Joseph Krist

Publisher

NEW YORK’S MUNICIPAL WORKFORCE WOES

Recently, much attention has rightfully been focused on the potential impact of the management upheaval in the New York City government. The lack of permanent commissioners at the police and Fire Department are the best examples of the knock on effects of the Mayor’s (and his team’s) ongoing legal troubles. Before that however, there were real issues with the City’s ability to attract and maintain workers to fill the career positions that are essential components of any effective bureaucracy.

Here’s one example of the impact of a hollowed out professional workforce. The City provides multiple benefits to low-income New Yorkers, including Supplemental Nutrition Assistance Program (SNAP) food stamps and Cash Assistance (CA). CA consists of two programs, Family Assistance (FA) and Safety Net Assistance (SN). The Federal and State governments determine the program requirements, and it is up to City employees at the Human Resources Administration (HRA) division of the Department of Social Services (DSS) to process applications, determine eligibility, and ensure benefit delivery. SNAP benefits are 100% Federally funded, while CA benefits are a mix of City, Federal, and State dollars.

SNAP and CA applications have significantly increased since 2020, accelerating with the end of pandemic-era safety programs. At the same time, staff levels declined during the pandemic and did not begin to recover until 2023 and 2024. From 2020 to 2022, SNAP and CA cases rose by 13%, while relevant staff levels decreased by 9%. This led to backlogs in the process which put the City out of compliance with federal standards. Timeliness has improved since 2023, but remains a challenge, especially for CA. Almost one third of new CA applications were still overdue as of June 2024, according to the most recent data provided by HRA.

Much of the difficulty with staffing is based on the pandemic and the City’s response to it. The effort to force City workers back to the office before many other facets of the City’s social service infrastructure were open or available was a major negative. It’s a situation which is manifested in the use of cancelled open positions as a way to “tighten the City’s budget belt” when issuing financial plans and updates. Hiring is likely to be a problem throughout the last one year plus of the current administration.

PFAS

The US E.P.A. is moving towards enforcement of standards covering certain chemicals generally known as PFAS and their presence in local water supplies. EPA established legally enforceable levels, called Maximum Contaminant Levels (MCLs), for six PFAS in drinking water. Public water systems must monitor for these PFAS and have three years to complete initial monitoring (by 2027), followed by ongoing compliance monitoring. Water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

Public water systems have five years (by 2029) to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed these MCLs. Beginning in five years (2029), public water systems that have PFAS in drinking water which violates one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation. 

EPA estimates that compliance with this rule is estimated to cost approximately $1.5 billion annually. The Bipartisan Infrastructure Law has dedicated $9 billion to help communities impacted by PFAS pollution in drinking water as well as another $12 billion in Bipartisan Infrastructure Law funding available to communities to make general drinking water improvements, including addressing PFAS chemicals. Estimated costs include water system monitoring, communicating with customers, and – if necessary – installing treatment technologies.

That raises the issue of the potential impact on the finances of local water systems from the rule. The circumstances of where these chemicals came from will dictate the financial burden. If it’s at a current or former military facility does the federal government have the responsibility? What is the cost breakdown between private and public sources of the pollution? It is important to note that “EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties.”

Superfund sites take a long time to be remediated and that reduces the current financial burden for localities. I note that the agency says that “EPA’s enforcement policy…will provide additional clarity on the agency’s intent not to pursue certain parties such as farmers, municipal landfills, water utilities, municipal airports, and local fire departments, where equitable factors do not support seeking CERCLA cleanup or costs.”

I see the program as a manageable long term issue rather than any short-term credit issue. There are already military installations (primarily those with air facilities) across the country which have executed agreements with host localities to share the burden of the cost of compliance. Air facilities through the use of firefighting foam have been huge contributors to the problem. A funding path would allow the costs to be spread across multiple balance sheets.

Public water systems can choose from multiple proven treatment options. In some cases, systems can close contaminated wells or obtain a new uncontaminated source of drinking water. The final rule does not dictate how water systems remove these contaminants.

HOUSING AND TAXES

A bill introduced this year in the  Honolulu City Council is the council’s third attempt since 2018 to pass an empty homes tax. It would consider homes vacant if they’re unoccupied for more than six months per year and includes exemptions for things like being in the military, receiving medical care or if the home is undergoing renovations. The Honolulu tax would be in addition to regular property taxes, and would start at 1% of assessed value before gradually going up to 3% over a few years. The bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. 

The goal is to increase occupancy rates and decrease the number of homes sitting empty. It is a concept that was first adopted in Vancouver, B.C. Like Honolulu, it had a significant stock of properties maintained as second homes and/or investment properties. Vancouver’s tax only exempts homes occupied by residents who are on a lease or sublease. The pending bill in Honolulu has been amended to exempt short-term rental owners. It is a phenomenon that we see in many areas which have significant tourism sectors in their local economies and significant second home bases. The pressure to offer short term rentals is immense.

Opponents also cite the associated costs of enforcement. In Honolulu, the bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. Bill supporters acknowledge those allocations may change during the upcoming budget process.

The primary goal of empty homes taxes is to reduce the number of vacancies. In Vancouver, vacancy rates were roughly halved. Another goal is reducing the number of investment properties. It will take three out of five votes on the Honolulu City Council to enact a tax. The complexity of solving housing shortages nationwide is reflected in situations like this. Some want the revenues to be generally available. Others want funding for housing development.

WINDY CITY WOES

The City of Chicago is facing a host of fiscal problems. The City’s FY2025 Budget Forecast, released in August 2024, estimated a $222.9 million year-end budget shortfall for FY2024, a $982.4 million deficit for FY2025 and over $1.1 billion for FY2026. These deficits equal or exceed those faced during the pandemic, and the City must now fill the $1.2 billion deficit for FY2024 and FY2025 without the benefit of the federal pandemic funding.

The City already allocates approximately 40% of its operating budget to debt and pension payments. Its personnel costs continue to increase while its revenues have not recovered as hoped. Labor negotiations are a major pressure. Chicago Public Schools face a militant teachers union (represented legally by the Mayor before he ran for Mayor) which is trying to negotiate a large pay increase while simultaneously pushing for the Mayor to support keeping schools open by. In part, limiting access to charter schools.

In December 2023 legislation for Tier 2 Chicago firefighters that changed the calculation of final average salary.21 This was promoted as the first part of a “fix” to preemptively address concerns about Tier 2 benefits potentially failing to meet Internal Revenue Service Safe Harbor rules, which requires that government pension plans that do not coordinate with Social Security provide benefits that meet certain minimum standards. Fixes to Tier 2 employee pensions and a new firefighters contract also are pending. (Tier 2 State pension benefits must meet Internal Revenue Service Safe Harbor Rules, which require public workers to receive a retirement benefit from their public pension that is at least equal to the benefit they would receive under Social Security.) This triple threat of labor issues is real.

The Mayor recently announced a hiring freeze across City departments but it is not clear whether this excludes police and fire. Those address what he can control. The FY2025 Chicago Public Schools (CPS) budget had to fill an initial $505 million deficit, which could grow by hundreds of millions more once contract negotiations with the Chicago Teachers Union are finalized this fall.

The Regional Transportation Authority (RTA) has projected a $730 million budget gap beginning in FY2026 once pandemic funds have depleted. These will all pressure the City to provide more funding over a period of massive competition for the same tax base. Tax increases are seen as currently not feasible (MCN 10.14.24). The State has its own fiscal issues to continue dealing with. The projected $538 million budget gap the City faced in FY2024 — the first year ARPA funds were no longer available to be used for revenue replacement — was originally closed in part with $49.5 million additional TIF surplus.

A Civic Federation analysis of the City’s near term fiscal outlook showed worrisome trends. The City’s four pension funds have a total of $35.6 billion in unfunded pension liabilities. All four of the City’s pension funds began to transition to state law-mandated 40-year funding plans in 2016. Since 2022, all four are now funded on an actuarially calculated basis. The FY2024 total required pension contribution was $2.8 billion (which included a $306.6 million supplemental pension payment), comprising 22.9% of total net appropriations. The two largest funds, the Municipal and Police Funds, received the largest portion of annual funding at 77% or nearly $2.2 billion.

In the meantime, the City of Chicago allowed a temporary casino space to open in September 2023. The Mayor’s FY2024 budget estimated that the temporary casino would generate $35 million to contribute toward the total $1.5 billion payment to the Police and Fire pension funds in FY2024. Meeting this projection would require just under $3 million per month in local tax allocations. The casino has only generated $13.1 million in total local tax allocations in the past twelve months and has yet to break $1.5 million in local allocations in a single month.

FEDERAL FOOD FUNDS FOR THE SOUTHEAST

The U.S. Department of Agriculture (USDA) announced that people in Florida recovering from Hurricanes Helene and Milton may be eligible for food assistance through USDA’s Disaster Supplemental Nutrition Assistance Program (D-SNAP). Approximately 407,733 households in 24 Florida counties are estimated to be eligible for this relief. USDA makes this funding available through states in the aftermath of disasters. It even allows people who may not be eligible for SNAP in normal circumstances to participate if they meet specific criteria, including disaster income limits and qualifying disaster-related expenses. 

Earlier this week, USDA announced that residents in parts of Georgia, North Carolina and Tennessee may be eligible for D-SNAP. USDA also announced that five more counties in Georgia —Dodge, McIntosh, Taliaferro, Thomas, and Warren—are now eligible, bringing the total area where D-SNAP is offered to 112 eligible counties and one Tribe across the states impacted by Hurricanes Helene and Milton. 

To be eligible for D-SNAP, a household must live in an identified disaster area, have been affected by the disaster, and meet certain D-SNAP eligibility criteria. Eligible households will receive one month of benefits – equal to the maximum monthly amount for a SNAP household of their size – that they can use to purchase groceries at SNAP-authorized stores or from

CLOSER TO THE EDGE

The National Student Clearinghouse Research Center reports that preliminary data for fall 2024 shows undergraduate enrollment increasing 3 percent. All sectors are seeing growth in the number of undergraduates this fall. There are however, worrying signs. Contrary to overall enrollment growth, freshman enrollment is declining, down 5 percent from this time last fall with public and private nonprofit 4-year institutions seeing the largest declines (-8.5% and -6.5%).

An almost 6 percent drop in the number of 18-year-old freshmen (a proxy for those enrolling immediately after high school graduation) is driving most of the decline. Is this the beginning of the long-awaited demographic cliff facing the higher education sector?

NATIVE AMERICAN GAMING

In California, card rooms have been a long running opportunity for gamblers to play legally. They are restricted to table and card games, hence the name, but slot machines are prohibited. In a number of small communities, card rooms generate significant revenues. Tribal casinos offering the full array of gambling opportunities are seen as direct competitors to the card rooms.

A new California law will now allow the tribes to sue to determine if the card rooms are, as the tribes contend, illegally operating games which are not permitted under California law. The tribes have exclusive rights to run the full array of games including slot machines. The tribes have sought to establish standing to sue over the issues. Without standing, the state courts were unwilling to hear the tribes’ cases.

A law passed in the recent legislative session has changed that. The Tribal Nations Access to Justice Act authorizes a California Indian tribe, under certain conditions, to bring an action solely against licensed California card clubs and third-party proposition player services providers to seek a declaration as to whether a controlled game operated by a licensed California card club and banked by a third-party proposition player services provider constitutes a banking card game that violates state law, including tribal gaming rights under the constitutional provisions described above, and to request injunctive relief. 

That final provision is what will enable the tribal gaming facilities to obtain injunctions against the card room operators. The bill would prohibit a claim for money damages, penalties, or attorney’s fees and would require that actions be filed no later than April 1, 2025. More than 60 tribal casinos operate statewide. It is estimated that there are 80 operating card rooms.

The law has the potential to change the landscape for the municipalities where card rooms are significant economic drivers. There are several of these in Southern California and there are concerns that should the tribes prevail in their legal efforts some of these smaller municipalities would lose employment and tax revenues.

DID ARKANSAS HIT THE MOTHER LOAD?

Researchers at the United States Geological Survey and the Arkansas Department of Energy and Environment estimate that there might be 5.1 million to 19 million tons of lithium in the Smackover Formation brines in southern Arkansas. That would represent 35% to 136% of the current amount of lithium estimated to be in the U.S. The U.S. relies on imports for more than 25% of its lithium.

The USGS estimates there is enough lithium brought to the surface in the oil and brine waste streams in southern Arkansas to cover current estimated U.S.  lithium consumption.  The low-end estimate of 5 million tons of lithium present in Smackover brines is also equivalent to more than nine times the International Energy Agency’s projection of global lithium demand for electric vehicles in 2030. 

LOCAL GAS TAX SUBSTITUTION

The issue of funding for road maintenance paid for by gas taxes continues to evolve. Cities are finding it harder to generate funds from gas taxes as electrification and fuel efficiency make gas tax revenues less dependable. At the state level, the debate over how to replace gas tax revenues has led to new or increased fees for electric car owners.

One city is trying a new model for generating revenues for street maintenance. On November 1, the City of Rock Island. IL will begin adding a flat fee to residents’ water bills to fund local street maintenance. The amount of the fee will vary with the size of the land parcels being charged. All parcels with a gross area of less than 6,000 square feet will pay $7 monthly. Parcels over 6,000 but less than 18,000 square feet will pay $10 monthly. Parcels over 18,000 but less than 43,560 square feet (an acre) will pay $20 monthly. Parcels greater than 43,560 square feet will pay $30 per month.

Currently Rock Island’s local gas tax brings in an estimated $500 K annually. The new fee is projected to generate $2 million in revenue. The new fee comes in the wake of legislation earlier this year that would eliminate an existing 1% state tax on groceries. That goes into effect on January 1, 2026. The law allows counties and municipalities to levy their own 1 percent grocery taxes by passing an ordinance. This eliminates the requirement for a referendum.

It’s an example of how even local government will have to be nimble as the transportation landscape shifts right in front of them. This is especially true as the rollout of a majority electric car market has been uneven. In the meantime, the roads still need to be maintained especially if the much heavier electric vehicles become the norm.

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.