Joseph Krist

Publisher

NYC

You know it’s reflective of something bad when the news is dropped on a Saturday evening. The latest departure from the Adams administration (City Corporation Counsel) over “personnel matters” just piles on the trouble for the Mayor. The management of three of the most important issues – police, migrants, and education – has been hampered and executed poorly.

This all comes as the commercial sector still is conducting efforts to revive in-office work. Transit remains an issue (a state problem) hindering a full return. Attendance at many entertainment and cultural venues across a wide spectrum of offerings remains lower. The restaurant industry remains stressed.

Under those circumstances, good government is as important as fiscally sound government is. With so much change in his management team and the whiff of criminality about City Hall, instability rules. Tuesday is always an interesting day for the Mayor. His weekly press event affectionately known as Tuesdays with Eric is reviving an old sport from the Cold War. Just like on May Days of old when you looked to see who was on Lenin’s tomb, the shift and deletions from the dais each Tuesday can be watched as well. 

FLORIDA BUDGET OUTLOOK

The Long-Range Financial Outlook (Outlook) is issued annually by the Legislative Budget Commission as required by article III, section 19(c)(1) of the Florida Constitution. The Outlook provides a longer-range picture of the state’s fiscal position that integrates expenditure projections for the major programs driving Florida’s annual budget requirements with the latest official revenue estimates. The 2024 Outlook includes projections for Fiscal Years 2025-26, 2026-27, and 2027-28.

Expenditure projections, or budget drivers, are grouped into two categories: (1) Critical Needs, which are generally mandatory increases based on estimating conferences and other essential needs; and (2) Other High Priority Needs, which are issues that have been funded in most, if not all, recent budgets. This year’s Outlook identifies 14 Critical Needs budget drivers and 28 Other High Priority Needs budget drivers, with total General Revenue needs of $7.5 billion in Fiscal Year 2025-26; $6.9 billion in Fiscal Year 2026-27; and $6.6 billion in Fiscal Year 2027-28.

The revenue and expenditures estimates included in the Outlook reflect current law requirements. The budget drivers do not include any assumptions regarding the creation of new programs or expansion of current programs. Further, the Outlook does not make any discrete adjustments for potential risks, such as major hurricanes or other natural disasters. In January 2024, the Seminole Tribe of Florida resumed revenue sharing with the State of Florida. That has generated over $300 million for the State in FY 2024.

While total revenue collections exceeded expectations since last years’ estimates by $1,085.7 million (or 2.3 percent), nearly 60 percent of the revenue gain was related to two sources: Corporate Income Tax and Earnings on Investments. There are no surprises regarding the expected expense outlook. In Fiscal Year 2024-25, Medicaid service expenditures are expected to be $33.2 billion. Total Medicaid expenditures for Fiscal Year 2025-26 are expected to be $34.7 billion, an increase of $1.5 billion. Education funding tied to enrollment growth continues to grow. Pension funding will require annual increases to meet actuarial requirements. 

The stat which interested us the most was the relatively flat growth from sales tax revenue. It is as good a current indicator as anything else as to the level and trend of economic activity. This is especially true in non-income tax states. That flat growth buttresses concerns about the level of economic activity in the State as revenue drivers like tourism show signs of weakness. The best example is diminished attendance at the Central Florida theme parks. The multiplier effect can be negative as well.

NET METERING

Another effort to promote residential solar energy has been swatted down in the courts. A North Carolina court ruled that the new net metering scheme which has been operating for nearly a year been properly vetted under state law. The State Utilities Commission had approved the changes which lower payments to residential generators without conducting their own study of the plan. The plan the regulators relied on was developed by Duke Energy.

The Court’s decision results in a less than straightforward decision. The Court agreed that “The commission erred in concluding that it was not required to perform an investigation of the costs and benefits of customer-sited generation,”. Nevertheless, the Court let the decision by the regulators to stand. Here’s where the Court confuses everyone involved.

The Court goes on to find that “however, the record reveals that the commission de facto performed such an investigation when it opened an investigation docket in response to [Duke’s] proposed revised net energy metering rates; permitted all interested parties to intervene; and accepted, compiled, and reviewed over 1,000 pages of evidence.”

The fruits of legislation in Arkansas are emerging and not everyone likes the taste. Legislation passed in 2023 limited the benefits of solar installations. The new policy created by the Legislature in 2023 is called “net energy billing,” and it will lead to far lower compensation for homes and businesses. Net energy billing will allow utility companies to decide a price for the bill credits that solar customers get now based on “avoided costs,”. That will lower payments substantially.

HIGH SPEED RAIL

The latest front in the battle to establish high speed rail as a viable transportation mode is not centered where the proposed high speed rail lines are located – Texas, California, Florida. Projects which are funded through the Inflation Reduction Act include “Buy American” provisions requiring the acquisition of equipment and rolling stock. The requirement is pitting two European manufacturers against each other – Alstom a French company and AG Siemens a German company.

Alstom has been producing equipment for Amtrak’s Acela service in upstate NY for several years. The program has been the subject of multi-year delays. There have been safety issues holding up deployment. The Siemens plant is under development in The State’s Southern Tier about one hour away. That plant is being built to comply with “Buy American” provisions of the Inflation Reduction Act.

Earlier this year the In July, Alstom filed a lawsuit against the US Department of Transportation, challenging its decision to award the contract for Brightline West’s train sets to Siemens.  Alstom contends that the new Amtrak Acela fleet it’s building at its existing Hornell, New York, facility should be considered a domestic option. The contract award came despite the fact that the Siemens plant is some two years from operating.

Siemens also took an unusual approach to its potential workforce. The company announced an advance agreement with the International Association of Machinists and Aerospace Workers to allow for union representation talks at its new Horseheads facility once there are employees to organize. 

NEW YORK WEED

The initial stages of the development of a legal cannabis market in New York State have been characterized by an understaffed regulator leading to slow approval of licenses. The delay in approvals has been cited as one of the reasons the legal weed market in NYC has been so chaotic. Enforcement has been held up by legal challenges to the State’s right to regulate sales. The effect has been to lower the available revenue stream to NYC in particular that had been expected to follow legalization.

So, what is the outlook for legal cannabis in New York State broadly but for NYC in particular. The NYC Independent Budget Office (IBO) has recently released its findings about the NYC market. Based on cannabis market growth in California, Colorado, Massachusetts, Oregon, and Washington state—all of which have seen at least five years of legal cannabis sales—IBO determined New York City may eventually see annual taxable sales between $833.6 million and $1.2 billion. A market of this scale would yield between $33 million and $47 million in annual city revenue.

If the New York State Division of Budget cannabis revenue forecasts for the coming four state fiscal years are accurate, IBO estimates that the city would receive $4 million, $20 million, $31 million, and $43 million in cannabis tax revenue in fiscal years 2024 through 2027, respectively. The New York City Office of Management & Budget estimates cannabis revenue of $38 million by fiscal year 2027, which translates to $950 million in sales that year.

New York rolled out a pretty complex system since it was trying to achieve so many different goals with its programs. How does it work? Under the MRTA, the cannabis industry is subject to three taxes: (1) a potency tax; (2) a state excise tax; and (3) a local excise tax. When cannabis product manufacturers sell to distributors, the distributors pay a potency tax based on the THC content of the products they buy. The potency tax rate depends on the form of the cannabis product: $0.03/mg THC for edibles, $0.008/mg THC for concentrates, or $0.005/mg THC for flower products.

If the manufacturer sells products directly to consumers, then the potency tax is applied at the point of retail sale. At the time of sale of cannabis product to a consumer, the retailer collects a state excise tax of 9 percent of the product’s price. A local excise tax of 4 percent is also imposed on retail sales, which is collected by the state and distributed to local governments based on where the retail dispensary is located.

The botched rollout in NYS has led to additional efforts to eradicate the illegal market especially in NYC. In February 2023, Manhattan District Attorney Bragg targeted over 400 stores for potential eviction proceedings for unlawful cannabis sales. In May 2023, Governor Hochul signed a law that increased OCM’s ability to assess civil penalties against unlicensed cannabis businesses, including fines up to $20,000 per day. In August 2023, the New York City Council passed a bill that prohibits commercial owners from knowingly leasing commercial space to unlicensed sellers of cannabis and other illicit products.

MTA

New York’s Metropolitan Transportation Authority released a proposed capital budget for the next five years. The $65 billion list of projects includes buying new subway cars, fixing century-old tunnels and installing new elevators. Half of the $65 billion has already been funded through bonds, federal grants and direct appropriations from the city and state. Congestion pricing has been “paused”.

It’s hard to know how much of the list is real given the politics of transit in NY. In the wake of the congestion pricing “pause”, the MTA has targeted certain projects for slowdowns. Access facilities for the disabled were a prominent target which may not have been the most politically astute move. Nor was the potential for delay in the northern extension to the Second Avenue subway. The authority’s chairman highlights the politics of the moment when he says that the report sought to be as “comprehensive” as possible in hopes of persuading lawmakers to increase state funding to the agency. That’s a nice way of saying wish list.

The Authority now appears to be aiming at increased state funding by trying to emphasize its role as an economic driver throughout the State. It is highlighting new rolling stock for the commuter railroads being built in the state. Those cars will be on lines which serve some of the largest sources of opposition to congestion pricing. The issue of MTA funding is likely to be at the center of the FY 26 budget process. We are only three months away from that.

CYBERSECURITY

Last month, the Port of Seattle, WA was the target of a cyber-attack. Now, the Port has gone public about the situation because it is taking a step many have supported in concept. Hackers are demanding $6 million in bitcoin from the Port which operates among other things, the Seattle-Tacoma International Airport for documents they stole during a cyberattack last month and posted on the dark web this week.

The Port of Seattle has decided not to pay. Flights were able to operate, but the attack did interfere with ticketing, check-in kiosks and baggage handling. Passengers on smaller airlines had to use paper boarding passes. The same group has targeted other municipal operations. Columbus, OH was one of their targets and data was stolen. No ransom was demanded.

CALIFORNIA WATER

A California Superior Court has issued a preliminary injunction that prevents the State Water Resources Control Board from requiring fees and reports from growers who over-pump the area’s groundwater. The heavy drawdowns of underground water by the agriculture industry are at the heart of the California water debate. The use of that water during times of drought to support water dependent crops has long been an issue. According to a State Water Board staff report, water extraction had caused so much damage to certain areas that the Tulare Lake basin sunk as much as six feet from June 2015 to April 2023.

The Board put the abusing water agencies under probation which provides for farmers who pumped 500 acre-feet or more of water each year to have had to meter and register their wells at a cost of $300 each, report their pumping activities and pay $20 for each acre-foot extracted. The judge found that the Board had exceeded its authority while offering the court’s recognition of the State Water Board’s responsibility “to consider adverse impacts groundwater extraction would have on public trust resources,” while acknowledging the need “to protect such resources where feasible.”

The dispute is likely to make its way through the California courts right on up to the California Supreme Court. This ruling is effectively a hometown local court ruling in Kings County where agriculture is the economic mainstay.

MISSISSIPPI RIVER BLUES

Water levels have been dropping in the lower Mississippi since mid-July, according to federal data, reaching nearly 8 feet below the historic average in Memphis on September 12. In October 2023, water levels reached a record-low 12 feet in Memphis. Those conditions have raised prices for companies transporting fuel and grain down the Mississippi in recent weeks, as load restrictions force barge operators to limit their hauls.

The drought is in its third year. The resulting restrictions on the loads which can be shipped on barges leads to higher costs and a much less climate friendly result from other shipping modes. According to a trade association for businesses that use the Mississippi River, a standard 15-barge load is equivalent to 1,050 semitrucks or 216 train cars. So, there is an environmental cost as well.

It has been worse as unlike the two prior years, no barges have grounded themselves this year. It’s all about reduced rural incomes in the face of increasing competition. The majority of U.S. agricultural exports rely on the Mississippi to reach the international market. More than 65% of our national agriculture products that are bound for export are moved on rivers like the Ohio and Missouri feeding the Mississippi on this inland waterway system

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