Joseph Krist

Publisher

WHERE CONGESTION PRICING DERAILED

In the wake of the decision to “pause” congestion pricing, it has been useful to look at how the MTA plan stacked up against the three large international examples. One of the most glaring issues is the fact that the level of revenue to be raised and the length of time in a day that the fees would be in effect had a real impact on perceptions.

It was recently noted that the example most relied on in New York is London. London does generate some $500 million of revenue each year. But it does so by collecting the fee only during the day – M-F 7am to 6 pm; Sa-Su Noon-6 pm. Much opposition was reflective of the fact that the MTA fee would be discounted but all day. The number of workers who worked shifts through public safety and hospital jobs and relied on vehicles as bus service is sporadic at night is significant.

Industries which see most if not all of their activity after 6 pm represented a significant block of opposition. Broadway has yet to return to pre-pandemic levels of attendance and tourist and restaurant areas like the Theater District, Little Italy, and Chinatown all saw the charges as a real hindrance to their businesses. At the same time, lower Manhattan has been transformed into an evermore residential district and those residents were not to be exempted.

Rightfully or not (beauty is in the eye of the beholder) Long Island commuters were wary of paying fees into a system which they believe shortchanges them. Any transit funding increase or change in its mechanics gets caught up in the city vs. suburb fight for money. That gets exacerbated by the lack of significant train service into the City from counties in the MTA service district west of the Hudson River. (Full disclosure: I live in one of those counties.)

Many of those who live in those counties are uniformed public servants and retirees who form a strong political block. They looked at the congestion fee as a $4,000 hit to their after tax income. As they say, the math is compelling. Add that to an extremely competitive set of elections to the U.S. House of Representatives and the fees became toxic.

In the end, the MTA has got to admit that it is often its own worst enemy. It wanted the $1 billion annual revenue requirement established by the Legislature. That left little if any room for negotiation. That shifted attention from the environmental reasons for the fee and created a perception that it was a money grab. It further alienated groups like the disabled. By effectively holding ADA compliance and full access (Full disclosure: I have a disabled family member) hostage to the imposition of the fee, it highlighted its abysmal record of providing that access.

If failure is an orphan, this one has a multigenerational genealogy.

PUERTO RICO

In a decision with implications for bondholders across the municipal bond market, a federal appeals panel found that PREPA bondholders have a non-recourse claim on PREPA’s estate for the principal amount of the bonds, plus matured interest. It also held that this claim is secured by PREPA’s Net Revenues — as that term is defined by the underlying bond agreement — and by liens on certain funds created by that bond agreement. The Bondholders were appealing the Title III court’s findings that they lacked a security interest in PREPA’s current or future Revenues or Net Revenues; that any such interest was potentially avoidable under; that they had failed to state a claim for breach of trust; and that they were not entitled to an “accounting” of misappropriated PREPA moneys.

In the Title III proceedings, the judge estimated the size of the potential claims. In the Oversight Board’s view, the Revenue Bonds were non-recourse, so the Bondholders could only recover from their collateral, i.e., the moneys in the Sinking and Subordinate Funds. In the alternative, the Board and its allies argued that the Title III court’s $2.4 billion estimation should be affirmed. Finally, the Board contended that if there were a lien on Net Revenues, it would be avoidable as unperfected.

PREPA’s Revenues and Net Revenues are “special revenues” under the Bankruptcy Code. The Court found that as security for the Revenue Bonds, PREPA pledged the Net Revenues and not just those moneys that made it into the Sinking and Subordinate Funds. The Court then asked does the lien on Net Revenues also apply to future Net Revenues, i.e., Net Revenues that PREPA has not yet acquired? The Court concluded that the answer is yes.

Several courts have also considered the scope of a municipal revenue lien like the one in this case. And all of them have concluded (or at least implied) that a revenue lien can extend to revenues to be acquired at a later date. Puerto Rico law, the Bankruptcy Code, and prior case law all indicate that the Net Revenues that PREPA acquires in the future will be subject to the pledge of Net Revenues made by PREPA in the Trust Agreement.

The Court found that the Bondholders had a legal “right to payment” rooted in the covenants outlined in the Trust Agreement. Because the Revenue Bonds specify the amount that PREPA legally owes the Bondholders, there was no need to estimate the Bondholders’ “right to payment” under section 502(c).

What is the amount of the Bondholders’ claim on PREPA’s estate? The Court concluded that the proper amount of the Bondholders’ claim is the face value (i.e., principal plus matured interest) of the Revenue Bonds. According to that Trust Agreement contract, the face value of the Revenue Bonds (i.e., the principal plus matured interest) is just under $8.5 billion. So, that is the amount of the Bondholder’s claim on the Net Revenues. The Court expressly declines to tell the Title III court — in the first instance and without adequate briefing — how it should deal with the Bondholders’ Net Revenue lien during plan confirmation.

ELECTRIC VEHICLES

The United Automobile Workers union announced a tentative contract agreement at an Ohio factory making batteries for electric vehicles. The accord covers 1,600 workers at a Lordstown plant operated by Ultium Cells, a joint venture between General Motors and a South Korean partner, LG Energy Solution. It produces batteries for G.M. electric vehicles. If you remember, closures of General Motors plants especially a Lordstown car production plant were a major topic in the 2016 presidential campaign.

This announcement is a product of UAW efforts regarding their national contracts. When the plant opened in 2022 it was a non-union shop. They were brought into the U.A.W. under the terms of the national contract the union negotiated with G.M. last fall. That process was followed by negotiations around wages and working conditions specific to this location.

G.M. started production this year at a battery plant in Spring Hill, Tenn., and has another under construction in Lansing, Mich. The union said it planned to use this contract as a template as it negotiated local agreements at other battery plants that G.M. and several other rivals are building. 

Ford Motor plans two battery plants in Kentucky, one in Tennessee and one in Michigan. Stellantis, the maker of Chrysler, Jeep, Dodge, and Ram vehicles, plans two battery plants in Indiana. With the exception of one of the Ford locations, those plants involve joint ventures that were brought under the U.A.W. umbrella under the national contracts the union signed with Ford and Stellantis last fall.

This new plant is located adjacent to the aforementioned Lordstown plant. The U.A.W. said about 200 workers who had once worked at the Lordstown plant and had taken jobs at other G.M. locations would soon transfer to the battery factory so they could return to the area.

CALIFORNIA FOREVER

California Forever is the entity which has purchased some 50,000 acres of farmland in Solano County for the purpose of starting a new city from scratch. The proposal is for a city of some 400,000 all living and working there in a walkable environment. The plan requires a vote by County residents to approve the zoning changes which would be necessary to permit development. 

California Forever has now qualified its utopian city initiative for the November ballot. Voters will be asked to allow urban development on 27 square miles  of land between Travis Air Force Base and the Sacramento River Delta city of Rio Vista currently zoned for agriculture. The project has been controversial from the start as the group of sponsors used “cover” buyers to allow the land to be accumulated. Farmers unwilling to sell have been threatened with legal action. Polls have shown significant opposition to the plan.

That is what is motivating the sponsors to offer a giant youth sports complex; $500,000 in grants to local organizations; a pledge to create at least 15,000 jobs averaging $88,000 in salary; $500 million to assist with down payments for housing, scholarships and other benefits for residents; and $200 million to revitalize the downtowns of such nearby cities as Rio Vista, Benicia and Dixon.

COLLEGES

Moody’s Ratings has revised Nazareth University’s (NY) outlook to negative from stable and affirmed its Baa2 issuer and revenue bond ratings. The outlook revision to a negative from stable was largely driven by a multi-year trend of softening enrollment and declining revenue, contributing to weaker operating performance relative to historical levels for the foreseeable future. The College faces a high reliance on student charges, a small operating scale, and a high age of plant.

Union College is a small private, not-for-profit college located in Schenectady, NY. In fiscal 2023, Union generated operating revenue of $141 million, and it enrolled 2,072 full-time equivalent (FTE) students as of fall 2023. The College’s A1 rating was maintained but the outlook is now negative. The school faces the common demographic risks confronting all small colleges but its debt structure and projected operating pressure are all weighing on the credit.

Marshall University is the second largest public university in West Virginia with approximately 76% in-state students. In fiscal 2023, Marshall generated operating revenue of $292 million and for fall 2023 had total FTE enrollment of 9,716. Its rating was lowered from A2 to A3 by Moody’s. The downgrade is driven by a structural deficit which is likely to persist through at least fiscal 2026.

A key contributing factor to the deficit is the declines in enrollment and student revenue in recent years driven by weak in-state demographics including a projected decline in the number of high school graduates, low higher education attainment rates and a price sensitive student population. 

HOSPITALS

Community Health System (CHS) is a not-for-profit, tertiary hospital system located in Fresno, California. It operates three acute care facilities: Community Regional Medical Center (CRMC), CHS’s flagship tertiary/quaternary facility with 864-beds; Clovis Community Medical Center (CCMC), a community hospital in the neighboring town of Clovis with 352 beds; and The Fresno Heart and Surgical Hospital (FHSH), which operates 57 beds.

Moody’s recently affirmed its A3 rating on CHS’ debt but it changed its outlook to negative. Revision of CHS’s outlook to negative reflects normalized financial performance (absent non-recurring items) that remains well below historical levels together with ongoing headwinds that may make targeted improvements difficult to achieve, including a new California state law to go into effect next month that will raise the minimum wage to $25 over the next couple of years for most healthcare employees.  

Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. The two Portland-based organizations would create a large regional system with over $7 billion in operating revenue, 12 hospitals, 100-plus locations and approximately 30,000 employees.  OHSU is the state’s only academic medical center and medical school while Legacy operates an extensive network of tertiary medical centers, community hospitals and distributive outpatient sites.

HYDROPOWER

The U.S. Energy Information Administration released data showing the least hydropower was generated in the western United States during the 2022–23 water year (October 1 through September 30) since at least 2001. Western region hydropower generation dropped by 11% from the previous water year. The western United States—Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming, California, Oregon, and Washington—produced most (60%) of the country’s hydroelectricity last water year (2022–23).

A combined 37% of total U.S. hydropower capacity is located in Washington and Oregon.  Water supply was below-average in the Northwest region for the rest of the water year, which reduced hydropower generation. In the 2022–23 water year, 23% less hydropower was generated in Washington than the water year before, totaling 62.3 million MWh. Hydropower generation in Oregon also fell by more than 20% in the 2022–23 water year.

In contrast, hydropower generation grew in California last year. From December 2022 to March 2023, a series of atmospheric rivers drenched parts of the western United States, especially California, with record rain and snow. In the Colorado River basin, hydropower generation at the Glen Canyon Dam increased by 27% during water year 2022–23 compared with the water year before. However, water conservation efforts downstream at Lake Mead reduced water releases. The Hoover Dam, which forms Lake Mead, generated 11% less electricity in the 2022–23 water year than it did in the previous water year.

UPDATES

This week it was announced that the Gateway Tunnel project would receive an additional $6.88 billion federal grant to fund the project. The federal grant — the most ever provided to a mass-transit infrastructure project in the country — was the final piece of the funding puzzle for the long-delayed tunnel between New Jersey and Pennsylvania Station in Manhattan. The grant would increase the federal funding for the Gateway project to about $12 billion, about 70 percent of its estimated total cost. That total includes about $1 billion from Amtrak, which owns the existing tunnels and Penn Station.

The balance, along with any overruns, will be supplied by New York and New Jersey. Last week, the two states and the Port Authority received approval to borrow their shares of the project’s cost from the federal government. The work could begin as soon as this year and is scheduled to be completed in 2035.

The Central Florida Tourism Oversight District announced an agreement with a locked-in, long-term plan for expanding Disney World. At least for the next 15 years, the length of the new agreement, Disney can develop the resort without worrying about interference. It gives Disney the ability to build a fifth theme park, add three small parks, expand retail and office space and build 14,000 hotel rooms, for a resort total of nearly 54,000. The district noted that, under the agreement, Disney is obligated to spend at least $8 billion. 

California AB5 was passed in 2019 to classify ride share drivers as full employees with a minimum wage, workplace protections and other benefits. The law was immediately challenged by Uber and struck down by an appeals court after years of deliberation.  In an en banc appeal, an 11-judge panel of the 9th Circuit of Appeals reversed the first appellate decision, determining the law does not illegally single out transportation gig workers, but merely changes regulations for all independent contractors. 

The 2019 law was impacted by the approval of a statewide ballot measure Prop 22 in 2020. That allowed companies like Uber to consider their employees to be contractors. That measure is also being challenged in court, with a labor union arguing last week that it unjustly hampers future legislation.

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