Joseph Krist

Publisher

We are about to take a rare week off. We need to devote our attention to issues of great import which do not involve municipal credit. We will deliver our next issue for the week of May 8.

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DEBT LIMIT POLITICS AND MUNICIPALS

Long time readers know of my regular disgust when ideology trumps any practical plan to resolve issues. Whether it is tax policy, environmental policy, or general public policy, the answers which result in tangible accomplishments usually don’t come from idealogues. That what turns our focus to Speaker McCarthy’s recent comments about the need to lift the federal debt Limit. In particular, we focus on one of his proposals.

The idea in question calls for the “claw back tens of billions in COVID-related money.” He is basing that on a figure generated by the Republican Main Street Partnership which is affiliated with the former Main Street Caucus in the US house. The plan to take back money from state and local government would require revisions to existing law. For example, the American Rescue Plan Act, passed in March 2021, included $350 billion in Coronavirus State and Local Fiscal Recovery Funds. The funds must be obligated by December 2024 and fully spent by the end of 2026. 

My own view is that the extra money spent during the pandemic was in many ways shot out of a cannon when clearly it could not have been spent all at once. The view from McCarthy seems to reflect the belief that the hoarding of these funds occurs in service demanding blue states. The fact that many red states did not directly approve expenditures related to COVID but instead funded otherwise unaffordable tax cuts to their constituents (think Lenny the Mayor of NYC in Ghostbusters) and voters. Not all of that money was spent on COVID responses in those places.

Spare us the sanctimony and increase the debt limit.

SOMETHING IS OFF

DePaul is the largest Catholic university in the country. It has had a long presence as a major institution even if most people know it for the school’s basketball success in the late 1970’s and 1980’s. One year ago, Moody’s upgraded DePaul University’s (IL) issuer and revenue bond ratings to A1 from A2. The university had approximately $253 million of debt outstanding at the end of fiscal 2021. The outlook was stable. The rating and outlook were based on “the university’s strong growth in unrestricted financial reserves, driven by multiple years of superior operating cash flow retainment combined with strengthening philanthropy.

Now just one year later, DePaul is showing signs of a situation that is anything but stable. It is offering a voluntary separation program to about 15% of the school’s 1,400 full-time staff and administration, according to an April 4 notice by DePaul University President Robert Manuel. It appears to be concentrated on administration as faculty are ineligible. School officials project a shortfall of $56 million for the fiscal year beginning July 1, barring cost-cutting measures. 

Much of the problem is being blamed on pandemic impacts on enrollments. In fact, declines in enrollment have been long-standing. Since 2018, total enrollment fell 6.8%, with steep declines more recently among graduate students, according to data from the school. University-wide enrollment at DePaul fell 3.5% year over year to 20,917 students in 2022.  DePaul received authorization for $77 million of stimulus funds as of June 2021, according to Fitch Ratings.

DePaul has gone out of its way to reiterate a willingness and ability to pay debt service. Nonetheless, one has to ask how the perception of the school’s short-term credit outlook could be so positive in the face of DePaul”s specific declines which were already apparent. National trends are not in favor of a school already experiencing lower demand. It is clear that something was missed in the rating process.

NATURAL GAS BAN LOSES IN COURT

The US Court of Appeals for the Ninth Circuit ruled that Berkeley’s natural gas piping ban, which the city’s government passed in 2019 as part of its climate agenda, violated the federal Energy Policy and Conservation Act (EPCA) of 1975. The city can ban the use of gas appliances but the effort to restrict piping specifically was seen as an end run around the law. The panel unanimously held that federal energy law preempts Berkeley’s ban on natural gas piping within buildings, and that Berkeley cannot bypass federal preemption by banning the pipes instead of natural gas products themselves.

The suit was brought on behalf of the California Restaurants Association. Restaurant operators have been among the most vociferous opponents of the bans. Berkeley Ordinance No. 7,672-N.S. banned natural gas infrastructure and the use of natural gas in newly constructed buildings beginning January 1, 2020, making Berkeley the first city in California to take such action. In the original complaint filed November 21, 2019, the CRA highlighted that its members include restaurants that “rely on gas for cooking particular types of food,” as well as for heating space and water, for backup power, and for affordable power, and that they would “be unable to prepare many of their specialties without natural gas.” 

The decision focuses attention on why it has made some sense for other jurisdictions (like New York State and Minnesota) to exempt restaurants from limitations on the use of natural gas. The District Court in California dismissed the complaint in July 2021 but it did find that that the CRA had standing and the dispute was ripe, but disagreeing on the statutory interpretation of federal energy law. The judges argued that the Energy Policy and Conservation Act of 1975 passed by Congress “expressly preempts State and local regulations concerning the energy use of many natural gas appliances, including those used in household and restaurant kitchens.”

“Instead of directly banning those appliances in new buildings,” the ruling states, “Berkeley took a more circuitous route to the same result and enacted a building code that prohibits natural gas piping into those buildings, rendering the gas appliances useless.” At the time of enactment, the legality issue was an open question. As has been the case with most “environmental” legislation, the ultimate forum for addressing the details becomes the court. In this case, the lack of a restaurant exception and the effort to regulate the transmission of gas made it easier for the appeal to succeed.  

OAKLAND STADIUM

The never-ending process to provide a more modern home for MLB’s Oakland A’s may have come to an end. The last few weeks have offered a mix of good and bad news for proponents of the new facility and the development project proposed for the surrounding area. The Oakland Waterfront Ballpark Project (Project) proposed a 50-acre development at Howard Terminal within the Port of Oakland (Port). The Project proposed not only a new ballpark for the Oakland A’s, but also 3,000 residential units, retail and commercial spaces, a performance venue, and a hotel, all with associated parking. A draft EIR was completed in February 2021, and final EIR certified by the City of Oakland (City) one year later.

Opponent litigation has been focused on “safety” issues in the area around the proposed development connected with the presence and expected continuing use of rail tracks by freight trains. Opponents of the stadium have focused on that issue and the issue of whether the project’s environmental impact review should have included pedestrian safety. In that litigation including appeals from both sides, the California First District Court of Appeal concluded that the EIR prepared for the proposed Oakland A’s stadium was largely satisfactory, but on a single point failed to adequately mitigate wind impacts.

The bulk of the issues reviewed in this case are environmental but more regarding locations adjacent to the proposed project area rather than with the proposed ballpark itself. Many of those issues seem to be over procedure. The Oakland ballpark project received legislation requiring courts to resolve any CEQA challenge within 270 days at each level, to the extent feasible. Here, the trial court reached a decision just 170 days after the case was filed, and the Court of Appeal issued this opinion 178 days after the appeal was filed. 

Overhanging all of this has been the increasing impatience among MLB owners regarding the inability of the City of Oakland to address the stadium problem. Built in 1966, the stadium has always been a bad compromise producing lousy seating arrangements for both football and baseball. The City has been burned before in stadium negotiations especially by the now Las Vegas Raiders. Las Vegas again loomed as a potential location for a major league stadium and team. MLB would like to see a stadium (or relocation) deal reached by year end.

Those delays in obtaining approvals and that pressure from MLB to get a resolution to the stadium issue have now driven A’s ownership to look to Las Vegas. The franchise signed a binding agreement this week to purchase 49 acres in Las Vegas meant for a new stadium. Oakland city officials, meanwhile, said they were ceasing negotiations with the team on a new stadium in light of the Vegas news. commissioner Rob Manfred said: “We support the A’s turning their focus on Las Vegas and look forward to them bringing finality to this process by the end of the year.” The current Collective Bargaining Agreement calls for the team to lose its revenue sharing next year if it doesn’t have a resolution to the stadium.

TOLL ROADS HOLD UP AFTER THE PANDEMIC

The Illinois State Toll Highway Authority’s (ISTHA) has begun a program of debt issuance totaling $2 billion over the next three years. In conjunction with that issuance, the Authority has seen its ratings reviewed and in the case of Moody’s, upheld. The Authority’s Toll Revenue debt totals some $6.8 billion and is rated Aa3.

ISTHA operates a tollway system that consists of approximately 294 miles of limited access highway in twelve counties in the northern part of Illinois and is an integral part of the expressway system in northern Illinois. The entire tollway system has been designated a part of the US Interstate Highway System, except for the 10 miles of Illinois Route 390. 

Strong traffic and revenue trends through toll increases and state-level fiscal stress demonstrate the inelastic demand for the tollway system roads and limited impact of competition. The lack of reliance on State general revenues created a more solid floor for the Authority’s debt ratings during the pandemic. The role of commercial trucking as a strong revenue source showed up in annual financial results.

ISTHA revenues recovered to pre-pandemic levels, being 97% in 2022 and, in the first two months of 2023, at 102% of the same period in 2019.  Total traffic in 2022 was 94% of 2019. While passenger traffic was still 8.1% down from 2019 in 2022, commercial traffic has shown much more resiliency than passenger traffic, with 2022 commercial traffic up 5.8% from 2019. In the first two months of 2023, traffic was at 99% of the same period in 2019. 

NEW JERSEY

The State of New Jersey scored a ratings hat trick recently with S&P, Fitch and Moody’s all announcing upgrade actions covering the State’s general obligation credit. The State economy is benefitting as one might expect from the end of the pandemic but also from the growing prevalence of remote work. Employment is above the state’s pre-pandemic peak. Moody’s cited the state’s commitment to full, actuarial pension contributions through fiscal 2024 (starting 7/1/2023) and its additional allocations of funds to a program to defease debt and cash-fund capital projects.

The overwhelming majority of debt issued through the State is secured by statutory revenue collection and/or dedication provisions enshrined in the state Constitution. As a result of the upgrade of the state, the ratings on bonds secured under the State’s Qualified School Bond Program and the Municipal Qualified Bond Program werf also raised through the actions of the three rating agencies.

THE NEXT CHALLENGE FOR COAL

The latest regulatory proposal covering coal fueled generating plants from the EPA will concentrate on water. Specifically, the level and types of water discharge from electric generating plants. Effluent Limitation Guidelines (ELGs) will be the method of regulation. ELGs are national industry-specific wastewater regulations based on the performance of demonstrated wastewater treatment technologies (also called “technology-based limits”). They are intended to represent the greatest pollutant reductions that are economically achievable for an entire industry.

EPA’s proposed rule would establish more stringent discharge standards for three types of wastewater generated at coal fired power plants: flue gas desulfurization wastewater, bottom ash transport water, and combustion residual leachate. The proposed rule also addresses wastewater produced by coal fired power plants that is stored in surface impoundments (for example, ash ponds). The proposal would define these “legacy” wastewaters and seeks comment on whether to develop more stringent discharge standards for these wastewaters.

EPA is also proposing changes to specific compliance paths for certain “subcategories” of power plants. The Agency’s proposal would retain and refresh a compliance path for coal-fired power plants that commit to stop burning coal by 2028. The Agency is issuing a direct final rule and parallel proposal to allow power plants to opt into this compliance path. Additionally, power plants that are in the process of complying with existing regulations and plan to stop burning coal by 2032, would be able to comply with the proposed rule.

Coal plant wastewater has until now been subject only to 1982 standards that allow it to be deposited in coal ash ponds, where it may overflow into water bodies and contribute to the contamination of groundwater. The rule proposes a standard of zero pollutants discharged from water used in scrubbers and boilers, and requires the best available technology to achieve this goal. Filtration with fine membranes, chemical treatment, and recycling water back into the plant could satisfy mitigation requirements.

One major flashpoint between the government and the industry is avoided for now. The proposed rule does not cover the contamination that seeps from unlined coal ash ponds into groundwater. Lined ponds are subject to separate legislation. The effect on water from the emptying of existing ponds has been another issue. The rule proposes to deal with such “legacy wastewater” on a site-by-site basis. It is a true compromise.

The proposed rules would reduce discharges significantly but would also be a significant cost to operators. The proposed rule exempts plants from the new mandates if they promise to stop burning coal by 2028 or, in some cases, December 2029. It also allows plants that have already installed less-effective wastewater pollution controls to keep operating through 2032 without further upgrades.

It is yet another data point for the analysis of electric revenue debt.

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