Joseph Krist

Publisher

NYC BUDGET

New York City Mayor Eric Adams today released New York City’s balanced $102.7 billion Preliminary Budget for Fiscal Year 2024 (FY24). The city’s revenue forecast was updated to reflect an additional $1.7 billion in FY23 and $738 million in FY24. The windfall increase in FY23 is driven by continued momentum from the record Wall Street activity in 2021, though the city expects that continued slowing growth in the economy will lead to slowing growth in tax revenue over the financial plan.

The 2024 budget is balanced using a prepayment of $2.2 billion from fiscal year 2023. Revenues and expenditures are balanced for 2023 and 2024 and gaps of $3.2 billion, $5.0 billion, and $6.5 billion are projected for fiscal years 2025, 2026, and 2027, respectively. As of November, the City has recouped 88 percent of the jobs lost at the height of the pandemic. While total employment is projected to grow 4.6 percent (fourth quarter to fourth quarter) in 2022, it is forecasted to rise just 0.7 percent in 2023 as tight monetary policy slows the economy. Sectors sensitive to interest rates, such as finance, real estate, and construction, are projected to lose jobs in 2023. In 2024, total employment is expected to return to its long-run growth path and recover all pandemic job losses by the end of the year.

The Preliminary Budget maintains a record level $8.3 billion in reserves. This includes $1.6 billion in the General Reserve, $250 million in the Capital Stabilization Reserve, $4.5 billion in the Retiree Health Benefits Trust fund, and $1.9 billion in the Rainy-Day Fund. Agency new needs in Fiscal Year 2023 (FY23) and FY24 are funded with savings or existing agency resources.

The immediate threats to the budget are obvious – pending labor contract negotiations and the asylum crisis. They are exacerbated by economic uncertainty. Tax revenues are forecast to dip 0.9 percent to $69.0 billion in 2023. The weaker economic outlook for calendar year 2023 leads to a further tax revenue decline of 0.2 percent in 2024. Overall employment gains are expected to slow in calendar year 2023, however non-finance wage growth remains strong, offsetting continued weakness in the finance sector.

Residential real estate is expected to stabilize as the overall demand for housing remains strong. Commercial real estate, which is already facing headwinds from high vacancy rates caused by work-from-home arrangements, will have to reinvent itself to meet those challenges in the coming years.

Property taxes are expected to grow 6.3 percent in 2023, reversing the pandemic driven decline seen in market values in Class 2 multifamily and Class 4 commercial properties. Non-property taxes are forecast to decline 5.9 percent, as most of the non-property taxes, except for sales and hotel tax, fall from historic peaks. Personal income taxes (including PTET) drop 8.5 percent in 2023 from the record levels posted in 2022 as bonus payments and non-wage income drop.

Corporate taxes are expected to decline 9.0 percent in 2023 after growing 13.2 percent in 2022, as finance sector firms adjust their tax payments to reflect lower liability in tax year 2023, which were offset by better-than-expected performance from nonfinance firms. The unincorporated business tax is expected to decline 8.9 percent.

Property taxes are expected to grow 6.3 percent in 2023, reversing the pandemic driven decline seen in market values in Class 2 multifamily and Class 4 commercial properties. Non-property taxes are forecast to decline 5.9 percent, as most of the non-property taxes, except for sales and hotel tax, fall from historic peaks. Personal income taxes (including PTET) drop 8.5 percent in 2023 from the record levels posted in 2022 as bonus payments and non-wage income drop.

Corporate taxes are expected to 7 decline 9.0 percent in 2023 after growing 13.2 percent in 2022, as finance sector firms adjust their tax payments to reflect lower liability in tax year 2023, which were offset by better-than-expected performance from nonfinance firms. The unincorporated business tax is expected to decline 8.9 percent.

As of November 2022, the City’s economy recovered 88 percent of the 957,000 jobs lost in March and April of 2020. In the first 11 months of 2022, the City added 189,000 positions, more than twice the average for the same period in the 10 years prior to the pandemic (88,000 jobs) but less than in the first 11 months of 2021 (263,000 jobs). The private sector expanded by 16,000 jobs a month on average in 2022 and three of the nine major private sectors are above pre-pandemic levels.

Total City employment is expected to advance by 4.6 percent in 2022 (on a fourth quarter to-fourth quarter basis), slow to 0.7 percent growth in 2023 and then grow at a rate around two percent for the rest of the forecast horizon. Employment is expected to return to its pre-pandemic peak of 4.7 million in the third quarter of 2024.

NYC AND OPEB

One of the issues facing New York City is the cost of retiree healthcare. In fiscal year 2022, New York City paid $3.4 billion to provide health care to its over 250,000 retirees. The City hopes to address at least a portion of this growing obligations for the healthcare provided. It has proposed local legislation which would amend the administrative code of the city of New York, to enable the city to place municipal retirees into a private insurance plan or require them to pay premiums to remain in standard Medicare.

This legislation would affect the portion of costs that the city pays for the premiums for supplemental Senior Care Medigap coverage, which annually costs the city approximately $600 million. The change authorized by the legislation would allow the city to implement its proposed Medicare Advantage program that would effectively shift those costs to the federal government and to retirees. It will not be a direct boost to the City’s General Fund. All the savings resulting from ending the city’s financial support for Medigap insurance will be contributed annually to the Joint Health Insurance Premium Stabilization Fund (the Stabilization Fund).

The fund was created in 1984 to equalize costs between the city’s two health insurance options at the time, GHI and HIP—each of which are offered to city workers at no cost. In addition, the Stabilization Fund ensured that the rates paid by the city were predictable for budgeting purposes. The city’s administrative code stipulates that the city must pay the HIP HMO rate for all employee health benefits.

The fund’s revenues are derived from equalization payments paid by GHI for years in which GHI’s premiums are lower than HIP’s. The fund also receives direct contributions from the city negotiated in labor agreements and earns interest on reserves. With this dedicated funding stream, by 2016 the fund had a balance of $1.8 billion.

CALIFORNIA BUDGET

Governor Newsome has proposed a budget for California for fiscal 2024. Prior to accounting for solutions, the Governor’s Budget forecasts General Fund revenues will be $29.5 billion lower than at the 2022 Budget Act projections, and California now faces an estimated budget gap of $22.5 billion in the 2023-24 fiscal year. The Budget reflects $35.6 billion in total budgetary reserves. These reserves include $22.4 billion in the Budget Stabilization Account (The Rainy Day Fund), which fulfills the constitutional maximum mandatory deposit limit of 10 percent of General Fund tax proceeds.  In order to make a withdrawal from this account, the Governor must first declare a fiscal emergency, and no more than 50 percent of the balance can be withdrawn in any single fiscal year.

The Governor’s Budget economic forecast does not project a recession nor does it propose to draw from the state’s reserve accounts to close the budget gap. To balance the budget, a number of maneuvers will be used. Funding Delays will save $7.4 billion. The Budget delays funding for multiple items across the 2021-22 through 2023-24 fiscal years, and spreads it across the multi-year without reducing the total amount of funding through the multi-year. 

Reductions/Pullbacks will total $5.7 billion. The Budget reduces spending for various items across the 2021-22 through 2023-24 fiscal years, and pulls back certain items that were included in the 2022 Budget Act to provide additional budget resilience. Significant items in this category include the $3 billion included in the 2022 Budget as an inflationary adjustment, and a $750 million Unemployment Trust Fund payment in the 2023-24 fiscal year.

The Budget shifts certain expenditures in the 2022-23 and 2023-24 fiscal years from the General Fund to other funds. Other moves include reducing expenditures for debt retirement for both General Obligation and Lease Revenue debt. Some $8 billion of transfers to budget reserves have been withdrawn. All told, the governor proposed spending $223.6 billion.

WATER LIMITS GET REAL

Two stories from this past week highlight the potential for water to limit development. Earlier this month, the city of Scottsdale, AZ stopped supplying water to Rio Verde Foothills. The housing development is located outside of the city’s incorporated area. Scottsdale said it had to focus on conserving water for its own residents, and could no longer sell water to roughly 500 to 700 homes — or around 1,000 people. The city sells water to private suppliers who then truck it to individual users.

It is just the tip of the iceberg. To prevent unsustainable development in a desert state, Arizona passed a law in 1980 requiring subdivisions with six or more lots to show proof that they have a 100-year water supply. S0, builders split their parcels into five lots or less to get around the water supply requirement.

The Arizona Department of Water Resources reported the Lower Hassayampa sub-basin that encompasses the far West Valley of Phoenix is projected to have a total unmet demand of 4.4 million acre-feet over a 100-year period. The bottom line: the Arizona Department of Water Resources cannot approve the development of subdivisions reliant on groundwater. Additional cuts to Colorado River water went into effect at the start of the year. Arizona must slash 21 percent of its water use from the river that provides water to seven states. That’s 592,000-acre-feet a year, or the water usage of more than 2 million Arizona households a year.

The report had been completed several years ago but the outgoing governor had a strong pro-development bias and kept the report from being released. Now, housing planned to bring some 800,000 residents to the west phoenix suburbs is under threat because of the lack of water. Until the use of water for agriculture is limited and used more efficiently, development will be threatened.

LOUISIANA AND EXTRACTIVE INDUSTRY

The efforts by Louisiana to transition its economy from dependence on petroleum continue. The changes however simply shift the natural resource to be extracted and exploited from fossil fuel to timber. The state already is home to wood pellet manufacturing to supply European demand for “green” heating fuel. Now, the state is looking to support the exploitation of its timber resources to an even greater degree.

The Louisiana State Bond Commission has unanimously passed a resolution granting its final approval of the issuance of up to $1.5 billion of tax-exempt bonds for the financing for the construction of a facility to manufacture non-carbon based plastics. The proposed plant would produce sustainable carbon-negative materials used to make products such as polyethylene terephthalate (“PET”) plastic, which, in turn, is used in packaging, textiles, apparel, automotive, and other applications, as well as hydrothermal carbon, which can be used in fuel pellets, as activated carbon, and as a replacement for carbon black. 

The 150-acre facility would create an estimated 500 construction jobs, 200 local full-time positions, and between 500 and 1,000 indirect local jobs. The plant would convert an estimated 1 million dry metric tons of wood residues each year into products for a wide range of end markets.

ANOTHER SMALL COLLEGE DOWNGRADE

Moody’s Investors Service has downgraded Saint Mary’s College of California’s (CA) issuer and revenue bond ratings to Baa3 from Baa2. The downgrade is largely driven by a familiar litany of factors – heightened student demand challenges contributing to weak operating results, lower debt service coverage, and increasingly thinning liquidity. 

Net student revenue typically accounts for over 80% of total operating revenue. Saint Mary’s College of California is a moderately sized private, not-for-profit college located in Moraga, CA, just east of San Francisco. In fiscal 2022, Saint Mary’s generated operating revenue of $119 million and enrolled 2,229 full-time equivalent (FTE) students as of fall 2022.

The negative outlook on the rating is maintained. Saint Mary’s College reflects Moody’s expectations of continued student market difficulties, operating deficits, and weak liquidity into at least fiscal 2023. 

LONG ISLAND POWER RATE EXPERIMENT

The Long Island Power Authority will consider the imposition of time-of-day pricing when it votes on a rate schedule for 2024. The proposal would see customers pay more between 3 and 7 p.m., but less during all other hours of the day and on weekends and holidays. Rates are further discounted during “super off-peak” hours from 10 p.m. to 6 a.m. The hope is that the rate change would encourage the use of electricity for things like cars and pool equipment to hours when demand overall is lower.

LIPA hopes to enroll 85% of its customers in the plan. It estimates that the plan could reduce overall demand by the equivalent of a large generating unit. Customers will still have the option to stay on a flat rate. LIPA is trying to stay ahead of the curve in terms of state energy policy. Internal combustion engine vehicle sales are limited after 2035 and state energy policies may require the use of electricity in new construction and move many to the use of heat pumps.

The goal of the rate structure is to alter behavior and smooth out electric demand as the industry seeks to move away from fossil-fueled resources.

PREPA PRIVATIZATION

The Puerto Rico Public-Private Partnerships Authority unanimously approved a contract for the operation and maintenance of power generation units currently owned by the Puerto Rico Electric Power Authority. The contract still needs approval from the Commonwealth. In the interim, PREPA is not disclosing the identity of the potential operator. All of this raises more questions than it answers.

The lack of transparency serves only to reinforce fears about whether the Commonwealth has learned anything from the bankruptcy experience. The need for transparency is rooted in the experiences of what happened when the transmission and distribution grid was privatized. The hope was that privatization would lead to a more resilient and reliable transmission grid. The opposite has been the case.

One hope was that operators would take advantage of the island’s abundant wind and solar resources. Less than 4% of Puerto Rico’s power generation currently comes from renewable energy. The Puerto Rico Energy Public Policy Act enacted in 2017 includes a goal for Puerto Rico to generate some 25% of its electricity from renewable sources by 2025.

ESG AND STATE POLICIES

The effort on the part of certain states to take actions including the withdrawal of funds (state cash pools and pensions, e.g.) from financial institutions who have taken public stances against investment in fossil fuel related industries

and companies continues.

A study authored by Wharton Business School professor Daniel Garrett and Federal Reserve economist Ivan Ivanov, estimated the increased cost to Texas entities following anti-ESG legislation that limited competition in the bond market by blacklisting certain firms that consider sustainability risks and opportunities. Garrett and Ivanov found that the Texas law raised costs to the public by as much as $532 million in its first eight months. This led to an additional study which focuses on the municipal bond market impacts of ESG boycotts actions, applied to six states: Florida, Kentucky, Louisiana, Missouri, Oklahoma, and West Virginia.

The study was based on a simple question:  If State X implemented similar legislation that generated the same bond market restrictions (i.e., the same investment banks were banned), the costs of borrowing to State X taxpayers would have been $X more than their completed bond deals actually did cost? The result is an estimated range of $264-708 million in additional costs for all six states combined, with Florida alone standing to bear $97-361 million.

In 2021, the Texas legislature enacted Texas Senate Bills 13 and 19 which bar banks or other institutions with particular ESG policies focused on fossil fuels and fire arms from acting as underwriters for bonds issued by “state governmental entities” including municipalities, school districts, and other entities. For each standard deviation increase in an issuers’ reliance on targeted banks (relative to the mean level of reliance among all Texas issuers), bond yield increases by 9.7 basis points. Applying these results to the 12 months of bonds issued since the anti-ESG law implementation through April 2022, the additional cost to Texas bond issues ranges between $303 million and $532 million in additional interest cost over the maturity of those bonds.

We are not judging the numbers or the conclusions. They are presented to provide an example of what information is out there.

There are efforts underway in a number of states to impose “punishments” on certain financial institutions. In 2022, the Commonwealth of Kentucky took steps on two pieces of restrictive ESG legislation. In April of 2022, Kentucky enacted, but has not fully implemented, S.B. 205, which would restrict firms determined to be what legislators say are energy boycotters from doing business with the Commonwealth. Kentucky also introduced H.B. 123 which would restrict firms that the legislators say boycott firearms.

The State of Louisiana has not yet enacted any ESG legislation that would impact the state’s public bond issuance; however, the legislature has taken steps towards passing H.B 978 that would restrict financial companies that the legislation says boycotts firearms from doing business with the state and local entities. The State of Oklahoma has taken action on two pieces of ESG banning or blacklisting legislation. The state has enacted but not yet implemented H.B 2034 which would restrict financial companies determined to be energy boycotters from doing business with the state. The state legislature has also introduced, but not enacted, H.B. 123 which would prohibit firms that boycott the firearms industry.

In March 2022, the State of West Virginia enacted S.B 262, which restricts financial institutions that the legislation says are determined to be energy boycotters from entering into a State “banking contract,” as the term is defined in West Virginia Code 12 1C 1(a)(1), based on its restricted financial institutions status.

TVA DECISION

The role of fossil fueled power plants as the core of the Tennessee Valley Authority’s generating fleet has become a primary issue for the Authority. It’s largest distribution customer – the City of Memphis – is still in the middle of a huge debate over future electricity sourcing. Many had hoped that pressure from large customers and a more supportive federal administration would drive moves to replace aging fossil-fueled plants with more climate friendly technologies. This week, TVA announced that it will replace its largest generator of electricity, powering 1.1 million homes with natural gas fueled generation.

The Cumberland City plant consists of two coal-fired units: the first unit will be retired and replaced with a 1,450-megawatt combined cycle natural gas plant by 2026. The second unit will be retired by 2028. TVA has not yet determined how it will replace the second unit. The choice comes in the face of the need for rolling blackouts to be employed among TVA customers in the face of extreme cold weather.

The transition from coal to natural gas will cut carbon emissions from the facility by up to 60%, TVA said. TVA is trying to have it both ways. It emphasizes the need for reliable base-load power like that provided at the Cumberland plant as the rationale for fossil fuels versus renewables. A record of operations at TVA’s eight other combined cycle gas plants suggests that they are run as base load facilities.

The EPA found that TVA failed to properly evaluate alternatives like solar at the site, noting that “the alternatives analysis continues to rely on inaccurate underlying economic information.” Specifically, TVA failed to account for expected declines in the cost of clean energy and increases in the cost of natural gas. The TVA rationale cites the fact the natural gas plant at the Cumberland site will be able to run on hydrogen fuel, or a mix of hydrogen and natural gas, if that technology becomes viable. The plants will be built so that carbon capture technology can integrated into the system if that technology matures and becomes cost-effective.

CARBON PIPELINES

The opening of the legislative season has seen a variety of bills proposed to address issues related to carbon pipeline development. Recently, 8 bills were offered to address specific issues raised by landowners in North Dakota. The primary concern is that of the potential for the use of eminent domain by pipeline sponsors. As is the case in Iowa and other states, the sponsor is Summit Carbon Solutions.

The eight bills would require 85% of landowners to provide a voluntary easement to obtain right of eminent domain. Counties could set a higher standard; remove carbon capture pipelines from being granted the right of eminent domain even if granted common carrier status; requires 100% consent for underground carbon dioxide storage from the owners of the pore space, eliminating eminent domain; survey crews must obtain written permission from property owners (There are currently multiple lawsuits involving Summit and surveyor access.).

If an individual prevails against the state in a court hearing, (as in a surveyor access case) they are entitled to be reimbursed for court costs; require that if property is taken by eminent domain, a court must increase the award by 33%; require a public hearing in each county where the pipeline company is seeking common carrier status; require 85% of landowners to consent to underground storage space. Counties could set a higher standard.

TRI STATE EXODUS CONTINUES

Mountain Parks Electric is a distribution cooperative serving 22,000 members in Colorado’s Grand and Jackson counties. It has given notice that it intends to leave Tri-State Generation and Transmission by Jan. 16, 2025. It joins six of Tri-State’s 42 members who have given withdrawal notices. They include the largest member which accounts for some 20% of demand from Tri-State. The utility has reached agreements with two other utilities for full withdrawal.

Others have reached agreements allowing for the procurement of power from entities other than Tri-State. Several other Tri-State members are also pursuing partial-requirements contracts, including Colorado’s Poudre Valley REA, Wyoming’s High Plains Power, and New Mexico’s Jemez Mountain Electric.

The amount assessed the departing member must be “just, reasonable and non-discriminatory.” This has led to a series of proceedings in front of administrative law judges to establish exactly what “just, reasonable and non-discriminatory” is. Both sides of the negotiations have submitted detailed filings backing their wildly divergent estimates of that amount. In the United case, a ruling is expected in July of this year.

WEALTH TAXES

According to the Washington Post, legislators in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington state will release bills “with the same goal of raising taxes on the rich.” They are the product of the movement to tax “wealth” championed by Senator Elizabeth Warren. Maryland lawmakers will propose an extra 1% tax on top of the state income tax rate on certain capital gains; Bills in Hawaii, Maryland and New York will propose lowering the estate tax exemption.  In California, activists want to impose a 1.5% tax on assets of $1 billion or more.

Proponents hope to see annual taxes paid based on the value of assets. The difficulties in calculating the tax base as well as practical issues over what types of assets would be subject to such a tax effectively doomed proposals from Senator Warren at the federal level. One example is farm assets which typically are owned by individuals who have lower current incomes.

Now, activists hope to achieve the same policy goals through changes to tax policy in 50 states. State tax commissions would face the unenviable burden of having to audit each family suspected of exceeding the threshold annually or rely on self-valuation. Previous efforts to generate taxes from point in time asset valuations proved incredibly difficult to administer and generated trading anomalies related to holdings of in state vs. out of state municipal bonds. Florida’s intangibles tax is a good example.

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.