Joseph Krist

Publisher

NUCLEAR

Constellation Energy said announced that it plans to reopen the shuttered Three Mile Island nuclear plant No. 2 in Pennsylvania. It’s easy to forget that the second unit of the plant was able to be restarted after the 1979 accident and it operated until 2019. Economics drove that decision. Microsoft, which needs tremendous amounts of electricity for its growing fleet of data centers, has agreed to buy as much power as it can from the plant for 20 years.

Constellation plans to spend $1.6 billion to refurbish the reactor that recently closed and restart it by 2028, pending regulatory approval. It is reflective of the federal tax credits available to keep operating nuclear plants open. They are supporting the extended life of Diablo Canyon. Credits are driving the effort to restart the Palisades plant in Michigan. The combination of carbon free power and the data center driven demand spikes seen in many areas are driving the effort.

If restored, the TMI reactor would have a capacity of 835 megawatts, enough to power more than 700,000 homes. This week, The U.S. Nuclear Regulatory Commission (NRC) has received a petition for rulemaking requesting that the NRC revise its regulations to include a Commission-approved process for returning a decommissioning plant to operational status. The NRC denied a similar petition in 2021. The petition was submitted in connection with the Palisades plant.

The plant owner, Holtec International remains on track to restart operations at Palisades in October 2025. NRC expects to issue a final decision on the required licensing actions by July 31. The NRC will continue to follow existing regulations while it evaluates the petition.

MEDICAID ON THE CALIFORNIA BALLOT

California’s managed-care tax comes from a levy imposed on health plans, based on monthly numbers of both Medi-Cal and commercial insurance enrollees. The money raised is matched by the federal government, doubling the spending power. That federal money is subject to reauthorization and appropriation by Congress every three years. California has had a tax in some form since 2009. It is one of 19 states to levy similar taxes.

Now, a ballot initiative up for vote in November may throw a wrench into the current system.  Proposition 35, a November ballot initiative that would create a dedicated stream of funding to provide health care for California’s low-income residents. It would change the funding structure in that it would specifically designate the purposes for which it is being levied.

The measure would use money from a tax on managed-care health plans mainly to hike the pay of physicians, hospitals, community clinics, and other providers in Medi-Cal. So far, it all sounds good. Some have focused on the risk being created in that Proposition 35 sets specific dollar amounts through 2026, which are based on the managed-care tax approved by the federal government last year. the tax requires another federal approval starting in 2027, the year the ballot measure would make funding permanent. The initiative does not provide for revenue reductions (like the federal matching funds) but mandates revenue levels.

The real concerns arise from some of the “mechanical” aspects of the proposal. The desire to be specific in purpose has raised concerns that some currently paid under the existing structure may not qualify for the new health tax program. Instead of relying on a dedicated fund for some of these costs, they would be funded out of the State’s General Fund. That would put these costs at risk of General Fund problems in future.

That’s because the ballot measure would supersede the budget, and it leaves them out of the health tax proceeds. The ballot measure contains flexibility for small changes, it requires a three-fourths majority vote in the legislature for any major changes. The Centers for Medicaid/Medicare Services also has issues with how the State currently levies its tax and what it funds. California’s tax derives revenues mainly from Medicaid services (instead of non-Medicaid services) and uses these revenues as the state’s share of Medicaid payments.

It leads to the CMS to find that the tax is not sufficiently redistributive as is required under the rules governing the federal program. Federal rules require that the commercial health plans be reimbursed for the tax they pay on their Medi-Cal membership. Since the Medi-Cal rate is around 100 times as much as the rate on commercial membership, 99% of the revenue from the tax is on the Medi-Cal side. It is a conscious choice in an effort to keep private premiums down.

INSURANCE AND TAXIS AND UBERS

The American Transit Insurance Company provides coverage for about 74,000 for-hire vehicles in New York City, or more than 60 percent of the available cars, according to city records. Recently, the company disclosed that it is insolvent. It faces more than $700 million in losses from existing and projected claims from past accidents. Were the company to collapse altogether, thousands of taxis, Ubers, Lyfts and livery cars would be immediately taken off the road until they could find other insurance.

The situation is complicated by the fact that the company is a privately held entity with a history of financial issues including misappropriation of funds. State regulators have ordered American Transit to explore all options to obtain more funding, including a potential sale of the company. The firm submitted two remediation plans, which included rate increases and setting up a blockchain platform where policies could be bought and sold as nonfungible tokens.

If it is not purchased, the company could go into receivership with the New York Liquidation Bureau, which would use American Transit’s remaining assets or a state fund to pay off active claims. Citywide, more than 780,000 trips are taken each day in taxis, Ubers and Lyfts. The firm was established in 1972, had its first public incident with the NYS Insurance regulators over finances in 1979 and managed to still be allowed to write business. Sounds like a major regulatory failure.

NYC

The indictment of Mayor Eric Adams is an unprecedented event in the history of one of the market’s largest issuers. The closest period of time since the 1975 financial crisis to this is the last Koch administration. Extensive as the corruption of the “City for Sale” era was, it did not have legal consequences for the Mayor. This is truly different. Fortunately for the City’s bondholders, the mechanisms established in the wake of the experience of the late 1970’s provide security for them.

The City’s GO debt is secured and paid by property taxes. These tax proceeds are effectively in a lock box where they remain until the collections are certified at which time moneys are released to the various sinking fund accounts for the bonds. Regardless of the outcome of the Mayor’s legal entanglements, those taxes will be levied, collected and deposited in to the lock box. We are not concerned about the full and timely payment of the City’s debt. Other related debt like that issued for the Transitional Finance Authority are also secured by revenues directed into appropriate funds for the payment of debt service. From our standpoint it is ongoing trading value rather than the issue of full payment that should be the concern of bondholders.

Functionally, if the Mayor vacates office before his term ends (12/31/25) the Public Advocate becomes the Mayor. That individual would then have to call a special election for a new Mayor. It would have to be done quickly as there are restrictions in state law as to when such a vote can be held relative to the primary dates for the 2025 mayoral election. It will be a very tumultuous time for City government at a time when it will be facing crucial funding issues.

The Mayor will have to issue a Financial Plan Update in mid-November. He will likely be looking for significant financial assistance from the State. If Adams resigns, it is unclear how badly this will hobble the City’s efforts in Albany especially in light of New York State’s fiscal year and budget timing (4/1). It will also come in competition with the ever increasing demands for state funding from the MTA.

Regardless of who is Mayor, the City’s prison system is in increasing legal trouble. Federal Judge Laura Taylor Swain ordered Department of Correction leaders to meet with lawyers for prisoners to create a plan for an “outside person” who could run the system. They must discuss whether a receiver would work with or replace a commissioner; how a receiver might be appointed; his or her tenure; and qualifications for the position

Given the upheaval in City government, it is highly likely that we see a receiver appointed. We would not be surprised if the receiver actually runs Rikers in the absence of a commissioner. It’s not clear what fiscal impact would result but reform of the City’s jail system will not come cheaply. The next court date is November 12.

NEW JERSEY TRANSPORTATION

A unanimous vote by members of the New Jersey Legislature’s Joint Budget Oversight Committee approved a plan to refinance some $3.2 billion of New Jersey’s transportation-infrastructure debt secured by the Transportation Trust Fund (TTF). Under the proposed refunding transaction, the planned share of pay-as-you-go spending will increase by about $1 billion through the end of the 2029 fiscal year. Over the same period, the projected amount of new borrowing will drop, from about $8.5 billion to $7.5 billion.

The decision comes in the wake of the latest five year reauthorization of the TTF and the taxes which support it – the state gas tax, the sales tax, and contributions from state toll-road authorities. In addition, the legislature approved a registration fee on electric vehicles established as a new source of revenue for the TTF. The gas tax will continue to see regular increases in the rate to offset declining receipts.

UPDATES

Brightline West – The $3 billion federal grant supporting construction of the Brightline train between Southern California and Las Vegas has been formally awarded. Along with a $3.5 billion private activity bond allocation, half of the projected funding need is filled. It’s expected that the other half will be debt and equity funded. Serious construction is now expected to begin in early 2025. Plans are for the high-speed rail system to be built and operating before the 2028 Olympic Games in Los Angeles.

MTA – the MTA formally submitted its capital program for the next five years. It comes in the wake of the “pause” in congestion pricing this summer. The $68 billion funding estimate accompanying the plan is only half funded. Some $22 billion in federal, state and local government funding is assumed. The MTA predicts $13 billion of new debt of its own. Here’s the rub. That only accounts for half of the plan’s needs. It will be one of the dominant items of the FY 2026 state budget.

Grid Terrorism – A conspiracy to launch an attack against five Maryland electric substations led to a sentence of 18 years in a federal prison. The plan was to try to start a race war in Baltimore. Other plots have been met with harsh sentences as well. Given the relative vulnerability of these pieces of the electric infrastructure, it’s important to discourage the threat given how hard it is to secure remote stand alone facilities.

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