Joseph Krist

Publisher

PREPA GETS A CHANCE TO SETTLE

The Financial Oversight and Management Board for Puerto Rico filed an amended proposed Plan of Adjustment to restructure the debt of the Puerto Rico Electric Power Authority (PREPA), including a schedule to repay the reduced debt. The Plan proposes to cut PREPA’s more than $10 billion of debt and other claims by almost half, to approximately $5.68 billion.

The debt would be paid by a hybrid charge consisting of a flat connection fee and a volumetric charge based on the amount of PREPA customers’ electricity usage that would be added to the electricity bills. The estimated PREPA legacy charge for customers not currently benefiting from subsidized electricity rates would be, on average, about $19 a month. The PREPA legacy charge would exclude qualifying low-income residential customers from the connection fee and kWh charge for up to 500 kWh per month.

For non-subsidized residential customers, the proposed PREPA legacy charge would be: a flat $13 per month connection fee, 0.75 cents per kilowatt-hour (kWh) for up to 500 kWh per month of electricity provided by PREPA, and 3 cents per kWh for electricity above 500 kWh per month. For commercial, industrial, and government customers, the PREPA legacy proposed charge would be: a connection fee of between $16.25 for small business customers, $20 per month for smaller industrial companies, and $1,800 per month for large businesses proportional to their current rate. Between 0.97 cents and 3 cents per kWh per month for electricity provided by PREPA.

The resolution of the bankruptcy is a minimum piece of the foundation of any plan for the utility going forward. The early signs of life going forward in the near-term are not encouraging. Even under the best of efforts, the grid remains environmentally challenged. The record over the period of the bankruptcy, especially in light of the lack of debt service payments shows how difficult the future will be.

NYC BUDGET

The City’s Independent Budget Office has reviewed Mayor Eric Adams’ proposed fiscal 2024 budget. IBO projects that the city will end fiscal year 2023 with a $4.9 billion surplus, $2.8 billion more than the surplus projected by the Office of Management and Budget (OMB) in the Preliminary Budget. This higher surplus is the result of IBO’s forecast of $1.8 billion more in anticipated tax revenues in 2023 than OMB, coupled with IBO’s estimate that city-funded spending will total about $1.0 billion less than budgeted in the Preliminary Budget.

Led by strong growth in revenue from property, sales, and hotel taxes, IBO forecasts $70.6 billion in total tax revenue this fiscal year, $1.2 billion (1.7 percent) greater than 2022 collections. However, slower economic growth, higher interest rates, and the end of Wall Street’s bull market in calendar year 2022 have generated declines in the forecasts of business income, personal income, and property transfer taxes. Further decreases in business and personal income taxes are expected next fiscal year, and with the projection of only modest property tax growth, IBO’s forecast of total tax revenue in 2024 is $69.7 billion, 1.3 percent less than 2023 revenue.

IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. The number of full-time municipal employees has fallen since the pandemic began from 301,000 in January 2020 to just under 281,000 in November 2022. Those reductions come with another cost. IBO notes that while the city has seen reduced costs due to the decline of active headcount, there is concern that these reductions have left some agencies unable to meet key performance targets.

The analysis points out two major sources of pressure and uncertainty arising from the Governor’s proposed state budget – transportation and Medicaid costs. One is a proposal to increase the city’s contribution to the MTA by approximately $500 million more annually. The second is the proposal ending Affordable Care Act (ACA) savings that the city has been receiving. These ACA Enhanced Federal Medicaid Assistance Percentage (eFMAP) payments have been flowing to localities, including New York City since 2015, which the city has passed on to H+H, the city’s public hospital corporation. This change would eliminate city savings of $124 million in 2023 and $343 million in 2024 onward.

COAL REGULATION

The US EPA announced that it would deny permits to continue dumping toxic ash into unlined or inadequately lined pits at six coal fired generating stations. The action reflects rules adopted in 2015. Enforcement of those rules was lax at best during the Trump administration. Now, the EPA is more actively enforcing the rules. Six individual coal generating plants were the subject of the ruling. One of those plants is operated and owned by a municipal power agency.

Salt River Project’s Coronado Generating Station is one of the plant’s whose owners argued that they should not have to meet the deadline since naturally occurring clay, archaic liners or other conditions made their pits essentially as safe as impoundments with modern liners. The EPA cited evidence of potential pollution releases from the pits, and “insufficient information to support claims that the contamination is from sources other than the impoundments.”

AMERICAN DREAM

Given all of the forces which have aligned against it, the recent news regarding the underperformance at New Jersey’s American Dream Mall is no surprise. We have been a skeptic from the days of the first efforts to create a retail mecca in the Meadowlands. Once the pandemic hit the region, it was only a matter of time.

On December 1, 2022, the Trustee delivered $26,743,375 to the trustee, to pay regularly scheduled semi-annual interest due and payable on the PFA Bonds for distribution to holders of record on the November 15, 2022 Record Date. In order to fund this payment, the Trustee transferred $2,595,130 from the Reserve Account to the Interest Account.

The PILOTs previously deposited to the Interest Account were insufficient to fund the interest payment in full due to a reduction in the assessed value of the Project, and a reduction in the Tax Rate, which resulted in lower PILOT obligations. After the transfer, the balance of the Reserve Account will be $51,504,870.

THE ESCALATING FIGHT OVER CARBON PIPELINES

The efforts by sponsors of several carbon capture pipeline projects to obtain permits and rights of way for their proposed pipelines are well documented. Most of the sponsors are working through the existing approval and acquisition process. Much has been made of efforts by those sponsors to be able to use eminent domain to obtain the necessary land for these facilities. The potential for the use of eminent domain has led to significant opposition at both the local and legislative levels in most of the states where carbon pipelines are proposed. In some cases, localities have voted for moratoriums of permitting and/or construction processes.

One example of the escalation of the debate is what is currently underway in Illinois. Last fall, McDonough County intervened in eminent domain proceedings before the Illinois Commerce Commission, noting that pipeline construction could affect emergency responders and farmland. A week later the county passed its pipeline moratorium covering a period of two years. Now, the sponsor of the project (Navigator) is trying a different approach.

Navigator has not been able to obtain enough leases for the pipeline’s route across Illinois or for a carbon sequestration site in the state, and on January 20 it withdrew its application for eminent domain powers, after state regulators said the application was incomplete. In the meantime, a draft agreement with McDonough County offers the county $20,000 per mile of pipeline per year for up to 30 years, with a $630,000 annual cap. The draft says the payment would be contingent on the county acting “in good faith” to “provide positive assistance” to the company, including obtaining road access and rights of way on county land.

It follows a prior effort in another Illinois county. The Illinois Times reported in October that Navigator had made a similar pitch to officials in Montgomery County, offering to pay up to $1.5 million a year for up to 30 years. No agreement has been reached there but the issue has been on monthly board meeting agendas for the past few months.

A 2011 Illinois state law regarding carbon dioxide pipelines mandates that regulators must make a decision on applications like Navigator’s request for eminent domain within 11 months of filing, which would mean June 2023.  In a January 6 filing, commerce commission staff urged the commission to deny the proposal or Navigator to withdraw it. The staff noted that the pipeline’s impact cannot be adequately evaluated since the exact route has not been determined, especially since the endpoint is not yet known.

Navigator would also need 14 separate federal, state and local permits for the project, and as of September the company had none of them, and likely could not obtain them before the June 2023 deadline for the commerce commission to rule on the eminent domain proposal. The current standards under state law meant to facilitate carbon dioxide pipelines expressly states that such pipelines are in the public benefit since they help grow Illinois’s “clean coal” industry.

It is not clear that ethanol plants are not viewed similarly with coal plants. The $3.2 billion, 1,300-mile proposed pipeline would connect to ethanol and fertilizer plants in South Dakota, Nebraska, Minnesota and Iowa before reaching Illinois.

ANOTHER SHOT TO HOSPITALS

On January 30, a federal appeals court allowed limits on hospitals’ use of pharmacies to distribute outpatient drugs, a credit negative for safety-net hospitals and other healthcare providers participating in the federal 340B program, which is designed to help hospitals that treat a disproportionate number of low-income patients. Under the program, not-for-profit hospitals can purchase drugs at a discount and receive reimbursement for the full price. Many safety-net hospitals and other providers rely on the program for a substantial share of operating cash flow.

Hospitals participating in 340B often reach agreements with contract pharmacies such as CVS and Walgreens to distribute the drugs on their behalf. In its ruling, the 3rd US Circuit Court of Appeals agreed with drug companies that hospitals can be limited in the number of contract pharmacies they can use. Using fewer contract pharmacies has the potential to curb hospital cash flow. While the financial benefit of the 340B program varies among participating hospitals, it can account for as much as 25% of operating cash flow. However, hospitals limited public disclosure on the program’s fiscal results makes it difficult to determine the precise effect contract pharmacies have on hospitals’ finances.

REEDY CREEK LEGISLATION

Governor Ron DeSantis unveiled his proposal to change the laws establishing the Reedy Creek Improvement District. The effort stems from the dispute which arose between the Governor and the Walt Disney Co. over the state’s “don’t say gay” law last year. The District was created to administer municipal services within the area largely comprised of Disneyworld. The proposed law would provide for the appointment of District managers by the Governor. Currently, the District’s taxpayers (Disney) appoint the board. The existing structure worked quite well for nearly a half century providing a stable credit.

The proposed move is troublesome given the motivation behind it. Everyone gets that Ron DeSantis is running for President and that he sees culture war issues as a foundational block of his campaign. Putting bond holders and bond insurers in the middle of a local, partisan, non-financial dispute over ideology is a real negative from our perspective. One of strongest magnets drawing people to invest in the US market is the existence of the rule of law and respect for it. While what DeSantis is doing is legal, it reeks of the sort of governance we find in far less developed countries.

MILEAGE TAXES

Vermont is the latest state to consider legislation to levy a usage-based fee on electric cars. Mileage data is already collected when vehicles undergo an annual inspection and officials say data from odometers could be used to charge EV owners 1.3 cents per mile. The proposal would also have people with plug-in hybrids pay an extra $57 per year when they renew their registration. Altogether, this would replace about $1 million in revenue. EVs now represent about 8% of vehicles on the road. EVs now represent about 8% of vehicles on the road in Vermont.

The issue has brought out a strange argument from “environmentalists.” They claim that a mileage fee on vehicles which do not pay any fuel tax at the pump are seeing a fee increase. The state is using the 1.3 cent rate in an effort to match what a typical gas vehicle uses. So, the argument loses force.

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