Joseph Krist

Publisher

NYS BUDGET

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

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

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

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

NYC BUDGET – LOOK WHAT I FOUND

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

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

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

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

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

BOEING AND AIRPORTS

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

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

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

RURAL BROADBAND

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

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

BRIGHTLINE

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

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

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

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

ROAD FUNDING

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

ARIZONA HOMELESSNESS ON THE BALLOT

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

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

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

ELECTRIC VEHICLES

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

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

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

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

WIND HEADWINDS

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

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

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

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

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

COAL REGULATION

The US EPA has released long awaited regulations for the continued operation of coal fired generating plants. The regulation from the Environmental Protection Agency requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. Three additional regulations include stricter limits on emissions of mercury from plants that burn lignite coal, more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants.

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

NORTH AMERICAN TRADE

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

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

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

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

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