Joseph Krist

Publisher

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NYS BUDGET

The New York State fiscal year begins on April 1 and the Legislature is supposed to have approved a budget for the Governor to sign. Nevertheless, New York State has historically adopted a flexible approach to the budget deadlines as policy disagreements have often held up final budget resolution. One might have hoped that the wave of money that has been received by the State from federal pandemic relief funding would have lowered the tension.

This however, is New York and this year several policy issues are causing the State to miss its budget deadline as we go to press. None of the particular points of contention – gambling in NYC, the Bills Stadium (see our next section), bail reform, and mayoral control of the NYC school system – raise short-term credit concerns. In most cases, the Legislature is looking to spend more than the Governor on certain issues and there are real disagreements over the price tag for them.

There are concerns that in many states, the temptation will be to fund expanded spending and services which are affordable under present conditions. The question is where the funding will come from in the long-term when federal spending is reduced. While the particular issues in the New York process are specific to the State, the unfolding process is reflective of many debates underway in many state legislators. Whether it’s tax cuts or spending, the sustainability of underlying revenue assumptions will remain a key credit factor.

BILLS STADIUM TOUCHDOWN

State Senator Sean Ryan, a Democrat from Buffalo – “Subsidies for sport stadiums are a bitter pill. Nobody is happy about doing this, but this is the best deal we could expect under the circumstances.”

The Buffalo Bills are approaching the finish line of their efforts to get a new stadium largely funded with public money. New York State announced that it had reached a deal with the Buffalo Bills to use $850 million in public funds to help the team build a $1.4 billion stadium — the largest taxpayer contribution ever for a pro football facility. The deal calls for the state to finance $600 million of the construction costs. Erie County, the location of the existing facility and the new one is expected to finance $250 million. The remainder would be financed through a $200 million loan from the N.F.L. that was approved on Monday, plus $350 million from the team’s owners.

The state would own the stadium and lease it to the Bills under a 30-year commitment from the team to play in the new stadium. The timing is fortuitous. The state is comparatively awash in money (for now) and the deal is being brought for legislative approval four days before the start of the fiscal year. That will limit scrutiny and deal making in the budget process. The state funding would have to be approved as a part of the budget.

We think that the comments of State Senator Ryan pretty much sum up the deal. There was much criticism of the redevelopment plan which came to be known as the Buffalo billion undertaken under the Cuomo administration. That program was intended to reinvigorate downtown Buffalo and redevelop its waterfront. It ended in scandal and criminal convictions.

While those issues are not expected to impact this project, the proposed expenditures would make more sense if the stadium was part of downtown Buffalo’s redevelopment. The location of these facilities in the suburbs is a throwback to the mentality of the sixties and seventies which saw many stadiums located in suburbs.

A downtown location would make the largest expenditure of public money for any NFL stadium in the country more logical. In this case, building at the existing site just looks like an out and out subsidy to the owner.

This transaction comes just as some other aging stadium projects receive more attention. In Kansas City, the ownership of the Royals of MLB is actively discussing the replacement of their current stadium at the Truman Sports Complex in MO. That project is expected to be undertaken downtown in keeping with the trend that emerged during the 1990-2010 era of stadium replacements in downtowns. “The Chiefs and the Royals are under contract until at least (January) 2031.”

Given that the Chiefs of the NFL play in 50-year-old Arrowhead Stadium, they too are looking at a replacement. Being the sole facility at the Truman Sports Complex does seem to have much attraction to Chiefs’ ownership. In their case, they have broached the idea of locating on the Kansas side of Kansas City. That could set up an interstate competition of incentives. “Kansas City has proudly hosted the Chiefs since the early 1960s. We look forward to working with the Chiefs, our state of Missouri partners, and local officials to ensure the Chiefs remain home in Kansas City and Missouri for generations to come.” – Kansas City mayor Quinton Lucas 

It is easy to forget that NY Mayor Bloomberg wanted to build a stadium ultimately to house the Jets of the NFL in Manhattan. It was only after that idea was rejected that the current stadium in the NJ Meadowlands was built with essentially private financing. That is not likely the case in KC.

SOUTHEAST POWER

South Carolina Public Service Authority (Santee Cooper) may have extracted themselves from the Sumner nuclear debacle, the bill for it continues accrue. The state-owned utility can’t increase rates until 2025 under a rate freeze approved by the General Assembly when the Sumner expansion was abandoned. Now, the recent increases in gas and coal prices have put the utility in the position of having to carry increased costs at the same time it is legally restricted from raising revenues.

Santee Cooper must now find some $100 million of expense reductions to stay within the constraints of a limited revenue base. Officials suggested taking $30 million from operating and maintenance and $70 million from capital projects. That has negative implications for both current operations and future rate increase needs.  It comes as the utility faces $130 million in increased fuel costs.

Moody’s Investors Service has upgraded JEA, FL – Electric Enterprise (JEA) ratings as follows: the senior lien electric system revenue bonds to A1 from A2; subordinate lien electric system revenue bonds to A2 from A3, St. Johns River Power Park System (SJRPP) revenue bonds to A1 from A2, Bulk Power Supply System revenue bonds (Plant Scherer revenue bonds) to A1 from A2. JEA has been through a lot as it challenged the take or pay contract it entered with MEAG for a share of the expanded Votgle nuclear plant. JEA has also revamped the membership of its Board of Directors. These changes all occurred after the ill-fated attempt by some in local government to privatize the electric system.

Now a new board is seen as a credit positive factor. The litigation over the power purchase contracts has been resolved. This means that JEA’s most significant credit challenge is related to its indirect exposure to nuclear construction risk at the Plant Vogtle project through its 20-year Project J Power Purchase Agreement (PPA) with MEAG Power and the impact to the construction budget and the schedule owing to the multiple delays in construction completion which could now extend into Q-1 2023 and Q-4 2023 for Vogtle Units 3 and 4, respectively. There is some cushion in JEA’s relative rate position versus other utilities. JEA has plans to raise its rates by about 1.5% annually beginning in 2022 through 2026 to manage the increasing obligations under the Project J PPA.  

This improvement in JEA’s rating laid the groundwork for another utility upgrade. Moody’s Investors Service has upgraded Municipal Electric Authority of Georgia Plant Vogtle Units 3&4 Project J Bonds to A3 from Baa1, affecting approximately $2.10 billion of outstanding rated debt. The rating outlook has been revised to stable from positive. The settlement of the JEA litigation challenge to the PPA and the perception that JEA’s willingness to pay were no longer in question, the threat to MEAG’s credit posed by the potentially invalid PPA have been eliminated.

TRI-STATE SAGA CONTINUES

The latest shot in the ongoing battle between Tri-State Generation and Transmission Cooperative comes in the form of a study for the Federal Energy Regulatory Commission. FERC is reviewing the effort by Tri-State’s largest customer – United Power- to exit from its power purchase agreements. Those agreements call for the payment of an exit fee which is designed to cover a proportional amount of the fixed costs incurred by Tri-State.

Tri-State has been fighting efforts by its members to exit their agreements for several years. Tri-State is a primarily coal reliant utility. That and a price scheme which has produced rates higher than those of competitors have lessened support for buying power from Tri-State. As a part of the exit process, Tri-State calculates a contract termination payment, or CTP. Tri-State tallied the portion of the overall debt a cooperative is responsible for based on its revenues, plus the cost of all the electricity it would have bought between now and the end of the contract in 2050.

The distribution utilities do not contest some financial obligation to Tri-State for leaving. They do believe that Tri-State’s calculations generate fee estimates that are meant to make exit so punitive that the members will stay with Tri-State. That may change in light of the fact that the FERC study found that in the case of the largest local distribution coop which gets its power from Tri-State, the proposed exit fee of $1.6 billion was much higher than would be needed to pay off the distribution utilities share of Tri-State’s debt service requirements.

Two cooperatives — the Kit Carson Electric Cooperative, in Taos, New Mexico, and the Delta-Montrose Electric Association, in Delta — have already left. They paid exit fees. Kit Carson paid a $37 million exit fee in 2019 and DMEA paid $136.5 million in 2020.  The exit fees for both were about double their annual billings, not eight times annual billings as Tri-State is seeking from United Power. The risk to Tri-State is clear.

When S&P lowered Tri-State’s rating to BBB+ and revised its outlook to negative from stable, they were clear about the concerns the proposed withdrawals create. “We revised the outlook to negative to reflect our view that the utility faces more pronounced governance exposures following the initiation by three of Tri-State’s members of the two-year notice period for withdrawing from the utility… We believe the utility faces significant governance risks. Over more than a decade, three CEOs have struggled to placate members that are expressing dissatisfaction with the level of rates and the utility’s carbon intensity. The notices of intent to withdraw compound these risks.”

UBER CONTINUES ITS NEW COURSE

Fresh off its landmark agreement with New York City’s yellow taxis, Uber is seeking a similar arrangement in the City of San Francisco. This coming week, the San Francisco Municipal Transportation Agency will decide whether to approve a pilot program involving Uber and Flywheel, which operates an app used by hundreds of taxi drivers in San Francisco across several taxi companies to accept rides. Pending final approval by the city’s director of transportation, service could begin in early May.

The upfront cost that Uber charges customers to get a taxi through its app will not be required to be the same as a metered taxi ride.  This has raised some opposition from existing taxi drivers who will face the potential downward pressure on fares. The plan comes at a time when San Francisco has seen real declines in the number of taxis on its streets. Pre-pandemic there were some 1300. That number bottomed out at 400 during the pandemic and is now only slower recovering toa current level of 600.

We note that SF and NY also share something in common which may drive the need for these agreements. These two cities have the lowest rates of returns to the office among the largest US cities. They also are like many other large cities still dealing with pandemic-related population declines. In 2021, population declined in San Francisco by more than 6%; Boston’s Suffolk County 3%, with New York City and Washington, D.C., seeing drops of over 2%. Los Angeles County, Chicago’s Cook County, Miami-Dade County, Philadelphia, Milwaukee and Minneapolis were reduced by over 1%. That implies lower demand for these services that appears to be likely to be sustained.

VIRGIN ISLANDS

As we go to press, the US Virgin Islands was hopeful of completing the successful sale of some $920 million of securitized debt. The bonds would be secured by a pledge of Federal Excise Tax Revenues which are normally received by the USVI government. This transaction has created a sale of the USVI government’s right to these revenues to a special purpose corporation created for this purpose.

The Matching Fund Special Purpose Securitization Corporation will receive the federal excise tax collected on rum that historically supported Matching Fund Bonds. Debt secured by those funds will fund the redemption of all VI Public Finance Authority debt outstanding secured by matching fund revenues. This then creates a flow of funds which covers debt service and based on history will generate “residual” revenues which can then be applied by the USVI government to fund its pension funding requirements.

Rum taxes have financed government in the USVI since 1954 under the current arrangement so the revenue stream projected is based on a long history. All of the rum subject to the tax is sold in the U.S. minimizing the risks to distribution. The challenge was in insulating investors from ongoing financial stress for the USVI government. The asset sale structure helps to create an entity and revenue stream protected from any bankruptcy or similar action by the USVI government.

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