Joseph Krist

Publisher

CALIFORNIA

Moody’s announced that it has revised its outlook on the state’s general obligation bond rating to negative. The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state’s budget. The state’s enacted fiscal 2024 budget scaled back or delayed certain non-recurring spending in an effort to retain budget reserves.

The situation is complicated by the fact that a more complete and accurate picture of the state’s revenue collections will likely not be available until October given the weather-related shift in the income tax filing deadline. The delayed receipt of revenue leaves the state with less certainty around fiscal 2024 budgeted revenues and a narrowed window in which to respond to revenue collections that fall short of present assumptions.

Given the negative outlook and the underlying challenges associated with a highly volatile revenue structure, Moody’s is unlikely to upgrade the state’s ratings in the coming year or two. Revising the outlook back to stable would follow greater certainty around revenue performance and the state’s capacity to balance near-term budget gaps without substantial use of reserves.

The Aa2 rating on the general obligation bonds is the same as the state’s issuer rating due to the broad pledge on the bonds, despite a constitutional priority of funding education. California’s Aa2 issuer rating balances the state’s massive economic base and presently healthy budget reserves and liquidity against a highly volatile revenue structure and limited operating flexibility relative to most states. The rating also incorporates above average leverage and fixed costs.

NEW YORK CITY

New York has not seen an outlook change on its Moody’s rating yet but that may change. Just a few weeks after awarding a stable outlook reflecting improved retiree healthcare funding, Moody’s is citing issues with the City’s potential retiree healthcare funding needs as being credit negative. These were cited along with the ongoing asylum seeker crisis as negative factors facing the credit.

We have made the case that the outlook for the City’s credit is negative already. The full impacts of the City’s labor negotiations along with the demands of the asylum seeker problem introduce serious uncertainty into the credit. The ongoing effort to revive the central business district continues to be slow going. Now, a chaotic opening to the school year faces a possible strike of bus drivers. The contract with a private vendor to manage facilities for migrants was rejected by the City Comptroller over compliance issues.

TEXAS WATER

In 2023, the 88th Texas Legislature passed Senate Bill (SB) 28 and Senate Joint Resolution (SJR) 75 providing for the creation of the Texas Water Fund. In addition, SB 30 authorized a onetime, $1 billion supplemental appropriation of general revenue to the Texas Water Fund, contingent on enactment of SB 28 and approval of SJR 75 by voters. Upon approval of the supporting constitutional amendment (Proposition 6) on November 7, 2023, the Texas Water Fund would be a special fund created in the state treasury outside the general revenue fund to be administered by the TWDB.

The Texas Water Fund is not able to transfer funds to the Economically Distressed Areas Program, the Flood Infrastructure Fund, or the Agricultural Water Conservation Fund. It will not be a new program at the TWDB and cannot offer loans and/or grants directly. Rather, it would enable the TWDB to allocate funding to existing financial assistance programs and the newly created New Water Supply Fund for Texas.

PREEMPTION

In July, the City of Houston, joined by San Antonio and El Paso, filed suit against the State of Texas, arguing that new law seeking to limit the ability of cities to regulate several areas of business activity was overly broad and violated the provisions of the State Constitution that give cities the power to make their own rules. A Texas district court judge ruled that the state law was unconstitutional. House Bill 2127, was set to go into effect on September 1.

The law would have prevented cities from enacting ordinances including those affecting labor, agriculture and natural resources, and was expected to nullify existing laws on everything from sanitation rules to the regulation of puppy mills. The law gained national attention because it would have tossed out ordinances in Austin and Dallas requiring periodic rest breaks for construction workers in the middle of the worst heat wave of the summer.

LABOR

The International Longshore and Warehouse Union and the Pacific Maritime Association announced agreement on a six-year contract with its workers. The agreement ends over a year of uncertainty about the availability of the port to shippers. This led some to reroute freight to East Coast ports which have been expanding their capacity to serve larger vessels. Seven months into 2023, the Port has processed 4,821,670 TEUs, about 24% less than the same period last year.

Members of the International Longshore and Warehouse Union (ILWU) voted 75% in favor of approving the new 6-year agreement that will expire on July 1, 2028. The Port of Los Angeles moved 684,291 Twenty-Foot Equivalent Units (TEUs) in July as cargo shipments declined compared to last year’s record month. July 2023 loaded imports landed at 364,208 TEUs, down 25% compared to the previous year.

Loaded exports came in at 110,372 TEUs, an increase of 6% compared to last year. With the need for empty containers in Asia slowing, just 209,710 empty TEUs were processed, a 39% year-over-year decline. Combined, July volumes were 684,291 TEUs, a 27% year-over-year decline.

CARBON CAPTURE IN SOUTH DAKOTA

The state Public Utilities Commission faced three choices this week about the future of carbon dioxide pipelines in South Dakota. The first was whether to grant Navigator a permit to have a branch of its proposed pipeline go through five counties — Lincoln, Turner, Minnehaha, Moody and Brookings — and collect CO2 from ethanol production facilities at Aurora, Chancellor and Hudson.

The second was whether the state commission should override local ordinances in Minnehaha and Moody counties. Those counties’ commissions adopted the ordinances this year, after Navigator had proposed its route. Navigator wants the ordinances overruled. The third was what additional conditions, if any, Navigator should face if a permit is granted.

The answer came when the Commission rejected the company’s application. It cited a failure by the company to adequately disclose carbon dioxide plume modeling, and a failure to provide timely notices to some of the landowners along the proposed route. Navigator has the opportunity to reapply with the issues narrowed to those criteria upon which the permit was denied. 

In Iowa, the other major carbon pipeline developer Summit Carbon Systems has represented to the state that if it cannot get its permit approved for the North Dakota section, that it will not build its proposed pipeline. Summit has asked for reconsideration of its proposed pipeline in North Dakota.  the North Dakota Public Service Commission said the evidence it considered did not show “the project will produce minimum adverse impacts upon the welfare of the citizens of North Dakota.” 

TRI-STATE GENERATION

We are getting to see what happens when a service provider is unable or unwilling to satisfy the demands of its customers. Tri-State is a wholesale power supply cooperative serving 45 members, including 42 electric distribution cooperative and public power district members in four states. Its primarily fossil fuel-based generation fleet is causing members to reconsider their power supply sources. Three of its members are leaving the Tri-State system oner the next two years.

Now, with less demand from its members, Tri-State finds itself in the position of having more capacity than it needs. To address this imbalance, Tri-State released a request for offers from third parties to purchase power from April 1, 2024, through Dec. 31, 2027. The request for offers is focused on power purchase agreements, and products offered include tolling agreements, block sales of energy, and dispatchable capacity.

“Tri-State will not consider offers to purchase its generating resources.” In the meantime, Tri-State had to cut rates in 2021 and 2022 to stem the customer losses. And they didn’t succeed. The experience does provide a teachable moment to other wholesale generators looking to cling on to their legacy assets.

HIGH SPEED RAIL

The U.S. does not have high-speed rail under definitions set by the International Union of Railways, a professional association representing the rail industry. The group defines high-speed rail as trains that travel faster than 155 mph on special tracks. The definition includes trains that run on standard tracks, if trains can cruise faster than 125 mph in most segments.

Many European and Asian countries operate high-speed trains around 200 mph on special tracks designed for faster speeds and closed to slower rail cars.

None of the nation’s rail lines are built for trains to run 200 mph. Amtrak’s Northeast Corridor — the busiest intercity U.S. passenger route is filled with hurdles to true high-speed service. They include sharp curves, bottlenecks, decaying tunnels, bridges and overhead power lines that slow down trains.

The corridor needs billions of dollars for basic improvements and to accommodate high-speed service.  The $1.2 trillion infrastructure bill enacted in 2021 has $102 billion for rail, but none of the money is set aside for high-speed rail. Currently, only 32 miles of tracks on the Northeast Corridor can handle speeds up to 160 mph. Amtrak plans to make an additional 100 miles of tracks capable of handling bullet trains in the next 12 years. The expansion would enable bullet trains to hit 160 mph in roughly 30 percent of the rail route by 2035.

In 2021, Congress increased federal funding for rail improvements and repairs to $102 billion through the Infrastructure Investment and Jobs Act. But the act, which authorizes funding for five years, provides only about a quarter of the money Amtrak needs for track improvements in the next 15 years. None of that money was earmarked for high-speed rail. The overall funding environment is hostile. 

PENSIONS PRESSURING DALLAS

Pension funding requirements and unfunded liabilities have been a continuing factor pressuring the ratings of the City of Dallas, TX. The need for better funding has lowered ratings before. In 2005, the City resorted to issuing pension obligation bonds to bolster funding of its two main pension funds. Now after some 18 years, the City has stated that it is considering issuing pension obligation bonds again.

Dallas still has $95.315 million of debt outstanding from the first POB issuance. It is considering a par amount of $400 million for a new sale. It is an easy band-aid but the real issue is how the City can incorporate increases in funding so as to remove pensions as a negative credit factor. POBs should never be a substitute for long-term funding actions.

In this case, the idea is being floated as interest rates are at a cyclical high. A final report on whether Dallas has a plan to fully fund pensions within 30 years must be issued by The Texas Pension Review Board in December 2024 ahead of the 2025 state legislative session. The state could mandate changes in funding requirements for these local pension funds.

Pensions are the central issue which could influence the rating presently. The economy is strong and the budget outside of the pension issue seems to be under control. The City needs to address the funding concerns quickly.

NEW HAMPSHIRE ELECTRIC

Three Granite State utilities – Eversource, Unitil, and Liberty Utilities – jointly testified in support of the existing net metering rate structure governing residential solar. Current rules were established as the result of 2016 legislation. The prior system gave participants credits equal to the price utilities charge customers for electricity. This same law also required the state to conduct studies on the impact and effectiveness of net metering and make changes to the regulations if the findings warranted.

What were some of the findings? “New Hampshire’s net metering policy — which is among the most balanced in New England — has been effective in encouraging the growth of [solar] resources in our state, and there is no evidence that the current compensation level is creating unjust cost shifts,” – Eversource on behalf of the utilities.

The environment contrasts with that in other states. North Carolina’s public utility authorities have approved a utility plan to reduce payments to net metering customers. And earlier this year, California cut rates by about 75% for new net metering customers, with utilities pushing for even more cost-cutting concessions. This follows an effort in 2022 to slash rates in Florida which was successfully vetoed by Gov. DeSantis.

On another front, New Hampshire stepped forward with a new fee for electric vehicles. Beginning September 1, fully electric vehicles must pay an extra $100 during annual registration and plug-in hybrids an extra $50. Traditional hybrid vehicles, which cannot be plugged in, do not face a surcharge. According to the New Hampshire Department of Safety, the average state driver covers 12,000 miles per year and averages 25 miles per gallon. With a state gas tax of 24 cents per gallon, that’s a payment of $115 a year in gasoline taxes.

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