Joseph Krist

Publisher

COLORADO RIVER FALLOUT

The recent agreement to limit lower basin states ability to withdraw water from the Colorado River has been hailed as a positive short-term result. No doubt that it is but now the realities of the ongoing water shortage in the West are being exposed. One of the largest examples of unbridled growth in the southwestern U.S. is Phoenix and its metropolitan area.

Now that growth is facing limits. The State of Arizona has determined that there is not enough groundwater for all the future housing construction that has already been approved in the Phoenix area, and will stop developers from building some new subdivisions. Maricopa County, which includes Phoenix and its suburbs, gets more than half its water supply from groundwater which is being steadily depleted.

The State will not approve new determinations of Assured Water Supply within the Phoenix AMA based on groundwater supplies. Developments within existing Certificates or Designations of Assured Water Supply may continue, but communities or developers seeking new Assured Water Supply determinations will need to do so based on alternative water sources.

The state says it would not revoke permits that have already been issued and is instead counting on water conservation measures and alternative sources to produce the water necessary for approved projects. The impact will be felt more in recently developed suburban parts of the state’s metropolitan areas. The major cities’ internal development has largely been approved.

The Phoenix Active Management Area (AMA) is a region of south-central Arizona encompassing 5,646 square miles and, with 4.6 million residents, the most densely populated area in the state. The State has determined that over a period of 100 years, the Phoenix AMA will experience 4.86 million acre-feet (maf) of unmet demand for groundwater supplies, given current conditions. The term “unmet demand” refers to the amount of groundwater usage that is simulated to remain unfulfilled as a result of wells running dry in the model” used by the State.

If a city does not have a designation from the state, then each proposed development must prove to the state it has a 100-year supply of water. That demand will increase pressure on agricultural land which will be more valuable as a source of water and rights to it than it would be as a producing asset.

TRANSMISSION

One of the reasons we have followed so closely the approval process for carbon capture pipelines is that it parallels in many ways issues with expanding the nation’s electric grid. The greatest holdup to efforts to decarbonize the electric utility industry and move the country to electric cars and appliances is the inability to deliver power from where it is produced to where it is needed.

The issue of transmission impacts the whole country. Maine has just gone through an extensive permitting and referendum process over the development of a transmission line from Quebec to Massachusetts. The Grain Belt Express would connect wind power from states like Kansas and send that power to demand centers farther east. Already, concerns over permitting and land acquisition resulted in changes to power distribution agreements to address local concerns.

In any week, there are new examples of proposed transmission projects seeking approval in order to deliver power from new source to consumers. The Interior Department’s Bureau of Land Management this week said it has advanced two transmission projects proposed by public utility NV Energy that would facilitate more renewable energy development and delivery in Nevada. The agency will start an environmental review for the Greenlink North project, which will span over 450 miles to connect Las Vegas to Reno, and release a draft environmental impact statement for the Greenlink West transmission project, which will cover 232 miles from Ely to Yerington.

The Bureau of Land Management (BLM) issued its record of decision last week for the SunZia Southwest Transmission Project, delivering up to 4,500 megawatts of primarily renewable energy from New Mexico into Arizona and California. The project was first proposed some 15 years ago.  The Idaho Public Utilities Commission is hosting public hearings throughout southern Idaho in mid-June to receive testimony about a proposed 500-kilovolt transmission line which would extend 300 miles across five Oregon counties and connect to Idaho Power’s existing Hemingway substation in Owyhee County. 

The problem is clear in the Northeast. PJM is the nation’s largest regional grid operator, with a territory that spans all or parts of 13 states from the Midwest to the Mid-Atlantic, plus the District of Columbia. Of nearly 2,500 utility-scale projects totaling 250 gigawatts of capacity waiting in interconnection queues nationwide today, 95% of them are in PJM’s queue.

California is considering legislation which would expedite the approval process for transmission line development and expansion in the Golden State. SB 619, a bill that would expand the California Energy Commission’s authority to certify and prioritize transmission projects on the agency’s agenda.  Last year the legislature enacted AB 205, which authorized the commission to certify and prioritize transmission projects that cost more than $250 million and carry electricity from renewable energy facilities to a system interconnection juncture.

SB 619 would broaden the types of transmission lines eligible for certification to include those lines that convey electricity to and from other facilities — regardless of their proximity to an interconnection point. SB 619 would apply to facilities like solar photovoltaic, wind or stationary thermal power plants with a generation capacity of 50 megawatts or more. Estimates for the scope of investment required range from $30 to $50 billion.

MEDICAID

Beginning on April 1, pandemic restrictions kept states from imposing new qualification requirements on Medicaid recipients. It was thought that many people might lose coverage if they were no longer able to qualify for Medicaid. Now after one month, data is emerging about the scope and nature of determinations that individuals were no longer eligible.

The Kaiser Family Foundation (KFF) found that 19 states had begun the process of renewing Medicaid eligibility. Based on records from 14 states that provided data, 36% of people whose eligibility was reviewed have been disenrolled. Four out of every five people dropped so far either never returned the paperwork or omitted required documents.

Some states have been more aggressive than others. In Indiana, recipients are given two weeks to comply with documentation requests. The Hoosier State has 53,000 residents who lost coverage in the first month of the unwinding, 89% for procedural reasons like not returning renewal forms. That is not an uncommon phenomenon as many of those people do not have access to the internet. States know that. So that is why they impose short-term response and qualification periods.

As of April 1, KFF found that more than 1 in 4 Americans — 93 million — were covered by Medicaid or CHIP, the Children’s Health Insurance Program. Some 50% of children in the U.S. get their medical care funded through these programs. KFF estimates that 15 million people will be dropped over the next year as states review participants’ eligibility.

In the end, the states might save money but then it will increase pressure from providers on the states to provide greater levels of aid for uncompensated care. It puts more pressure on hospitals already dealing with utilization and inflationary issues. For safety net hospitals, the pressure on finances will only increase.

EPA WETLANDS DECISION

The Supreme Court decision last week to narrow the scope of the Environmental Protection Agency regulations on wetlands. The decision will be a boon to project developers – especially road developers – wetlands regulation has been effectively used to slow down, alter and even stop highway developments. Projects with significant right of way needs will be able to access certain areas which were effectively off limits for development.

Not only will it aid development but it will also pressure regulatory efforts dealing with waste. You would be surprised by the size and nature of some proposed developments adjacent to bodies of water which may no longer be regulated by the federal government. In many of those situations, activities associated with developments generate indirect threats to local water sites. Even facilities like warehouses have been found to generate pollution at adjacent water sources.

P3 BLUES

Three years ago, the University of Iowa entered into an agreement with a private consortium to operate the University’s campus utility systems. The 50-year agreement with the consortium – “University of Iowa Energy Collaborative” or UIEC – was supposed to provide greater system reliability for a more certain and affordable cost. Now, only three years into the transaction, the parties are suing each other over payments and whether the promised reliability levels had been achieved. The university is obligated to the partnership for $35 million annually.

In January, the private partner sued the University in federal court over reduced payments it received from the University. It has agreed to drop that case but to renew its efforts in state court. The University has now filed a counter claim. The issues are twofold. There have been two significant electric outages since the operator took over. The University is also fighting efforts to get it to fund a $1.5 million annual fee which it believes is the operator’s obligation. Bottom line is that the University feels that it is not getting the benefits expected.

OFFICE OCCUPANCIES AND TRANSIT

The longer it goes on, the continuation of lower occupancy rates in commercial and office buildings makes the status quo look a bit more permanent. It has become clear that in major cities with significant cultural bases, it is those primarily evening/night activities which are driving returns to cities. This started the establishment of different utilization patterns especially on mass transit. Many agencies have been reluctant to alter schedules to reflect changing in demand in fear of being accused of feeding the “doom loop” phenomenon in their city.

Now efforts are taking hold in some of the most affected markets. BART – the Bay Area system designed primarily to facilitate work-based commutation from outside the City of San Francisco to and from the City. This dictated a traditionally based rush hour schedule. The declines in demand for that service have been offset a bit by increased demand for more frequent night and weekend service. This has led BART to announce revised schedules increasing service frequency at night and on weekends.

Connecticut Gov. Ned Lamont proposed reducing service on the MTA New Haven Line to 86 percent of pre-pandemic levels, potentially resulting in dozens fewer daily trains running between Connecticut and New York City. Last summer, the state expanded service for the New Haven Line by introducing new weekday express trains as part of its TIME FOR CT initiative, designed to deliver faster trains and improved travel time.

THE FED AND ITS TAKE ON NYC

The latest Beige Book from the Federal Reserve provides some insight on the New York City economy while it copes with its recovery from the pandemic. Tourism activity in New York City has remained strong and is nearing pre-pandemic peaks. Business travel has continued to pick up, particularly domestic travel, despite competition with destinations in warmer parts of the country. For the first time in three years, graduation season has brought many international visitors to New York City.

European tourists are returning in large numbers but lags in visa processing have continued to constrain visitors from China and parts of South America. Hotel performance has remained on a strong upward trend, and New York City has had the highest hotel occupancy rates of all the major markets in the country in recent weeks.

Residential Rents are at all-time records in Manhattan, Brooklyn, and Queens and vacancy rates remain exceptionally low. Office vacancy rates were steady at elevated levels across the District and rents were mostly flat. New York City’s retail market weakened, with increases in vacancy rates and rents trending down.

INSURANCE IN CALIFORNIA

Natural disasters have always generated issues with insurance whether they be directly weather related like hurricanes and floods, or earthquakes and wildfires in California. In the aftermath of Hurricane Andrew in the early 1990’s, the insurance industry began to pull out of the home insurance market in Florida. The hurricane states in the Southeast have had to create entities to issue insurance to fill in gaps left by private providers.

The most recent example of the phenomenon comes from California where State Farm has announced that it will not write new homeowners or business insurance in California. The insurance company stated that the decision was made because of rising construction costs that are outpacing inflation, a challenging insurance market, and “rapidly growing catastrophe exposure.” State Farm was the largest underwriter of property and casualty insurance policies in California in 2021 with over $7 billion in premiums written, and a market share of 8.3%.

MINNESOTA NICE

Minnesota Gov. Tim Walz signed a bill legalizing recreational marijuana. This makes Minnesota the 23^rd state to legalize it. The legislation allows adults 21 and older to carry up to 2 ounces of marijuana in public and possess up to 2 pounds at home, starting Aug. 1. The legislation had been held up in a split legislature in recent years. The legislature came under full Democratic control in January and the Senate reversed previous actions and approved the legislation.

It will take some time for the law to have real impact. The retailing infrastructure is far behind the legislation and the state regulatory agency has said that it will be some time before sales can start. The criminal record and conviction provisions included in the law merely begin a process that the state says will take several months to execute. The legislation allows adults 21 and older to carry up to 2 ounces of marijuana in public and possess up to 2 pounds at home, starting Aug. 1.

As we go to press, Florida’s Department of State reported that the proposed ballot measure to legalize recreational marijuana gathered enough signatures to put it on the ballot in 2024. Petitions to get the proposed constitutional amendment on the ballot gathered 967,528 valid signatures some 70,000 above the requirement to reach the ballot.

The law would permit adults 21 and over to possess up to three ounces of marijuana for personal use. Medical marijuana treatment centers, which were legalized by a statewide referendum in 2016, would be allowed to sell marijuana for recreational use.

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

Joseph Krist

Publisher

COLORADO RIVER SETTLEMENT

Arizona, California and Nevada – the lower basin states -have agreed to take less water from the Colorado River. The federal government has agreed to pay about $1.2 billion to irrigation districts, cities and Native American tribes in the three states if they temporarily use less water. In aggregate, the reductions would amount to about 13 percent of the total water use in the lower Colorado Basin.

The agreement struck over the weekend runs only through the end of 2026. The majority of the cuts — 2.3 million acre-feet — would come from water districts, farm operators, cities and Native American tribes that had agreed to take less water in order to qualify for federal grants offered under the 2022 Inflation Reduction Act. Those payments will total about $1.2 billion. 

The plan as is provides some political shelter over the 2024 election cycle. It does not really address any of the long-term issues around that of water. The individual states will manage the specific cuts to specific agencies so that will leave issues like agricultural versus residential water use for later discussion. The melting snowpack is providing additional supplies to southern California through temporary water diversions. This will temper the impact of proposed cuts but that sort of weather cannot be counted on.

ILLINOIS BUDGET

As we go to press, a budget agreement has been announced for the State of Illinois. The legislature had failed to reach agreement before last week’s deadline. The spending plan is estimated to be $50.5 billion. Governor Pritzker’s proposed budget plan from February totaled $49.6 billion in spending. The budget framework includes a $200 million additional pension payment, bringing total pension stabilization investments to $700 million.

As is often the case, education funding was at the center of the debate. The budget plan provides $250 million to fund the first year of the governor’s early childhood plan to eliminate preschool deserts and help stabilize the childcare workforce. It also includes $50 million for early childhood capital improvements — and $350 million for the state’s evidence-based funding formula for K-12 schools. The plan funds a $100 million increase for public universities.

With Chicago being a favored destination for asylum seekers, the City sought additional funding for things like healthcare costs for the immigrants. As has been the case in New York, pinning down a realistic cost estimate for these costs has proved difficult. While the numbers are substantial, there are real arguments about the actual cost. The city has estimated its cost at some $1 billion.

KENTUCKY PENSION CHANGE

Kentucky announced that the County Employees Retirement System (CERS) has increased its assumed rate of investment return to 6.50% from 6.25%. The rise in general interest rate levels is the ostensible cause. In reality, governments will be required to contribute less to CERS beginning July 1, 2024 (i.e., fiscal 2025). Using the system’s most recent valuation, the actuaries for CERS preliminarily estimate that contributions from participating governments will fall to around $814 million from $866 million in fiscal year 2015, roughly a 6% reduction.

The move will be a short-term benefit for the county governments. In the longer run, the changes will lead to less cash inflow and slower asset accumulation for the historically underfunded CERS. The change occurs in the context of the Commonwealth’s history of severe underfunding of pensions. Moody’s valued CERS’ unfunded liabilities for pensions and OPEBs combined at $19.8 billion, with a funded ratio of 44%. This was based on Commonwealth of Kentucky data most recently audited financial statements as of June 30, 2022.

We view the change negatively on several levels. The assumption that the current interest rate environment will become the norm seems to ignore the economy. It is clear that current rate levels are suppressing parts of the economy. With enormous pressure being brought to bear on the Federal Reserve to slow if not reverse the interest rate trend, the move to increase the discount rate for a long-term portfolio seems questionable.

At the same time, the liability to pensioners continues at the same level. What the move does is to take a step back from addressing Kentucky’s long-term pension issues. It took a long time for any positive trends to be established. It would be a shame to see that change.

MASS TRANSIT AND BUDGETS

New York’s Metropolitan Transit Authority has announced the inevitable. It plans to raise bus and subway fares to $2.90 and increase the cost of a weekly pass. The announcement comes as the Authority continues the process of levying congestion fees against drivers. The 15-cent increase could be in effect by Labor Day. The hike is part of a proposed package of 3 to 5 percent increases in transit fares and railroad ticket prices, plus a 6 to 7 percent hike in bridge and tunnel tolls.

The announcement comes on the heels of the documentation of lost revenues of nearly $700 million due to fare evasion. The package will raise approximately $300 million annually for the agency — slightly less than half of the losses from fare-beating last year. The fares for the express bus favorited by commuters in neighborhoods with limited subway access would jump by a quarter from $6.75 to $7, while the cost of a seven-day pass would increase from $62 to $64. Railroad riders would see the cost of a monthly or weekly pass increase by 4.3 percent on average, though the MTA will still cap the price on the most expensive 30-day tickets at $500.

The fare increase process of public hearings and votes will focus unwanted attention of the subway system which continues to experience challenges in its efforts to restore patronage levels. The city continues to lag in its recovery from the pandemic. While employment has returned to prepandemic levels, attendance at the office has not.

In Illinois, the Chicago Transit Authority is looking to the State of Illinois for increased operating funding. CTA has identified a $400 million gap to be closed in its budget. Federal dollars have been offered for rolling stock replacement but funding for operations has been scarce. It comes at a time when big city mass transit systems are hard pressed to employ enough operators to maintain service.

In California, mass transit agencies in the state are seeking significant operating subsidies as well. The statewide ask is some $6 billion.

HIGHWAY ERA ENDING

The latest example of the move to remove highway infrastructure designed in the 1970’s continues. The focus has been on elevated highways which cut right through urban areas effectively creating barriers to movement within the city. From time to time the debate has unfolded in the aftermath of accidents or disaster. In the 1970’s it was Westway in Manhattan. In the eighties and early nineties, it was the Bay Area and the replacement of the Embarcadero and elevated sections of highway in Oakland.

The success of those projects led to the consideration of elevated road replacements not driven by disaster. In Seattle, the Alaska Way was dismantled after many years opening up access to the Seattle waterfront significantly. In upstate NY, the replacement of the I-81 viaduct in Syracuse moves forward. Now, the latest example of the movement’s strength comes from Milwaukee.

A process is underway to determine the best costs of action for the replacement of infrastructure for I-794, an elevated road slicing through Milwaukee’s downtown. The City has undertaken a plan for downtown development and hopes to connect more of its downtown with the City’s waterfront. The state is undertaking a process to determine the best course of action to deal with the structures need for renovation.

One of five possible approaches is the removal of some of the elevated road and its replacement with a street level boulevard. It would not be the first such road to be dismantled in Milwaukee. The first was some 20 years ago and that plan is considered to be a success.

PUBLIC POWER UNDER PRESSURE

The New York State Legislative Commission on the Future of the Long Island Power Authority, have been studying the feasibility of not renewing the current management contract with PSEG Long Island, a unit of New Jersey-based Public Service Enterprise Group (PSEG) when it expires in 2024. The company was hired in the wake of high levels of customer dissatisfaction with the recovery of Long Island’s energy grid after Superstorm Sandy. As the legislative process unfolds, the politics of the issue get more complicated.

Supporters of the plan to revert to direct control by LIPA believe that direct operation would provide better service through more accountability. Opponents cite “lost taxes’ and greater taxpayer liability for the systems operations. On April 17, a feasibility study was released which concluded that the public would likely reap some financial benefits if the utility was transitioned to a public power authority. According to the report, LIPA customers could conceivably save $50 million or more annually by replacing PSEG Long Island. Much of that assumes that direct control will keep rates lower than would be the case under the status quo.

The irony is that the direct operating model was seen as a weakness given its susceptibility to local political pressure. Now, it is seen as salvation. The process will continue over the summer with a goal of having a legislative plan in place for the 2024 legislative session. In the short run, the status quo prevails.

In California, a public agency which distributes “green” energy to its customers faced possible dissolution. The Orange County Power Authority was established to develop aggregate demand for non-fossil fueled power. It serves eight localities but the two largest customers – Huntington Beach and Irvine – account for 70% of the power demand. The existence of the Authority has been a contentious issue in more conservative Orange County.

The agency has been under pressure as the result of transparency and management concerns. The CEO was fired and new procedures adopted. Nonetheless, discontent with the agency grew. Recently, Huntington Beach voted to withdraw from OCPA and return to being a Southern California Edison customer. The city accounts for 30% of demand. This focused much pressure and attention on the other large customer Irvine.

Huntington Beach residents and businesses will likely no longer be able to choose to pay for 100% renewable energy. And their electricity bills may actually go up — currently OCPA’s basic rate plan is cheaper than the one offered through Southern California Edison. All of this may have influenced the City of Irvine to choose a different path. It voted to remain a customer of OCPA.

PORTS

Ports continue to be impacted by slower activity levels. The West Coast ports where labor negotiations color the outlook for the ports reported significant drops in throughput. The Port of Los Angeles reported a 22.5% decline when measured against 2022’s strong year. The port processed 688,109 20-foot-equivalent unit containers compared with 887,357, or a decline of more than 199,000 TEUs. The adjacent Port of Long Beach also reported a 19.6% year-over-year decline as the complex moved 659,049 containers in April compared with 820,718. The Port of Oakland processed 180,482 TEUs, compared with 188,442 for a 4.2% decline from 2022.

It is a national trend. Ports in Seattle and Tacoma, Wash., reported a 12.8% decline to 232,321 containers in April compared with 266,635 a year ago. On the East Coast, the Port of Savannah, Ga. processed 408,686 containers in April, its second-highest month this year. Still, it marked a 17.5% year-over-year decline from 495,782. However, that’s up more than 11% from 367,880 in March, which was the slowest month for the port since July 2020. Volume at Port Houston also slowed by 8% in April to 307,879 containers compared with 334,493 a year ago. The Port Authority of New York and New Jersey reported that in March, volume declined 33.4% to 574,452 TEUs compared with 862,117 a year ago.

CARBON CAPTURE

Summit Carbon Solutions is a familiar name to readers as the sponsor of a carbon capture pipeline network through the Midwest. Iowa farmland owners have been among the leading critics and opponents of the project. In North Dakota, a different source of opposition has arisen. The legislature has requested that the state investigate the ownership structure to see if the proposed pipeline violates — Senate Bill 2371 and House Bill 1135 — which were passed earlier this year and go into effect Aug. 1.

Senate Bill 2371 prohibits foreign adversaries of the United States and foreign business entities with principal executive offices located in a country that is identified as a foreign adversary from owning and developing property in North Dakota. House Bill 1135 prohibits people who are not a U.S. citizen, U.S. permanent resident or Canadian citizen from directly or indirectly acquiring agricultural land in North Dakota.

The bill also states that limited liability companies can’t directly or indirectly acquire or otherwise obtain any interest in any title to agricultural land unless the ultimate beneficial interest of the entity is held directly or indirectly by citizens of the United States or permanent resident aliens of the U.S. The request reflects the fact that Summit has listed five owners of which one – TPG Rise – is supported by investment from The Silk Road Fund — an investment fund backed by the Chinese government.  

These concerns come in the wake of The Department of Energy’s announcement that it would not follow through on a $200 million proposed grant to Microvast Holdings Inc., a lithium-ion battery company that is planning a manufacturing facility in Tennessee, seven months after the award was tentatively approved. A Securities and Exchange Commission decision in 2022 added Microvast to a list of companies subject to potential intellectual property violations in China.

UPDATES

More support for the development of a lithium extraction industry in and around California’s Salton Sea came when Ford announced a large purchase from a Salton Sea producer. Energy Source Minerals will supply Ford with lithium hydroxide produced at ESM’s Project ATLiS, located in Imperial Valley California. Project ATLiS is expected to be operational in 2025. GM had already been involved with another Salton Sea producer since 2021.

Moody’s assigned a negative outlook to California’s GO rating. The surprise increase in the budget gap garnered points with no one.

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

Joseph Krist

Publisher

CALIFORNIA BUDGET

The May revision to the Governor’s proposed budget dropped on Friday afternoon. If the budget was filled with good news, it would not have been released during a prime news dump period. So, it should have been a clue that a surprise was in store.

That surprise came in the form of an unanticipated increase in the estimated deficit facing the State. Since the release of the Governor’s Budget in January, monthly revenue shortfalls have continued, which have contributed to the May Revision General Fund revenue estimate shortfall of $8.4 billion (before transfers and adjustments). The additional budget shortfall at the May Revision, after transfers and adjustments, is estimated to be $9.3 billion. The $309 billion revised budget now reflects a $31 billion shortfall, some 10% of state spending. The state has reserves in the Budget Stabilization Account (BSA), which is now approximately $22.3 billion.

The volatility inherent in the State’s tax structure – nearly half of all personal income tax in the state is paid by the top one percent of earners – is at the heart of the problem. Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility.

The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion is corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporation tax revenues for the current fiscal year.

So, what to do? The May Revision reduces an additional $1.1 billion in spending across the 2021-22 through 2023-24 fiscal years. Combined with the Governor’s Budget’s $5.7 billion in reductions and pullbacks and a $57 million adjustment, the May Revision includes total solutions in this category of $6.7 billion. Additional maneuvers include $3.3 billion in shifts of spending commitments from the General Fund to other funds; the withdrawal of $450 million from the Safety Net Reserve; $3.7 billion in revenue and borrowing, which consist primarily of an additional $2.5 billion from the Managed Care Organization tax and $1.2 billion in additional borrowing from special funds. Combined with the Governor’s Budget amount of $1.2 billion, there is a total of $4.9 billion in new revenue or borrowing.

The word “shift” appears all over the proposals. In some cases, shift involves the source of revenues. In others, it represents a shift from current funding to the use of bonds to finance projects which were formerly supported by General Fund spending.

NEW YORK CITY BUDGET AND THE MTA

When the most recent proposed budget from the Mayor was released, the state had not yet adopted its budget. The state budget is an important component of the City’s budget process and those negotiations can produce some unexpected and expensive changes in state funding. Now that the State budget has been adopted, changes to funding ratios create problems for the City.

The Executive Budget did not anticipate additional paratransit costs that became clear with the adoption of the state budget. Starting in July of this year, the city is required to subsidize MTA’s paratransit operating costs at 80 percent—up from 50 percent—after fares and dedicated tax revenues. This increase is limited to 2024 and 2025 and is capped at $165 million in addiƟonal contribuƟons each fiscal year. IBO esƟmates this policy will increase the city’s paratransit subsidy by $163 million in 2024 and $165 million in 2025, for a total of $328 million over the two years—or about 30 percent more than the $1.1 billion the MTA previously projected.

This comes as the MTA has quantified the negative impact of fare evasion. Fare evasion cost the MTA $690 million in 2022. The MTA is on track to lose $1 billion this year due to fare evasion. Critics cite facts like those to point out that the losses are about equal to what the MTA hopes to generate from congestion pricing. It is difficult to generate support for those fees when there are daily examples of fare evasion.

STATE REVENUE SHORTFALLS

In Massachusetts, a report by the Massachusetts Department of Revenue showed April revenue was down 31% year-over-year, with the state collecting $4.78 billion, $2.1 billion less than in April 2022. In its revenue report, the Massachusetts DOR Commissioner highlighted steep dips in short-term capital gains as a major factor in tax declines for April. Nonetheless, the state is expected to move forward with both tax cuts and new spending. most of the key proposals in the governor’s budget proposal, including a $600 child tax credit, new seniors tax credit, renters assistance, a reduction of the estate tax, and a centerpiece short-term capital gains tax cut that would reduce the rate from 12% to 5% over two years.

Illinois revenues sunk in April by $1.8 billion from April 2022 collections. The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while the legislature’s Commission on Government Forecasting and Accountability (COGFA) cut its estimate $728 million to $51.2 billion. COGFA noted that Illinois revenues are still up $132 million from last year but that counts $325 million of one-time federal American Relief Plan Act funding that won’t be available in the coming fiscal year.

MAINE TRANSMISSION

A Maine jury unanimously found that Central Maine Power was entitled to resume construction of the New England Connector transmission line. More importantly, the plaintiffs in the case announced that they would not appeal the verdict. This will allow construction to resume. CMP immediately sued the state to reverse the results, arguing the referendum was unconstitutional for creating a retroactive law nullifying a project that had been lawfully permitted by numerous state and federal government agencies. the Maine Department of Environmental Protection is expected to lift the freeze on construction which was imposed after passage of the referendum halting the project in 2021.

STADIUM NEWS

This week two cities effectively ended the possibility of professional sports franchises staying in their current homes. In one case, a referendum process allowed voters to make the decision directly while in the other the local political structure would not support a project.

Voters in Tempe voted against a proposed development plan centered around a new arena for the NHL Arizona Coyotes.  And the vote comes after the City of Phoenix and Sky Harbor Airport raised concerns about the location of the proposed development and threatened additional litigation against the deal. Propositions 301, 302 and 303 — all needed to receive a majority of “yes” votes in order for the Coyotes project to move forward. Each one was losing by a 56% to 44% margin, with the exception of Prop. 303, which was losing 57% to 43%.

There is a real likelihood that the franchise will move given the lack of a permanent place to play. There are already four cities which have been suggested as a future home for the team. Three of those cities have available arenas and the fourth will see one later in connection with an Olympic bid. The Coyotes are not the first NHL team to have arena woes – the NY Islanders eventually landed on their feet with the UBS Arena in Elmont, NY.

The Oakland A’s of MLB announced that they had entered into an agreement to develop a baseball stadium right on the Las Vegas Strip. Part of the transaction would include some $350 million provided by the State of Nevada, subject to legislative approval. It is impossible to overstate the impact that the success of the NHL Vegas Golden Knights has had on the perception of Las Vegas as a viable professional sports city. Concerns about consistent attendance and any worries about issues related to gambling simply have not materialized.

THE MOUSE WARS ESCALATE

Last month the CEO at Disney asked about Florida “Does the state want us to invest more, employ more people, and pay more taxes, or not?” Apparently, Disney believes that the answer for now is no. Following through on that conclusion, Disney announced that it was not going to pursue a planned development within the District which would have transferred 2,000 employees from California (at a state estimate of $120,000 average salaries) and seen an overall $1 billion investment.

There are lots of reasons why Disney would cancel the project. Employees were unhappy with the move and the company is in the midst of a major cost cutting program. Nonetheless, the opportunity to up the ante in Disney’s dispute with the Governor allowed Disney to package the cancellation of the project as being in support of its position.

The situation reflects the toxic matching of ideology and political ambition. It tends to backfire and it occurs on both ends of the political spectrum.

SOLAR AND NET METERING

The effort to reduce the favorable economic impact for customers who install solar panels continues to spread. Net metering – the mechanism for paying for surplus solar generation – has been steadily under attack. Ironically, most of these actions are being undertaken in states where solar would make sense. The primary effort is to reduce the price paid by distribution utilities for solar generated electricity. Such actions have been seen in California, Arizona, Texas, Florida.

North Carolina recently approved new net metering rates which will lower payments to those with solar. The new net-metering rules are scheduled to take effect July 1. A settlement negotiated last year by three North Carolina solar installers and included in the utilities commission’s May order will allow existing residential solar owners to continue to be credited for excess electricity at the current standard rate for up to 15 years.

Under new rules approved by the utilities commission March 23, customers will be credited more during times of peak demand — such as early morning in winter and evening in the heat of summer — and less when loads are lower. Overall, it is expected to lower payments to residential solar customers.

In addition, the insurance industry in Florida is cancelling homeowners insurance policies for many who have installed solar. It is estimated that half of the state’s home insurance carriers are making the move. Add that to the already existing issue of declining coverage as the result of hurricanes and it will put even more pressure on government backed insurance plans.

HYDROPOWER

It is estimated that 45% of the U.S. hydro fleet has licenses that expire by 2035. Bipartisan hydropower permitting reform legislation introduced last week in the U.S. Senate would establish a two-year permitting process to install turbines on non-powered dams and a three-year procedure for pumped storage projects unconnected to waterways. The sponsors and co-sponsors are from four states with significant hydro resources and the partisan split is even.

According to the Energy Information Administration, the United States has 1,029 FERC-licensed facilities with about 80 GW of hydroelectric capacity and about 22 GW of pumped storage capacity. Last year, hydropower accounted for about 6.2% of total U.S. utility-scale generation and almost 29% of utility-scale renewable generation. The bill, The Community and Hydropower Improvement Act, S.1521, seeks to cut years off of the relicensing process.

It is the pumped storage issue which is most intriguing. The process has recently gained lots of attention even though pumped storage has been utilized for years. Municipal investors have long been familiar with pumped storage projects. About 35 GW of potential additional pumped storage capacity is available in the U.S. FERC is reviewing three pumped storage license applications in California, Washington and Wyoming totaling nearly 2,672 MW. 

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

ROAD FUNDING

Oklahoma’s Department of Transportation is inviting drivers to take part in a six-month pay-per-mile pilot program set to launch this July. The Fair Miles program is designed to address emerging impacts on funding as electric car use grows. Drivers who volunteer to be part of the pilot will have several mileage reporting options (MRO), including an onboard device (OBD-II) and telematics, if provided by the vehicle manufacturer.

Oklahoma joins Oregon, Utah, Virginia and Washington in conducting similar pilot studies. In Oklahoma, the state is looking for 500 diverse participants, who will each be paid $50 for taking part. The project was authorized in 2021.

Indiana is taking a different approach while it figures out a long-term source of funding for roads which does not include a gas tax. In 2017, a state task force recommended several provisions which became law. They included raising the gas tax by 10 cents, indexing the tax to inflation with a cap of one penny, and directing revenue from a separate gas sales tax to a dedicated road improvement account rather than the state’s general fund.

Under current law, the annual inflation adjustment to the gas tax, which is limited to a penny, was set to end in 2024. Lawmakers in the budget agreed to an extension, pushing the expiration date out to 2027. 

CALIFORNIA TRANSIT FUNDING

The issue of state funding for transit usually plays out in places like New York and Illinois where the use and demand for mass transit is quite concentrated. There debates over state revenue assistance to transit agencies is taken for granted. It’s usually not an issue of whether to subsidize or not. This year, the issue of operating subsidies for local mass transit is coming to the state budget negotiations in California.

The California Transit Association which represents 85 public transit systems has proposed that the state appropriate some $5 billion to subsidize operating revenues to fill in projected shortfalls in local transit revenues.  The systems anticipate a cumulative budget deficit of around $6 billion over the next five years, according to the association. The state has never done this before.

The agencies are hoping for additional funds from the state’s sales tax on diesel fuel and unallocated revenue from the state cap-and-trade program. They’re also asking to use some existing capital funding to support operations over the next several years. How badly is the money needed? The agencies say they’re willing to give more operating oversight of transit operations to the state, and respond to demands for “accountability” in the form of safety and service improvements.

CONGESTION PRICING

The Federal Highway Administration tentatively approved an updated draft of a report commissioned by the Metropolitan Transportation Authority that identified ways to mitigate the potential harm of congesting pricing on disadvantaged communities. This opens a 30-day comment period after which FHA is expected to give its final approval. The M.T.A. says the tolling program could begin as soon as spring 2024.

That assumes that a toll level will be agreed upon in spite of continued strong suburban resistance. Other critics include taxi drivers, as well as Lyft and Uber drivers. The M.T.A.’s own research has shown that fare increases triggered by the tolls could slash demand for taxis and for-hire rides by up to 17 percent.

ASYLUM COSTS

Last week we discussed the budgets for the State and City of New York. One result was that the City was not going to receive financial aid from the state to reduce the costs of the asylum surge into NYC in the amounts the City had hoped for. The recently adopted New York State Budget included funding to reimburse New York City for 29 percent of costs associated with sheltering asylum seekers, up to $1 billion in reimbursement over two years. 

As the budget process moves to the City side, the NYC Council commissioned the City’s Independent Budget Office (IBO) to examine city expenses associated with serving asylum seekers that were included in the Executive Budget. A most frequently cited figure by the Mayor is $4 billion. IBO modeled a baseline cost scenario which assumes variation in the influx of asylum seekers in line with current trends. It also studied a lower-cost and higher-cost scenario.

What did IBO find? All three IBO cost scenarios are based on the assumption that the volume of asylum seekers utilizing city services will fluctuate. When this is combined with varying cost models, the resulting total costs are between $600 million and $1.7 billion lower than the Executive Budget projection of $4.3 billion for fiscal years 2023 and 2024. How did the difference come to be?

Baseline-cost scenario ($3.07 billion) – IBO estimates that the asylum-seeking population in 2024 will continue to follow trends of arrivals, stays, and exits seen in 2023, and that the current cost of providing shelter and food and other city services for asylum seekers will remain constant. This scenario totals $3.1 billion across 2023 and 2024, $1.2 billion lower than the Executive Budget.

Lower-cost scenario ($2.67 billion) – assumes that, while the asylum-seeking population will continue to grow over the course of 2024, the city will find cost efficiencies next year, lowering the per-household cost of providing shelter and food for asylum seekers.

Higher-cost scenario ($3.728 billion) – assumes that the asylum-seeking population will continue to grow over the course of 2024 and that the cost to shelter and care for asylum seekers will be higher than current rates as the city continues to ramp up emergency spending.

Across each of IBO’s three cost scenarios, the city will not receive the full $1 billion it might get from the State. The findings will give ammunition to those City Council members who did not support budget cuts for things like libraries.

WATER, MICHIGAN, BANKRUPTCY

Stop me if you think you have heard this before but another Detroit suburb is having trouble with its water system. For ten years, the City of Highland Park and what is now the Great Lakes Water Authority have been in litigation over unpaid water bills. Last month, a Wayne County Circuit Court Judge ordered Highland Park to provide a payment schedule which would resolve the outstanding $24 million debt due to GLWA.

The court case against the city resulted in at least three mediations, with the last one being overturned by the court of appeals resulting in its reversal after DWSD/GLWA agreed to settle and pay Highland Park $1,000,000 for overcharges. Instead, the parties find themselves at this crossroads. Highland Park’s City Council voted to petition Michigan Governor Gretchen Whitmer requesting she authorize the city to go into Chapter 9 municipal bankruptcy. They had hoped that this would happen by April 20.

In 2014, the city chose a neutral evaluation process under state law which was a pre-bankruptcy mediation. The order of a payment program is actually a stick to get the parties to some agreement. In fairness, it is likely a burden for the majority of Highland park’s ratepayers to make their full payment. It is also symptomatic of the fiscal problems which have seen the city run under the State emergency manager laws – once for six years and again for two years between 2001 and 2015.

FLORIDA

In 1882, the US passed the Immigration Act. That law was enacted primarily at the behest of California where Chinese immigrants were accused of taking jobs and holding down wages. The law excluded merchants, teachers, students, travelers, and diplomats. It was renewed after its original ten-year term expired and after two renewals was replaced by the Chinese Exclusion Act. That law made the restrictions permanent and they stayed in place until 1943.

Now, in preparation for his Presidential campaign Florida Governor signed his state’s version of restrictions on Chinese individuals. The new law is structured to prevent “governments or agents” from “countries of concern” – China, Russia, Iran, North Korea, Cuba, Venezuela and Syria from buying farmland or any property within 10 miles of any military installation, seaport, airport, power plant, water treatment facility or any other location deemed critical infrastructure.

The law bans citizens from those countries of concern who are not lawful permanent US residents from owning any real estate in Florida. Those knowingly selling property in violation of the new regulations may be subject to civil and criminal penalties, and the new laws allow the state to seize property improperly obtained by foreign nationals.  The legislation also prohibits state colleges and universities from soliciting or accepting gifts and grants from foreign countries of concern and bans private schools from being owned or controlled by adversarial nations. 

While the language does not limit the law to exclusively Chinese interests, the Governor made it clear in the signing ceremony that the law targeted Chinese interests. The “CCP threat” is a popular talking point among the conservative voters being targeted by The Governor and his campaign. Whether it will have any practical effect on the issue is another thing. It is a continuation of some very noisy efforts to use the law and the courts to score cheap political points.

On that note, the state has enacted legislation which purports to overturn the development agreement adopted by the Reedy Creek District and Disney at the old board’s last meeting in February. The litigation related to this is piling up with suits and countersuits flying. While we do not believe that the legal battles will impact the payment of outstanding debt from Reedy Creek, we are troubled by the willingness of the Legislature to support an unnecessarily disruptive politicization of a municipal bond credit.

P3 DEFAULT

Eastern Michigan University is considered a commuter campus with only 17.5% of enrolled students living on campus. To facilitate the attendance of its commuter students, the University had operated an extensive parking system on campus. Part of that system included a garage for 740-odd vehicles. To facilitate the management and refurbishment of the garage, the University entered into a public-private partnership for the maintenance and operation of the garage. The term of the agreement was 35 years.

The project was financed through the issuance of bonds by the Arizona Industrial Development Authority, a conduit issuer. The proceeds of the Bonds were used to, among other things, refinance the Project by prepaying a Prior Loan and redeeming Prior Notes and finance certain costs of the Project. The debt service on the bonds would be paid from repayments under a loan agreement with the operator.

The Borrower failed to make at least the Loan Payments required under the Loan Agreement that became due on May 1st, 2021, November 1st, 2021 and May 1st, 2022. In addition, the Borrower failed to make the complete Loan Payment that became due on May 1, 2023 (together with the earlier missed Loan Payments, the “Missed Loan Payments”). Those were defaults under the loan agreement. The Borrower’s failure to timely make each of the Missed Loan Payments constitutes a Loan Default Event under the loan agreement and creates a default under the Indenture securing the bonds.

In the meantime, the garage is closed so there are no revenues generated. The dispute between the University and the operator has been in the courts. Provident EMU has sued EMU twice in both federal and Michigan court. The federal case was thrown out quickly. In litigation to date, Provident accused EMU of underselling the cost of repairs needed on a 784-space parking structure and either undercharging or reserving more spaces than planned in the garage. The parties have been in disputes resulting from pandemic restrictions which limited operations.

It is part of a pattern of disputes between Universities and private housing and parking providers. The attraction of the P3 model for universities is that it shifts risk off their balance sheet. If they had wanted to guarantee the debt, they could have issued traditional parking revenue bonds. The whole point of these transactions is to shift risk. So, when revenues do not meet expectations, relying on universities to suddenly step up and backstop debt which they worked very hard not to be responsible for may be a fool’s errand.

HOCKEY ON THE ARIZONA BALLOT

On May 16, the voters in Tempe, AZ will have their chance to cast votes for or against a proposal to issue debt for the development of a mixed use commercial and residential community anchored around a new arena for the NHL Arizona Coyotes. The Coyotes have been in the Valley of the Sun for a quarter century without ever being able to lock down a permanent home. Multiple ownership groups and continuing interest in moving the franchise have not helped.

The team now plays on the Arizona State University campus. It is designed for college and while its ice was rated the best in the league, the building holds only 5,000 people. It is not a viable long-term solution. After the Desert Dogs were kicked out of the arena in Glendale, a long-term solution had to be found before the pressure to move the franchise only grew.

The project was approved by the council to become a referendum on Nov. 10, 2022, and on Nov. 29, the proposed use of land and development that would be the entertainment district was unanimously approved. The team has agreed to pay the City under the terms of a 30-year Government Property Lease Excise Tax, which allows developers to build in Arizona by paying an excise tax instead of property taxes for a set number of years. 

A robust debate has unfolded with two sides offering what can only be described as the usual arguments. It is fair to say that a failed vote would result in enormous pressure to be placed on the NHL and its other owners to move the team to where it could have a permanent home.

PUERTO RICO

Beginning in 2016, CPI—a nonprofit media organization that has reported on Puerto Rico’s fiscal crisis—asked the Board to release various documents relating to its work. When CPI’s requests went unfulfilled, it sued the Board in the United States District Court for Puerto Rico, citing a provision of the Puerto Rican Constitution interpreted to guarantee a right of access to public records. The Board moved to dismiss on sovereign immunity grounds, but the District Court rejected that defense. The First Circuit affirmed. The case moved to the US Supreme Court.

The court began by citing Circuit precedent that Puerto Rico enjoys sovereign immunity, and it assumed without deciding that the Board shares in that immunity.

The question presented is whether the statute categorically abrogates (legal speak for eliminates) any sovereign immunity the board enjoys from legal claims. The Court held it does not. Under long-settled law, Congress must use unmistakable language to abrogate sovereign immunity. Nothing in the statute creating the board meets that high bar. Lacking that language, this Court assumed without deciding that Puerto Rico is immune from suit in United States district court, and that the Board partakes of that immunity.

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity unmistakably clear. The statute does not explicitly strip the Board of immunity or expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity. The standard for finding a congressional abrogation is stringent. Congress, this Court has often held, must make its intent to abrogate sovereign immunity “unmistakably clear in the language of the statute.”

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity “unmistakably clear.” The statute does not explicitly strip the Board of immunity. It does not expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity.

MAINE TRANSMISSION

Maine’s highest court ruled today that a 2021 ballot initiative seeking to block construction of a 145-mile transmission line was unconstitutional. It ruled that the ballot measure could not retroactively ban New England Clean Energy Connect, or NECEC as the project is known. They noted the proposed transmission line had received a certificate of public convenience and necessity from state utility regulators.

The decision still requires adjudicating the issue of whether Avingrid, the project sponsor and CMP owner had completed enough work on the project that it could not be stopped. The applicability of the decision on the initiative in this case depends on what a county jury decides in litigation currently ongoing to resolve that question. 

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

LAKE MEAD

The Upper Colorado Basin’s snowpack stands at almost 160% above normal. Forecasts say the melting snow flowing into Lake Powell via the Colorado River and its tributaries could hit 177% of average this year. Colorado’s snowpack is well above average, and Utah had its snowiest winter on record. So, we’re all good? Right?

Colorado River flows have declined about 20% compared to historic flows, even with this year’s record-breaking snowfall. Regional water authorities predict that Lake Powell will end 2023 at 3,573 above sea level. That would be a clear improvement over last year when it ended the year at 3,524 feet. Lake Mead ended 2022 at 1,044 feet, and authorities predict it will end this year at some 1,068 feet.

Those levels must be compared with Lake Powell’s official full level of 3,700 feet. It’s peak storage was when it filled to 3,708 feet in 1983. In 1983, Mead reached 100% full at 1,225 feet. At their lowest levels, Lake Powell was at 23% of capacity, while Lake Mead had reached 28% of capacity. Combined, they are today only about 26% full.

MAINE TRANSMISSION TRIAL

The New England Clean Energy Connect, a long-running effort by Massachusetts to import 1,200 megawatts of electricity produced by hydropower from Quebec is facing a crucial legal test. A jury of nine Cumberland County residents in Maine’s Business and Consumer Court will sit at trial to decide if the billion-dollar project can move forward. 

The trial revolves around the question of whether or not a 2021 referendum on the project which resulted in a 60% -40% vote against the project came in time to stop it. The jury’s specific task is to decide whether Central Maine Power had completed enough work by the time the referendum intervened that it can legally finish the project. The referendum came after the project had completed the full approval process before Maine state regulators.

The politics of the issue have, as they say, made for strange bedfellows. The usual profiles of opposing groups on these sorts of issues do not fit this case. On one hand the opposition is over process and how much local participation there was. Those interests have combined with operators of natural gas fueled merchant generation to oppose cheaper hydropower. Some environmentalists find themselves on opposite sides of the issue from entities like the Sierra Club.

What does not help is the role of the energy supplier – Avingrid – in this mess. Avingrid (a foreign owned company) acquired Central Maine Power as part of an effort to develop a retail base in the US for its renewable energy projects. (Full disclosure, I am an Avingrid customer. Thoughts and prayers are accepted.) 

Based on their abysmal customer relations policies and operational shortcomings, those subsidiaries are seen negatively by the public. Comments from CMP’s customers in Maine were among the things which led the New Mexico power regulators to deny Avingrid’s bid to purchase Public Service of New Mexico.

CLIMATE LITIGATION A STATE COURT MATTER

The Supreme Court last week declined to hear five appeals from the fossil fuel industry seeking to move climate change lawsuits it faces to the federal courts. The lawsuits before the high court were filed by Rhode Island, the cities of Baltimore, Honolulu, and Imperial Beach, California, and counties in California and Hawaii. 

To date, at least five federal circuit courts of appeals have considered the jurisdictional issue and concluded that there were insufficient grounds to move the cases from the state courts to federal jurisdiction. A separate appeal filed by the oil companies challenging lower court decisions in cases out of New Jersey and Delaware is still pending before the Supreme Court.

The decision is the first since a 2021 SCOTUS ruling that found that an appeals court relied on too narrow an interpretation of a procedural issue against the fossil fuel companies.

NY BUDGETS

NYS finally has a budget some one month late. Fiscal and non-fiscal issues delayed enactment and revolved around perennial concerns – housing, mass transit, bail reform. The issue of housing was effectively punted until the budget was completed as there is some 60 days more in the legislative session. Bail reform was reduced as an issue which left funding for the MTA as the remaining fiscal issue.

The budget agreement provides new and recurring funding for the MTA through an increase in the payroll tax paid by the city’s big businesses. The increase is expected to generate about $1.1 billion for the agency. In addition, the agreement includes a one-time payment from the state of $300 million. It also includes an additional $65 million payment to reduce a proposed fare hike. New York City will be expected to provide $165 million. The state initially proposed a yearly payment of $500 million from the City.

The State budget includes a $1 increase in the tax on a pack of cigarettes. Tuition for out of state students at SUNY and CUNY will increase. The budget agreement also included a prohibition on the use of gas stoves in new construction. The ban on the stoves is the first statewide ban to be enacted. All of the previous bans were imposed by localities. Note that existing gas furnaces can be replaced. The ban is only on new construction.

Now that a budget has been arrived at, the focus moves to the NYC budget. The state will provide some $1 billion of aid to address the costs of asylum seekers. The aforementioned payment from the City to the MTA and the addition of $300 million in state assistance to the MTA remove significant uncertainties from the City budget.

HOSPITALS – BIG GETS BIGGER

The wave of consolidation in the healthcare industry continues. The latest example comes from the announcement that Kaiser Permanente is acquiring Pennsylvania’s Geisinger Health System. Geisinger is a large regional provider with an extensive provider network. Like Kaiser it combines hospitals and insurance in its basic business model. The transaction expands Kaiser Permanente’s footprint across the country.

Kaiser has formed a subsidiary – Risant Health – which plans to acquire several health systems. Geisinger would operate independently under the new subsidiary of Kaiser’s hospital unit after the deal closes, which is expected early next year. Geisinger, based in Danville, Pa., reported about $6.9 billion in revenue last year. It counts 10 hospitals and about 600,000 health plan enrollees and employs more than 1,700 doctors. 

MAY 11

This week will mark the end of the use of Title 42 as a method to limit crossings primarily from the southern border by immigrants. Rooted in public health control issues, Title 42 was seized upon by the Trump administration to limit crossings from Mexico by basing its use upon pandemic limitations. As the pandemic waned, Title 42 has remained in place as the size of the pool of potential asylum seekers has continued to grow.

Without Title 42, asylum seekers will be able to gain admittance to the US for processing of their claim. This will focus even more attention on the costs of the lack of a realistic immigration system. It will also focus attention on the budgets of two of the nation’s largest cities – New York and Chicago. Government officials in border states, especially in Texas, have already indicated their intention to continue to bus new arrivals to these two cities. New York already counts over 50,000 new asylum seekers. More than 8,000 migrants have come into Chicago since August, according to city officials. Chicago runs eight shelters dedicated to new migrants. 

In Texas, El Paso, Laredo and Brownsville declared states of emergency ahead of the end of pandemic-related asylum restrictions. In Denver this month, officials announced that only immigrants with a formal application to stay in the U.S. will be allowed in emergency shelters. Denver has spent nearly $13 million sheltering and supporting more than 6,000 migrants.

TRANSIT FUNDING

While much of the attention focused on the Tennessee legislature this year has been about social issues, there has been action on transportation. Tennessee Gov. Bill Lee signed a bill that will allow for the creation of “choice lanes” on congested highways in urban areas. The plan would let drivers pay a fee, which rises and falls with traffic demand, to use an express lane. Buses will be able to use the lanes without paying the toll. The legislation authorizes public-private partnerships for the development of the “choice lanes.”

The big effects reflect the decision to at least authorize toll-based funding and the use of P3 structures to finance, fund, and construct transit infrastructure. The increased use of tolling in the Southeast reflects long standing changes in culture and the migration of Northerners who have experienced toll roads as a fact of life.  That historic resistance has slowed the implementation of toll-based funding. The framing of the issue of tolling as one of user-based funding to support the use of tax dollars to fund these expansions has had appeal.

In Colorado, legislation was enacted to expand a free fare program for mass transit to reduce air pollution by offering free public transit rides during peak ozone season. Zero Fare for Better Air was backed by $28 million of funding and provided free bus and train rides for the entire month of August.  A total of 15 transit agencies took part. This year’s bill expands the grant program allows transit agencies to roll over the money and use it for rider outreach. It also gives transit agencies more flexibility on when to use the money, as Colorado regions experience ozone season differently.

It clearly had an impact on ridership. Denver’s RTD reported a 22% increase in ridership during the free-fare month and an increase of 36% from August 2021. Ridership increases in other counties were significant. Pueblo County reported a 59% increase over the year prior, Archuleta County a 56% increase and 48% for Mountain Metro in Colorado Springs. 

VIRGIN ISLANDS WATER AND POWER

When we last commented, the Virgin Islands Water and Power Authority was staring down a deadline to finance a $145 million buyout deal with propane supplier Vitol. The highly politicized board of the Authority was delaying a vote on the plan effectively risking the Authority’s ability to operate its power generation facilities. Finally, a package of funding was approved by the legislature and the buyout can move forward.

The legislature has been debating a proposal to approve a $150 million line of credit to make an initial cash payment of $45 million to Vitol which was due on April 14. It finally approved amended legislation on April 21, granting the government access to a $100 million line of credit. That meant to enable the government to make the initial payment to Vitol by the new deadline, which was May 1. A first payment of $45 million is being advanced by the V.I. government under the line of credit. WAPA will fund the payment to Vitol $100 million by August 14. The generation facility would then be controlled again by WAPA enabling it to procure Propane more freely.

It is a short-term fix as the ultimate source of the $145 million cost of the buyout has yet to be established. WAPA plan was to apply for reimbursement for the $145 million buyout from the U.S. Department of Housing and Urban Development, but the federal agency has yet to agree to provide that funding. That reliance on a federal buyout has been seen as problematic by many and it continues to limit the positive credit impact it will have.

Power remains a highly expensive commodity in the VI. The current retail rate is 41 cents a kilowatt hour, including 22 cents for the Levelized Energy Adjustment Clause or fuel rate, plus 19 cents from the base rate, which pays for day-to-day operating costs. WAPA’s actual operating cost is around 55 cents, depending on fuel prices. The gap has been subsidized by the VI government. The fuel cost declines expected under the new structure are looked at as a chance to reduce the subsidy.

RATINGS

Moody’s announced that it has downgraded the City of Jersey City, NJ’s issuer, general obligation unlimited tax (GOULT), and city-guaranteed ratings to A1 from Aa3. The outlook was revised to negative from stable. The action is a reflection of the fact that bond raters, investors, insurers do not like surprises. Moody’s is pretty clear on this issue in the case of Jersey City.

In 2021, the city’s audit reported a financial result materially worse than indicated by previously published unaudited financials. Moody’s notes that this is an unusual occurrence in New Jersey. The final audit reflected a significant operating deficit and negative adjusted fund balance. Moody’s notes that the city has raised taxes materially and taken other steps to stabilize its finances. Unaudited results for 2022 reflect a considerable recovery.

An outside consultant which works with the City on its finances and suggests specific steps also reports out of date systems and internal controls. Weak internal systems in municipal governments are not a new phenomenon. That is unfortunate. In this case, Moody’s specifically cited the state of the city’s IT infrastructure as something “which must be addressed before the city’s finances can truly be on a healthy footing; as a result, governance is a key driver of this rating action.”  

The Northern California healthcare powerhouse Sutter Health has been dealing with a variety of legal issues relating to its anticompetitive practices. The system had to pay some $575 million to settle state litigation. The cash hit as well as the negative impacts of the pandemic on the hospital sector pressured Sutter’s ratings.

After a sustained period of bad credit news, the trend has been reversed. S&P Global Ratings raised its long-term rating to ‘A+’ from ‘A’ on Sutter Health. The move was based on improved operating results and the lack of extraordinary funding costs of legal settlements lead to an improved balance sheet as well.

Detroit was the beneficiary of a rating upgrade from S&P. S&P Global Ratings raised its long-term rating to ‘BB+’ from ‘BB’ on Detroit’s unlimited-tax general obligation (GO) debt. Another year of positive financial results and improvements to reserves and liquidity supported the upgrade. The outlook is positive based on Detroit’s recent revenue growth and forecasts showing that it can follow through with its financial plan, at least in the near term. The current administration has gained credibility and political support for its efforts to maintain balanced finances. The city benefits from the undeniable improvement in the city (at least its CBD) which reflects the strength of the state’s major industry.

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

Joseph Krist

Publisher

We are about to take a rare week off. We need to devote our attention to issues of great import which do not involve municipal credit. We will deliver our next issue for the week of May 8.

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DEBT LIMIT POLITICS AND MUNICIPALS

Long time readers know of my regular disgust when ideology trumps any practical plan to resolve issues. Whether it is tax policy, environmental policy, or general public policy, the answers which result in tangible accomplishments usually don’t come from idealogues. That what turns our focus to Speaker McCarthy’s recent comments about the need to lift the federal debt Limit. In particular, we focus on one of his proposals.

The idea in question calls for the “claw back tens of billions in COVID-related money.” He is basing that on a figure generated by the Republican Main Street Partnership which is affiliated with the former Main Street Caucus in the US house. The plan to take back money from state and local government would require revisions to existing law. For example, the American Rescue Plan Act, passed in March 2021, included $350 billion in Coronavirus State and Local Fiscal Recovery Funds. The funds must be obligated by December 2024 and fully spent by the end of 2026. 

My own view is that the extra money spent during the pandemic was in many ways shot out of a cannon when clearly it could not have been spent all at once. The view from McCarthy seems to reflect the belief that the hoarding of these funds occurs in service demanding blue states. The fact that many red states did not directly approve expenditures related to COVID but instead funded otherwise unaffordable tax cuts to their constituents (think Lenny the Mayor of NYC in Ghostbusters) and voters. Not all of that money was spent on COVID responses in those places.

Spare us the sanctimony and increase the debt limit.

SOMETHING IS OFF

DePaul is the largest Catholic university in the country. It has had a long presence as a major institution even if most people know it for the school’s basketball success in the late 1970’s and 1980’s. One year ago, Moody’s upgraded DePaul University’s (IL) issuer and revenue bond ratings to A1 from A2. The university had approximately $253 million of debt outstanding at the end of fiscal 2021. The outlook was stable. The rating and outlook were based on “the university’s strong growth in unrestricted financial reserves, driven by multiple years of superior operating cash flow retainment combined with strengthening philanthropy.

Now just one year later, DePaul is showing signs of a situation that is anything but stable. It is offering a voluntary separation program to about 15% of the school’s 1,400 full-time staff and administration, according to an April 4 notice by DePaul University President Robert Manuel. It appears to be concentrated on administration as faculty are ineligible. School officials project a shortfall of $56 million for the fiscal year beginning July 1, barring cost-cutting measures. 

Much of the problem is being blamed on pandemic impacts on enrollments. In fact, declines in enrollment have been long-standing. Since 2018, total enrollment fell 6.8%, with steep declines more recently among graduate students, according to data from the school. University-wide enrollment at DePaul fell 3.5% year over year to 20,917 students in 2022.  DePaul received authorization for $77 million of stimulus funds as of June 2021, according to Fitch Ratings.

DePaul has gone out of its way to reiterate a willingness and ability to pay debt service. Nonetheless, one has to ask how the perception of the school’s short-term credit outlook could be so positive in the face of DePaul”s specific declines which were already apparent. National trends are not in favor of a school already experiencing lower demand. It is clear that something was missed in the rating process.

NATURAL GAS BAN LOSES IN COURT

The US Court of Appeals for the Ninth Circuit ruled that Berkeley’s natural gas piping ban, which the city’s government passed in 2019 as part of its climate agenda, violated the federal Energy Policy and Conservation Act (EPCA) of 1975. The city can ban the use of gas appliances but the effort to restrict piping specifically was seen as an end run around the law. The panel unanimously held that federal energy law preempts Berkeley’s ban on natural gas piping within buildings, and that Berkeley cannot bypass federal preemption by banning the pipes instead of natural gas products themselves.

The suit was brought on behalf of the California Restaurants Association. Restaurant operators have been among the most vociferous opponents of the bans. Berkeley Ordinance No. 7,672-N.S. banned natural gas infrastructure and the use of natural gas in newly constructed buildings beginning January 1, 2020, making Berkeley the first city in California to take such action. In the original complaint filed November 21, 2019, the CRA highlighted that its members include restaurants that “rely on gas for cooking particular types of food,” as well as for heating space and water, for backup power, and for affordable power, and that they would “be unable to prepare many of their specialties without natural gas.” 

The decision focuses attention on why it has made some sense for other jurisdictions (like New York State and Minnesota) to exempt restaurants from limitations on the use of natural gas. The District Court in California dismissed the complaint in July 2021 but it did find that that the CRA had standing and the dispute was ripe, but disagreeing on the statutory interpretation of federal energy law. The judges argued that the Energy Policy and Conservation Act of 1975 passed by Congress “expressly preempts State and local regulations concerning the energy use of many natural gas appliances, including those used in household and restaurant kitchens.”

“Instead of directly banning those appliances in new buildings,” the ruling states, “Berkeley took a more circuitous route to the same result and enacted a building code that prohibits natural gas piping into those buildings, rendering the gas appliances useless.” At the time of enactment, the legality issue was an open question. As has been the case with most “environmental” legislation, the ultimate forum for addressing the details becomes the court. In this case, the lack of a restaurant exception and the effort to regulate the transmission of gas made it easier for the appeal to succeed.  

OAKLAND STADIUM

The never-ending process to provide a more modern home for MLB’s Oakland A’s may have come to an end. The last few weeks have offered a mix of good and bad news for proponents of the new facility and the development project proposed for the surrounding area. The Oakland Waterfront Ballpark Project (Project) proposed a 50-acre development at Howard Terminal within the Port of Oakland (Port). The Project proposed not only a new ballpark for the Oakland A’s, but also 3,000 residential units, retail and commercial spaces, a performance venue, and a hotel, all with associated parking. A draft EIR was completed in February 2021, and final EIR certified by the City of Oakland (City) one year later.

Opponent litigation has been focused on “safety” issues in the area around the proposed development connected with the presence and expected continuing use of rail tracks by freight trains. Opponents of the stadium have focused on that issue and the issue of whether the project’s environmental impact review should have included pedestrian safety. In that litigation including appeals from both sides, the California First District Court of Appeal concluded that the EIR prepared for the proposed Oakland A’s stadium was largely satisfactory, but on a single point failed to adequately mitigate wind impacts.

The bulk of the issues reviewed in this case are environmental but more regarding locations adjacent to the proposed project area rather than with the proposed ballpark itself. Many of those issues seem to be over procedure. The Oakland ballpark project received legislation requiring courts to resolve any CEQA challenge within 270 days at each level, to the extent feasible. Here, the trial court reached a decision just 170 days after the case was filed, and the Court of Appeal issued this opinion 178 days after the appeal was filed. 

Overhanging all of this has been the increasing impatience among MLB owners regarding the inability of the City of Oakland to address the stadium problem. Built in 1966, the stadium has always been a bad compromise producing lousy seating arrangements for both football and baseball. The City has been burned before in stadium negotiations especially by the now Las Vegas Raiders. Las Vegas again loomed as a potential location for a major league stadium and team. MLB would like to see a stadium (or relocation) deal reached by year end.

Those delays in obtaining approvals and that pressure from MLB to get a resolution to the stadium issue have now driven A’s ownership to look to Las Vegas. The franchise signed a binding agreement this week to purchase 49 acres in Las Vegas meant for a new stadium. Oakland city officials, meanwhile, said they were ceasing negotiations with the team on a new stadium in light of the Vegas news. commissioner Rob Manfred said: “We support the A’s turning their focus on Las Vegas and look forward to them bringing finality to this process by the end of the year.” The current Collective Bargaining Agreement calls for the team to lose its revenue sharing next year if it doesn’t have a resolution to the stadium.

TOLL ROADS HOLD UP AFTER THE PANDEMIC

The Illinois State Toll Highway Authority’s (ISTHA) has begun a program of debt issuance totaling $2 billion over the next three years. In conjunction with that issuance, the Authority has seen its ratings reviewed and in the case of Moody’s, upheld. The Authority’s Toll Revenue debt totals some $6.8 billion and is rated Aa3.

ISTHA operates a tollway system that consists of approximately 294 miles of limited access highway in twelve counties in the northern part of Illinois and is an integral part of the expressway system in northern Illinois. The entire tollway system has been designated a part of the US Interstate Highway System, except for the 10 miles of Illinois Route 390. 

Strong traffic and revenue trends through toll increases and state-level fiscal stress demonstrate the inelastic demand for the tollway system roads and limited impact of competition. The lack of reliance on State general revenues created a more solid floor for the Authority’s debt ratings during the pandemic. The role of commercial trucking as a strong revenue source showed up in annual financial results.

ISTHA revenues recovered to pre-pandemic levels, being 97% in 2022 and, in the first two months of 2023, at 102% of the same period in 2019.  Total traffic in 2022 was 94% of 2019. While passenger traffic was still 8.1% down from 2019 in 2022, commercial traffic has shown much more resiliency than passenger traffic, with 2022 commercial traffic up 5.8% from 2019. In the first two months of 2023, traffic was at 99% of the same period in 2019. 

NEW JERSEY

The State of New Jersey scored a ratings hat trick recently with S&P, Fitch and Moody’s all announcing upgrade actions covering the State’s general obligation credit. The State economy is benefitting as one might expect from the end of the pandemic but also from the growing prevalence of remote work. Employment is above the state’s pre-pandemic peak. Moody’s cited the state’s commitment to full, actuarial pension contributions through fiscal 2024 (starting 7/1/2023) and its additional allocations of funds to a program to defease debt and cash-fund capital projects.

The overwhelming majority of debt issued through the State is secured by statutory revenue collection and/or dedication provisions enshrined in the state Constitution. As a result of the upgrade of the state, the ratings on bonds secured under the State’s Qualified School Bond Program and the Municipal Qualified Bond Program werf also raised through the actions of the three rating agencies.

THE NEXT CHALLENGE FOR COAL

The latest regulatory proposal covering coal fueled generating plants from the EPA will concentrate on water. Specifically, the level and types of water discharge from electric generating plants. Effluent Limitation Guidelines (ELGs) will be the method of regulation. ELGs are national industry-specific wastewater regulations based on the performance of demonstrated wastewater treatment technologies (also called “technology-based limits”). They are intended to represent the greatest pollutant reductions that are economically achievable for an entire industry.

EPA’s proposed rule would establish more stringent discharge standards for three types of wastewater generated at coal fired power plants: flue gas desulfurization wastewater, bottom ash transport water, and combustion residual leachate. The proposed rule also addresses wastewater produced by coal fired power plants that is stored in surface impoundments (for example, ash ponds). The proposal would define these “legacy” wastewaters and seeks comment on whether to develop more stringent discharge standards for these wastewaters.

EPA is also proposing changes to specific compliance paths for certain “subcategories” of power plants. The Agency’s proposal would retain and refresh a compliance path for coal-fired power plants that commit to stop burning coal by 2028. The Agency is issuing a direct final rule and parallel proposal to allow power plants to opt into this compliance path. Additionally, power plants that are in the process of complying with existing regulations and plan to stop burning coal by 2032, would be able to comply with the proposed rule.

Coal plant wastewater has until now been subject only to 1982 standards that allow it to be deposited in coal ash ponds, where it may overflow into water bodies and contribute to the contamination of groundwater. The rule proposes a standard of zero pollutants discharged from water used in scrubbers and boilers, and requires the best available technology to achieve this goal. Filtration with fine membranes, chemical treatment, and recycling water back into the plant could satisfy mitigation requirements.

One major flashpoint between the government and the industry is avoided for now. The proposed rule does not cover the contamination that seeps from unlined coal ash ponds into groundwater. Lined ponds are subject to separate legislation. The effect on water from the emptying of existing ponds has been another issue. The rule proposes to deal with such “legacy wastewater” on a site-by-site basis. It is a true compromise.

The proposed rules would reduce discharges significantly but would also be a significant cost to operators. The proposed rule exempts plants from the new mandates if they promise to stop burning coal by 2028 or, in some cases, December 2029. It also allows plants that have already installed less-effective wastewater pollution controls to keep operating through 2032 without further upgrades.

It is yet another data point for the analysis of electric revenue debt.

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

NYS BUDGET

The budget stalemate under way in Albany is a disappointing return to past practices. Under the Cuomo administration, several factors contributed to a string of on time budgets. That improvement in timely budget adoption helped to support rating upgrades for the State and its related issuers. Now, with one party super majority control in the Legislature, a number of non-fiscal items are delaying budget adoption.

The two sticking points have been charter school expansion and bail reform. With super majorities, progressives in the Legislature are holding out for resolution of those two issues before enacting a budget. This in turn puts pressure on the underlying municipal entities most especially for New York City. Even without budget adoption, the City knows that its hopes for reimbursement from the State for the costs of the massive influx of immigrants in 2022 and 2023 have not been realized.

The stalemate comes as the State faces some significant demands going forward. The MTA remains a significant potential fiscal problem, massive capital allocation decisions regarding the Gateway Tunnel still await, and the public housing crisis in NYC remains. At least debt service will continue to be paid on state debt and an additional temporary funding bill (to get workers paid) is likely.

NEW YORK CITY

The Adams administration has completed labor negotiations with its biggest non-uniformed union (DC 37) as well as with its Police Department. Prior analyses of the Mayor’s budget proposals were limited by the lack of hard cost information associated with those contracts. Now that those negotiations have concluded, the City’s Independent Budget Office is able to assess the budget plans based on real numbers. So how much will the contracts cost the City?

The five-year contract ratified by DC 37 last week includes 3 percent raises for each of the first four years of the new contract (retroactive to the contract start date in May 2021), a 3.25 percent raise in the fifth year, an $18 minimum wage, and a $3,000 one-time bonus for eligible members. The eight-year tentative agreement with the PBA on April 5 ranges from August 2017 through July 2025. The first three years of raises follow the uniform pattern from the previous bargaining round. This pattern features 3.25 percent in years one and two, 3.5 percent in years three and four, and 4.0 percent in year five. The PBA’s tentative agreement did not include a bonus.

The DC 37 agreement sets the pattern of wage increases for all non-uniformed municipal employees, and the tentative PBA agreement set the pattern for uniformed employees. This includes all union and non-union employees at city agencies, as well as at the New York City Housing Authority, City University of New York, Health + Hospitals, libraries, and the Fashion Institute of Technology. IBO forecasts that the total cost of the new contracts for all employees would be $18.2 billion over the course of the financial plan from 2023 through 2027. This estimate reflects the cost above the amount already set aside in the city’s labor reserve.

The City will get some benefit from headcount reductions. Between 2012 and 2020, active full-time municipal headcount increased each year, to a record high of about 302,000 in January 2020. Since the pandemic began in March 2020, that total has dropped to just under 281,000 as of January 2023, a decrease of roughly 7 percent. The Adams administration implemented across the-board vacancy reductions as part of the Preliminary Budget’s Program to Eliminate the Gap (PEG), which removed about 4,000 vacancies. Despite this cut in budgeted headcount, almost 22,000 vacancies remain.

Except for the scenario one variations in which just DC 37, or just DC 37 and the PBA ratify their contracts this year, the annual estimated cost of labor settlements exceeds IBO’s estimate of vacancy savings under each scenario every year. If headcount remains at its current level, however, the savings from paying fewer than budgeted employees would offset some of the additional costs of higher compensation under the new labor agreements. In all scenarios, IBO projects an increase in total personal services costs during the plan period.

TRANSPORTATION EMPLOYMENT

U.S. airline industry (passenger and cargo airlines combined) employment increased to 790,657 workers in February 2023, 2,687 (0.34%) more workers than in January 2023 (787,970) and 59,661 (8.16%) more than in pre-pandemic February 2019 (730,996). The February 2023 industry-wide numbers include 679,578 full-time and 111,079 part-time workers for a total of 735,118 FTEs, an increase from January of 2,785 FTEs (0.38%). February 2023’s total number of FTEs remains just 9.44% above pre-pandemic February 2019’s 671,701 FTEs.

The 26 U.S. scheduled passenger airlines reporting data for February 2023 employed 482,271 FTEs, 4,543 FTEs (0.95%) more than in January 2023. February 2023’s total number of scheduled passenger airline FTEs is 39,493 FTEs (8.92%) above pre-pandemic February 2019. U.S. cargo airlines employed 248,681 FTEs in February 2023, down 1,187 FTEs (0.47%) from January 2023. U.S. cargo airlines have increased FTEs by 23,929 (10.65%) since pre-pandemic February 2019.

U.S. scheduled-service passenger airlines employed 508,450 workers in February 2023 or 65% of the industry-wide total. Passenger airlines added 4,696 employees in February 2023 for a twenty-second consecutive month of job growth dating back to May 2021. Delta led scheduled passenger carriers, adding 1,338 employees; Southwest added 1,134, and United added 1,082.

U.S. cargo airlines employed 248,681 FTEs in February 2023, down 1,187 FTEs (0.47%) from January 2023. U.S. cargo airlines have increased FTEs by 23,929 (10.65%) since pre-pandemic February 2019. U.S. cargo airlines employed 277,999 workers in February 2023, 35% of the industry total. Cargo carriers lost 1,372 employees in February. FedEx, the leading air cargo employer, decreased employment by 1,582 jobs.

The problems which confront mass transit providers are being reflected in employment trends within the transportation industry. The unemployment rate in the U.S. transportation sector was 5.0% (not seasonally adjusted) in March 2023 according to Bureau of Labor Statistics (BLS) data. he March 2023 rate fell 0.1 percentage points from 5.1% in March 2022 and was below the March 2020 level of 5.4%. Unemployment in the transportation sector reached its highest level during the COVID-19 pandemic (15.7%) in May 2020 and July 2020. Unemployment in the transportation sector was above overall unemployment. 

TIME’S UP ON THE COLORADO

The Biden administration on Tuesday proposed to put aside legal precedent and save what’s left of the river by evenly cutting water allotments, reducing the water delivered to California, Arizona and Nevada by as much as one-quarter. The Department of the Interior’s Bureau of Reclamation (Reclamation) draft Supplemental Environmental Impact Statement (SEIS) to potentially revise the current interim operating guidelines for the near-term operation of Glen Canyon and Hoover Dams. 

The draft SEIS analyzes three alternatives: one is to do nothing; another is to adjust water releases from the Glen Canyon Dam or a third which would see reduced releases from Glen Canyon Dam, as well as an analysis of the effects of additional Lower Colorado River Basin reductions that are distributed in the same percentage across all Lower Basin water users under shortage conditions. 

Clearly, the federal government would rather see the states work it out and perhaps the lack of a rea; sense of what a failure to agree would entail will act as a catalyst to further negotiation. The draft SEIS will be available for public comment for 45 calendar days and the final SEIS is anticipated to be available with a Record of Decision in Summer 2023. Between now and August there remains time for sanity to prevail.

The usual obstacles still remain however. Spreading the reductions evenly would reduce the impact on tribes in Arizona as well as many fast-growing cities. At the same time, it would hurt Southern California’s agriculture industry especially in the Imperial Valley. Overall, the action alternatives would hurt the lower basin states (CA,AZ,NV) relative to the four upper basin states.

As for California, the State Water Project (SWP) is expected to deliver 75% of requested water supplies. The last projection in February was for only 35% of allocation requests. The increase translates to an additional 1.7 million acre-feet of water for the 29 public water agencies that serve 27 million Californians. The Sierra snowpack is more than double the amount that California typically sees this time of year.  The SWP is able this year to pump the maximum amount of water allowed under state and federal permits into reservoir storage south of the Sacramento-San Joaquin Delta.

One familiar indicator is Lake Oroville, a regular subject of ours. Lake Oroville, the State Water Project’s largest reservoir, is at 120 percent of average for this time of year and currently releasing water through the Oroville Spillway.

UNIVERSAL BASIC INCOMES

Starting in February 2019, the Stockton Economic Empowerment Demonstration or SEED, gave monthly payments of $500 to 131 people. There was also a control group of 200 Stockton residents. The payments were to be a guaranteed income from February 2019 to January 2021.

The primary outcomes were income volatility, physical and mental health, agency, and financial wellbeing. The treatment condition reported lower rates of income volatility than control, lower mental distress, better energy and physical functioning, greater agency to explore new opportunities related to employment and caregiving, and better ability to weather pandemic–related financial volatility. 

The group which received payments comprised a group where gender was approximately 70% female and 30% male. Nearly half of recipient group and the control group were white, with one-third Black or African American. The recipient group had nearly double the representation and Asian and Pacific Islanders than the control group, and both groups had just over one third Hispanic or Latino.

Approximately 75% of participants lived in an under four-person household, and around 50% had children in the household. Most were single (59%), with 40% married or partnered. The average age was 40 years in the control group and 45 in the test group. Forty percent reported full- or part-time employment. More individuals in treatment were stay at home parents (11%) than control (7%).

The results of the study trend to support much of the anecdotal evidence which has been derived from other guaranteed income plans across the country. Those who received payments showed better physical functioning, slightly less income volatility, a substantial increase in full and part-time employment among the treatment group during year one. GI removed material barriers like childcare funds, transportation, reducing contingent labor, and completing necessary internships or training for applying to positions with unknown results. 

NYC EDUCATION SPENDING

In most localities, the school district is a stand-alone entity, managing its own budget and raising its own revenues above those received from the state. In New York City however, the financial operations are conducted within the City’s budget. A recent report from the respected Citizens Budget Commission does break out Department of Education spending. It comes as the state legislature is in the middle of a fight over the expansion of charter schools in the state.

CBC found that: DOE’s fiscal year 2023 budget totaled $36.9 billion as of January 2023. It includes non-education spending of $5.6 billion for pension contributions, debt service, and additional fringe benefits that are allocated centrally. Between fiscal years 2016 and 2022, DOE spending grew 32.5 percent, or 4.8 percent annually. Thirty percent of spending growth was due to one-time federal pandemic aid.

The increased spending came despite enrollment declines. Long-term enrollment declines accelerated during the COVID-19 pandemic. Between school years 2015-16 and 2021-22, K-12 DOE enrollment declined by more than 141,000 students, with the largest losses (90,000 students) occurring during the pandemic.

The number which causes the most negative attention reflects the fact that in fiscal year 2022, the DOE spent more than $37,000 per K-12 DOE student—up 15.2 percent from the prior year and 46.9 percent since fiscal year 2016, including centrally allocated cost. ​​​The total DOE budget for fiscal year 2024 is projected to decrease by $401 million to $36.5 billion, primarily due to a $243 million decrease in federal pandemic aid.

With enrollment declines projected to continue, K-12 DOE per-student spending will increase to nearly $38,000 in fiscal year 2024 and to more than $41,000 in fiscal year 2026. Adding unbudgeted yet likely collective bargaining costs, per-student spending would reach nearly $44,000 in fiscal year 2026. Given projected enrollment declines, per-student K-12 DOE spending in fiscal year 2024 would still be $555 higher than in fiscal year 2023.

NASSAU COUNTY UPGRADE

After a period of fiscal stress and outside oversight, Nassau County, NY continues its long-term trend of rating improvement. Moody’s Investors Service has upgraded the county’s issuer and general obligation limited tax (GOLT) ratings to Aa3 from A1 and has upgraded the Nassau Health Care Corporation, NY (county guarantee) ratings to Aa3 from A1. It also maintained a positive outlook on the credit.

Moody’s cited the reduction of liabilities and continued balanced budgets. It is clear that the oversight of the Nassau Interim Finance Authority (NIFA) has helped to maintain positive fiscal trends. The County has an overwhelmingly residential tax base. This should provide some protection about declines in commercial (primarily office) real estate which are vulnerable to current work trends.

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

WESTERN WATER

Back in 2017, the dam at Lake Oroville in California was damaged by water overflows resulting from a wet winter. It resulted in significant repairs to spillways and other infrastructure to handle anticipated water flows. Over the next few years, the lake found itself in a drought and water levels almost became too low to produce hydroelectric power. The Oroville Dam was becoming a virtual barometer of short-term water conditions.

Now those repaired spillways are being tested as the lake has filled and water is being released in a controlled manner. That water primarily serves customers in the north and east of the state and has a significant agricultural demand. Under current conditions, water is being counted on to recharge groundwater aquifers depleted during the drought years to support agriculture.

Compare this situation to that of southern California. There, irrigation interests and agencies like the Metropolitan Water District of Southern California are much more impacted by conditions in the Colorado River basin. The latest measurements of the lake, taken in February, showed its water levels at 1,047 feet, down more than 19 feet from the same time last year and down more than 40 feet from 2021.

March however, did bring unexpected good news. While the weather focus has been on the weather in California and its favorable drought impact, the weather has also been more favorable in the Rockies. Proof of that came this week when Lake Mead’s water level was at 1,045.91, almost 3 feet above the projected level. snowpack has built the Snow Water Equivalent (SWE) stored in the Colorado Rockies to 158% of the average. Lake Powell has risen more than a foot over the last month after dropping to a new all-time low in mid-March.

THE CLIMATE DEBATE IN A NUTSHELL

There may be no bigger fundamental disagreement than that we see in the debate over climate change. The amount of hype and distortion supporting various diverse opinions is overwhelming. While there are serious debates over the science of climate, the issue of climate change has become wrapped up in corporate virtue signaling and greenwashing.

The latest example comes from the Pacific Northwest. When the NHL Seattle Kraken was accepted into the league, they decided to play in a new arena which was designed to be carbon neutral. Much was made of the fact that even the ice the hockey was played on would be made from recycled rain water. Amazon went so far as to pay for the naming rights to the arena. In the midst of real debates over the contribution to climate change that distribution companies like Amazon make to a changing climate, Amazon is paying to have the arena named the Climate Pledge Arena.

Now, the Oregon legislature is considering a bill which would require data centers and crypto miners to use clean energy in big, new facilities. Amazon, Apple, Facebook and Google all operate large data centers in central and eastern Oregon. The companies have as yet not weighed in on their support or opposition to the bill publicly. It has become clear though that in private, Amazon has made significant efforts to oppose the clean energy requirement.

Apple and Facebook have built renewable energy projects to help power their Oregon data centers. Amazon’s data centers in Morrow and Umatilla counties appear to be relying primarily on carbon-burning fuel sources for most of its electricity. It’s not an accident that these facilities are located in eastern Oregon. Climate legislation passed in recent years in Oregon imposes emission limits on areas like Portland. Rural eastern Oregon was exempted from those limits.

The situation provides an example of why the politics and maybe more importantly the culture of the climate movement are so difficult. It is hard to advance the cause of decarbonization if its most prominent “influencers” creates an easy to criticize approach to the whole issue. And in the annual poll of NHL players by its labor union, Climate Pledge Arena did not make the top five of the rankings for best ice in the league.

PARIS PANS SCOOTERS

In the debate around “micro transit”, experiences in Europe and other locales are referenced by proponents of various schemes in the U.S. Whether it be bicycles, congestion pricing, Citibikes or other schemes (especially in New York), European experiences are referenced in the efforts to “nudge” behavior. This was especially true under the Bloomberg administration and continued since. Now, there is some evidence that those references might not be so helpful.

Voters in Paris voted to ban the devices from the streets of the French capital. Supporters of scooters will cite the fact that 100,000 Parisians voted, less than 7.5 percent of those eligible. Supporters of the ban can cite the margin of victory – 89%. Even the mayor of Paris who once championed the deployment of scooters led the campaign to support the ban. According to the mayor, “there will be no more self-service scooters in Paris” come Sept. 1. Privately owned scooters will still be permitted.

The City of Light joins Copenhagen and Montreal as large cities where deployment has been stopped. Copenhagen did allow scooters again but under a much stronger regulatory framework. It’s another example of not as much a rejection of technology but it’s manner of deployment. The same issues which have dogged scooter rental systems across the U.S. – careless riding, use on sidewalks, idle scooters strewn about sidewalks – plagued the Parisian system.

MEDICAID UNWINDING

Towards the end of 2022, Congress passed legislation which allows the continuous enrollment policy requiring that Medicaid recipients retain their coverage to end. That legislation carved out Medicaid from other pandemic related items and provided for states to begin to unwind changes during the pandemic which allowed people to stay on Medicaid without additional qualification checks through the term of the public health emergency declared due to the pandemic.

The carve out allows states to begin the process as of April 1 whereas most other impacted programs have until the end of the public health emergency on May 10. The eligibility verification process is expected to reduce Medicaid enrollment significantly. The legislation mandates that states report data monthly to the Department of Health and Human Services on how many people have been taken off Medicaid. It also allows the department to intervene if a state does not comply with federal requirements. It does not prevent recipients from losing benefits.

Last week we highlighted the importance of Medicaid to the rural hospital sector. Five states — Arizona, Arkansas, Idaho, New Hampshire and South Dakota — were expected to begin their processes of removing people from Medicaid this month. The expectation is that the process could take up to one year in some states. We note that these five states have significant rural health sectors.

The policy change also returns to the spotlight issues which plagued the Medicaid program before the pandemic regarding eligibility. The lack of computer and internet access and issues with literacy have been cited as major hurdles to be overcome by potential recipients.

COMMUTER RAIL GOES PUBLIC IN CHICAGO

Union Pacific announced that the freight railroad would transfer its Chicagoland commuter rail operation to Metra in early 2024. UP operates three commuter lines for Metra and the Burlington Northern Norfolk and Southern (BNSF) operates a fourth. Commuter service in Chicago is unique in that Metra operates some routes and others are operated by freight railroads under contract for Metra. The agency already owns the rolling stock operated by the private companies.

UP is paid $100 million annually to operate the commuter services. It has operated the lines since 1995 through an acquisition. In recent years, UP and Metra have had a contentious relationship. In 2019, UP sued Metra trying to get out of its obligation to provide commuter service. And in 2020, Metra said it was losing millions of dollars a month because UP was not having conductors collect fares. UP will continue to maintain the track and dispatch trains on the three impacted routes. 

WHY MADISON SQUARE GARDEN IS IN THE CROSSHAIRS

These should be heady times for the owner of Madison Square Garden. It’s two sports teams are in the playoffs, it remains a preeminent concert venue and it retains its reputation as “the world’s most famous arena. Nonetheless, the arena is now best known for the legal battles being waged between the Garden and some of its fans. The disputes have brought issues like the use of facial recognition to the forefront. That issue has focused a lot of attention on the tax breaks the Garden receives which are unique among New York’s teams

MSG is a privately-owned commercial property that would pay property taxes to New York City, if not for the property tax exemption granted to it in 1982 under state law. Prior to receiving the tax exemption, the owners of the arena, who also owned the Knicks basketball and Rangers hockey teams, threatened to move the teams to New Jersey if not provided with some form of property tax relief.

Since 1982, MSG has received a full exemption from property tax liability under Article 4, Section 429 of New York State Real Property Tax law. The exemption is contingent upon MSG’s continued use by professional major league hockey and basketball teams for their home games. It is worth some $40 million annually.

In contrast, Yankee Stadium, Citi Field, and Barclays Center were all built on publicly owned land that is exempt from property taxes. The land and the stadiums are leased to team-affiliated limited liability corporations (LLC). The team affiliated LLCs in turn make annual payments in lieu of taxes (PILOTs) to pay down the debt service associated with these bonds. The PILOTs do not enter the city’s general revenue stream as property taxes would. The stadium PILOTS totaled $84 million for Yankee Stadium, $44 million for Citi Field, and $39 million for Barclays Center in 2023.

It becomes more difficult to justify this sort of tax subsidy in the current environment. That has nothing to do with ownerships recent run of truly negative publicity (while he owns two playoff teams). It just screams out from an equity point of view that the current arrangement makes no sense.

NYC – WELL THAT WAS QUICK

It has been clear for some time that the fiscal outlook for NYC has been more guarded than many have let on. There were already questions about how the City would fund the increased costs related to labor settlements (MCN 2.27.23). When the settlements were announced, the City had no clear plan for those costs. Now it looks like the City is going to attempt to do things the old-fashioned way and rely on a significant budget cutback.

Mayor Adams announced that he was requesting the leaders of nearly every city agency, including the Police Department, to cut their budgets by 4 percent for the coming fiscal year, which begins in July. Only the Department of Education and the City University of New York will be subject to smaller cuts of 3 percent. The agencies must come up with a plan in 10 days.

The move comes after it became clear that the NYS budget was not going to significantly reduce the City’s costs associated with the wave of immigrants who have arrived in the City since last year. The budget director estimated that the price of providing services to the arriving migrants would be $4.3 billion through the next fiscal year. It also sets up a real conflict with the City Council who released its own plan that claims to have found an additional $2.7 billion in funding it said the mayor had failed to account for and called for $1.3 billion in new investments.

ARIZONA TRANSPORT CHOICE

In 1985, voters in Maricopa County, AZ approved a sales tax to fund transportation improvements in the County. It’s term was extended again in 2004. Over the years, projects like the City of Phoenix’s light rail system and major road projects were funded through the tax. Now the tax faces a 2025 sunset without a vote. Over the life of the tax, Maricopa County has been at the top of the list of the nation’s fastest growing counties. Regional leaders want to ask voters to extend the tax again but need approval from the state Legislature to hold an election. Two bills that would allow the county to hold the transportation tax election are under consideration in the Legislature. 

Over the same period, the politics of the state have become more ideological and the combination of climate issues and an anti-tax sentiment makes for an uncertain outlook for an extension. One bill would allow 39% of funds to be spent on transit, a small percentage of which could be used to operate and maintain light rail but not extend it. The second would allocate 26% of funds to public transportation and also forbids light rail expansion.

ANOTHER PRIVATE COLLEGE DOWNGRADE

Moody’s Investors Service has downgraded Rider University, NJ’s issuer rating to B2 from Ba3 and revenue bond rating to B2 from Ba2. The university had $111 million of outstanding debt as of fiscal year end 2022. The ratings have been placed under review for possible downgrade.

The downgrade reflects the university’s ongoing multi-year deep deficit of operations and rapidly deteriorating unrestricted liquidity, at just 22 monthly days cash on hand for fiscal 2022. Moody’s estimates that material negative cash flow from operations will continue through at least fiscal 2025, further depleting liquidity.

Starting in fiscal 2024, the university’s main source of liquidity is expected to be a $15 million line of credit; access to $10 million of the total $15 million line is at the bank’s discretion after it reviews the proposed use of funds, adding additional liquidity concern. Furthermore, the line expires on June 15, 2023, with the renewal process underway currently but not assured. Flat enrollment in fall 2023 continues the trend of enrollment which has seen enrollment decline 16% from fall 2018 to fall 2022.

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

TAR HEEL MEDICAID EXPANSION

North Carolina has become the 40^th state to expand Medicaid under the provisions of the Affordable Care Act. Advocates have estimated that expansion could help 600,000 adults. The legislation includes nearly all adults who make less than 133 percent of the federal poverty level. The provisions of the bill will go into effect at the start of 2024, and county social services departments can begin accepting applications from eligible individuals beginning as soon as December of this year.  

The expansion of Medicaid is especially important in states with significant rural populations. Between 2010 and 2021, 136 rural hospitals have closed. The bulk of rural hospital revenue comes from government payers, of which Medicare comprises nearly half. Medicaid expansion is one policy that has helped rural hospitals remain viable. Rural hospitals received COVID-19 relief funds from the Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan Act. With those funding sources running out, the pressure increases on their finances and ability to stay open.

The majority (74%) of rural closures happened in states where Medicaid expansion was not in place or had been in place for less than a year. The holdout states are: Wyoming, Kansas, Texas, Wisconsin, Tennessee, Mississippi, Alabama, Georgia, South Carolina and Florida.

I FOUGHT THE MOUSE AND THE MOUSE WON

We have been clear that the effort by Florida Governor Ron DeSantis to politicize the operations of the former Reedy Creek Improvement District was poor governance. This week, we see that it may just be incompetence on the part of the Governor. While the Governor was busy renaming the district (the Central Florida Tourism Oversight District) and assembling a board to run it, Disney was busy quietly putting together a plan to effectively maintain control over the District for as long as it wanted.

In the final meeting of the Reedy Creek board, a new development agreement between the District and Disney was approved and executed. This agreement cements Disney’s role in the development of the District. One important change is the duration of the agreement. “Shall continue in effect until twenty one (21) years after the death of the last survivor of the descendants of King Charles III, King of England living as of the date of this declaration.” 

That contractual language is known as a “royal lives” clause. The use of this language is not uncommon. It seems to leave the Governor with no ability to interfere in the new development agreement. It also limits the District’s ability to use Disney’s name, Mickey Mouse and other characters without the company’s approval. The board knows its position. In the words of one new director “The board loses, for practical purposes, the majority of its ability to do anything beyond maintain the roads and maintain basic infrastructure,”.

It isn’t as if the royal lives clause is some obscure trick. It is a staple of first year law classes so it should not have been a surprise. Let’s just say that we have a strong view of which dwarf the Governor is after this conclusion to his effort.

NAVAJOS AND THE COLORADO RIVER

The Supreme Court of the United States ruled in a  908 case called Winters that when the government creates an Indian reservation, it accepts an obligation to deliver water to that reservation for agricultural use. The Navajo tribe has limited access to water from a few Colorado River tributaries. It does not have rights to the Colorado directly even though much of the reservation borders the Colorado River’s main stem. The tribe argues that it should have rights to use that water.

The Navajo have been able to get their legal quest to obtain Colorado River water to the Supreme Court. The question before the Supreme Court is whether the United States’ treaties with the Navajo Nation requires it to find more water for the tribe. In 1849 and 1868, the Navajo Nation signed two treaties with the United States which created a reservation that would serve as a “permanent home” for the Navajo so long as the tribe allowed settlers to live on most of its traditional territory, which include much of what is currently New Mexico, Arizona, Utah, and Colorado. 

The case sets up a dispute between the seven states in the Colorado River basin and the tribe. This reflects that the reality is that water from the Colorado is the most likely source of water for the tribe. The Biden administration is taking the side of the states. This based on the concern that giving the Navajo water rights would further increase the difficulty in allotting the Colorado’s diminishing supply.

A decision in favor of the Navajo would allow the tribe to pursue its interests in court as the states continue their process of reallocating water from the Colorado River basin. That process was supposed to be settled in the summer of last year but those negotiations have been contentious and non-productive. Ultimately, a settlement could be imposed. The federal government already would prefer for the states to work things out amongst themselves.

WASHINGTON STATE CAPITAL GAINS TAX

The Washington Supreme Court found the state’s capital gains tax constitutional. The 7-2 ruling was over a contentious bill previously overruled by lower courts and passed into law in 2021. Two opponents challenged the law by saying that the tax was a property tax on income, which violated the privileges and immunities clause of the state constitution and the dormant commerce clause of the U.S. Constitution.

The law provided for a 7% tax on an individual’s long-term capital gains exceeding $250,000 while imposing no tax for individuals with capital gains below the $250,000 threshold. Opponents claimed that the levy based on the amount of gains violated the state constitution’s uniformity requirement. The Court found that “The capital gains tax is a valid excise tax under Washington law. Because it is not a property tax, it is not subject to the uniformity and levy requirements of article VII, sections 1 and 2 of the Washington Constitution,”.

Collections on the tax will proceed as planned. The tax went into effect on Jan. 1, 2022, and the first payments for 2022 are due on or before April 18. The legislation provided for the deposit of the first $500 million of each tax year to a legacy trust account to support K-12 education for early learning and childcare programs. All additional revenue collected after would be donated to a school construction account funding the construction of school facilities.

Washington becomes the only state to levy a capital gains tax without taxing earned income.  

CLIMATE LITIGATION SONG REMAINS THE SAME

The latest jurisdiction to opine on the proper venue for climate litigation against oil companies is the US District Court for the Eighth Circuit. Just as was the case with the Tenth Circuit in Colorado’s case against fossil fuel companies, the Eighth Circuit said that the proper venue for these cases is the state courts. This makes the sixth court to reach that conclusion.

The states have been careful to base their actions on issues of state rather than federal law. In the case, the appeals court was clear that Minnesota’s suit rests solely on state law, including claims of common law fraud and violations of various consumer protection statutes. They were clear that “there is no substitute federal cause of action.” “Minnesota is not the first state or local government to file this type of climate change litigation. Nor is this the first time that the Energy Companies … have made these jurisdictional arguments. But our sister circuits rejected them in each case. …. Today, we join them.”

The companies continue to work to find a way to get the issue before the US Supreme Court. They got there once but the case was sent back to the lower court with instructions as to how wide a range of issues must be considered by the lower court. This decision comes in the wake of those concerns.

WEST VIRGINIA HOSPITAL DOWNGRADE

Cabell Huntington Hospital is a regional referral center with over 300 beds and serves as the primary teaching hospital for the Marshall University Joan C. Edwards School of Medicine in Huntington, WV. It is part of a two-hospital obligated group which includes St. Mary’s Medical Center, a tertiary care hospital with 393 beds. In addition to the hospitals, the system owns various outpatient sites, and is the largest healthcare system in the primary service area. The combined system saw 40,169 inpatient admissions in FY 2022 and over 33,000 surgeries. 

Huntington is the hub of a declining rural area at the connection of WV, KY and OH. Like many hospitals it faced significant strains during the pandemic. When those pressures abated, the system was in a weaker position with a declining balance sheet. Then it experienced a month-long strike of the services workers union in November 2021. Like so many others, the issues of labor costs, general inflation and a slow recovery of utilization levels pressured results.

All of this has resulted in a downgrade of the system’s ratings on its $334 million in outstanding debt at fiscal year-end 2022. Moody’s took their rating to Baa2 from Baa1. It maintained a negative outlook on the new rating. The outlook reflects an expectation that Cabell will face difficulties achieving substantial margin improvements in 2023 given ongoing and significant labor challenges and related costs.

FUNDING A NORTHWEST PASSAGE

Proposals to replace the crucial I-5 bridge between Washington and Oregon all rely on uncertain funding of the $6+ billion cost. Each of the states is committed to fund $1 billion of the cost. To date, the funding for Oregon’s share has been uncertain. Now, the legislature will get to debate and vote on a plan.

The latest proposal would see the State issuing $300 million of bonds backed against Oregon’s general fund and $700 million backed by the highway user tax program used by the Oregon Department of Transportation.  Concerns are around funding that debt service versus the trend of declining revenues. Proponents would be happy to move to a mileage tax and that is part of the debate.

Participation in the state’s mileage tax experiment has been a disappointment. The failure to act in years prior to this plan are coming back to haunt this as well as many other projects. The impact of inflation, supply chain problems and shortages in the workforce – all issues we’ve cited before – accounts for a recent increase in the estimated cost of the project to upwards of $7 billion.

It is a trend that is emerging as infrastructure providers negotiate the application process for federal funding. Various local matching funds requirements must be met at the state and/or level to qualify for funding. In many cases, the situation is competitive so there is a real incentive to solidify commitments to facilitate applications.

RENEWABLES

Last year, the U.S. electric power sector produced 4,090 million megawatt hours (MWh) of electric power. In 2022, generation from renewable sources—wind, solar, hydro, biomass, and geothermal—surpassed coal-fired generation in the electric power sector for the first time. Renewable generation surpassed nuclear generation for the first time in 2021 and continued to provide more electricity than nuclear generation last year.

Natural gas remained the largest source of U.S. electricity generation, increasing from a 37% share of U.S. generation in 2021 to 39% in 2022. The share of coal-fired generation decreased from 23% in 2021 to 20% in 2022 as a number of coal-fired power plants retired and the remaining plants were used less.

The share of nuclear generation decreased from 20% in 2021 to 19% in 2022, following the Palisades nuclear power plant’s retirement in May 2022. The combined wind and solar share of total generation increased from 12% in 2021 to 14% in 2022. Hydropower generation remained unchanged, at 6%, in 2022. The shares for biomass and geothermal sources remained unchanged, at less than 1%.

More wind-generated power was produced in Texas than in any other state last year. Texas accounted for 26% of total U.S. wind generation last year, followed by Iowa (10%) and Oklahoma (9%). One of the largest wind farms in the United States (nearly 1,000-megawatt capacity [MW]) came online in Oklahoma in 2022.

In 2022, California ranked first in utility-scale solar generation, producing 26% of the country’s utility-scale solar electricity. Texas was the second-largest producing state (16%), followed by North Carolina (8%). Several of the largest solar plants built in the United States in the last three years are located in Texas, including the 275 MW Noble solar plant, which started operations in 2022.

NUCLEAR HURDLES

It is becoming clear that the Biden administration supports nuclear power.

Recently, the Department of Energy (DOE) released “roadmaps” to guide industry and policymakers about new energy technologies. Nuclear was one of the three highlighted sources of carbon-free energy. According to DOE, advanced nuclear could become a major contributor to net-zero goals in 2050, accounting for around 200 gigawatts of the firm power capacity necessary to meet the deadline. But the department said that within the next few years, at least one specific nuclear design needs to emerge as a clear leader by winning contracts to build anywhere from five to 10 reactors.

Here’s what DOE says about modular nuclear and its context. Small modular reactors (SMRs) can provide more certainty of hitting a predicted cost target and are likely to play an important role in the early scale-up of nuclear power; scaling the industry toa full 200 GW of new nuclear capacity may require large nuclear reactors as well. DOE also describes where the market is in terms of the development of nuclear right now. While the estimated first of a kind (FOAK) cost of a well-executed nuclear construction project is ~$6,200 per kW, recent nuclear construction projects in the U.S. have had overnight capital costs over $10,000 per kW. Delivering FOAK projects without cost overrun would require investment in extensive upfront planning to ensure the lessons learned from recent nuclear project overruns are incorporated.

Subsequent nuclear projects would be expected to come down the cost curve to ~$3,600 per kW after 10-20 deployments depending on learning rate; this cost reduction would largely be driven by workforce learnings and industrial base scale-up. However, the nuclear industry today is at a commercial stalemate between potential customers and investments in the nuclear industrial base needed for deployment—putting decarbonization goals at risk.

The risk of delay is clear. Rapidly scaling the nuclear industrial base would enable nearer-term decarbonization and increase capital efficiency. If deployment starts by 2030, ramping annual deployment to 13 GW by 2040 would provide 200 GW by 2050; a five-year delay in scaling the industrial base would require 20+ GW per year to achieve the same 200 GW deployment and could result in as much as a 50% increase in the capital required.

EL PASO BALLOT

On May 6, voters in El Paso, TX will be asked to vote on one of the most detailed and complex voter initiatives we have seen in a long time. The initiative will ask voters: Should the City Charter be amended to create a climate policy requiring the City to use all available resources and authority to accomplish three goals: to reduce the City’s contribution to climate change, invest in an environmentally sustainable future, and advance the cause of climate justice.

The initiative would require the City Council to employ a Climate Director, who shall report directly to City Council; create a Climate Department to be directly overseen by the Climate Director; create a nine member climate commission appointed by City Council, create an annual goal for climate jobs and the adoption and implementation of a policy that will transfer current City employees to climate work and provide a preference for contractors who are able to advance the City’s climate policy.

The City would be required to create an annual Solar Power Generation Plan for the City of El Paso and to require the City Manager to establish and maintain policies that encourage the development of rooftop solar power generation capacity within the City of El Paso using existing City facilities and require both new buildings and retrofitted buildings to include solar power generation capacity.

The initiative would establish goals of requiring (1) 80% clean renewable energy by 2030 and (2) 100% clean renewable energy by 2045. The initiative calls for the City of El Paso to employ all available efforts to convert El Paso Electric to municipal ownership; to require the City to undertake all necessary efforts to prepare City infrastructure to withstand extreme weather conditions and ensure uninterrupted provision of basic services and utilities to City residents.

It would require the City to ban the use of City water for fossil fuel industry activities, defined to include El Paso Electric, outside of the city limits and prohibit the City from selling or transferring any water for purposes of fossil fuel industry activities outside of the city limits, or otherwise allow any City water to be used for such purposes. It would prohibit the City from imposing any fees, fines, or other financial or nonfinancial burdens that limit the purchase, use, or generation of renewable energy and nullifying any such fees, fines, or other burdens in existence at the time the charter amendment takes effect.”

The complexity of the initiative is what happens when one tries to legislate through the ballot. Complexity will not necessarily translate into support. It often leads to people either not voting on it or voting no simply because it is so complex.

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

ESG 

Utah’s State Treasurer is now invoking God in his argument against ESG investing. He recently gave a speech in which he opined that

environmental social governance, or ESG is an “outcomes-based” plan, like the biblical “war in Heaven.”  “Outcomes-based governance like the UN’s [Sustainable Development Goals] and ESG opens the door to authoritarianism.” ESG ignores “the very real human cost of boycotting fossil fuels” and that its “coercive tactics” mean that “capital is not going to where it would normally go—to profitable projects in the oil and gas industry.”

So far, the Treasurer has moved about $100 million in state money previously managed by the investment firm BlackRock to different asset managers. (Out of $30 billion under his management.) The Public Treasurers Investment Fund is where the state, cities, counties and other public entities deposit money to earn investment income until it’s needed. There is still $6.8 billion with BlackRock.

It is clearly not a state policy. The Utah Retirement Systems manage some $45 billion of pension funds. URS has the $6.8 billion under BlackRock management, and it has made no changes in its portfolio or asset managers related to ESG. The decision as to where and how to invest is made by the pension fund’s managers who report to a board.

We see that as a good thing in that the Treasurer clearly is not using logic or reason in his approach. It is hard to take someone seriously who opines as a government official that the UN’s Sustainable Development Goals “have widely been touted by UN leaders as the master plan for humanity” and were partially created by the Chinese Communist Party.

MODULAR NUCLEAR

NuScale Power says it will need to reach an 80% subscription level by February 2024, up from the current 25%, for its plans for a small modular reactor, or SMR, plant in Idaho. Failure to reach that level would require NuScale to reimburse Utah Associated Municipal Power Systems, or UAMPS, for costs incurred. NuScale will seek to increase subscriptions from members, power producers yet to join the consortium or others.

GOVERNANCE – VIRGIN ISLANDS POWER

The US Virgin Islands is now moving forward to comply with a ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. The law provides an opportunity for a changing of the guard at VIWAPA and is a positive turn for the embattled credit. 

Act 8472 was passed into law unanimously by members of the 34^th Legislature on August 3, 2021 after previously being vetoed by Governor Bryan. The legislation restructures the WAPA board to afford greater independence and establishes professional criteria for those who serve. Following the unanimous override of the veto, the Administration took steps to prevent the implementation of the new law by filing for both a temporary restraining order and a permanent injunction with the Virgin Islands Superior Court.

The VI Supreme Court has now ruled in favor of the law. The ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. It is some 16 months after the release of a scathing report on the failures of the existing Board. They include findings that WAPA’s Board and management did not fully exercise due diligence in undertaking the LPG Conversion Project, did not ensure that it mitigated WAPA’s financial risk when they approved the Project without detailed engineering plans.

WAPA’s management did not follow WAPA’s established procedures for contracts and change orders. In addition, WAPA’s contract negotiations lacked transparency. Furthermore, WAPA officials created an apparent conflict of interest when they engaged the professional services of a firm that also worked for Vitol during a similar time period. Finally, WAPA did not achieve its goal to convert the number of power-generating units it needed to burn LPG and did not ensure that its rented units could burn LPG as stipulated in rental agreements.

CLIMATE LITIGATION

Colorado municipalities, like many others across the country, have been litigating against fossil fuel companies over their lack of disclosure of the risks of climate change related to fossil fuel production and use. As has been the case in all of the other litigation, the plaintiffs sue in state courts. In response, the fossil fuel defendants try to have the cases moved to federal court. This is seen as more favorable for the defendants. The process has been for a federal court to deny the transfer to federal court. The federal appeals process plays out and this case now goes to the US Supreme Court.

In this case, the federal government was asked to weigh in on its view of the case as to the appropriate jurisdiction. Now, a brief is submitted in response to the Court’s order inviting the Solicitor General to express the views of the United States. In the view of the United States, the petition for a writ of certiorari should be denied. The brief notes that in similar litigation brought by the City of Baltimore, the court of appeals rejected petitioners’ contention that “there is federal-question jurisdiction over [respondents’] state-law claims because they are governed by federal common law.”

SOLAR AND PROPERTY VALUES

Researchers at the federally sponsored Lawrence Berkeley National Lab have released their findings from a survey in six states which looked at the impact of large-scale solar projects on local property values.

The study used data from CoreLogic on over 1.8 million residential property transactions that occurred within six years before and after a LSPVP was constructed in the five U.S. states with the highest concentration of LSPVPs as measured by number of installations: California (CA), Massachusetts (MA), Minnesota (MN), North Carolina (NC), and New Jersey (NJ), as well as in Connecticut (CT), chosen for its relatively high population density (i.e., urbanicity) near LSPVPs.

In our six-state study area (CA, CT, MA, MN, NC, NJ), we find that homes within 0.5 mi of LSPVP experience an average home price reduction of 1.5% compared to homes 2–4 mi away; statistically significant effects are not measurable over 1 mi from a LSPVP. These effects are only measurable in certain states (MN, NC, and NJ), for LSPVPs constructed on agricultural land, for larger LSPVPs, and for rural homes.

Changes in sales price are not statistically significant for CA, CT, and MA. However, MN, NC, and NJ, show a statistically significant negative effect of 4%–5.6%, more than double that of the average across all states in the base model. statistically significant home value reductions are only observed for homes nearest to LSPVPs that are sited on previously agricultural land.

LSPVPs accounted for over 60% of all new solar capacity in the United States in 2021, and, as the largest resource by capacity in interconnection queues.

MORE POLITICS IN FLORIDA

A group of suburban legislators is pushing legislation which would effectively take control of the Gainesville Regional Utilities out of the hands of local elected officials and place it in the hands of political appointees of the Governor. The proposed legislation comes after proponents of the change were defeated at the ballot box. The legislator behind the current bill also sponsored a 2018 referendum Gainesville for a bill that would put an independent GRU board in place appointed by the City Commission, rather than the governor. The vote failed, with 40% of voters in favor. 

The bill targets GRU specifically, one out of 33 regional electric utilities in the state. GRU is the fifth largest in Florida, serving 93,000 customers. Some 37,000 people served by the city-owned utility can’t vote for Gainesvillecommissioners. GRU rates were the second highest in the state in 2022. It’s not clear exactly how the proposed bill would change things as non-resident customers still won’t be able to vote on city positions.

CARBON PIPELINE TEST

The issue of land acquisition and the potential use of eminent domain to accomplish this for a carbon capture pipeline has emerged as one of the debates in the Iowa legislature. This week the Iowa House passed House File 565. The bill would require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections and require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections.

The bill also contains a requirement that pipeline projects be paused until the new federal regulations are announced, as well as requirements that pipelines be in line with all local zoning rules and obtain permits in other states before being granted a permit in Iowa. A proposed amendment to remove those provisions failed. The bill has bipartisan support. Conservatives are coalescing around the idea of opposition to eminent domain being used to build for-profit projects for private companies.

The debate included testimony from a federal regulator about carbon pipeline safety. There was something for both sides of the debate. The fact that the history to date provides a favorable statistical view of pipeline safety is evaluated in light of a 2020 CO2 pipeline break in Mississippi which forced evacuations and some hospitalizations. The fact is that federal regulations are still not fully developed. The goal is to produce regulations reflective of the 2020 experience to the rules in two years.

As it stands, support for the bill in the Iowa Senate is unclear and the Governor says she supports the current permitting process.

P3 FOR SCHOOLS AND ENERGY

The Washington State legislature unanimously passed a bill which would authorize the use of public private partnerships to finance and develop projects at schools in the state to increase energy efficiency. Municipalities, including cities, counties, and port districts, may negotiate performance-based contracts with companies that offer water conservation, solid waste reduction, or energy equipment and services under the terms of the bill. Conservation projects may be funded through utility savings, capital funding, grants, or loans.

The state would be authorized to issue COPs backed by pools of school district projects under the bill. This would also create a roll for the state in terms of project scope and compliance requirements. The underlying project contracts will call for a district to contract with a private provider who will develop, own, operate and maintain financed equipment. A traditional sale/leaseback arrangement between the district and the private provider provides for the equipment to return to district ownership at the end of the lease.

PRAIRIE STATES THREAT

It is hard to believe that a project which has been at the center of much of the energy debate in Illinois could escape full scrutiny from the many interest groups involved. That appears to be the case with the Prairie States Generating Station in southern Illinois. In a lawsuit filed this week the Sierra Club alleges that the coal-fired base load plant does not have a permit to operate. The suit follows a financial release from the operating entity from the plant owned by Prairie State Generating Company which operates the plant for its owners – the Illinois Municipal Electric Agency (IMEA) and the Northern Illinois Municipal Power Agency (NIMPA).

Prairie State reported to state regulators that it had during April 2021 exceeded the mercury emissions limits in its construction permit, which reflected federal mercury standards. Prairie State applied for the permit from the Illinois Environmental Protection Agency in 2010, but the state agency never granted nor denied the permit. The plant began operating in June 2012. 

A construction permit under the Clean Air Act to begin operations, but that permit is supposed to be replaced by an operating permit. The construction permit explicitly stated it was only valid for one year after operations began. The lawsuit demands that Prairie State cease operations until an operating permit is in place. The suit unintentionally shines a truly unfavorable light on the obvious weaknesses in the Illinois system of permitting and supervision. It also reflects badly on advocacy groups who “assumed” that there was an operating permit in place.

Illinois’ 2021 energy law allows the plant to keep operating with a mandate to close or capture all carbon emissions by 2045. Almost all other coal plants in Illinois will need to close by 2030. 

SALT RIVER RENEWABLES

The Salt River Project in Arizona has announced that it has acquired 100% of the capacity of a 161 MW wind project in northern Arizona. Construction begins this week and the facility is scheduled to begin delivering energy to SRP customers by early 2024.  The project is being developed by a private developer who will finance construction and operation of the assets. It will include some 50 windmills and as a privately owned facility is projected to generate nearly $10 million in direct tax revenue to the host county over its life.

SRP already obtains power from the 127-MW Dry Lake Wind Power Project, which was the first large-scale wind power facility built in the state. SRP’s renewables push includes wind and solar. SRP will install 2,025 MW of solar by 2025, which is enough to power more than 450,000 average-size homes.

PREPA RULING

The judge presiding over Puerto Rico’s Title III proceedings has found that bondholders  had a “unsecured net revenue claim” against PREPA. The holders had hoped that they would receive a claim on net revenues. Now, the ruling facilitates efforts the get the PR Oversight Board’s plan for those bondholders moving forward. It is a huge disappointment to them as they could receive as little as 0.2% of their principal under current proposals.

It is a carefully crafted and worded statement. In our view, the judge has made a real effort to make a ruling that is specific to this credit. There are references to individual words in the bond resolution that indicate that the ruling is narrow as it relates to revenue bonds in general. Judge Swain found that “the word “pledge” is an “unsecured” promise and did not create a lien, which would require use of the words “lien or charge.”. The Oversight Board takes the position that the PREPA trust agreement only granted a lien on cash in accounts held directly by the trustee.

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