Joseph Krist
Publisher
CALIFORNIA URBAN WATER REGULATION
The California State Water Resources Control Board approved regulations that will set long-term limits on the amounts of water the state’s urban utilities can use on an annual basis. The goal is to generate about 500,000 acre-feet in water savings each year by 2040. The new rules arose as the result of legislation from 2018. The regulation is expected to apply to 405 urban suppliers, which collectively provide water to about 95 percent of California’s population, according to the Water Board.
Each year a water utility will be required to generate an “urban water use objectives” plan and will require compliance beginning in 2027. The limits will be phased in over the ensuing 13 years. The expectation is that ultimately annual water savings will approximate 500,000 acre feet. The mechanics of how each regulated utility achieve these goals – legal, regulatory, education, enforcement – are left to each utility. What will apply across the board is that in the event that a water utility exceeds its usage limits, it will be fined $10,000 a day until usage returns to required levels.
According to the board’s estimates, cuts greater than 30 percent will only affect six suppliers (two percent of all suppliers in the state affected by the regulation) by 2025 and 46 (12 percent) by 2040; this means that 118,370 people will be affected by the largest cuts by next year, and 1,733,569 in 15 years. The regions where water suppliers will be asked to make the biggest cuts to water delivery (greater than 30 percent) by 2040, are South Coast, San Joaquin Valley, and Tulare Lake.
The reductions needed to meet the objective based on 2040 standards, relative to the subset of urban uses subject to standards, will be of 92 percent for the City of Vernon; 58 percent for City of Atwater; 50 percent for Oildale Mutual Water Company; 45 percent for the West Kern Water District; and 43 percent for the City of Glendora.
Sixty-five percent of suppliers serving 29,157,064 people will initially be unaffected as of next year. By 2040, 31 percent of suppliers serving 12,459,736 residents would have avoided a reduction in water delivery entirely. Eight percent will see a reduction of less than 5 percent; 13 percent will have to cut water delivery between 5 and 10 percent; 21 percent between 10 and 20 percent; and 15 percent between 20 and 30 percent.
The new rules must still receive the final approval of the Office of Administrative Law. If approved, the regulation will come into effect by January 1, 2025.
KEY BRIDGE COLLAPSE IMPACT
The financial impact of the Key Bridge in Baltimore was always going to be about more than the cost of replacement. It is expected that the Federal government would pick up much of the cost of that project. In the meantime, the impact on operating revenues is a different story. The Maryland Transportation Authority operates 7 other facilities – three bridges, two tunnels and two turnpikes – funded by tolls covering operations and maintenance and debt service.
The Authority’s Board was recently advised that a $153 million decline in toll revenues throughout the 2024 through 2030 forecast period is expected. While mostly attributed to the Key Bridge, the forecast sees a decline of usage across the entire Authority portfolio. That will likely cause tolls to rise sooner than initially planned.
It is noted that the Authority emphasized its need to not only meet operating needs but also to respect its various bond covenants. “Beginning in fiscal year 2028, a systemwide total increase will be necessary to maintain two-times debt service coverage throughout the remainder of the forecast period.”
PENSION FUNDING
Earlier this year, the City of Houston reached a long sought labor agreement with its firefighters. The hurdle that proved the highest to climb was the issue of funding levels. It was important to the unions that pension funds be adequately funded. The high levels of underfunding and the increasing cost of funding had been a long time negative weight on the City’s credit. Now, the City has turned to the capital markets to help it meet obligations it incurred in reaching the labor agreement.
The key component is the provision of some $650 million to increase the fun ding level of the pension funds. The plan is to issue debt to fund the expenditure. The wrinkle is that many municipalities have turned to pension funding bonds (pension obligation bonds or POB) to increase funding. The usual mechanism however is to issue POB which are not backed by the taxing power of the issuing municipality.
Houston is choosing to use debt but is also issuing that debt in the form of general obligation debt. That is a pledge of taxing power in support of this debt for an operating cost. In this case, the bond issue would provide the $650 million to be turned over to the pension fund. It also comes as the City seeks to fund the cost of salary increases agreed to as a part of the overall contract package.
The plan has earned pressure on the City’s ratings. S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. “The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases.”
The City also faces increasingly frequent flood and hurricane events generating increased expenses. It also faces legal issues from an April Texas court ruling in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. The Court found that the amount subject to transfer is limited under state property tax laws. The estimated revenue hit if that survives all the way through the state court system is $110-120 million annually.
The City of East St. Louis has long been a depressed credit. It has often underfunded its pension funds as a way of maintaining current budget balance. Under state law, pension boards which oversee the funds can request that the State Comptroller intercept state aid to a city and direct those funds to the pension funds. For months, the City and its pension boards have been negotiating over how much the City needs to put in during its current fiscal year. The Police Pension Fund has now decided to request that the State Comptroller intercept some $3.5 million to be deposited into that fund.
Now the City has chosen to challenge the intercept provisions in court. The City is suing the Police Pension Board and the Comptroller claiming that the intercept program is unconstitutional. The city is asking the court for a permanent injunction that would block the comptroller’s office. “The enforcement of this statue exacerbates existing inequalities by reducing the City’s ability to provide essential services that these communities rely on. The reduction in state funds due to the intercept will lead to decreased public safety, health services, and other vital municipal functions, disproportionately affecting minority residents.
The City stopped making monthly payments to the Police and Fire pension funds after September of last year. The Funds indicated in January that they would seek impoundment without funding. Since then, the Fire and Police Funds have taken slightly different approaches. The Fire pension fund negotiated an agreement with the city in March. Under that deal, the city government agreed to put $4.5 million into the fire pension fund by the end of May.
The East St. Louis Police Pension Board says the city owes $3.5 million to the fund, covering fiscal years 2016, 2019 and 2021. The city says it received less than that – about $3.3 million – from the state during the first quarter of this year. It takes some 60 days to process an intercept request which would put a decision into August. A local judge has issued a temporary restraining order that stops the intercept from proceeding, for now. A hearing will be held on August 5 which is six days before an intercept could occur.
MUNICIPAL FINANCE AND HOMELESSNESS
One of the more intractable problems which is also the most visible is that of homelessness and its intersection with mental illness. The lack of facilities, the reluctance to fund or locate needed facilities and current politics have all stood in the way of dealing with the issue. Now a recent financing and a project groundbreaking are showing what can be accomplished through the municipal market.
The Mead Valley Wellness Village is a 450,000 sq. ft. behavioral health campus with five main buildings: a Community Wellness and Education Center, a Children’s and Youth Services building, Urgent Care Services, Supportive Transitional Housing, and Extended Residential Care. It includes residential as well as outpatient facilities. There are provisions for families as well. They reflect the state of the art in terms of holistic treatment of the overarching problem.
The facilities will be operated by Riverside University Health System–Behavioral Health (RUHS-BH), a county agency. The County owns the land – an 18 acre site near Perris, CA – and created an entity specific to this project to act as landlord. Through this structure, the County has affected a P3 with the developer and builder/designer at risk through construction. Upon acceptance of the facility, the County’s obligation to make lease payments kicks in.
The location of the facility isn’t exactly a garden spot off I-215. That reflects the difficulty in siting projects like this. There isn’t much around to object to it. The facility is anticipated to open in 2026 and is estimated to have an annual impact of more than $78 million and will lead to more than 800 jobs.
PIPELINES ON THE BALLOT
The South Dakota Secretary of State has certified a ballot item which could repeal legislation seen as supportive of the Summit Carbon Systems proposed pipelines. Senate Bill 201 was enacted in 2023. Pipeline opponents were able to gather signatures in numbers well above the requirement. This puts the law in the classification of a “referred law.” It’s uncommon, The last referred law vote was in 2016.
Senate Bill 201 allows counties to collect a pipeline surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion. It provides that commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. That means local rulemaking still exists, and the decision to make a carbon pipeline company comply with those setbacks still rests with the Public Utilities Commission.
FEMA FLOOD RULES
Since August 2021, FEMA has partially implemented the Federal Flood Risk Management Standard (FFRMS). Prior to the FFRMS, FEMA required non-critical projects to be protected to the 1% annual chance (100-year) flood to minimize flood risk. Critical projects, like the construction of fire and police stations, hospitals and facilities that store hazardous materials, had to be protected to the 0.2% annual chance (500-year) flood. This standard reflected only current flood risk.
The FFRMS will increase the flood elevation — how high — and floodplain — how wide — to reflect future, as well as current, flood risk. Until now, implementation relied on existing regulations to reduce flood risk, increasing minimum flood elevation requirements for structures in areas already subject to flood risk minimization requirements, but not horizontally expanding those areas (widening of a flood plain). That was a problem exposed when prior storms revealed that much development was occurring in flood plains in Harris County, TX.
One of the major distinctions between partial and full implementation are the expansion of the floodplain to reflect both current and future flood risk and the requirement to consider natural features and nature-based solutions. Less reliance on sea walls and the like and more on softer more absorptive natural areas with greater spacing between development on the shore or the riverbank.
Given the last 10 days or so of weather up here in the NYS woods, the argument over climate change is pretty much over. So, it’s only rational to face reality and mitigate risk. No reason for the government not to apply at least some insurance industry common sense. In this case, it’s at least based on some evidence. The efforts at flood mitigation in the Rockaways for housing and other smaller areas on Staten Island and in New Jersey in the wake of Superstorm Sandy provided that. It does hit values no doubt but we haven’t seen evidence of real fiscal problems.
It’s appropriate that the release came as a spate of storms has been brewing. The predictions have been for a more dangerous than normal storm season. It’s clear that the issue of managed retreat is going to gain prominence. Just this week the situation in Houston has been pretty severe so this is becoming almost a regular occurrence there. There was already a realization that planning maps needed to be adjusted in Harris County. The same is true in rural Vermont where it’s two years in a row for one town.
Eventually, the insurance market will tighten and the pressure against building back will increase.
PREPA BANKRUPTCY
The never ending process we know as The Puerto Rico Electric Authority bankruptcy may be closer to an ending but not a solution. The bankruptcy court has given the Oversight Board, PREPA and its creditors some 60 days to come up with a workable Plan of Adjustment. The parties have been negotiating but to no avail. Now, the judge has raised the potential for the bankruptcy to be dismissed if a solution cannot be found.
Mediation efforts have come up short with the mediator expressing a pessimistic view. “I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.” The judge noted that a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”
Both sides in the process were admonished for taking unrealistic positions in their negotiations. Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available. The judge noted that none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit on appeal.
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