Joseph Krist

Publisher

CALIFORNIA BUDGET

Governor Newsome released his proposed budget for fiscal 2025. The 2024-25 Governor’s Budget proposes spending of $291.5 billion in total state funds, consisting of approximately $208.7 billion from the General Fund, $80.8 billion from special funds, and $2 billion from bond funds. Revenues for the General Fund include a transfer from the Budget Stabilization Account/Rainy Day Fund of $12,026 billion. Some 53% of GF revenues are projected to come from the personal income tax.

The budget shortfall facing lawmakers in 2024—estimated at $37.9 billion—is rooted in two separate but related developments during the past two years according to the Governor. They are the substantial decline in the stock market that drove down revenues in 2022 and the unprecedented delay in critical income tax collections.  The State pushed back its filing deadline until this past October as the State dealt with a number of natural disasters in the normal tax season.

The new estimate is significantly lower than the $68 billion gap estimated by the State Legislative Analyst in the fall. Last year, due to federal tax deadline delays and California’s subsequent conformity, the majority of the state’s revenues did not arrive until October and November. That means the correction that would have come as part of last year’s May Revision is instead being made in this January budget.

Had the filing delay not been in place, most of the revenue drop would have been reflected in lower tax receipts before the May Revision and incorporated into the 2023 Budget Act projections. This would have resulted in a larger budget gap in 2023, additional solutions to close it, and a smaller shortfall for 2024 than what is now faced. 

The governor proposed funding nearly $19 billion of the gap with drawdowns of the State’s reserves. The remainder of the gap would be addressed by reducing $12 billion from planned spending and delaying a little more than $7 billion in spending commitments into fiscal year 2026. The reductions are concentrated in cuts to spending on education, housing, and climate. In the smoke and mirrors category, using Prop 2 Debt Repayment Funding ($1.3 billion) to fund pension payments and delays in the distributions of funds to transit systems and to the state university system ae employed. 

NYC PROPERTY TAXES

The real property tax (RPT) is New York City’s largest source of tax revenue, comprising 44 percent of the City’s tax revenue collections in fiscal year 2023. Covid-19 pandemic’s effect on city property values led to swings in RPT revenue in 2022 and 2023, and RPT current forecasts through 2027 anticipate slower growth in tax collections. Property tax collections increased relatively steadily by an average of 6.4 percent per year from 2012 through 2021.

In anticipation of major declines in rental income for commercial properties and residential apartment buildings, the Department of Finance (DOF) sharply reduced the assessment of property values that were used to calculate the 2022 tax bills, which led to a 6.0 percent decrease in property tax collections that year. Annual RPT revenues rebounded in 2023, rising by 7.0 percent to a level just above 2021 revenues. Some of the rebound reflected adjustments to the prior year’s assessment adjustments.

In the current 2024 fiscal year, IBO forecasts a 3.6 percent increase in property tax revenue, followed by average annual growth of 3.2 percent from 2025 through 2027. This is about half of the annual growth seen in the decade prior to the pandemic. The bulk of revenue growth in IBO’s forecast comes from apartment buildings and commercial and industrial properties, which account for, respectively, 38 percent and 34 percent of aggregate gross levy growth from 2024 through 2027.

The IBO addressed the issue of office attendance declines and IBO’s baseline forecast accounts for some office market softening by projecting 2 percent annual growth in Manhattan office values throughout the forecast period, rather than the 5 to 6 percent growth seen before the pandemic. To address concerns about the issue, IBO tested by incorporating a 6 percent annual decline in the Manhattan office gross levy—rather than a 2 percent annual increase—calling this the “office doomsday” scenario. This substantially reduces IBO’s RPT forecast: IBO had baseline forecasted about $35.9 billion in revenues in 2027, and 3.2 percent annual growth from 2024 through 2027. But with this more pessimistic office outlook, IBO forecasts $1.3 billion lower revenues in 2027, and only 1.9 percent annual growth.

TAXES ON THE 2024 BALLOT

San Diego County voters will have the opportunity to vote on a proposal to raise local sales taxes to fund transportation improvements. The initiative hopes to provide funding for shoring up the coastal railroad route that is the only connection for freight and passenger trains between San Diego and Los Angeles. Previous efforts to get voter approval for taxes for transit failed. One lost at the polls by missing a two-thirds vote requirement. The other failed to get enough signatures to make the ballot.

This initiative is a “citizens initiative” which under California law requires only a simple majority vote – 50%+1 – in order to be enacted. The failed vote actually got a 57% majority so there is a real likelihood of passage.

NUCLEAR

The recent halt to plans for a demonstration small modular reactor in Idaho may have fallen through but proponents of the technology soldier on. The U.S. Nuclear Regulatory Commission (NRC) has voted to issue a construction permit to a private concern to develop a demonstration reactor to be built at the Heritage Center Industrial Park in Oak Ridge, TN. The project is the first non-water-cooled reactor to be approved for construction in the U.S. in over 50 years. 

The planned reactor will instead be a fluoride salt-cooled, high-temperature reactor (KP-FHR) technology. A separate application for an operating license and subsequent NRC approval will be required before operations can commence. Oak Ridge is no stranger to the development of new nuclear power technology. The funding is provided in part from a Department of Energy Advanced Reactor Demonstration Program (ARDP) award and will involve assistance from Oak Ridge National Laboratory and Idaho National Laboratory.

ESG, IDEOLOGY AND BACKLASH

We saw recent comments made by local municipal borrowers in Oklahoma after they had to delay bond issues and change underwriters due to anti-ESG legislation enacted in Oklahoma. The State Treasurer had released a list of financial institutions prohibited from doing business with governments in the state due to his determination that the companies violated the state’s 2022 Energy Discrimination Elimination Act by boycotting energy companies. The Texas Attorney General began maintaining his own list in 2021. There are similar stories of delayed issues there as well.

The Oklahoma localities are lobbying for changes to the law. At the time of enactment, it did not appear that the issue of local bond issuance was a paramount concern. Now there is sentiment being expressed that the State could do what they want with their resources but that the law was not intended to raise costs for local issuers and taxpayers.

Even at the state level, the policy has created issues. The Oklahoma Public Employees Retirement System voted 9-1 in August to retain BlackRock Inc. and State Street Corp. as investment advisers even though those banks were on the treasurer’s blacklist. A retiree and former president of the Oklahoma Public Employees Association in November filed a lawsuit against the state and its treasurer, calling the state’s anti-ESG legislation “government overreach” and a violation of free speech. The ERS cited a potential negative impact from the policy.

CLIMATE LITIGATION

The latest attempt to move lawsuits filed by states and localities against the fossil fuel industry into federal courts has failed. The U.S. Supreme Court declined to take up a challenge to a lawsuit brought by Minnesota Attorney General Keith Ellison against six fossil fuel companies. The industry has pretty consistently failed in its attempts to have suits dismissed at the state level. The case that has gone the furthest was filed by the city and county of Honolulu. That state’s Supreme Court recently ruled that oil companies did not have the arguments necessary to dismiss the case.

Proponents of sweeping bans on the use of natural gas appliances suffered another defeat in court. The 9th U.S. Circuit Court of Appeals declined to conduct an en banc hearing on a review an initial circuit court decision which invalidated a ban on gas appliances in new buildings enacted by the City of Berkeley, CA. Unless the city of Berkeley chooses to appeal the case to the Supreme Court, the 9th Circuit’s judgment is now final. It will apply to the eleven Western states within its territory.

The decision does not leave local government unable to regulate the appliances. Other approaches which have not been struck down include the use of building code requirements and overall limits on emissions designed to effectively diminish the use of gas, especially for cooking.  

WOOD

A producer of wood pellets for use in wood stoves is facing financial issues imperiling its ability to operate.  The situation threatens the credit supporting industrial development bonds issued in Alabama and Mississippi for manufacturing facilities operated by Enviva. The Alabama issue totaled $250 million while the Mississippi issue totals $100 million. The outstanding bonds are rated CC by Standard and Poor’s. In addition to the bonds, the company received significant economic aid from the State of North Carolina.

Enviva supplies European and Asian utilities with wood pellets as an alternative to burning coal.  After dismal third quarter 2023 results, Enviva announced it would delay completion of a new pellet plant in Mississippi. More concerningly, the company’s auditors issued a going concern letter. In November, Moody’s, S&P, Fitch all lowered ratings to the lowest levels above default.

According to Enviva, the company supports more than 1,800 jobs in mostly rural North Carolina at its four wood pellet production plants and Port of Wilmington facility and has invested more than $675 million in the state. That facility enables the export of the pellets to European and Japanese markets. In those markets, the choice is posed as wood or coal. On that basis, wood is less polluting and trees can be planted as trees are harvested. That results in wood pellets considered to be renewable biomass overseas.

The company cites collapsing prices for wood pellets, long-term contracts that lock Enviva into deals with customers at low prices, high interest rates that makes its loans more expensive to service, and operational issues at some of its plants. Enviva also faces significant litigation issues as the use of wood pellets as a “renewable” source of energy is highly controversial. The US takes a different approach to wood pellets than do European countries and Japan.

WESTERN HYDRO

The difficulty in long-term water use planning comes from the volatility of data relating to weather and water. A quick review of data from recent years provides a window into that volatility. Federal data shows that 2021 and 2022 were two of the three lowest years for hydropower generation nationwide since 2010. Much attention was paid to the impact of multiple atmospheric rivers in California and California increased its hydropower generation by 72 percent in federal FY 2023. At the same time, hydropower generation in Washington State—the national leader in hydropower—was down 23 percent compared to the previous 12-month period.

The latest water level data for Lake Powell, the reservoir in Arizona and Utah that feeds the Glen Canyon hydropower plant showed the surface of the lake level this week was 3,568 feet above sea level, according to the Bureau of Reclamation. On the same day last year, the water was at 3,525 feet—some 43 feet lower. That was close to the reservoir’s lowest level since it was initially being filled in the 1960s. It is at 35% of capacity.

If the level falls to 3,490 feet—78 feet below the current level—water will be too low to drive the turbines that generate electricity. If the level falls to 3,370 feet—198 feet below this week’s reading—it would reach “dead pool” status, when the water is too low to flow downstream from the dam. In October of this year, the Bureau of Reclamation reported that between October 2023 and September 2024, an estimated 9.4 million acre-feet of water would flow into Lake Powell. That estimate was cut to 7.6 million acre-feet just before the latest measurements.

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