Joseph Krist

Publisher

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NEW YORK PENSIONS

Throughout all of the years when the State of New York’s credit was on its way down, one area which remained a positive was the management of the State’s various pension funds. It has been a reflection of regular funding, good investment management, and flexibility in terms of the structure of the pension fund obligations.

Over recent years, the issue of how to effectively lower pension benefits and funding requirements in states with significant unfunded pension obligations has been a continuing problem. One way is to introduce different tiers of pension beneficiaries based on date of hire. It is a slow path but a steady one and it has proven out.  New York has had several tiers of pension categories which clearly establishes a precedent.

Another issue has been the debate over how realistic the discount rates being applied were when pension funds estimated their unfunded liabilities. The higher the assumed return to the fund the better off the fund would be so long as the annual actuarially required contribution (ARC) from current funds was made. These assumed rates of return were kept high even in the face of poor investment performance. It allowed legislators to reduce annual ARC requirements and avoid tax increases.

Eventually, one has to pay the piper and the pension funds have been no exception. Slowly, assumed rates of return have been lowered. There has still been concern that in many states the assumptions remain too high. Here once again, NYS finds itself in a leading position. The State Comptroller and pension fund overseer has announced that the long-term assumed rate of return on the Fund’s investments will be lowered from 6.8% to 5.9%.

In 2010, he decreased the rate from 8% to 7.5%, in 2015 to 7% and in 2019 to 6.8%. The median assumed rate of return among state public pension funds is 7.0% as of August 2021, according to the National Association of State Retirement Administrators. This comes as the State was able to report a funding ratio of 99.3%.

MEET ME IN ST. LOUIS

The City of St. Louis has always suffered economically in comparison with its surrounding St. Louis County. The trend of migration from the City to the County in the post WWII era accelerated in the late 1960’s. The resulting damage to the City’s tax base and economic base has been a drag on its credit for years. The existence of the City and County as two distinct governments created tensions between the two governments which have interfered with sound regional infrastructure development and the provision of many services.

At the same time, the City’s financial management was weak and its fiscal position and ratings continued to decline. The result was a decline to a Baa2 rating for general obligation bonds and a Baa3 lease appropriation rating. Now, the City has benefitted from the strong pre-pandemic economy and reported consecutive years of current budget surplus. Add $ 498 million of federal funding through the American Rescue Plan Act (ARPA) to the mix and the outlook improves.

And so, it is as Moody’s upgraded the City of St. Louis, MO’s general obligation unlimited tax (GOULT) debt rating to A3 from Baa1. Appropriation debt is now rated Baa2. The balanced current operations along with the aid provides a more stable base to support the credit. The city has remained the center of employment in its region and it does have a tax structure which captures revenues from commuters through economically sensitive activity taxes such as earnings, payroll, and sales tax revenue. This is a real factor in offsetting the less favorable economics and demographics of the City. Thus, the positive fiscal result.

NYC AND ELECTRIC VEHICLE CHARGING INFRASRUCTURE

The City of New York will pilot the installation of public vehicle chargers for electric vehicles. They will be provided at newly reserved curbsides beginning in Manhattan. They are designed to charge a vehicle in under one hour up to at least 80% capacity. Charging will cost of 35 cents per kilowatt-hour. 

Press reports indicate an expectation that the DOT will also announce plans to expand its network of curbside charging stations from the current 24 stations — each with two plugs — to 10,000 by 2030. However, those chargers will be of the slower “Level Two” variety. The initial 24 stations are part of a pilot program to install 100 curbside chargers by next month. The installations are part of a four-year “demonstration”. 

It is the sort of investment if cities are serious about their curb management from both business and transportation perspectives. Reservations of curbsides for these vehicles as well as reservation of curb for deliveries are two ways localities can take a forward leaning approach to vehicle management. Larger cities are in a unique position to take advantage of their effective ownership of their streets including curb space. It is a way to drive results and not just policies.

WEST VIRGINIA COAL UPDATE

We have regularly discussed the role of regulation in the process of decarbonizing the electric power grid. In particular, discussed the role out of state regulators play in the regulation of the operation of coal fired generating units which supply power to those states. Recently, we focused on regulatory actions in Virginia and Kentucky which could impact the operations of coal fired generation in West Virginia. Decisions in those two states limiting the amounts which could be charged to customers in those two states have made an earlier closing date for coal assets more likely.

Now, Appalachian Power and Wheeling Power petitioned the West Virginia Public Service Commission to approve making West Virginia customers responsible for $48 million annually to cover wastewater compliance work to keep the John Amos, Mountaineer and Mitchell coal-fired generating plants in Putnam, Mason and Marshall counties federally compliant with federal effluent limitation guidelines. The companies are asking West Virginia customers to shoulder all of the cost burden for these planned upgrades required to keep the plants compliant with wastewater discharge guidelines. Not making the wastewater treatment upgrades would require that the plants shutter in 2028.

ENERGY AND ASSESSMENTS

The vulnerability of reliance on extractive energy industries has been made clear. What policy changes could not accomplish in terms of the production of fossil fuels, the pandemic and its impact on oil demand did. One example of the potential impact of a changing energy environment occurs in Colorado.

Colorado is better known for its relationship with fossil fuels through mining. There are areas which produce oil. One of them is Weld County. This northern Colorado county produces an estimated 90% of the oil extracted in the state. The County has gone through the declines in production associated with the pandemic which reduce unemployment and support tax revenues. Now that process has impacted the County through a reduction in assessed valuations for oil and gas properties.

Weld County its all-time oil production peak at nearly 170 million barrels in 2019. Production dropped to just under 150 million barrels out of the ground in 2020. According to production data kept by the Colorado Oil and Gas Conservation Commission, this year’s yield is on pace to fall an additional 30 million barrels. The County saw an unprecedented $2.7 billion reduction to its assessed property valuation last year, a nearly 18% decline from 2019. This resulted in property tax revenue declines of $45 million. 

The County is not unprepared. It has $100 million in a general contingency fund, another $100 million in its public works reserve fund and $36 million in a reserve account for county buildings. This should aid in the transition from extraction Colorado’s oil and gas sector is taxed at a property assessment rate of 87.5%, three times what commercial property is taxed at and more than 12 times the rate for homes.

At the local level, the reliance on large taxpayers is not without risk. The Platte Valley School District relies on oil production facilities for an estimated 95% of revenues. The assessed property value in the school district last year went down even more sharply — 34% — than the county as a whole.  That could have implications for the County tax base going forward. Much of the population increase in the County is suburban sprawl from Denver, fueled by lower housing costs and property taxes. Those lower residential taxes reflect the revenue derived from energy extraction.

NYS AND ELECTRIC VEHICLES

One of the questions we asked when Andrew Cuomo resigned was what does the change in governor in New York mean for a variety of policies – criminal justice, the economy, the state’s role in economic development, the environment? This week we received our first indication of where policy might be going under a Hochul administration.

The new Governor has signed legislation that will require all passenger vehicles sold in the state to be emission-free by 2035. Hochul signed an order instructing the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. A simultaneous executive order calls for the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. The goal is to eliminate emissions from medium- and heavy-duty vehicles by 2045.

The actions make New York State the second, after California, to enact limitations on sales of internal combustion powered vehicles.

CLIMATE LITIGATION

Hoboken, NJ will have its lawsuit against fossil fuel producers heard in state, rather than federal, court. Hoboken sued oil and gas companies in 2020, charging climate change-related violations both of state common law and New Jersey’s Consumer Fraud Act. The city joined several others in pursuing legal remedies to address climate change issues.

The companies petitioned to move the case to federal court which is seen as a friendlier venue for these suits. The judge ruled that Hoboken’s lawsuit is not subject to “complete preemption” under the Clean Air Act or the Outer Continental Shelf Lands Act and that no federal officer is implicated in the city’s suit.  At the same time, he cautioned the city that “federal law may ultimately block Plaintiff’s claims through ordinary preemption.” 

That issue will have to be decided in state court. The defendants are likely to appeal the matter to the U.S. Court of Appeals for the 3rd Circuit.

VEHICLE MILEAGE TAXES

In California, the legislature recently extended a road usage charge pilot program until Jan. 1, 2027.  The debate spotlighted the usual suspects in terms of the arguments made and the pitting of rural versus urban interests. Rural voters and their representatives complain that the mileage tax would penalize then because of their need to travel relatively large distances as part of their day-to-day life.

That argument ignores the reality that under the current scheme, electric car drivers get all of the benefit of infrastructure while only gas-powered drivers pay those costs through taxes. If your car gets 20 mpg and you take a 60-mile trip, you use three gallons of gas which generates an average of 27.9 cents per gallon. So that trip cost (in terms of a tax) 84 cents. A 1.4 cent per mile mileage tax would generate the same level of revenue for the same trip.

The logical conclusion is that vehicle mileage fee proponents have done a bad job of addressing this concern. Take Pennsylvania where initial estimates of what a vehicle mileage fee would be are around 8 cents per mile.  That simply is not going to fly with long distance drivers. It then generates opposition to the concept rather than the price. The actual amount of the fee is not the big hurdle but it gets in the way of acceptance of the concept. It also comes as very mixed signals come out of Washington.

On the one hand, are the climate deniers and fossil fuel defenders who oppose any change. There is however, some bipartisan support for vehicle mileage fees in Congress and the Transportation Secretary has spoken very favorably about the VMT concept. Nevertheless, the proposed $3.5 trillion infrastructure package originating in the House does not include a VMT.

MUNICIPAL UTILITY IN MICHIGAN

The State of Michigan has not seen the creation of a municipal electric utility since 1912. Reliability issues, especially in the recent past have led many to question the ability of investor owned, profit based electric utilities to properly invest in grid resilience and reliability. It is an issue which has gained heightened attention in the aftermath of winter storms in Texas and the current disaster in Louisiana. We expect that this trend will continue.

The latest municipality to deal with these issues is the City of Ann Arbor, Michigan. The City Council voted unanimously, to ask the city’s Energy Commission to make a recommendation by Dec. 31 on whether the city should undertake a feasibility study to explore alternatives to the current situation which relies on DTE Energy. The hope by proponents of municipal power is that the process could lead to recommendations for the formation of a municipal utility.

Such an action would have to be approved by the City’s voters. State approval is not needed. In the City, the Energy Commission is expected to make recommendations to the City and then a feasibility study would be undertaken. Supporters of a municipal utility hope that the process leads to a ballot initiative in November, 2022.

PURPLE LINE P3

Maryland’s Purple Line has been a poster child for what could go wrong with a public-private partnership. The project was supposed to be completed by the Spring of 2022 but litigation and other construction delays destroyed that timetable. Eventually, the private partner pulled out of the project threatening its viability and completion.

The State of Maryland stepped into the process designing new partnership agreements dealing with many of the issues which disrupted the project. The net result is that the State would have to accept more of the financial costs of delays associated with approvals and litigation. Now, the Maryland Transit Administration, said the agency and private team managing the project expect to have a new contractor selected in December and a new construction contract finalized by Feb. 17. 

The hope is that this process could allow substantial construction to resume in the Spring or early Summer of 2022. A new construction contract previously had been scheduled to be finalized this month but, construction teams bidding on the project asked for more time to submit proposals. The timing change because it would modify a $250 million Purple Line legal settlement approved in December.

MDOT has been able to fund some work over the past year, including moving utility lines and manufacturing light-rail vehicles and some of the system’s electrical components.

PRIVATE HIGH SPEED RAIL

We always notice that high speed rail developers highlight the “private” nature of their projects and the lack of reliance on grants for funding. The effort is designed to make the projects look like products of an all private approach to funding. In the end though, these projects all seem to rely on some form of cost subsidy from a government funding source.

The latest example is the Texas Central, a proposed high speed line between Dallas and Houston. Texas Central has publicly stated that construction is projected to begin at the end of 2021 or beginning of 2022. Now, it appears that the start of construction hinges on the inclusion of federal lending in the infrastructure bill currently being written in the House.

The cost of the project is estimated at $24 billion. Financing commitments from private lenders cover about half of that amount. The remainder would be financed by federal loans to the project. That funding would be cheaper than private funding. Texas Central estimates that the fare for the train would be $150 based on comparisons with current airfares.

Land acquisition remains a hurdle for the project. 40-percent of the land required for the train has already been secured.  The remainder is planned to be acquired after financing is in place. The only sure section of the project is to be an initial test phase. Once financing is secured, the first 50-miles of track will be built from Dallas to the south so engineers can conduct tests. 

ILLINOIS POWER

A 100% clean energy sector by 2050 is the goal of legislation in Illinois which was under consideration as we go to press. The plan would lead to the closure of private, for-profit coal powered plants that generate more than 25 megawatts of electric generating units by 2030, and it would close down municipally-owned coal-fired power plants and natural gas power plants by a deadline of 2045. The proposal includes $694 million in taxpayer funds for Exelon to prop up its carbon-free nuclear power plants in Byron, Dresden, and Braidwood. 

Governor Pritzker’s office said the current version of the Senate bill would still allow the municipally-owned Prairie State and Springfield City, Water, Light, and Power coal-fired plants to “continue polluting for 24 years with no restrictions.” The measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The pressure to protect the public power owners of the Prairie State Generating plant was intense. After all, municipal purchasers of the plant’s output are spread across three adjoining states to Illinois. The significance of the target date of 2045 for public power operators is that essentially all of the debt of the various agencies and municipalities which has been issued to finance Prairie State by that time. There is however, no guaranty that future legislatures will not enact legislation which could shorten that time frame. Should that be the case, some of the borrowers would find themselves paying for stranded assets. 

Prairie State emits 12.7 million tons of carbon dioxide per year, the most of any generating plant in the state.  The two IOU owned nuclear facilities are cited for their lack of carbon emissions and their role as employers of over 20,000.

CARBON FREE BUT…

The Illinois debate reflects many facets of the national energy debate. Obvious existing carbon free generation – nuclear and hydroelectric – are under pressure on other environmental grounds. While debates continue around the country – nuclear in Illinois and hydro in the Pacific northwest – the impact of drought on the debate complicates it.

The drought has significantly reduced the total amount of carbon free power for the West and Southwest. Hoover Dam’s normal capacity is 2,074 MW. Currently it is limited to 1,567 MW. The dam requires a power pool minimum elevation of 950 feet to produce power (with an expected capacity of 650 MW), Lake Mead’s elevation as of Aug. 31 was 1,067.96. feet. USBR’s California hydropower reservoir water levels are expected to remain above power pool minimums throughout the remainder of 2021, including at the 663-MW Shasta power plant at Shasta Dam and the 162-MW Folsom plant at Folsom Dam. Against this backdrop, there is growing support in the Northwest for removing dams in the name of species preservation.

The nuclear issue comes down to dollars and cents. New York and New Jersey subsidize their nuclear generators. A move to do so in Ohio has resulted in a significant criminal scandal. The energy industry has been at the center of scandal in Illinois. Nuclear generation has threatened municipal utilities in South Carolina and Florida. This has created a huge hurdle to overcome the carbon free nature of nuclear generation.

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