nearly four times (+280%) by 2035 versus greenfield expansion only, with only 20% higher transmission expenditures over the same period. Second, reconductoring projects typically cost less than half the price of new lines for similar capacity increases.

The discussion coincides with estimates from providers of power of their transmission needs. ISO New England the regional grid provider, released its 2050 Transmission Study. It is the first the regional grid operator has undertaken examining the region’s transmission system in detail beyond the traditional 10-year planning horizon. The study estimates the region will need to invest between $16 billion and $26 billion on transmission infrastructure over the next 26 years to ensure a reliable clean energy transition.

MICHIGAN EV PLANT

The electric vehicle industry is going through a period of retrenchment as profitability has so far eluded the manufacturers. Rivian is delaying the development of a manufacturing facility in Georgia and consolidating production in Illinois. Ford and GM have experienced disappointing sales growth and profitability. Tesla sales are slowing. This has raised fears that massive support provided by states to EV manufacturers is not generating the expected returns on investment.

Ford had originally announced the development of an electric vehicle battery production facility in Michigan. The state offered some $2 billion in tax and other incentives including a local tax break worth about $772 million, $330 million for road upgrades, and a $210,000 job-creation grant that would go directly to Ford once it hires at the facility. When announced in February, 2023 the projection was for the creation of 2,500 permanent jobs. That was reduced to 1,700 in the Fall.

Ford originally expected to build a 2.3 million-square-foot production facility for lithium iron phosphate (LFP) batteries. The automaker’s footprint in Marshall is just over 500 acres, the site plan shows, compared to the 730 acres originally planned. Today’s construction reflects a 1.2 million-square-foot production building, a reduction of nearly one-half. Ford added a 600,000-square-foot packing plant to the west of the production building. 

Given the lower amount of Ford’s investment, the pressure is on to recalculate the proper level of incentives from state and local government. If the expected economic impact from the tax incentives declines by 25%, many believe that the state’s subsidies should be reduced by a similar amount.

SMALL COLLEGE CLOSURE

The Goddard College Board of Trustees announced on April 9 that the institution will close at the end of the current semester. The Board came up with several attempts by Goddard to become financially viable which all proved unsuccessful. It had sought out educational partners and laid off staff. In January, it shifted its course offerings to on line only in what was described at the time as a temporary move. But, in the end, that strategy was not sufficient to save the college. the number of Goddard students plummeting from more than 1,900 in the 1970s to only 220 currently.

The Plainfield, VT institution joins Poultney’s Green Mountain College, Bennington’s Southern Vermont College, The College of St. Joseph in Rutland, and Marlboro College in Marlboro in ending operations over recent years. Goddard was one of the quirkier colleges whose reputation and demand were based on its unique structure. The decline in demand for that sort of curriculum and approach decimated its ability to fund from tuition.

Combine the looming demographic trends which are projected to lower demand across the board for higher education and the outlook for Goddard was bleak. The Trustees have now decided to close and the campus is reported to be up for sale.

DETROIT

Detroit has made the long trek back to an investment grade rating from the major rating agencies with S&P following Moody’s last month in moving the credit to investment grade. It culminates a decade long process which began with the City’s bankruptcy. S&P noted Detroit’s flexibility from operating reserves, the Retiree Protection Fund and stimulus funds and its “commitment to maintaining balanced operations.”

“The city has shown continuous operational and financial improvements that have allowed it to make significant strides to solidify its financial and economic position to a point that supports a BBB rating,” The rating agency also nodded to Detroit’s “achievable” pensions strategy, strong pipeline of economic development and the “disciplined planning and budget oversight” of the city’s management team.

A change in Detroit’s pension funding policy this year was reflected as the city changed its funding to a level principal amortization instead of a level dollar policy thereby leading to higher pension contributions. These were funded with increased draws on the Retiree Protection Fund rather than the operating budget. S&P notes that that the city has met all the requirements of its post-bankruptcy Plan of Adjustment, and has often “exceeded expectations.” The rating is limited despite these improvements as the City faces significant budget pressures not unlike those of many other older northern cities.

CRYPTO AND POWER

The U.S. Energy Information Administration estimates that mining for bitcoin and other digital currencies accounts for 0.6 to 2.3 percent of the nation’s electricity use. It is admittedly an educated guess at best. Recent growth is largely due to cryptocurrency mining operations relocating to the United States from China after that country cracked down on digital currency mining in 2021. The demand being generated by crypto currency activities is in the center of the issue of supply adequacy.

Assuming the share of global activity in the United States remains approximately 38%, USEIA estimates electricity usage from Bitcoin mining based in the United States to range from 25 TWh to 91 TWh. That estimate represents 0.6% to 2.3% of all United States electricity demand in 2023, which was 3,900 TWh. This estimate of U.S. electricity demand supporting cryptocurrency mining would equal annual demand ranging from more than three million to more than six million homes. USEIA identified a total of 137 facilities to date; there are only 52 facilities of those for which there is location and capacity data. Those sites are located in 21 states, with most in Texas, Georgia, and New York.

In Arkansas, the Legislature is revisiting legislation passed last year to support the growth of crypto mining in the state. The Arkansas Data Centers Act of 2023, or Act 851, which prevents local governments from passing noise and zoning ordinances specifically aimed at crypto mines. The Senate sponsor of the bill cites the increasing number of “bad actors” in the industry and increasing complaints from residents of host locations.

Several other proposed bills are being considered. They deal with who should regulate the industry, the establishment of new fees associated with crypto mining operations, siting issues, notice requirements before the start of operations at sites, and limits on foreign ownership.

NUCLEAR AND CLIMATE CHANGE THREATS

The GAO just released a study commissioned by Congress to review the climate resilience of energy infrastructure. The report examines (1) how climate change is expected to affect nuclear power plants and (2) NRC actions to address risks to nuclear power plants from climate change. The study notes that all operating and shutdown nuclear power plants are located in areas where climate change is projected to increase measures of heat, including daily and average maximum temperature.

The effects of climate change on maximum temperatures are projected to be most severe in the South, where one-third of the plants are located. The plants in the South are projected to experience an annual average of from 21 to 31 days with higher maximum temperatures than historical high temperatures. About 20 percent of nuclear power plants (16 of 75) are located in areas with a high or very high potential for wildfire. More specifically, more than one-third of nuclear power plants in the South (nine of 25) and West (three of eight) are located in areas with a high or very high potential for wildfire.

About 63 percent of nuclear power plants (47 of 75) are located in areas with exposure to either Category 4 or 5 hurricane storm surge or high flood hazard, and nine are located on a coastline, where NOAA projects a range of sea level increases. In addition, 20 percent of nuclear power plants (15 of 75) are located in areas with exposure to both Category 4 or Category 5 hurricane storm surge and high flood hazard.

Some 60 of the 75 nuclear power plants in the United States are located in areas with high flood hazard and two are in areas with moderate flood hazard. Just over one-third of the plants (21 of 60) located in areas with high flood hazard are in the South. About 23 percent of nuclear power plants (17 of 75) are located in areas that may be inundated by storm surge from Category 4 or Category 5 hurricanes. All 17 of these plants are in the East and South, and the six plants with exposure to Category 5 hurricanes are located in the South

About 23 percent of nuclear power plants (17 of 75) are located in areas that may be inundated by storm surge from Category 4 or Category 5 hurricanes. All 17 of these plants are in the East and South, and the six plants with exposure to Category 5 hurricanes are located in the South.

JEA MANAGEMENT UPHEAVAL

The attempt to privatize the City of Jacksonville, FL electric system four years ago led to federal criminal investigations and charges against members of management including the CEO and CFO. The potential for individuals to profit from the proposed sale led to increased scrutiny from the public and city government. Now, the former CEO of JEA has been found guilty of conspiracy and wire fraud in connection with a scheme that would have resulted in the CEO and other JEA executives making millions in bonuses if the utility was sold to a private buyer.

Now, the CEO appointed to replace the now convicted CEO is under pressure to resign. It turns out that the utility owned by the City is being run by managers operating remotely as they don’t live in Jacksonville. Questions have been raised over spending by JEA on a variety of events usually associated with private entities which focused attention on management. Many of the actions under question are not unusual in a private sector setting but the expectation for a municipally owned entity is to operate in a more cost conscious way. The point of a public utility is to provide a service on a cost of service basis, not to enrich management.

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

Can we pick a week to take off or what? It never fails. New York doesn’t have a budget and its all to do with housing. While most magnified in NYC, housing is increasingly a statewide issue. Even in the rural counties. Its going to take a complex deal to settle things and then the budget will move forward. The project to clear the shipping channel in Baltimore is underway and funding for that is not a problem. The replacement bridge – who knows in the current Congressional environment. Opening Day in MLB sees in the official departure from Oakland. Voters in Jackson County, MO sent a message to the ownership of both the NFL and MLB by a huge margin. D.C. will keep its teams.

PORT OF BALTIMORE

The port handled more than 444,000 passengers and 52.3 million tons of foreign cargo valued at $80 billion in 2023 – including 750,000 automobiles. Over 30,000 vehicles cross the Francis Scott Key Bridge on a daily basis. The port accounted for 28% of coal exports in the United States in 2023, according to census data, second only to Norfolk, Virginia.

According to the U.S. Energy Information Administration, there are two full-service terminals that receive, store, and load coal onto oceangoing vessels at the port: the Curtis Bay Coal Piers served by the CSX Railroad, and the CONSOL Energy Baltimore Marine terminal, served by both the CSX and Norfolk Southern Railroads. Baltimore primarily exports coal from the northern Appalachia coal fields in western Pennsylvania and northern West Virginia.

About half of the 28 million short tons of coal exported from the port in 2023 went to India, according to the administration. Baltimore primarily exports coal from the northern Appalachia coal fields in western Pennsylvania and northern West Virginia. About half of the 28 million short tons of coal exported from the port in 2023 went to India, according to the administration.

The beneficiaries: the Port of New York/New Jersey and the Virginia ports. CSX has already announced that it is rerouting coal to New York given its rail track ownership in that area.

D.C. KEEPS ITS TEAMS

Ted Leonsis, the principal owner of the NBA Wizards and NHL Capitals signed a letter of intent formalizing an agreement between his parent company, Monumental Sports and Entertainment, and the District of Columbia. The deal would keep the two franchises at their current downtown location through 2050. The teams had tried to reach an agreement with the Commonwealth of Virgina and the City of Alexandria for an arena/real estate deal. That plan required approval from the Virginia legislature.

That was the rub. The Governor was a huge backer of the plan but it did not have the broad political support that was needed in the Commonwealth. Local government in D.C. was much quicker to coalesce around a plan in response which supported local opposition to moving the teams. There was no disagreement about the role of the arena in development in the District’s Chinatown. Nevertheless, the agreement does not come cheaply.

Monumental would receive $500 million in cash from the city to renovate twenty seven year old Capital One Arena; another $15 million would go to improve a street connection that connects the arena to the adjacent Gallery Place building. The team will also get control of scheduling at the arena and a guaranteed police presence from the City. 

Now the question is whether the City is willing and able to put a package together to support a new stadium for the Washington Redskins. That remains to be seen.

The move to Virginia ran into significant opposition. The owner admits that he completely misread local sentiment. He based his move on the idea that the metro area was one big entity and found to his surprise that “a large share of residents of the District, Virginia and Maryland consider those areas different entities.”

K.C. STADIUM VOTE

The owners of the K.C. Royals and the Chiefs are going back to the drawing board after Jackson County, MO voters delivered a stunning rebuke to their threats to move out of Missouri across the river to Kansas. A ballot initiative to extend an existing 3/8 of one cent sales tax for twenty five years was defeated by a 16 point margin. In the current environment, a 16 point loss is a landslide. Now the owners are left to either act on their threats to move or come up with financing with a much smaller share of government funding.

The vote was driven by the potential for the Royals to move from their suburban location to a downtown site. There was a case to be made for a new baseball stadium to be a redevelopment driver. Ownership however, could not come up with a firm plan and could not even articulate a preferred location. On the Chiefs side, ownership saw an opportunity to piggyback on the baseball project to get fun ding for renovations to Arrowhead Stadium

It did not help that the Chiefs’ owner undertook a tone-deaf campaign that undermined his case. He is seen as a classic case of second generation wealth. He also wasn’t helped by the release of an NFL Players Association poll which sought player attitudes towards the stadium itself but also of Mr. Hunt as an owner. The stadium was rated as among the league’s worst and the owner was cited for underinvestment in facilities. He came off looking like a cheapskate who was now looking for a government handout.

OAKLAND

Construction has not yet begun on the Oakland A’s new stadium in Las Vegas. It is not expected to be complete until the 2028 season. The A’s lease at the Oakland Coliseum is set to expire after the 2024. This week, the City of Oakland offered a five year extension to the lease. It would have provided for an opt-out clause after three seasons and requires the team to pay $97 million as part of an extension fee.

The offer came as the city has dropped previous requirements that called for MLB to keep the A’s name and colors in Oakland, as well as a demand that MLB guarantee the city a future expansion team. Staying in Oakland, or playing in Sacramento, would enable the team to retain their rights to their local broadcasting money. 

That is a major factor behind the latest announcement that the A’s have reached an agreement to play in Sacramento while a new home is constructed in Las Vegas.

This week, the Tropicana Las Vegas closed its casino for the last time along with its hotel. The demolition will open up a 35 acre site for which 9 acres will be dedicated to a new ballpark for the A’s. The current season will be the last for the A’s in Oakland.

TRI STATE LOSES ANOTHER

Tri-State Generation and Transmission Association is set to lose another participating distribution customer. La Plata Electric Association (LPEA) is obligated to purchase at least 95% of its power from Tri-State through 2050. Its customers want more electricity from renewable sources. The situation mirrors that of the other participants who have withdrawn from Tri-State. The formal decision by LPEA triggers a two-year exit period.

The move occurs pursuant to an agreement between the Federal Energy Regulatory Commission, Tri-State and LPEA. LPEA wants out of its contract with Tri-State because it has been unable to have direct control over its own rates or ability to seek clean energy opportunities. As has been the case with other withdrawn participants, the size of the exit fee required is a point of major contention. Tri-State’s initial price of exit: $209.7 million.

COAL REVERSAL

One year ago, Rocky Mountain Power announced the planned early closure of two coal fired power plants in Utah. The plan was to employ modular nuclear generators to replace the coal based power. Since then, a number of developments have impacted that decision. One has been the difficulty of getting modular nuclear started. The other is the impact of federal court decisions on the ability of the U.S. EPA to enforce regulations which limit the operations of coal plants to reduce or eliminate air pollution impacts on neighboring states.

The courts have significantly hindered the ability of the EPA to limit coal plants based on their generation of pollution into other states. Now, in light of the limits on EPA regulation, Rocky Mountain Power has decided to abandon its efforts to close the plants early. A new integrated resource plan submitted by Rocky Mountain Power reverses plans to greatly increase renewables and develop new nuclear. The changes are significant.

The plan being replaced called for 17 gigawatts of solar and wind power and more than eight gigawatts of battery storage over the next two decades. The updated plan reduces by more than 13 gigawatts the amount of renewable energy the company had planned to add by 2034. That includes cutting more than four gigawatts of solar power and another four gigawatts of battery storage. The coal plants being held open produce 2.5 gigawatts.

The Warren Buffet owned generator has benefitted greatly from newly enacted legislation in Utah designed to skew regulation in favor of coal. That legislation makes the coal plants the state’s “preferred” energy source. It provides for a self-insurance fund for Rocky Mountain. Under the bill, every Utah customer will pay a surcharge on their bill that will go to a Rocky Mountain fund that can be used to pay wildfire claims in the state. 

That is a direct reaction to PacifiCorp’s potential exposure in states like Oregon where it has significant wildfire-related risk exposure. Buffet has complained about this risk and regulation and now characterized his investment in generation to be “a costly mistake”. Recently, he even suggested that the electric generation, transmission and distribution utility may not actually be suited for investor ownership. Public power advocates have long agreed with those sentiments. It is a view which advocates would be wise to seize upon in their efforts to build the case for public power.

NUCLEAR LOAN

The timing around the holiday for a resurrection story could not be made up but just before Easter we were provided with one. The U.S. Department of Energy announced that it would loan $1.5 billion to the owners of the closed Palisades nuclear plant in MI. If the plant is successfully restarted, it would be the first nuclear plant to do so in the U.S. The Diablo Canyon nuclear plant in CA received federal assistance but that was to extend operations at a functioning plant.

The state had previously pledged $300 million toward the Palisades restart, contingent on the federal investment. It was all part of legislative actions which requires all state electricity to be from carbon-free sources by 2040. Nuclear was classified as “clean” but not a renewable but as a no-carbon resource it fits the goals of the legislation. This is just the start of the process.

The repowering plan must be approved by the Nuclear Regulatory Commission, which will require approval of multiple pending licensing requests for the project. The hope is to extend the life of Palisades through 2051 providing 800 megawatts to the electrical grid. The loan will serve as a bridge financing until operations activate long-term power purchase agreements are already in place with two rural electric cooperatives with customers in Michigan, Illinois, and Indiana.

ANOTHER ONE BITES THE DUST

Birmingham-Southern College, a private liberal arts school in Birmingham, Ala., is set to close at the end of May. The decision comes after it failed to secure a multimillion-dollar loan from the state. Alabama lawmakers last year approved a new loan program that could lend Birmingham-Southern as much as $30 million. The state treasurer twice denied the loan last year, citing concerns about the school’s ability to pay its debts.

The legislature sought to change the loan program this year to move the responsibility of approving loans from the state treasurer to the Alabama Commission on Higher Education and further specified the terms of the loan. That legislation could not make it through the Alabama house so the school decided to cease operations. It has a long history of financial weakness and mismanagement which has not helped its cause.

MANSION TAXES

The concept of a tax on the sale of homes above a certain price (usually a minimum of $1 million) is not new. Attempts to create one in NY state were unable to make it through the legislature. Earlier this year the voters in Chicago defeated a ballot item which would have created such a tax. These votes transpired in the wake of the establishment of a mansion tax in Los Angeles via a vote in November of 2022. We now have a year’s worth of data from Los Angeles to analyze to see if such a tax has the desired effect.

Measure ULA, levies a 4% charge on all property sales above $5 million and a 5.5% charge on sales above $10 million, with proceeds funding affordable housing and homelessness initiatives. It is more expansive than other proposals in that not just luxury home sales, but also multifamily developments and commercial properties, since the tax applies to all property sales above $5 million.

Initially, proponents of Measure ULA estimated the tax would raise some $900 million per year. Last March, a report from the City Administrative Office lowered that number to $672 million. According to the L.A. Housing Department, Measure ULA has raised roughly $215 million in its first year. In the first three months of Measure ULA, the tax raised $15 million, only $5 million per month. The trend of collections has more recently been positive.

But from July 2023 to February 2024, the tax raised roughly $200 million, or $25 million per month. Projections for the city’s fiscal year, which starts on July 1 and ends on June 30, would be around $300 million. This has not slowed efforts to overturn the tax. Opponents focus in on data showing that from April 2022 to March 2023, the year before Measure ULA hit, L.A. had 366 single-family home sales of $5 million or more. In the 12 months since, there were just 166 — a drop of roughly 68%. They cite much lower rates of sales slowdowns in neighboring cities which have not imposed a mansion tax.

In November, Californians will vote on a statewide ballot initiative called the “Taxpayer Protection Act.” If passed, the act would require special taxes to be approved by two-thirds of the vote instead of a simple majority, applying to all measures adopted after Jan. 1, 2022. Since Measure ULA was adopted in 2023 and only received 57% approval, it could require another vote or potentially be repealed.

RECREATIONAL CANNABIS AND THE SUNSHINE STATE

Medical marijuana was approved in 2016 to become legal in Florida. Since then, efforts have been ongoing to get recreational marijuana approved. They have been stymied by court decisions which kept earlier efforts off the ballot. Now, the Florida Supreme Court has approved a ballot initiative to legalize recreational use which will appear on the November ballot.

Amendment 3 will legalize the “non-medical personal use of marijuana products and marijuana accessories by an adult” 21 or older if approved by 60% or more of statewide voters. It would take effect six months after the election. Prior efforts in 2021 to advance such an initiative failed to pass muster with the Court. Observers note that the decision represents a clear reversal of positions on the Court as both decisions were issued under significant majorities. Medical marijuana got a 71% vote in 2016.

SMALL POTATOES

The Idaho Legislature is taking up the battle against ESG investment management that is regularly occurring in so-called “red states”. House Bill 669 would ban the largest banks and credit card companies from financial “discrimination” against any person or entity on the basis of “social credit scores” that consider their views on religion, climate targets or gun regulation. The bill would only apply to banks with more than $100 billion in assets and to payment processing companies that handle over $100 billion annually. The Idaho attorney general would have authority to investigate and enforce the law and to allow private lawsuits.

What is useful about this particular exercise is the fact that the sponsors of the legislation have been very open about the fact that they did not write the law. It was written for them by a group of conservative thinktanks. In this case it was written by a Christian nationalist organization. After all, we’re talking about Idaho.

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 breaking for the Easter holiday. The Muni Credit News will next publish on April 8. We think that it is even money at best that the NYS budget will be done by then.

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MIGRANTS

The two cities most prominently impacted by the influx of migrants – Chicago and New York – have announced changes in their shelter policies to reflect the ongoing pressures resulting from the problem. Chicago has received more than 37,000 migrants since August 2022. Nearly 11,000 migrants are living in 23 homeless shelters. The city began an eviction process for longer term residents. It is anticipated that some 2000 individuals will be moved out of city provided shelter by May 1.

Case reviews will provide exemptions for pregnant women, people with certain medical issues and migrants who are already in the process of securing housing. Families with children can receive renewable 30-day extensions. Chicago is a sanctuary city but it is not a right to shelter jurisdiction so these sorts of changes do not have to overcome legal hurdles that right to shelter provides.

In New York, an agreement has been announced that will grant the city some relief from court-imposed requirements that there is a right to shelter. It is this concept that has left NYC particularly vulnerable to the types of tactics used by the governors of Texas and Florida to “export” immigrants. Under the new plan, adult migrants will be allowed to stay in shelters for only 30 days under the agreement, city officials said. Some would be allowed to stay longer if they met certain conditions, including having a medical disability or an “extenuating circumstance”.  

The city would have liked to have done this earlier but it operates under a consent decree (won in 1985) requiring the city to satisfy the right to shelter. The new plan is the result of months of negotiations. Under the agreement, adult migrants ages 18 to 23 would have at least 60 days in the shelter system before having to move out, unless they meet the exceptions. Migrant families with children would not be affected. The settlement also does not apply to people who are not migrants and staying in city shelters.

The situation is still critical. There are 65,000 migrants still under the city’s care, 22 percent of whom are single adults or adult families without children, according to city officials. 

HOUSTON PENSION SETTLEMENT

The City of Houston has announced an agreement with its firefighters union over issues related to back pay and pensions. The firefighters and the City had been unable to negotiate a labor agreement and some firefighters had been working for eight years without a contract. The $650 million settlement to finally resolve the city’s looming liability addresses longstanding pay issues dating back to 2017.

Under the terms of the agreement, all current firefighters, retired firefighters, and the families of firefighters who have died since 2017 will receive lump sum payments for the wages owed back to 2017. In addition to the back pay, the agreement makes permanent the temporary 18% pay increases awarded to firefighters in 2021 and mandates additional raises of 10% on July 1, 2024. With the subsequent pay hikes specified through 2029, total firefighter pay will increase by up to 34% over the life of the contract.

The costs of the settlement will be financed with the issuance of judgment bonds. This is tax backed debt issued by an entity to fund a large near term payment while spreading its costs over a long period. It’s not an uncommon municipal bond practice but this case creates a much larger than usual amount to be funded and financed.

NEW YORK CANNABIS

This week NY Governor Kathy Hochul made it official – the rollout of the recreational cannabis regulatory mechanism in New York is officially a “disaster”. She ordered a full review of review of the state’s licensing bureaucracy. The main goal of the review is to shorten the time it takes to process applications and get businesses open. Disaster is one of the kinder words used by all sides of the industry – doctors, retailers, medical dispensaries. Some of the problem is blamed on the equity provisions of the rollout. The reality is more complex.

For whatever reason, the social and political goals of the program were allowed to overtake the nuts and bolts work of establishing and implementing a regulatory program. The state Office of Cannabis Management, which recommends applicants to the board for final approval, received 7,000 applications for licenses last fall from businesses seeking to open dispensaries, grow cannabis and manufacture products. But regulators have awarded just 109 so far this year. 

The agency has been plagued by staff as well as management turnover. It is led by a well meaning attorney who doesn’t have executive experience. The head of the equity side of the program had to resign over accusations of favoritism. This has all gotten in the way of a structured plan to award licenses. This had led to proliferation of illegal unlicensed retail sites including an estimated 1500 in New York City alone.

The emphasis has been on the social and economic equity goals enshrined in the legalization law. Its goal is to have half of all licenses go to people harmed by anti-cannabis policies; women; racial and ethnic minorities; distressed farmers; and disabled veterans. Much of the criticism of the office has been rooted in the role of equity concerns as an impediment to licensing. Along with a lack of enforcement in NYC, the botched rollout is actually increasing illegal activity.

BALLOT RESULTS

It took some two weeks to find out but in California Proposition 1 was approved by the voters with a razor thin majority. With just 50.2 percent of voters approving, the gap was less than 30,000 votes out of more than 7 million cast in the race. Only about a third of registered voters cast ballots in the California primary. There was a clear divide between the urban areas and the rest of the state. The vote authorizes over $6 billion of debt issuance capacity to address the issues of homelessness and mental health.

In Chicago, a referendum that would change the city’s real estate transfer tax and raise rates on high-value properties to fund homelessness programs appeared to be failing in the tabulated vote. Only 20 percent of registered voters in Chicago cast ballots. The vote is a huge political defeat for the Mayor as neither the voters nor the Council have provided support for higher taxes. The result puts the Mayor and the City in a weakened position as they confront the need to reach a contract agreement with the Chicago Public Schools teachers union.

TEXAS AND ESG

The Texas Association of Business Chambers of Commerce Foundation (TABCCF) released a new economic impact study illustrating the financial impact of Texas’ Fair Access law, passed in 2021. In the 87th Session of the Texas Legislature in 2021, lawmakers passed Senate Bills 13 & 19, barring any Texas municipality from contracting with banks if they are found to be restricting funding to oil & gas companies or discriminating against firearms companies based on their line of business.

In a 2023 study entitled Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies, Dr. Dan Garrett of the University of Pennsylvania and Dr. Ivan Ivanoff of the Federal Reserve Bank of Chicago examined the consequences. Their study found that competition in the public finance market was indeed reduced due to these laws, and that interest costs were 0.144 percent higher as a result. This new study builds on that work. Further examination of transaction costs associated with issuing debt, specifically the underwriters spread, shows a sharp increase in the fiscal years 2022-23 in the wake of the laws’ implementation. Applying the historic average from fiscal years 2015-21 implies excess costs of $270.4 million.

The real issue is at what level of government is the cost of anti-ESG policies borne. The move in Texas has been primarily driven at the state level. That isn’t where the cost is being borne. There is little sign of any external impact on underwriters spread at the State level post-2021. The situation appears to change locally, however, as the underwriters spread more than doubled from fiscal year 2021 (the last year before the anti-ESG laws were implemented) to fiscal 2023.

The study sums it up well. “In simple terms, when government attempts to mandate values (no matter what kind) to business, the market loses, and taxpayers bear the consequences.”

COAL

A joint resolution that passed the Kentucky House natural resources committee this week would direct the state’s environmental authority to defy federal rules for fossil fuel power plants. House Joint Resolution 121 says the U.S. Environmental Protection Agency is “overreaching” its regulatory power. It would also prohibit the state’s environmental cabinet from enforcing federal air quality standards related to power plants. The lead sponsor of the resolution stated that “actually enacting the measure could lead to a federal government takeover.” It’s not clear quite what he meant.

The legislation is designed to plan for Kentucky’s energy needs into the future through the creation of an “independent” energy commission that would review all requests to shut down existing power plants. That would be an added step on top of the existing Public Service Commission approval process. The bill is opposed by the state’s investor owned utilities Louisville Gas & Electric and Kentucky Utilities, and Duke Energy.

The sponsors want the state to declare itself a “sanctuary state” for fossil fueled electric generation. The IOUs believe that it would lead to higher energy costs and could force them to keep open ineffective and uneconomical plants. The irony is that the party of free markets is the one hoping to legislate against efforts to respond to market forces. This comes as Utah’s Governor signed legislation designed to keep the Intermountain Power Project alive as a coal fired generation plant.

It’s part of an effort to “nullify” federal laws and regulations governing the operation of generating facilities. Kentucky still gets about 68% of its electricity generation from coal and another 23% from natural gas, according to the resolution. Less than 1% comes from wind and solar power. The other side of the argument was best expressed by one legislator – “I’m not comfortable with going down the road of nullifying federal laws that we don’t like. It sets a dangerous precedent. It didn’t work out well 170 years ago.”

STILL MICKEY MOUSE TIME IN FLORIDA

Attorneys for the Central Florida Tourism Oversight District filed a motion for a protective order that would stop the board members of the District from having to give videotaped depositions to Disney attorneys. District attorneys cite the “apex doctrine,” to support a view that high-level government officers shouldn’t be subject to depositions unless opposing parties have exhausted all other means of obtaining information. Florida is one of a minority of states which recognize that doctrine.

The board members who claim that being forced to give depositions would “impede” their ability to fulfill their duties and divert resources and attention away from overseeing the district. Depositions are a basic part of the discovery process in almost any civil litigation. If you’ve ever been deposed you know the process is annoying at best. That does not do anything to mitigate how poor a look for the District this all is from a governance point of view. The good news is that debt service payments of the District’s debt continue to meet made smoothly.

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

INTERMOUNTAIN POWER

Utah lawmakers passed a measure Thursday that allows the state to purchase a coal-fired power plant operating in Delta that now serves California customers and some local cities.  Of particular angst to some lawmakers is the fact that California receives 98% of the power but Intermountain Power Authority (IPA) is using Utah water and stopped using Utah coal to run its 1,900-megawatt plant. When it transitions to natural gas as mandated by California’s clean energy standards, it also plans to purchase that fuel from Wyoming, not Utah.

The situation is driven by two concerns. One is the desire of many Utah legislators to find a way to save a coal plant. The move is being positioned as one of concern over access to water rights. The sponsors claim that the law is not intended to interfere with the Intermountain Power Agency’s transition to natural gas and potentially hydrogen in the next few years. It is being pitched as an issue of state and local control.

The second is that the plant is operated by the agency via the Los Angeles Department of Water and Power. It pays local taxes but it does so after doing what many other entities of its type do – the plant has appealed its county tax assessment 26 of 38 years. The real issue is that the bill’s sponsors feel that the plant operated with little Utah government oversight, despite being set up decades ago as a political subdivision of the state. They believe that a “California controlled” entity should not have control over the IPA budget.

PURPLE LINE BLUES

The Maryland Transit Administration will seek approval next month for as much as $425 million in “relief payments” related to delays in the Purple Line light rail project. The extra payments are the result of a roughly 234-day delay that will push the line’s completion back from spring of 2027 to December of that year. The Maryland Transit Administration took over the utility related work in 2020 as the original contractor began to exit from the project.

The Administration did complete the utility work in October. In December, operations and maintenance facility work was complete. The project is now 65% complete, with 13 of 21 stations in active construction. Additionally, nearly 17,000 linear feet of track has been laid. That gets the Administration out of direct construction activities.

Now construction is in the hands of Purple Line Transit Partners, the private consortium building the line. Partners will receive an initial $60 million from the state. Additional payments will be made as the company hits certain milestones such as the delivery of rail cars. The utility work payment is on top of $449 million in payments spread out over the next several years that is part of an increase already in the proposed Consolidated Transportation Program.

Seven months ago, the Board of Public Works approved an additional $148 million in payments to Purple Line Transit Partners. The money covered cost overruns and delays that pushed the project to spring of 2027. The additional funding being sought pushes the cost of the project to about $4 billion. Including financing over the 36-year life of the project, the cost is $10 billion.

NY HOSPITAL MERGER

Northwell Health (A3 stable) and Nuvance Health (Baa3 negative) signed a definitive agreement to merge later this year. The parties expect to close toward the end of 2024. It is a positive development for the Nuvance credit which is teetering around investment grade at Baa3 with a negative outlook. Northwell is a much larger entity generating some $16 billion in annual revenue compared to Nuvance Health’s $2.6 billion.

Nuvance Health’s weaker financial performance would be modestly dilutive to Northwell Health.  If the affiliation closed today, Northwell Health’s operating cash flow margin would decline by 30 – 60 basis points and days cash position would decline by a modest three days.

SMALL COLLEGE DOWNGRADES

Moody’s downgraded Hartwick College’s (NY) issuer and revenue bond ratings to Caa1 from B2. As of June 30, 2023, the college has approximately $35 million in outstanding debt. The outlook was revised to stable from negative. Ongoing deep operating deficits and a high reliance on large supplemental endowment draws is weakening already thin liquidity through at least fiscal 2024. 

S&P revised its outlook to negative from stable and affirmed its ‘BBB-‘ long-term rating on Champlain College in Vermont. The school has a debt service coverage covenant of 1.10x, which was not met in fiscal 2023 with debt service coverage of negative 0.43x. Based on the legal documents, the remedy for this covenant violation was to hire an independent consultant, which was fulfilled. “The negative outlook reflects our opinion that the college’s enrollment could continue to decline in the near term, leading to ongoing operating pressures. This could further pressure financial resources and weaken them to a level commensurate with a lower rating.” 

S&P lowered its long-term rating to ‘BBB’ from ‘BBB+’ on the Albany College of Pharmacy and Health Sciences (ACPHS).  “The downgrade reflects our view of the effects of ongoing demand challenges on the college’s enrollment and financial operations, as well as its weakened financial resources over the last two years relative to historical performance”. ACPHS’ operations are generally reliant on student-derived revenues that may likewise remain pressured.  

EMINENT DOMAIN

In 2022, NV Energy filed a court complaint to use the power of eminent domain in building a gas pipeline crossing property owned by an entity called Mass Land Acquisition (MLA). MLA’s parent is a company called Blockchains which hopes to develop a “cryptocurrency city”. MLA contested the eminent domain request all the way to the Nevada Supreme Court. The landowners argue that NV Energy’s use of eminent domain violates the state Constitution, which “expressly prohibits a private party from using the power of eminent domain to transfer interests in property from one private party to another.”

NV’s position is that state law and the Nevada Constitution actually clearly allows them to use eminent domain because they provide a “public use,” which specifically includes utilities and pipelines for petroleum or natural gas. The municipal bond angle – the Las Vegas Valley Water District and Southern Nevada Water Authority filed amicus briefs supporting the NV position.

The South Dakota Legislature passed three bills intended to strengthen landowner protections while maintaining a regulatory path forward for the Summit Carbon project. Carbon capture pipeline operators will have to pay $500 for access to survey land. Counties through which the pipelines run could collect a surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion.

The bills restrict easement durations, terminating them if a pipeline does not secure a Public Utilities Commission permit within five years or if the easement goes unused for the same period. Additionally, easements cannot extend beyond 99 years and must be documented in writing and recorded in a county register of deeds office. Current law says the Public Utilities Commission may overrule counties’ pipeline setbacks. The legislation establishes that the commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. 

PIPELINE PLANS EXPAND

Summit Carbon Solutions plans to expand its carbon dioxide pipeline footprint in Iowa by about 50% — or about 340 miles according to a new regulatory filing in Iowa. That is in addition to the existing proposal for 690 miles of pipe through Iowa. Summit has more than doubled its number of ethanol plant partners in Iowa to a total of 30 out of 42 in the state. Two large ethanol producers — POET and Valero — that had initially agreed to be part of Navigator CO2’s competing pipeline have since signed with Summit.

The project now includes 57 ethanol producers in five states and is expected to transport more than 16 million metric tons of carbon dioxide each year. The system has a total capacity of about 18 million metric tons. More than half of the corn Iowa farmers produce is used to make ethanol. Summit filed requests with the IUB to schedule public meetings in 22 counties for its expansion plans. The company proposed the first meeting for Adams County on April 22. The rest would be held over the course of about three weeks, ending May 9.

NUCLEAR

The Nuclear Regulatory Commission released a long-awaited proposal – “Part 53” – aimed at speeding up licensing for advanced reactors. Part 53 is meant to offer a “voluntary” alternative to advanced nuclear applicants under a framework that would be applicable to all reactor technologies; use information from risk assessments to focus safety analyses on important issues; and ensure plants are regulated based on how they perform and not just how they are designed.

Advanced nuclear reactors are being developed under the existing Part 50 program which is designed for traditional large scale reactors. The uncertainty associated with this process has likely slowed development. The rulemaking process is likely to make implementation of Part 53 delayed until 2027. Recent setbacks in the industry have likely bought regulators some time to effectively catch up in terms of new regs.

SOLAR

The US solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, a 51% increase over 2022. This is the first year where new solar exceed 30 GWdc of capacity for the first time. Residential solar grew 12%, adding 6.8 GWdc of capacity as installations in California were accelerated as customers rushed to take advantage of more favorable net metering rules before the switch to net billing in April. Commercial solar saw a similar increase in California, leading to national growth of 19% over 2022. Community solar grew just 3% compared to 2022. Nationally, utility-scale installations spiked to 22.5 GWdc of capacity, a 77% increase over 2022. 

The result – Overall, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time.

Nevertheless, the California Public Utilities Commission issued a proposed decision that found that the Net Value Billing Tariff (NVBT) policy supported by solar advocates ​“conflicts with federal law and does not meet the requirements” of AB 2316, the 2022 state law that ordered the CPUC to create an affordable and equitable community-solar program.

The California investor-owned utilities argued that the community-solar and battery projects envisioned for NVBT fall under federal law that governs larger-scale generators operating in wholesale energy markets. What are the points of interpretation driving the arguments? AB 2316’s requirement that any new program must not increase costs for nonparticipating customers? An interpretation of the Public Utility Regulatory Policies Act (PURPA), a 1978 law that requires utilities to purchase power from certain non-utility-owned generators under structures governed by the Federal Energy Regulatory Commission.

BOSTON

The Boston Policy Institute (BPI) is a newly launched non-profit focused on analysis about the Commonwealth of Massachusetts and the City of Boston. Among its first efforts is a recent report on the impact of office building values on city revenues after the pandemic. The Fiscal Fallout of Boston’s Empty Offices raises several issues which put the City of Boston under more fiscal pressure than some other major cities.

The reports premises are based on the role of office buildings in the City’s tax base. More than one-third of Boston tax revenue comes from commercial

property taxes, by far the highest proportion among major U.S. cities.

This leaves Boston especially vulnerable to falling real estate values. The value of office space is projected by the BPI expected to decline 20–30 percent by

2029, and overall commercial real estate prices by 12–18 percent.

A second estimate is that Boston will face a cumulative revenue shortfall of $1.2

billion to $1.5 billion over the next five years. Boston will have few ways to compensate for this lost tax revenue. Massachusetts precludes cities from introducing local sales and income taxes; and fully offsetting the decline in commercial real estate would require a 25 percent to 30 percent increase in residential property taxes.

Whereas property taxes comprised roughly 55 percent of city revenues in 2002, today they account for 75 percent. Current estimates suggest that more than 20 percent of all office space in Boston is vacant. As is the case in other cities like New York and Chicago, remote and/or hybrid work is poised to be a long term drag on valuations for office real estate.

It remains a situation worth watching as the budget season unfolds.

NEW JERSEY GAS TAX

Funding for New Jersey’s Transportation Fund has been a major concern during the FY 2025 budget process. Now a plan has been advanced which would raise the state’s gas tax by some 10 cents per gallon over a period of ten years. It would also impose a fee ranging from $250 to $290 a year on electric vehicles over that period. Electric vehicles would be charged a $250 fee in the first fiscal year. That would increase by $10 a year after that, capped at $290 by the end of the five-year period.

Currently, the state collects 42.3 cents for each gallon of gasoline sold and 49.3 cents on every gallon of diesel — the seventh-highest rate in the nation. The level of the tax is determined annually through a formula established through a deal with the State Legislature in 2016 for the gas tax to be adjusted each October to ensure it generates about $2 billion a year in revenue to support the TTF.

The new tax is proposed to be in addition to rates derived from the formula. The higher gas tax and new electric car fee would take effect in July if approved by the Legislature and signed into law. The Governor has also proposed eliminating a sales tax exemption on electric car sales.

MISSISSIPPI

S&P Global Ratings revised the outlook to negative from stable and affirmed its ‘AA’ long-term rating on Mississippi’s general obligation (GO) debt. Elevated credit risks stemming partly from persistently weak economic and demographic trends, which could result in an increasingly challenging budget environment as the state manages through its phased-in income tax reductions…The risk of future budgetary pressure is further elevated due to pension contributions falling short of their actuarially determined contribution amounts in each of the past three years and a relatively high level of unfunded pension liabilities.”

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

TOWN AND GOWN AND TAXES

Newark, DE is the home of the University of Delaware. It is the dominant property owner in the city and obviously plays an outsized role in the local economy. It also is exempt from property taxes. This has always been an issue as it is in many “college towns”. The university is not ignorant which is why in lieu of property taxes, UD began making an annual payment of $120,000 in 1965. The annual payment level has remained at that level. It has been estimated that adjusting for inflation and enrollment which has quadrupled since 1950, that payment today would be almost $1.2 million since.

The City has been under pressure to find additional revenues and the tax exemption makes it harder to maximize property tax revenues. UD also added an annual police support subvention payment of $60,000 in 2001 but that has remained at that level as well. Newark City Council voted unanimously to advance a resolution seeking a charter change to levy a $50 fee per student per semester on the University of Delaware. The fee would apply to all full-time and part-time students, undergraduate or postgraduate, and would be adjusted annually using the previous 12 month Consumer Price Index.

The city is not requiring the fee be charged to students directly – that decision is up to the university. The next step is legislation in the state legislature to approve the charter change. Two-thirds of state lawmakers in both chambers now have to approve a bill for the city to amend its charter to levy the fee, and the governor would have to sign it. The City Council would then vote on it a final time.

The expected hue and cry from campus touches on all of the current political issues playing out on college campuses. Here’s one example of how the University may be generating its own trouble. The school makes its payments to the city through a credit card. This means that, according to the city, Newark absorbs $400,000 in processing fees a year despite requests asking the school to use a different payment method.

CHICAGO

Chicago’s progressive mayor ran on a platform of raising taxes on the rich. One of his main proposals concerned a levy on real estate transactions valued at $1million or more. Specifically, he proposed increasing one-time real estate transfer taxes on properties over $1 million, while reducing levies on transactions below that. The tax would also be graduated, with properties between $1 million and $1.5 million incurring a duty increase of $10 per every $500, and properties over that facing charges of $15 for every $500.

The tax was going to be submitted to voters on the March 19 primary ballot. Before it could get to the vote, the large real estate interests sued in Cook County Court to have the ballot item declared misleading. As we went to press last week, a County judge found against the ballot item. The Chicago Board of Elections could still appeal. In an interesting twist, it’s too late to remove the item from the ballot. This will allow a vote to occur on the item if the appeals process can reach a conclusion by the date of the vote.

Even if the ballot item is declared ultimately illegal, voters can still cast a vote for it. While the results of the ballot votes will not be publicly released if it is declared illegal, exit polling could generate some interesting insight into what the public thinks.

In the meantime, S&P announced that it has lowered its outlook on the City of Chicago’s general obligation debt to negative. S&P currently rates the City at BBB-. S&P cited rising public safety labor costs, recent legislative changes to pension contributions and the ongoing costs of migrant arrivals. It seems to feel that the city and state have not provided enough clarity as to total cost and funding related to migrants and charged that the City is unwilling to raise revenues.

Are they talking about Chicago or “stable” New York City?

NYC BUDGET

The combination of it being state budget season in NY and the ongoing asylum migrant crisis have led to several cases of whiplash in terms of the public utterances of the Mayor. The swings back and forth have made an analysis of the city’s budget that much more difficult.

The Adams Administration included a second round of reductions to agency budgets in its Program to Eliminate the Gap (PEG) in the Preliminary Budget and Financial Plan for fiscal year 2025. This PEG follows a first round of reductions from the Administration’s November Plan, and totals just over $3 billion for 2024 and 2025, although there were restorations of previous cuts that offset a portion. (All years refer to City fiscal years.)

While the third round of reductions for the Executive budget has been called off, the cuts included in the two most recent plans have the potential to substantially impact the life experiences of New Yorkers. Separately, shortly after the November Plan was announced, the Administration announced a 20% reduction to the estimated cost of providing services for asylum seekers—which was reflected in the Preliminary Budget. Last week, the Administration announced an additional 10% reduction in those costs, which is anticipated to be reflected in the Executive Budget. The NYC Independent Budget Office has taken its shot at explaining what’s going on.

The wild swings in the Mayor’s outlook have caused real tensions with groups facing the largest proposed cuts. Some of the areas proposed for cuts in both plans include those that largely contract with nonprofit organizations for the provision of human services: Department of Education early childhood programs, programs for justice-involved individuals (including criminal justice contracts, re-entry services, and mentorship programs), and older adult centers. There are no ready replacements for the services these entities provide and the impacted populations usually are among the lower income segments.

The Department of Cultural Affairs also received cuts in both plans and has reduced subsidies to the 34 members of the Cultural Institutions Group and grants to over 1,000 smaller organizations through the Cultural Development Fund (CDF) by 13% and 11%, respectively, since the Adopted Budget. IBO analysis of detailed CDF grant data showed that about 80% of this year’s grantees received smaller or no awards than last year, and generally organizations that received smaller awards last year received disproportionately larger cuts to their grants this year. 

The Preliminary Budget included cuts from the November Plan that were either partially or fully restored. Partial restorations included one police officer academy class and one year of Summer Rising programming that will provide enrichment for about 100,000 elementary and middle school students this summer. Full restorations included the Parks Opportunity Program (a six-month job training program for thousands of low-income New Yorkers) and litter basket service.

Among new cuts in the Preliminary Budget, the City reduced the overall budget for asylum seekers by 11% in 2024 and by 20% in 2025. The City’s share of the overall costs was also reduced by 36% over 2024 and 2025, partly due to additional State funding. Some cuts have resulted in reductions to full-time headcount at agencies such as the Department of Buildings and the Department of Parks and Recreation, which could contribute to concerns about adequate staffing for service provision.

CONGESTION PRICING – THE COST OF EXEMPTIONS

As the public comment period continues into March, various parties are making their case for their vehicle or class of vehicles be exempt from the charge. This has led to studies of possible results for given vehicle classes. This week, the NYC Independent Budget Office analyzed what the impact on congestion fee revenues would be if yellow cabs were exempted.

According to the MTA, taxis and for-hire vehicles made up more than half of the vehicles in the CBD prior to the Covid-19 pandemic. Under the proposed schedule, taxis and for-hire vehicles such as Uber and Lyft are exempt from the congestion toll, and instead are subject to a per trip surcharge paid by the passenger on any trips entering, exiting, or within the central business district (CBD). The MTA’s proposed surcharge is currently set at $1.25 for yellow taxis, green cabs, and traditional for-hire vehicles such as livery cars.5,6 A higher surcharge of $2.50 is set for high-volume for-hire services such as Uber and Lyft.

Based on current yellow taxi trip data—provided by the New York City Taxi and Limousine Commission (TLC)—IBO estimates an exemption just for yellow taxis would cost the MTA $35 million per year in foregone surcharge revenues, or about 3.5% of the authority’s $1 billion annual revenue estimate. While both industries still have ridership below pre-pandemic levels, yellow taxi ridership has been notably slower to recover. TLC trip data indicates that in October 2023, total yellow taxi trips entering, exiting, or within the CBD were at 49% of prepandemic levels, while high-volume for-hire vehicle trips were at 88% of pre-pandemic levels.

HOUSING AND TRANSIT

The MBTA Communities Law was passed in January 2021. It requires MBTA communities to establish multifamily zoning no more than half a mile from a commuter rail station, ferry terminal, or bus station, and the zoning districts must have no age restrictions and must be sustainable for families with children. In December 2023, Milton Town Meeting voters approved zoning changes that allow for more multifamily housing so that the town could comply with the MBTA Communities Law.

Milton is one of approximately 177 communities subject to the MBTA Communities Law and one of 12 that had a deadline of Dec. 31, 2023, to enact a compliant zoning district. Recently, the Town held a referendum on the plan. The result – 5,115 Milton residents voted “no” while 4,346 others voted “yes.” Now the Town faces consequences. The Massachusetts Attorney General is suing the Town for being out of compliance with the law.

Milton will no longer be eligible for a recent $140,800 grant for seawall and access improvements, which was contingent upon compliance with the law. The town will also not be eligible to receive MassWorks and HousingWorks grants and will be at a competitive disadvantage for many other state grant programs.

NEW JERSEY TRANSPORTATION

Gov. Phil Murphy wants to tax the wealthiest corporations in New Jersey to create a dedicated fund for NJ Transit. His proposed new “Corporate Transit Fee” would tax businesses that earn more than $10 million in profits.  The proposal would raise the corporate tax rate to 11.5% for affected businesses, instead of the 9% currently in effect. It would replace a previous fee program which expired at year end.

The original corporate tax surcharge raised about $1 billion annually, and the new one is expected to raise about $800 million. It comes as the state faces a funding shortfall for transit estimated at $1 billion. The Governor is fighting opposition from commuters to an announced 15% increase in fares scheduled to take effect on July 1. It is a reversal from his last budget address, when Murphy pledged to end the previous surcharge on wealthy companies’ taxes.

On another front, the Governor has proposed ending a sales tax exemption for electric vehicles. Since 2004, New Jersey residents were exempt from paying the 6.625% sales tax when buying, leasing and renting new or used fully electric vehicles, based on the zero-emission light duty vehicle tax break. The exemption did not apply to plug-in hybrid cars. Ending the sales tax waiver on electric vehicles over three years is also expected to net about $70 million a year based on current estimates.

Data from the New Jersey Department of Environmental Protection and the state’s Motor Vehicle Commission shows that as of June, 2023 there were just over 123,000 electric vehicles on the road in New Jersey. That represents just about 1.8% of the light-duty vehicles on the roads in the state. The New Jersey Coalition of Automotive Retailers (NJCAR) said in 2023 nearly 80% of car sales were gas-powered vehicles, about 11% were electric cars and roughly 9% were hybrid or plug-in hybrid.

CALIFORNIA PUBLIC POWER SOLAR

The Pasadena City Council unanimously voted on Monday to allow Pasadena Water and Power to enter into a $512.2 million, 20-year power contract with Southern California Public Power Authority for solar photovoltaic and battery energy storage. The City needs to replace its lost share of power from the Intermountain Power Project in Utah. This contract comes on the heels of contracts for 25 MW geothermal energy, and one third share of a 117 MW solar energy project through the Authority.

Beginning on December 31,2027, the contract will cover the daily delivery of a maximum of 105 megawatts of solar photovoltaic energy and up to four hours of dispatchable battery energy storage, not exceeding 55 megawatts. It is a 20-year fixed price contract.

SOONER TAX CUT

Oklahoma has eliminated its sales tax on groceries. The bill won’t go into effect until 90 days after the session adjourns on May 31. The bill also contained language that prohibits cities and towns from increasing the taxes on groceries until June 30, 2025. The state portion of the grocery tax generated $400 million each year. It comes as tax cuts in general are a major topic of the current legislative session. Other proposals would lower income taxes. The politics of the issue drove passage of the grocery cut (lower the regressive tax first) before an income tax cut which has been seen as favoring high income taxpayers.

MORE HOSPITAL CREDIT PRESSURE

Palomar Health is the largest public health care district in the State of California, with over $1 billion of revenues reported for fiscal 2023, and generating over 24,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. It’s operations have been under heavy stress but a decline in cash to only 39 days at year end has increased that strain.

The district’s Moody’s ratings were put on negative outlook in mid-2023 so the stress was becoming clear. Now, Moody’s has placed Palomar Health’s (CA) A1 general obligation (GO) rating and Baa3 revenue bond rating under review for downgrade. The change covers approximately $712 million of revenue bonds outstanding and $646 million of GO bonds outstanding.

As is often the case, potential covenant compliance issues are dictating the timing. The current trend of financial results puts financial covenants at risk for a breach at June 30, 2024, which could result in the acceleration of outstanding debt. Obviously, the district will have to articulate a plan to avoid covenant violations to support its ratings.

CARBON PIPELINES

The South Dakota House of Representatives approved Senate Bill 201, a bill which provides new regulations on pipeline transmission infrastructure and also allows counties to charge carbon dioxide pipeline developers $1 for every linear foot of pipe that runs in the county. The bill reinforces language on federal preemption of local ordinances and regulations affecting carbon dioxide pipelines.

Under existing law, if the South Dakota Public Utilities Commission does not determine that a carbon dioxide company’s pipeline route is “unreasonably restrictive,” proposed pipeline routes, like those by Summit Carbon, cannot violate county ordinances and local zoning and building rules. The law has allowed some counties along Summit Carbon’s pipeline project to implement a range of restrictive setback ordinances. 

STADIUMS

The Utah legislature will be asked to consider a bill which creates the Utah Fairpark Area Investment and Restoration District. The bill authorizes the district to levy: an energy sales and use tax; a telecommunications license tax; a transient room tax; a resort communities sales and use tax; an additional resort communities sales and use tax; and an accommodations and services tax. It provides for an increase in a car rental tax and provides for how the additional revenue is to be spent. The state would own the stadium and the land underneath it. 

The legislation comes following statements from both Major League Baseball and the National Hockey League regarding potential expansion. It is designed to allow the State of Utah to be in a position to fund half of the cost of a proposed stadium for baseball. Salt Lake City is positioned to be the recipient of a hockey team either through expansion or the relocation of the Arizona Coyotes.

Arizona is under tremendous pressure to solve its arena problems soon and there is an existing arena in Salt Lake City. Baseball will take longer to resolve stadium issues in Oakland/Las Vegas, Tampa Bay, and now Chicago. There will be no expansion until those items are resolved. The bill also sets a deadline to get an MLB franchise deal which must occur before 2034.

The issue of public financing and/or funding for proposed facilities in each of these cases has been controversial. One irony of the current cast of characters is that the White Sox ownership threatened to move in the mid 80’s. There was this new domed stadium sitting empty in Tampa Bay that was calling to the Sox to move. That was solved when the State of Illinois stepped up with state tax support for bonds to build the current stadium. Now, the Sox are doing it again.

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

TRANSPORTATION

The increasing prevalence of e-bikes and other lithium-ion battery powered vehicles is leading to calls for increased regulation. The issues range from the use and storage of vehicles powered by lithium-ion batteries, to where they can be ridden, parking and insurance. It’s become clear that in today’s urban landscape, the explosion of the food delivery business ensures that the vehicles are here to stay.

The latest city to look at regulation is San Francisco. The City and County Board of Supervisors voted to create safety standards for some devices powered by lithium-ion batteries. Since 2017, the number of fires in the city associated with a lithium-ion battery has increased every year with a high of 58 in 2022. The data for 2023 is still being compiled. During that six-year period one person was killed and eight others were injured.

In New York City, the batteries are controversial as they tend to be owned by residents of large buildings. Fires attributable to the batteries pose a greater threat in those environments. Recently, the FDNY asked Congress to adopt national standards for the batteries. In 2023 alone, the city saw 268 fires caused by the batteries. The fires killed 18 New Yorkers, and left another 150 injured. 

SOUTH CAROLINA PUBLIC SERVICE

The South Carolina Public Service Commission unanimously approved Santee Cooper’s long term Integrated Resource Plan. After it’s ill-fated involvement in the failed Sumner nuclear expansion, the Authority moved away from nuclear going forward. The plan is controversial nonetheless as it includes the expansion of natural gas as a fuel of choice.

Santee Cooper is looking to partner with Dominion Energy on a gas plant that would be located on the Edisto River at the former site of a coal plant. The real controversy arises over the fact that it would require new pipeline projects that have not been disclosed to the public. The plan puts new focus on Santee Cooper’s management and its efforts to recover politically from its nuclear difficulties.

An independent consultant retained by the Commission also warned that Santee Cooper did not meaningfully evaluate alternatives to the gas plant and recommended that the utility accelerate solar and storage builds in the near term.

HOUSING AND TRANSIT

Two issues – climate change and housing shortages – are increasingly seen as two sides of the same issue. Climate advocates continue to advocate against cars and for mass transit. At the same time, the accessibility of mass transit remains an issue as there continues to be a disconnect between the location of transit relative to housing. Ironically, the role of local planning and permitting agencies is increasingly seen as one of obstruction.

This first became an issue in California. The expansion of BART farther away from the Bay Area has increased accessibility but expected housing development has not occurred as hoped. Efforts to revamp zoning restrictions to facilitate the development of housing near BART stations were stymied by local opposition driven by fears of gentrification. Those fears drove opposition to legislation which would have addressed those concerns and the effort failed in the legislature.

Now, the effort to link transit and development is spreading. In Colorado, a new bill (HB24-1313) has been offered which would authorize a new process for approving development. It would provide for the state to analyze cities to determine where they have current or future transit lines as well as how much developable property is within a half-mile of rail lines and a quarter-mile of most high-frequency bus lines. The state would then set “housing opportunity goals,” or “HOGs,” for the cities. 

Such a designation would require a city would have to allow an average of 40 units per acre across all of its transit-adjacent areas, with exemptions for certain properties. It would also provide for denser housing within areas designated as transit centers (typically adjacent to a station) by allowing cities to allow higher densities of up to 300 units per acre in a transit center — in the range of eight to ten floors. 

If local governments don’t cooperate, the state could withhold millions of dollars in transportation funding. Cities that don’t participate could lose out on funding from the Highway Users Tax Fund which is a major source of funding for localities to maintain roads.

The Connecticut legislature is considering legislation to encourage development around transit facilities as well. A bill would follow up on legislation adopted last year which established a state development entity to operate programs to encourage transit adjacent development. It provided for Transit Oriented Community Districts which are designed to accommodate transit adjacent development.

A municipality can choose to create such a district and in doing so would be in place to receive financial assistance from the state.

LITIGATION

Earlier this month, a Contra Costa County Superior Court Judge California Attorney General Rob Bonta’s petition to link the state’s climate accountability case with lawsuits brought by the counties of Marin, San Mateo, and Santa Cruz, and the cities of Imperial Beach, Richmond, and Santa Cruz. Oakland and San Francisco’s climate lawsuits have been the subject of separate legal proceedings but after a ruling by the U.S. Ninth Circuit Court of Appeals the case will be sent back to the state courts. The Oakland and San Francisco suits will be merged into this suit.

CYBERSECURITY

Fulton County, Georgia is the latest victim of malicious hacking activities. A ransomware attack interfered with the county’s processing of certain taxes and water bills, property transactions, communications, and operations of its court system. The County is fortunate in that the bulk of revenues which could have been impacted by the event had already been collected. This includes taxes collected by the County for underlying levels of government.

This attack follows a 2018 event which impacted the county’s largest city, Atlanta. The City experienced some $17 million of additional costs related to recovery. The County has not released a cost estimate related to recovery.

This news coincides with an announcement of a successful criminal prosecution of the perpetrator of a 2020 hack against the University of Vermont Medical Center. That event significantly impacted the facility’s ability to provide services. It wasn’t just about financial and records information. It impacted the provision of things like chemotherapy for nearly one month. It had a huge impact on the over 1.1 million people across multiple states who are served primarily on the hospital.

UNIVERSITIES

Moody’s Investors Service has placed University of Idaho’s (ID) A1 issuer and revenue bond ratings under review for downgrade. The action affects approximately $130 million in rated debt outstanding as of June 30, 2023. The outlook has been changed to rating under review from stable.

The placement of University of Idaho’s (U of I) ratings under review for downgrade is prompted by the potential proposed purchase of the University of Phoenix by Four Three Education, Inc. in the next two to four months. The Regents of the University of Idaho is the sole member of Four Three Education, Inc. Four Three Education is planning to issue $685 million in bonds to finance the purchase through separately secured debt. 

Given the proposed substantial increase in financial leverage, uncertainty regarding Four Three Education’s operating performance prospects and exposure to potential future legal action from the United States Department of Education, a multi-notch downgrade is possible. There are a ton of questions associated with the plan. Away from general operating risks, there are issues specific to the University of Phoenix which could create significant financial liability risk.

It is not clear what, if any, financial entanglements with the University’s general revenue backed credit. Ther are concerns that a host of potential legal and regulatory actions could create additional risk. It seems that the UI credit could ultimately be available to support repayment of debt to finance the purchase. The lack of detail is a major source of downgrade pressure.

Moody’s downgraded Roosevelt University’s (IL) (Roosevelt) issuer and revenue bond ratings to B2 from B1. Roosevelt is a moderate sized private university offering undergraduate, graduate and professional degree programs at its campuses in downtown Chicago and in Schaumburg, a northwest suburb of Chicago, and online. The university enrolled 3,585 full-time equivalent students in Fall 2023, with operating revenue of approximately $92 million.

A period of declined enrollments and strained finances are the primary weaknesses. The concern is that the University might violate debt service and liquidity covenants supporting outstanding debt. Primary among them is an unrestricted cash and investments to MADS covenant that is tested twice annually. Roosevelt must maintain coverage of no less than 150% through fiscal 2024, no less than 162.5% in fiscal years 2025, no less than 175% in fiscal 2026, no less than 187.5% and 2027 and no less than 200% in fiscal 2028 and beyond.

Moody’s downgraded Robert Morris University’s (PA) issuer and revenue bond ratings to Ba1 from Baa3. The outlook remains negative. Robert Morris University is a private university with its main campus in suburban of Pittsburgh. The university enrolled 3,555 full-time equivalent students across its undergraduate and graduate degree programs in fall 2023 and generated $110 million of operating revenue in fiscal 2023.

The concerns are that the university will continue to take elevated draws on financial reserves as the result of material operating deficits over the next two to three fiscal years as it pursues a strategy to grow net tuition revenue and return to fiscal balance. The negative outlook also incorporates uncertainty over fall 2024 enrollment and fiscal 2025 net tuition revenue results.  

ILLINOIS BUDGET

Governor J.B. Pritzker proposed a FY 2025 budget totaling $52 billion. It comes as the issue of asylum seekers and migrants has moved to center stage in the state’s fiscal debate. Chicago has received nearly 36,000 asylum seekers who have arrived since 2022 primarily as the result of being shipped there from Texas. Illinois has spent some $638 million on services for migrants over the same period.

Chicago enacted a budget which increased spending on migrants by some $182 million in the current FY. The proposed state budget would include additional funding for migrant services. Overall, the budget proposal increases spending by 2%. Spending for K-12 education is increased by about $450 million. Pensions continue to be a concern. The Governor proposes increasing the funding target to 100% from 90% while extending the proposed full funding date to 2048.

To fund proposed increased spending for asylum seekers and education, the proposal includes tax increases. Primary is an increase in the sports wagering tax — paid by casino sportsbooks — to 35% from 15%, generating an estimated $200 million. Pritzker also wants to cap a deduction that allows corporations to reduce their taxable income for $526 million in savings.

CALIFORNIA WATER

The California Department of Water Resources on Wednesday announced an increase in its projected statewide water allocations for 2024. California’s snowpack currently stands at 86 percent of the average for the current date and 69 percent of the average for April 1. Forecasts anticipated the agency would be able to fulfill 15 percent of supplies requested from the State Water Project, up from an initial 10 percent allocation predicted in December. The projected 15 percent of fulfillment, which is subject to reevaluation this spring, would translate to about 200,000 acre-feet of additional water. Lake Oroville, the State Water Project’s largest reservoir, stands at 134 percent of its average for the current date.

L.A. PORT RECOVERY

The benefits of the end of the pandemic and the settlement of outstanding labor issues had the expected salutary effect on the finances of the Port of Los Angeles. The Port of Los Angeles handled 855,652 Twenty-Foot Equivalent Units (TEUs) in January, the second-best start to the year on record. January 2024 loaded imports landed at 441,763 TEUs, up 19% compared to the previous year. Loaded exports came in at 126,554 TEUs, an increase of 23% compared to last year. The Port processed 287,336 empty containers, up 14% over 2023.

The potential labor problems at the Port did drive significant volume to U.S. East Coast ports. Much of that was facilitated by moving freight through the Panama Canal. A severe drought has made travel through the Canal much more difficult and expensive. This has significantly reduced the attractiveness of the East Coast ports.

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

Joseph Krist

Publisher

PREEMPTION

Michigan’s new Clean Energy Future legislation takes effect this November. The law includes a provision that moves final authority for the permitting of large-scale renewable energy projects over to the Michigan Public Service Commission. Before that, such decisions were decided at the local township level. State legislators were concerned that local permitting hurdles would make the state’s efforts to achieve net carbon neutrality unachievable.

The Sabin Center for Climate Change Law at Columbia University reports that as of last year, the center counted nearly 300 projects that have faced serious opposition, and at least 228 local governments that either place onerous restrictions on wind and solar projects or ban them outright. The report calculates the number of challenged projects increased 39% and the number of local restrictions increased by 35% during the period of March 2022 to May 2023.

A new law passed by the Illinois General Assembly last year set statewide standards for wind and solar projects. It is a good example of the other side of the preemption issue. Most of what we have seen to date have been efforts by localities to adopt policies within their own jurisdictions. Those localities bridle at the idea that the state could override for those policies (usually social issues) but are happy to use the technique for climate goals.

Which leads us to…

PIPELINES

In South Dakota, legislation was rejected by a House committee which would have prohibited the use of eminent domain by carbon dioxide pipelines if more than half of the transported carbon dioxide is intended for sequestration rather than commercial uses such as carbonated beverages or enhanced oil recovery. The committee rejected a bill that would have required the pipeline project to have voluntary easements with landowners on 90% of the route before attempting to use eminent domain for the rest.

What drove the votes?  Two-thirds of corn grown in South Dakota is sold to ethanol plants, and ethanol producers have said they need the project to stay viable in markets that require fuels to reduce their environmental impact. Additional legislation has now advanced to the State Senate which would prevent counties from enacting local zoning rules strict enough to regulate gas or liquid pipelines out of existence. To offset the loss of local control, it provides

for counties to levy a per-foot surcharge on pipeline companies and codify certain landowner protections for things like disrupted drain tile.

In Missouri, the Missouri House approved legislation that will block cities and counties from requiring developers to install electric vehicle charging stations in new construction projects. the measure is aimed at preventing local governments from “overly burdening businesses with regulations”. The legislation came in response to a 2021 decision by the St. Louis County Council requiring developers to add electric car charging stations to parking lots. 

Under the terms of the bill, any city or county that requires the installation of charging stations in new construction projects must pay all of the costs and provide maintenance of the unit once installed. The measure also prohibits cities and counties from requiring more than five electric vehicle charging stations per parking lot in parking lots of less than 30 parking spaces. The measure now goes to the Senate, which has previously failed to advance earlier versions. 

House Bill 1034, a bill requiring hydrogen pipelines to be permitted by the South Dakota Public Utilities Commission, was passed by huge majorities. In Florida, legislation (SB 1084) advanced by the Florida Senate would preempt local governments from requiring a higher number of parking lot spaces to be reserved for electric vehicles. Sponsors made clear the measure would outlaw extra spaces even if developers want to put them in. The Florida Department of Agriculture and Consumer Services will have control over setting thresholds. They would be able to determine what percentage of spaces could be set aside for electric car charging. It would be against the law to exceed the limits.

NEW YORK CITY BUDGET

We know that there are many steps in the process of establishing a final budget but nevertheless the analysis of the Mayor’s proposed budget for FY 2025 from the Independent Budget Office (IBO) is useful. IBO starts with updated FY 2024 numbers which project a Current Year Surplus of $2.8 Billion more than the Adams Administration’s estimate. This higher surplus results from IBO’s forecast of approximately $900 million more in anticipated tax revenues in 2024 than the Administration’s estimates, coupled with IBO’s estimate that City-funded spending will total about $1.9 billion less than presented in the Preliminary Budget financial plan. 

A $3.8 billion surplus is projected for FY2025. The surplus is driven by IBO’s forecast of $2.0 billion more in anticipated tax revenues than the Administration’s estimate and the use of this year’s $2.8 billion surplus to prepay some of next year’s expenses but is tempered by IBO’s estimates of $1.5 billion in additional spending over the Administration’s projections. Although the outyear budgets are not balanced, IBO’s projected gaps are well within the range that the City has closed in the past. The City could roll forward some of the 2025 projected surplus to help close the gap in 2026.

On the spending side, IBO expects spending to come in notably lower than Preliminary Budget levels in two areas. IBO anticipates the City will spend $1.6 billion less on salary and fringe resulting from civilian, non-pedagogical vacancies in 2024. Current active full time headcount is approximately 285,000 positions, which is 5% lower than the peak of 300,000 positions in 2020.

IBO also estimates $2.4 billion less in spending on asylum seekers than what is reflected in the Administration’s estimates across 2024 and 2025. In addition, IBO forecasts lower charter school enrollment than the Administration, estimating $91 million in savings from 2026 through 2027 for charter school tuition costs. Spending continues to grow. In the current FY, spending has risen 7% since the adoption of the budget. City funded spending is up 3%.

As for the economy of the City, the sector that has gained the most jobs since the pandemic (nearly 138,000) is Health Care and Human Services. Most of that growth is concentrated in the low-wage ambulatory care subsector, which includes home health aides. Other sectors that have surpassed pre-pandemic levels include some of the highest wage industries in the City— particularly the finance and insurance sector and professional, scientific, and technical services. Employment in many low-wage industries continues to trail well behind pre-pandemic levels, notably retail trade and leisure and hospitality.

What drives spending? The Department of Education, Department of Social Services, and centrally budgeted costs such as fringe benefits, pension costs, and debt service, have the largest budgets by agency, in line with past years. As of the Preliminary Budget, they comprise nearly two-thirds of the City’s total expense budget.

TWO SIDES OF ENVIROMENTAL REVIEW

Two situations were reported this week which reflect different approaches to environmental laws and reviews. It may surprise you when you see which entities are taking the approach they are taking in regard to development. They both serve to undercut stereotypes about attitudes towards environmental regulation and both have potentially significant impacts on development.

The first is San Francisco where a State senator will introduce legislation which would effectively end environmental reviews for proposed developments in a large piece of San Francisco. The law would amend the California Environmental Quality Act (CEQA) to remove requirements for review to a 150 block area in downtown SF. It comes as 35 percent of office space remains empty four years after the onset of the pandemic in the city.

The proposal would limit reviews and the rights of individual entities to intercede in the environmental approval process. It highlights the contradictions in the concerns of advocates and interest groups. On one side are those who believe that the environmental process needs to continue to stymie “gentrification”. They are many of the same arguments made against prior proposals to encourage development around suburban transit facilities.

On the other side are the housing advocates who look at empty buildings and masses of homeless individuals and see a potential to significantly impact the supply of affordable housing. Those advocates find themselves to some degree on the same side as developers they historically oppose. Labor interests are also allied with the proposal. The law will waive environmental review for only projects that pay a prevailing wage. It would still require environmental review for hotels and waterfront property, as well as for the demolition of any building that housed tenants within the past decade.

In Montana, a state judge ruled that state officials have failed to impose adequate limits on the construction of new homes that rely on groundwater. At issue, was a proposed small housing development in ranch country. The project would have relied on new wells in an area where aquifer levels have been steadily declining. Nonetheless, the project received both county and state approval. The judge found that Montana’s policy for approving new developments violates state law.

BAD WEEK FOR AUTONOMOUS VEHICLES

Waymo announced a voluntary recall of its self-driving car software following two incidents involving its vehicles in Phoenix, Arizona. Waymo said the company chose to do the voluntary recall after consulting with the National Highway Traffic Safety Administration and its internal review of two incidents which took place in Phoenix on Dec. 11, 2023, in which two robotaxis crashed into the same towed pickup truck within minutes of each other.

Last week, a driverless Waymo car collided with a cyclist in San Francisco, causing minor injuries and the incident is now being reviewed by the state’s auto regulator. Tesla’s autonomous vehicle software was involved in a recent accident while being employed by the driver. The California DMV has filed formal accusations against Tesla saying that the company’s marketing and advertising is deceptive.

And then there is Cruise, the driverless car company owned by General Motors. Already under restrictions in SF, the company faces new charges. The California Department of Motor Vehicles is investigating allegations that a self-driving vehicle operated by Cruise nearly hit a 7-year-old boy after it failed to yield to him and his family while they crossed the street in San Francisco last year. The National Highway Traffic Safety Administration is investigating at least four incidents involving Cruise vehicles and pedestrians.

TURNPIKE KEEPS ON ROLLING

The pandemic was hard on New Jersey’s overall transportation systems. Low ridership on trains hurt revenues on New Jersey Transit and the PATH. So long as remote work predominated, toll revenues were hurt. Private bus services which had been a lynchpin of the New York metropolitan area transit in some cases found themselves out of business. One entity which has done just fine in the period of recovery from the pandemic has been the New Jersey Turnpike Authority (NJTA).

The Authority owns and operates the New Jersey Turnpike (NJT) and the Garden State Parkway (GSP). They serve as a key link in the I-95 corridor and are the gateway to the NJ shore, respectively. The system has established a history of continued demand for the roads through large rate increases, economic recessions, and other negative shocks like the recent pandemic. 

The Authority also has shown a much better record of toll adjustments. Historically, tolls were a very highly politicized issue. Now, under a state approved plan an annual toll indexation policy to ensure financial metrics has been established. There is still a potential for politicizing tolls as the Governor approves NJTA’s budget and toll rates. It is in a governor’s interest to support increases as excess Authority revenues can be transferred to the State.

Moody’s affirmed the Turnpike Authority’s senior revenue bond rating at A1 with a stable outlook this week.

COLLEGE CREDITS CONTINUE TO WEAKEN

Moody’s downgraded Allegheny College’s (PA) issuer and revenue bond ratings to Baa3 from Baa2 and maintained a negative outlook. One of the oldest private liberal arts colleges in the United States served 1,168 full-time equivalent students in fall 2023 and generated $67 million of operating revenue in fiscal 2023. Demand has been a problem and is not projected to improve.

Moody’s also downgraded Webster University’s (MO) issuer and revenue bond ratings to B1 from Ba3. The ratings have been placed under review for possible downgrade, previously the outlook was negative. A going concern opinion in the fiscal 2023 audited financial statement was an obvious issue as liquidity has dwindled. This has led the University to rely on through $40 million of outstanding lines of credit at fiscal end 2023 adds elevated credit risk. The lines are due on demand and collateralized by endowment funds. 

Another pressure source– employee costs. This week, the California State University system and the union representing 29,000 professors, lecturers, librarians, counselors and coaches reached an agreement which would immediately increase salaries for all faculty members by 5 percent, retroactively to July 1, 2023, with another 5 percent raise scheduled for July 1, 2024, if the state does not cut funding for the university system. The salary floor for the lowest-paid faculty members would immediately rise by $3,000 a year, and paid parental leave would grow to 10 weeks from six.

ROCKY MOUNTAIN HOMELESS

Denver, a city of 750,000, had received nearly 40,000 migrants, the most per capita of any city in the nation. Denver has spent more than $42 million on the migrants. If expenditures continue at the current pace of $3.5 million a week, the crisis could cost the city about $180 million in 2024, or 10 percent or more of its annual budget. The City has received only $9 million authorized in federal reimbursements. 

Denver does not allow local law enforcement to detain undocumented immigrants solely on the basis of their status and does not turn them over to federal authorities unless a judge has issued an arrest warrant. To become eligible for work permits, migrants must apply for asylum, a cumbersome process, and then wait 150 days. After pausing discharges of migrants in November because of the cold, Denver recently reinstated time limits for migrants in city-provided hotels. Stays will be up to 14 days for adults without children and 42 days for families. 

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

PORT AUTHORITY BUS TERMINAL

The Port Authority of New York and New Jersey released a draft environmental impact statement and a revised project plan in support of its effort to replace the nearly 75 year old Port Authority Bus Terminal, the world’s busiest bus terminal. The estimated cost of the project is $10 billion. The revised plan would include a 2.1-million-sq-ft main terminal, a bus storage and staging facility and ramps directly connected to the Lincoln Tunnel. 

The storage and staging facility will be constructed first and serve as a temporary terminal while the existing building is demolished. That will occur in 2028. The new terminal would be completed in 2032. The Port Authority is currently applying for a federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to help finance the project. The authority is also negotiating plans for commercial development above the terminal with city officials via payments in lieu of taxes.

LONG ISLAND POWER AUTHORITY

New York lawmakers have introduced a bill, The LIPA Public Power Act which would allow the agency to distribute electricity themselves to Long Island and Rockaway residents without the need for a third-party company. The utility has effectively been managed by PSEG Long Island, an investor-owned, for-profit utility company whose contract is up in 2025. Storms have been at the center of the latest debate over LIPA. The proposed change stems from the utility company’s poor performance in responding to Tropical Storm Isaias in 2020.

As of October 2023, PSEG Long Island customers spend an average of 22.73 cents per kilowatt hour for their residential electricity, which is 11.92% higher than the average state price of 20.31 cents. If enacted, it would represent yet another change in the management and operation structure. It was a major storm that drove cries for the current arrangement. Now the winds are blowing in the opposite direction. It is not clear whether the bill has enough support to pass.

EMINENT DOMAIN

State regulators in South Dakota have rejected the initial permitting request from Summit Carbon Solutions for a pipeline through the state to transport carbon dioxide. Summit can try again and now the State Legislature is working on several pieces of legislation which would, if enacted, add protections for private property owners when pipeline companies conduct surveying, ensure better terms for landowners in agreements with pipeline companies, and add financial protections for landowners subjected to eminent domain.

Two bills failed to make it out of committee. One was a bill to prevent carbon pipelines from using eminent domain at all. The second would have required carbon pipelines to have a regulatory permit before pursuing eminent domain. The pending bills would require any person or entity looking to conduct an examination or survey on private property to have a pending or approved siting permit application with the state. It would also require 30-days written notice to the property owner. The notice must include a detailed description of the property areas to be examined, the anticipated date and time of entry, the duration of presence on the property, the types of surveys and examinations to be conducted, and the contact information of the person or agent responsible for the entry. 

The bill also would require entities seeking to enter private property for surveys to make a one-time payment of $500 to the property owner as compensation for entry, in addition to covering any damage caused during the examination. Property owners would also be given the right to challenge the survey or examination by filing an action in circuit court within 30 days of receiving the written notice. 

Under a second bill, carbon pipeline agreements would not be allowed to exceed 50 years and would automatically terminate if not used for the transportation of carbon dioxide within five years from their effective date. Landowners would be entitled to annual compensation for granting the easement, set at a minimum of $1 per foot of pipeline each year the pipeline is active. 

In Nebraska, a bill has been introduced to limit the use of eminent domain. Legislative Bill 1366 would provide that a local government, such as a city or county where eminent domain is to be used, or the Nebraska Public Service Commission, would have to vote to approve its use. The bill would also require “good faith” negotiations and providing an appraisal to a landowner, before eminent domain could be used.

The Nebraska Public Service Commission has the authority to approve only the routes of oil pipelines under current law. The proposed bill would expand that to CO2, gas and natural gas pipelines, the agency said, “and possibly other private chemical and water pipelines,” both within the state and those crossing state lines.

The North Dakota Public Service Commission decided that state rules preempt local ordinances on pipeline zoning issues. It cited state law changes in 2019 that said “the approval of a route permit for a gas or liquid transmission facility automatically supersedes and preempts local land use or zoning regulations except for road use agreements.” Before 2019, the law said state rules may supersede local ordinances, if the local ordinances are deemed unreasonably restrictive. 

The decision will enable Summit Carbon Solutions to reapply for a permit of some 350 miles of its planned pipeline in North Dakota. It was initially denied in late 2023. The reapplication proceedings could begin in one month.

MASS TRANSIT

The Washington Metro Area Transportation Authority (WMATA) is facing a $750 million budget gap for FY 2025. Earlier this year it proposed significant service cuts in the absence of additional funding for its operations from its intergovernmental funding partners. Under that plan, several stations would close permanently, rail service would stop at 10 p.m., about one-third of bus lines would be cut.

Now, the District of Columbia has made a funding proposal to increase its support for WMATA in an effort to stave off service cuts. D.C. Mayor Muriel Bowser and two Council members said the city is offering up to $200 million, on top of its fiscal 2024 operating subsidy. The funds would be used to help close WMATA’s fiscal 2025 budget deficit. The city’s proposed contribution, combined with proposed funding from Maryland and Virginia, would help WMATA cover $480 million of a $500 million gap.

PUERTO RICO ELECTRIC

The Puerto Rico Electric Power Authority (PREPA) is in the middle of its continuing fight to avoid paying off its billions of municipal bond debt. While this effort drags on, planning must be undertaken to improve and develop the electric grid on the island. This week, the U.S. Department of Energy delivered its views on efforts to diversify and strengthen the electric system in support of the Commonwealth’s climate goals.

DOE and FEMA conducted a two-year study which concludes that Puerto Rico can successfully meet its projected electricity needs with 100% renewable energy by 2050. Puerto Rico must increase new power generation infrastructure significantly—on the scale of hundreds of megawatts—to stabilize the grid and alleviate current generation shortfalls, including rapid deployment of utility-scale and distributed renewable resources and significant amounts of storage. 

Here is where the ongoing bankruptcy proceedings for PREPA get in the way. Outside funding for resilience components of the resource plan (solar, wind) to address economic equity concerns is available. On February 22, 2024, residents can apply for DOE’s Solar Access Program — a program designed to connect up to 30,000 low-income households with residential rooftop solar and battery storage systems with zero upfront costs. 

This program is being funded from the Puerto Rico Energy Resilience Fund, a $1 billion DOE program focused on improving the resilience of Puerto disadvantaged households and communities. Frequent outages continue to impact Puerto Ricans on a day-to-day basis, caused in part by the poor state of repair of the electric transmission and distribution grid and insufficiency of the current generation fleet, which is frequently unable to supply enough electricity to meet load under even normal, non-peak conditions.

This only addresses part of the problem for an agency with massive capital needs and questionable market access.

RATES, INFLATION AND BUDGETS

At some point, the realities of recent years’ inflation combined with the impact of pandemic costs was going to negatively influence budgets. On top of those factors, many governmental employers were emboldened by the pandemic to take more aggressive stances in their contract negotiations. When you put those factors together, it is a formula for budget imbalance and pressures to reduce expenditures. It’s not just a challenge for smaller less well-to-do communities. Larger richer communities are under the same pressure.

The latest example is Santa Clara County, CA. This week it issued a budget update. Last summer, the county avoided a strike with its largest union, SEIU Local 521, when it reached a deal that resulted in the largest increase in wages in two decades. Now, the cost of salaries and benefits is expected to rise $488 million, or 9.5%, between the current budget and the 2024-25 fiscal year budget. Mid-way through this year, county officials predict a $45.9 million balance at the end of the 2023-24 fiscal year. 

Like many counties, Santa Clara faces significant healthcare costs. The general fund balance is just about totally offset by a $42 million shortfall in the County’s health system.

NET METERING

The pendulum continues to swing back and forth when it comes to the level of compensation provided to utility customers with rooftop solar and excess power. Last year, states like Florida and California reduced the payment amounts available from utilities to their customers with solar. These moves have lowered the demand for solar by rendering it less economical and affordable. The outcry from customers has begun to generate support for increasing those amounts.

Two bills in the Hawaii legislature would seek to increase rates that residential and business rooftop solar system owners receive for helping Hawaiian Electric balance its power needs on Oahu, Maui, Molokai, Lanai and Hawaii island under a program approved by the state Public Utilities Commission in December and scheduled to begin March 1. Under the new system, participating customers receive a fixed fee plus bill credits for exported energy, which on Oahu is 32.9 cents per kilowatt-hour.

The legislation would mandate that program participants receive the “retail” rate credit for exported electricity, meaning the rate Hawaiian Electric customers pay for electricity, which is about 40 cents per kilowatt-­hour on Oahu. The same arguments against the increase we have seen in other states are being advanced in Hawaii. Primarily, the issue is that customers without solar power are “subsidizing” customers who produce their own power. The fixed cost base of legacy utilities would be spread among fewer customers.

Hawaii Electric claims that solar incentives between 2001 and 2015 reduced company revenues by some $105 million. That may be the real issue that the utilities have. Rooftop solar helps to weaken the monopoly on service that utilities benefit from.

In Utah, legislation has been introduced to increase the energy bill credits for energy generated by rooftop solar power. Under current laws and regulations, Rocky Mountain Power charges 10 cents for each kilowatt hour it provides. When it credits rooftop solar equipped customers, it only credits customers with about five cents per kilowatt hour. The legislation would require energy companies to credit solar owners at least 84% of the cost per kilowatt.

In North Carolina, the Court of Appeals heard arguments this week challenging Duke Energy’s net metering rates. The battle over net metering between Duke and the state has been going on for a decade. The solar industry and electric customers are claiming that the State Utilities Commission failed to follow the law when it relied on a Duke analysis of the costs of net metering in arriving at a rate. Other provisions of the law regarding timetables for adoption of new rates were drafted by Duke.

The solar industry hopes to see that the Utilities Commission conduct its own studies as required by law. In the interim, delay in the implementation of a new rate schedule would occur until a final approval from the state.

PENNSYLVANIA BUDGET

Pennsylvania Governor Josh Shapiro released his budget proposal for FY 2025. His plan would increase total authorized spending by 7% through the state’s general fund, while tax collections are projected to increase by $1 billion, or 2%. The budget proposal holds the line on taxes, and instead draws down the state’s cash reserve from $14 billion to $11 billion. The additional money is intended to fund several education initiatives.

Last year, state courts found Pennsylvania’s system of school funding unconstitutionally discriminates against poorer schools. To address that, the budget proposes a $1.1 billion increase, or 14% more, for public school operations and instruction. This is based on a school funding commission’s recommendation last month supported by his appointees. A significant portion, about $872 million, would go toward poorer schools.

A major reorganization of the state higher education system is designed to facilitate increased access and lower costs. Shapiro’s budget allots an extra $200 million, or 10% more, for the state’s higher education institutions. He hopes the program will enable tuition to be limited for qualifying students to $1000 per year. Other significant investment would go to public transportation, increasing state aid by about $280 million, or about 20%. More than half of that would go to the Philadelphia-area Southeastern Pennsylvania Transportation Authority, or SEPTA.

TRANSIT SUBSIDIES

Various strategies to combat the impact of the pandemic on mass transit utilization have been suggested in its wake. Recently, the Mayor of Boston claimed that the primary factor keeping workers on a remote basis is the cost of mass transit. Her remedy would be to put mass transit on a fare-free basis. A number of small and medium size cities have tried free fare experiments. Their use on larger systems has been limited.

In New York, the city maintains a program to limit the impact of transit costs on low income individuals. The City’s Fair Fares NYC program provides half-price transit trips to New York City residents between the ages of 18 and 64 with household income below 120 percent of the federal poverty level (currently $17,496 for an individual and $36,000 per year for a family of four), who do not otherwise qualify for reduced-price MetroCards or city-provided carfare.

The NYC Independent Budget Office (IBO) examined the cost of expanding the Fair Fares program to include New Yorkers who are aged 65 and older have disabilities, and whose income is less than 200 percent of the federal poverty level. IBO estimated the cost if Fair Fares were to completely cover the price of these riders’ transit, rather than the program’s current half-price subsidy. IBO estimates this Fair Fares expansion would cost between $27 million and $67 million per year, depending on the transit services included in the program.

NEW ORLEANS AND FLOODS

Some 19 years on from the disaster that was Hurricane Katrina, flooding remains a major issue for the city. New Orleans’ stormwater infrastructure is currently funded through property taxes. A proposal is being made that a more comprehensive funding source which would include currently tax-exempt properties be established. A stormwater disposal or drainage fee could be levied against all properties regardless of their property tax status.

The rate would be based on size for single-family properties. For all other properties, it would be based on the amount of impervious area. That allows the impact of large facilities with substantial footprints to be factored in. Think warehouse facilities and shopping malls. Stormwater fees are a long-standing tool in the municipal market and they have appeared in many forms. In this case, the fees would support the issuance of bonds.

That part of the proposal has become a real issue. The Sewerage and Water Board of New Orleans does not have a favorable image among its stakeholders. Support for the plan may require the creation of a separate entity to oversee collection of the fee and its use. The Sewerage and Water Board of New Orleans says it needs about $1 billion to upgrade the city’s drainage system over the next decade. Backers of the proposal estimate that a fee would yield some $38 million annually to support debt service.  They would like a new entity to oversee things.

HEALTH SYSTEM CREDIT PRESSURE

Novant Health operates 15 medical centers in North Carolina, including several regional referral centers. The Novant Health Medical Group has nearly 2,000 physicians and maintains numerous physician offices and outpatient centers. The system is headquartered in Winston-Salem, NC. As the result of the acquisition of New Hanover Regional Medical Center, it has major operations in three different North Carolina markets.

That acquisition has come with a cost. Moody’s Investors Service has placed Novant Health’s (NC) Aa3 long term rating under review for downgrade. Novant closed on its acquisition of three hospitals from Tenet Healthcare for $2.4 billion on January 31.  Novant Health financed the acquisition with a bridge loan, roughly doubling its debt load to some $5 billion.

The system will have to make the case that the benefits of the expanded system are enough to offset the major increase in debt. The risks from integration issues are present in all of these deals.  

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