Joseph Krist
Publisher
GOVERNMENT
CHICAGO CREDIT CURVE CONTINUES UPWARD
Another Chicago issuer got some good ratings news this week following on the improvement in the Chicago Public Schools credit. This time it was the City of Chicago itself. Moody’s Investors Service has revised Chicago (City of), IL’s outlook to positive from stable and affirmed the Baa3 issuer and the Baa3 rating on the city’s general obligation unlimited tax (GOULT) debt.
Moody’s based the outlook revision to positive on the basis of what they see as strengthened pension contribution practices and positive trends in the city’s financial position. A new pension funding policy was adopted in the fiscal 2023 budget under the prior administration. The reduction in uncertainty over whether a new Mayor and administration would continue those practices has been addressed. Those practices are continued in the fiscal 2024 budget which calls for pension contributions designed to keep the net pension liability (GASB NPL) from growing.
Moody’s also has affirmed the Baa1 rating on the city’s water revenue bonds, the Baa1 rating on senior lien sewer revenue bonds, and the Baa2 rating on the junior lien sewer revenue bonds. It is clear from Moody’s that the exposure of the sewer and water revenue bonds to the city’s credit challenges is the primary factor constraining the ratings despite otherwise strong attributes of the systems.
WEALTH TAXES
So far in 2024, lawmakers in 10 states – California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington – have proposed new taxes on “wealth”. They are all variations on a concept driven primarily by Senator Elizabeth Warren. Each year an individual taxpayer would be assessed income taxes on increases in the value of assets they own. If their net worth exceeds a certain amount, the year over year increase would be treated as income for tax purposes.
One of the main sticking points holding back any effort to tax wealth is that the tax would be imposed merely because of a change in asset value. It would not be based on whether the change in value had actually been realized. No states currently assess any taxes on a living individual’s net worth or unrealized capital gains.
Texas voters approved an amendment to their state constitution in 2023 which would effectively prevent taxes based on wealth or net worth. A campaign is underway which is expected to get an initiative on that state’s ballot in November which would eliminate the state’s capital gains tax. The Connecticut legislature is expected to consider a wealth tax which would eliminate the carried interest tax loophole.
WHAT ARE THEY THINKING?
One of the hallmarks of the U.S. securities markets is the respect in the U.S. for the rule of law. It has always been a significant factor driving the location and growth of the U.S. economy. Now, some are so ideologically driven that they seriously propose steps which would allow governments to ignore the rule of law. The most egregious one which we have seen has begun making its way through the Utah legislature.
The Utah Constitutional Sovereignty Act, or SB57, would allow lawmakers to reject any action from the federal government they view as unconstitutional, unless a court rules otherwise. Lawmakers could “prohibit the enforcement of a federal directive within the state by government officers if the legislature determines the federal directive violates the principles of state sovereignty”.
It is another attempt to limit the regulatory power of the federal government based on the 10th Amendment to the U.S. Constitution. It argues that only federal actions specifically authorized in the Constitution are legal. Many fear the legislation could be applied to any federal action which two thirds of the Utah Legislature does not like. Its sponsor claims that “we simply want to look at a process whereby we can vet, very carefully, any of those situations” “where we feel like the federal government steps over and reaches in and does some harmful things to our citizens, our state, our businesses.
That is a pretty broad field of play and that is the concern. The claim is that it would rarely be invoked but that is always the claim of legislative sponsors of legislation designed to fight policies in court which they cannot win at the ballot box. The votes come as Utah’s fossil fuel industry has been fighting regulations limiting its ability to export its products from their landlocked locations. Some of those are federal but state permit issues are what has killed proposed shipment infrastructure for the export of Utah fossil fuel products.
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ENVIRONMENT
SOLAR
Recently we noted the role of Arizona’s public power entity as a hindrance to the use of residential solar power. Other municipal utilities are moving the other way. The latest example is CPS Energy, San Antonio’s municipally owned electric and natural gas utility. It announced the acquisition of the capacity of a 150 MW solar generation project in rural Texas. The utility currently has 551 megawatts of operating solar capacity and solar energy makes up roughly 7% of CPS Energy’s current power generation portfolio.
WATER
Here’s one example of why the current negotiations over the redistribution of water from the Colorado River and its surrounding region are so fraught. A private oil shale development company is seeking approval for the development of a reservoir on land under the supervision of the Bureau of Land Management. The particular tract for which the company is seeking a permit is within the boundaries of an area that the U.S. Forest Service and BLM are proposing to withdraw from eligibility for new oil and gas leases.
Conditional water rights are a unique provision of Colorado law which allow a would-be water user to reserve their place in the priority system based on when they applied for the right — not when they put water to use — while they work toward developing the water. Older waters rights get first use of the river. An applicant must file what’s known as a diligence application with the water court every six years, proving that they still have a need for the water, that they have taken substantial steps toward putting the water to use and that they “can and will” eventually use the water.
When the holders of conditional rights with older priority dates finally begin diverting water they have not used in decades, they may force junior rights holders to stop using water. That could potentially curtail users that have been receiving that water in some cases for decades. It has been estimated that there were conditional water rights associated with oil shale development on impacting 736,770 acre feet of water to be stored in 27 reservoirs in the mainstem of the Colorado River basin.
WIND
The New Jersey Board of Public Utilities has awarded two new contracts for electricity from offshore wind farms. The projects are being undertaken in the wake of the decision by a previous developer to abandon its efforts to produce power from offshore windmills. At the time, the developer cited increases in costs due to general inflation, supply chain issues and interest rates.
The new contracts reflect those factors. The Board of Public Utilities estimates that under the contracts New Jersey awarded the monthly, the monthly bill of the typical residential customer in New Jersey would go up by $6.84. The two projects together would be capable of producing about 3,470 megawatts of electricity. New Jersey remains contracted with another offshore project, Atlantic Shores, for 1,510 megawatts. Combined, the three projects could produce more than one-third of the state’s 2040 target.
On the West Coast, the Humboldt (CA) Bay Harbor District was awarded $426.7 billion dollars in federal grant funds to construct its offshore wind terminal in far Northern California. The District is constructing a terminal to serve the offshore wind generation industry. It plans to partner with an existing private terminal operator which is supplying $422 million of its own funds for the project.
Humboldt Bay is situated to be the first site to build a terminal for the construction and deployment of commercial offshore wind turbines on the West Coast. It will include a 1,200 foot wharf. The total cost is projected at $853 million. The target operation date is 2028. The Bureau of Ocean Energy Management auctioned off rights for the first offshore wind farms on the West Coast in December of 2022, and additional auctions are planned off the coast of Southern Oregon.
COAL
In 2020, the Wyoming legislature passed a bill intended to compel utilities to retrofit coal plants with carbon capture technologies rather than retire the facilities. It was portrayed as an effort to ensure reliability in a state where the coal industry is under attack. What was not clear to many was that costs associated with carbon capture adaptation could be passed through to customers. Now the potential cost to consumers is beginning to be assessed against utility ratepayers.
State regulators this month approved a $1.1 million annual “low-carbon” surcharge for Black Hills Energy. According to preliminary filings with the state, if the utilities move forward on a state-imposed mandate to retrofit coal-fired power plants with carbon capture technology the state’s ratepayers, it could mean up to $1 billion in additional costs for Black Hills Energy’s 145,000 customers in the state, and more than $2 billion for Rocky Mountain Power’s customers.
Black Hills Energy operates two units while Rocky Mountain Power operates three coal-burning units in the state that are subject to the law. The reality is that the real hope held by supporters is that federal funding would limit the impact on ratepayers. They believe that the recently expanded federal “45-Q” tax credit program for carbon capture facilities, along with technological developments could reduce the ratepayer burden.
The one common thread to the debate between “green interests” and the legacy fossil fuel interests is the hope that someone else will pay the bill. Electric cars, solar, wind, heat pumps all currently cost money and remain out of reach to many. A “surcharge” to keep the coal industry alive in Wyoming would likely deter potential large customers. Corporate customers are in a position to resist the surcharge effort especially if they have power supply agreements for power generated at non-fossil fueled plants.
It’s a prime example of the challenges facing climate activists, ratepayers and suppliers during the energy transition.
DALLAS FACES ENVIRONMENTAL REFUND OBLIGATION
In 2007, a gas company paid the City of Dallas $19 million for the right to drill for natural gas on city park land. In 2013, the Dallas City Council voted to stop renewing leases on land amid new restrictions on drilling within the city. That move led to a 2014 lawsuit filed by Fort Worth-based Trinity East Energy, LLC. A Dallas County jury in February 2020 agreed with Trinity East Energy that Dallas had improperly denied its permits to drill on city-owned park land and nearby private land in 2013.
The state Supreme Court rejected the city’s petition for review of those decisions in September 2023 and also declined another city motion for a rehearing of its petition to review the case on Dec. 29. Now, the Council has is scheduled to vote Wednesday whether to approve up to $55 million in bond money to cover the total costs of the judgment. It would be the use of an old tool, the judgment bond which was designed for the occasional unfavorable legal judgment.
CHICAGO NATURAL GAS BAN
The new mayoral administration in Chicago has introduced the Clean and Affordable Buildings Ordinance (CABO). It would eliminate harmful natural gas emissions by setting an indoor emissions limit banning the combustion of fuels that emit more than 25 kg/btu – effectively requiring all new construction to switch to clean power sources like electric or other high efficiency systems. That is the same standard New York City set in a law enacted in 2021.
The following are exempted from the proposed emissions standard: commercial cooking, emergency backup power, crematoriums, wood fireplaces, industrial production, commercial laundry and labs and hospitals. The ordinance is not designed to force anyone to “give up their gas stove”. It is only targeted at new construction (including new additions to existing buildings). By amending building codes, the ordinance is designed to be immune to legal challenges to other “gas bans” imposed across the country. It would go into effect one year after passing City Council, in line with Chicago’s three-year building code cycle.
CAT BONDS
Since Hurricane Ian in 2022, the Florida Hurricane Catastrophe Fund has issued $1.9 billion in reimbursements to insurers and anticipates additional payments amounting to $8.1 billion by 2028. The fund also continues to make payments related to Hurricanes Irma and Michael, which struck in 2017 and 2018, respectively.
Now, the Fund plans to issue debt to provide between $1.5 million and $3 billion of new funding. According to the State, the bonds can be fit into the program’s existing debt structure which means that assessments to support bond repayment do not have to increase.
According to the Insurance Information Institute, the average insurance premium for homeowners in Florida has spiked by 42% year-over-year, to an average of $6,000 in 2023. At least a dozen insurance companies have stopped issuing new policies in Florida since January 2022 and three companies have announced their intentions to withdraw from the state in the past year.
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TRANSPORTATION
The U.S. Department of Transportation (DOT) today announced the approval of $2.5 billion in private activity bonds authority allocated for the Brightline West High-Speed Intercity Passenger Rail project connecting Las Vegas, Nevada, and Southern California. The 218-mile, high-speed rail line will primarily run along the I-15 median with trains capable of reaching 186 mph or more, cutting the trip to two hours – half the time to travel by car.
DOT previously approved a private activity bond allocation of $1 billion for Brightline West in 2020, bringing the total allocation for this project to $3.5 billion. In December, DOT also awarded a $3 billion grant from President Biden’s infrastructure law to the Nevada Department of Transportation for this project. In June, DOT awarded a $25 million grant to San Bernardino County Transportation Authority (SBCTA) through the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) Program that will be used for the construction of the Brightline West stations in Hesperia and Victor Valley, California.
We continue to note that high speed rail in the US continues to need public funding support. Both this project and its Florida counterpart were advertised as projects which were private which could serve as models for the future expansion if high speed rail. The reality has been that neither project would have happened without significant support from the Federal government.
MILEAGE FEES
Members of the far-right Arizona Freedom Caucus (in the state legislature) have offered a bill which would ban state, city, town and county governments from creating any tax based on miles traveled in a vehicle. The bill also would ban any of those government entities from tracking the number of miles a driver has traveled through odometer readings, traffic cameras or using phone tracking data. It also includes provisions aimed at barring policies that reduce how much people drive.
The sponsor believes that mileage fees are part of a conspiracy to take away people’s freedom of movement. They believe that it is part of a plan to “force” people to use public transit and ban personal vehicles. A concurrent resolution being floated with the bill would put the issue of mileage fees to a ballot in November.
PURPLE LINE
The ongoing saga of the effort to complete a light rail system in suburban Maryland known as the Purple Line continues. The latest turn of events is the news that Fitch Ratings had placed its ratings on debt issued to finance the project on negative outlook. The Negative Outlook reflects the project’s complex construction works that have led to delays approaching the design build (DB) and lenders’ longstop dates for a second time in the short two-year span since financial close on the first “renegotiation” of the P3 agreements behind the project.
The outlook change is an indication of the desire to see this impending second “renegotiation” concluded and executed. The removal of this source of uncertainty would alleviate the pressure on the project’s ratings. Fitch Ratings has affirmed the ‘BBB’ rating on approximately $100 million of private activity revenue bonds (PABs) series 2022A (green bonds) and $543.5 million of series 2022B PABs (green bonds) issued by Maryland Economic Development Corporation on behalf of Purple Line Transit Partners LLC (PLTP; limited liability company) for the Purple Line light rail transit (LRT) project (the project).
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