Joseph Krist

Publisher

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THE INFRASTRUCTURE BATTLE BEGINS

The great infrastructure battle of the 21st century is about to commence with the formal release of the Biden Administration’s infrastructure plan. It begins in an environment where the need to refurbish, replace, and reimagine infrastructure is clear. This should generate widespread support. The problem is that because of the realities of Senate politics, too many other issues are going to become wrapped up in issues with significant non-financial goals and outcomes because of the need to rely on one last reconciliation process to pass any infrastructure bill.

It is impossible to separate the funding aspects of the bill from the policy goals of the bill. It is clear that the bill will attempt to rely on hikes in corporate income taxes and the estate tax. The Transportation Secretary however, has taken increased gas taxes and/or a mileage tax off the table. He’s blaming rural concerns about the reliance upon driving long distances creating imbalances in the impact of any potential higher tax rates. We feel that taking those items off the table is a mistake, especially since a vehicle mileage tax does have some bipartisan support.

As opposed to prior efforts, the bill is already entangled in issues like economic justice, environmental justice, reparative justice, racism, and class. The tax battle will be at the core of passage. There will be policy debates – on taxes, subsidies, environmental, the anti-car crowd, and energy aplenty. That is to be expected. We foresee trouble with shifting the cost of these physical projects from the use of the projects to instead become an instrument for income and wealth redistribution.

An infrastructure bill can be hugely transformational and there will be portions of this bill which will be. Electric charging and universal broadband can both be accomplished through some existing structures where the issue has been as much about cost and funding as opposed to nonfinancial issues. A federal investment will address much of the cost issue. What will be harder is the balance between the many competing interests which are already becoming manifest.

Among them are: is it an infrastructure bill or a tax bill? Can a transportation bill be compatible with environmental goals and economic justice? We have already seen labor opposition to coal generation closures and limits on fossil fuel extraction industries. Opposition to expanded infrastructure often pits the interests of construction workers and other skilled and unskilled workers against those of opponents of a given project. In the end, people on both sides are often worse off. 

NEBRASKA PUBLIC POWER DISTRICT

The Nebraska Public Power District (NPPD) hired Ascend Analytics and Siemens to study the potential impact of any future regulation of carbon on the utility’s operations and finances. The results of that effort were released this week and the findings bode well for efforts by utilities to reduce their carbon footprint.

The study found that the utility could significantly reduce its exposure to such policies without burdening customers with severe rate hikes.  Ascend’s study said that if wholesale power prices continue to fall, the utility likely could cut its carbon emissions by 90% without any added expense. Siemens estimates that the utility could, for example, chop its carbon intensity in half by 2030 and by 80% by 2050 while increasing rates to its utility and municipal customers by no more than the rate of inflation.

Both studies show, that like previous efforts to control pollution in the water and sewer space that the last segment of any such cleanup is the most expensive relative to the reduction in pollution achieved.  Siemens’ models recommends closing the 1,365-megawatt Gerald Gentleman Station (coal fired)  before 2036. However, it said that attaining 100% clean energy might require relicensing the Cooper Nuclear Station, a costly proposition. Both studies recommend closing the 225-megawatt coal-fired Sheldon Station early or converting it to operate on natural gas.

Now for the qualifiers. The Ascend study reflects assumptions of a continued and persistent fall in the cost of power, mostly due to the addition of solar and wind generation, very cheap because they require no fuel.  Both the Ascend and Siemens studies call for at least one of nuclear, natural gas, or batteries as a source of carbon free power.

MICROGRIDS

The Poudre Valley Electric Association (PVREA) plans to test a microgrid for a small town in its northern Colorado service area. Red Feather Lakes  is a town of 400 some 8,000 feet up in the Rockies which is vulnerable to outages resulting from weather and damages to the one transmission line bringing power into town. In an effort to improve resilience and reliability, the town is now working on developing Red Feather Lakes its own source of power less dependent upon the one line.

The Poudre Valley project is one of four microgrids involving five rural electric cooperatives that are receiving funding from the National Rural Electric Cooperative Association and the US Department of Energy. The others are in South Dakota, and North Carolina. The key to the Poudre Valley microgrid is the increasing availability of battery technology.

This grid will use a Tesla Powerpack battery to store power to serve initially as a backup at some city facilities. This test will provide for the battery to be connected to the utility system as a whole.  The city has done similar things with solar power installations on some city facilities and the perceived success of that project has generated support for this effort.

Parlier, a small city in Fresno County, has some 15,000 residents spread among 4,000 households. They are currently customers of PG&E. Now in the face of risks to the local distribution system, the City is embarking on a program to install residential solar for its customers.

The program is being paid for by investors that also accrue state and federal incentives based on solar installations, such as California’s Self-Generation Incentive Program and the federal investment tax credit (ITC). The investors are also responsible for keeping the systems maintained, generating and feeding power into the grid, since that’s how they will themselves be remunerated. A 20 year power purchase agreement secures the investment in the equipment with customers scheduled to pay monthly bills for their solar from the city and then a smaller bill to PG&E to cover any electricity demand not met by their PV system.

Each installation includes a solar PV system with battery storage, an LED lighting retrofit and other energy efficiency equipment. After 20 years, ownership of the system transfers over to the homeowner.

SANTEE COOPER SOLAR PROJECT

The South Carolina Public Service Authority (Santee Cooper) has gotten its share of bad press in recent times primarily revolving around its participation in the expansion of a nuclear generating plant. The resulting problems related to that investment have led to the State considering the sale of the state agency among other steps.

So now we can see the agency in a somewhat more positive light. We have advocated for municipal utilities taking the lead in clean energy and renewable investments. So we view with interest an announcement that the 98 MW Centerfield Solar project in the northern part of the state reached commercial operation status. The privately developed and financed project will deliver electricity to Santee Cooper under a long-term power purchase agreement. It puts the municipal utility in a better position than a competing investor owned utility.

Dominion is one of the potential buyer/operators of Santee Cooper if it is sold. Dominion has committed to shuttering its entire coal fleet in South Carolina by 2030 and adding as much as 2 GW of solar and up to 900 MW of battery storage, the first project isn’t expected to enter service until 2026, and the additions are set to come in 50-100 MW annual increments over 20 years.

PANDEMIC PRESSURES CONTINUE FOR TRANSIT

The Illinois Economic Policy Institute released a study of the impact of the COVID 19 pandemic on transportation in Illinois. Following Illinois’ stay-at-home order, traffic volumes were most impacted in March and April of 2020, with April experiencing a 40% drop in total vehicle travel compared to the same month in 2019. Vehicular traffic has recovered since April but still averaged a 15% year-over-year reduction in travel.

Transit similarly experienced massive ridership drops in April and May 2020, with reductions between 68% for Chicago Transit Authority (CTA) buses and 100% for Metra rail. For June through December 2020, year-over-year ridership declines remained 50%-60% for bus services, 77% for CTA Rail, and 89% for Metra.

The motor fuel tax (MFT), the most significant source of transportation funding in Illinois, lost $308 million over the 11-month period between April 2020 and February 2021 due to COVID-19. Of the $308 million in lost MFT revenue, $151 million would have been distributed to the state, $30 million would have funded transit agencies, and $126 million would have gone to local governments. Local sales taxes generated $96 million less for the Regional Transportation Authority (RTA) between March and November 2020 compared with the year prior. Collective farebox revenue from the CTA, Pace, and Metra generated $645 million less in 2020 compared to 2019; 69% less for Metra, 62% less for CTA, and 50% less for Pace.

Not all of this will be made up if new commuting patterns hold. A U.S. Census Bureau survey indicates that 35% of Illinois workers who were working at an employment site prior to COVID-19 are now working from home as of February 2021. Changing travel patterns have impacted traditional commute times, with data showing Chicago’s morning commute has declined, while midday hours experienced increased traffic.

Similar patterns are emerging across the country. It is clear that in terms of office occupancy, status quo will likely never return. The implications for commercial real estate values and tax generation potential are significant. Those impacts will manifest themselves in increased appeals of valuations, increased delinquencies, and likely lower valuations.

STIMULUS QUICKLY PAYS OFF

Yet another example of the salutary effects of the American Rescue Plan is the improved outlook for credits buoyed by the Act’s injection of liquidity to issuers balance sheets. The clearest and most recent example is the improved ratings outlook for the State of Illinois. Moody’s and Standard and poor’s both shifted their outlooks for Illinois’ general obligation bond ratings to stable. This relieves the immediate pressure on the state’s ability to remain an investment grade borrower.

Illinois received $7.5 billion under the legislation for the state itself. Chicago and Cook County received substantial monies as well. For a group of credits like these which largely share problems and tax bases, the impact of the shot of funding comes at an especially critical time for the state and its major local credits. For the state, the cash lessens the immediate sting of the failure at the 2020 ballot box of the graduated income tax.

It is not a panacea but the state does face a less turbulent atmosphere in which to make its effort to stabilize the state fisc. Clearly the outlook changes improve the state’s credit but it remains a long way from being a real upgrade candidate.

WIND – THE OTHER RENEWABLE

The change in administrations in Washington has had clear impacts on the outlook for fuller adoption of solar and wind power. The new attitudes are reflected in the Biden administration plan announced this week to designate an area between Long Island and New Jersey as a priority offshore wind zone and set a goal of installing 30,000 megawatts of offshore wind turbines in coastal waters nationwide by 2030, generating enough clean electricity to power 10 million homes. 

This follows actions in support of Vineyard Wind, a proposal for 84 large turbines with 800 megawatts of electric generating capacity slated to come online by 2023. We have previously covered the proposed project. It withdrew its environmental review data when the Trump administration slow walked the approval process. A proposal was resubmitted has now been approved. It would result in the construction of the nation’s largest offshore wind generation project to date.

The administration said it would accelerate permitting for proposed wind projects off the Atlantic coast, offer $3 billion in federal loan guarantees for offshore wind projects and upgrade the nation’s ports to support wind construction. Some local ports are already using tax exempt financing to undertake port upgrades for the renewable generation industry.

A National Bureau of economic research paper from 2020 examined the issue of “green jobs”. “The effect of environmental policy on employment is still hotly debated and polarized, with advocates on both sides ignoring or exaggerating the labor market costs and benefits of environmental regulations. Advocates of stronger environmental policies argue that such policies create high-paying “green jobs”, while critics point to the job losses in energy-intensive industries that they are sure will follow.

Previous literature finds that net effect of environmental policies on employment is small especially when general equilibrium effects and offsetting mechanisms are accounted for. However, other studies find job losses concentrated in polluting industries and among unskilled workers. Adverse impacts on manual labor are of particular concern for policy-makers, given the secular decline in their employability and wages driven by automation and globalization.

THE NUMBERS BEHIND PENSION FUNDING

The actuary for the pension funds covering New York City’s employees has recommended a series of changes in the assumptions used to calculate the City’s unfunded pension liability and the level of actuarially required contributions (ARC). The City’s Independent Budget Office recently released an analysis of the proposed changes and what they might mean for the City’s budget in the future. The report gives real insight into the implication of the funding choices the City makes and provides a good summary of the issues facing any pension manager.

Included in the current package of changes proposed by the Actuary is a reduction in the NYCRS assumed rate of inflation. This action on its own would greatly increase the size of employer pension contributions across the financial plan period. the Actuarial Interest Rate (AIR). The AIR is the rate the Actuary uses when calculating the cost of future pension benefits in current dollars; it is also the assumed rate of return on the pension funds’ investments. Currently, the assumed rate of return for pension investments is set at 7.0 percent, comprised of a 2.5 percent rate of inflation and a 4.5 percent increase in real (inflation-adjusted) returns.

Changes in the AIR would have significant implications for the City. According to the most recent Comprehensive Annual Financial Report, reducing the AIR by 1.0 percentage point to 6.0 percent annually would increase the city’s share of unfunded pension liabilities from $46.4 billion to $70.4 billion—over a 50 percent increase in the amount owed. The proposed reduction in the assumed inflation rate would reduce the NYCRS assumptions of annual employee salary increases from 3.0 percent to 2.8 percent, and growth in retiree COLAs from 1.5 percent to 1.3 percent per year. This assumption of slower growth in wages and living costs has the effect of slowing the growth of future benefits and thus lowering the city’s pension liabilities.

Put all of those factors into the equation and the Actuary’s pension assumption changes would have an immediate impact on the cost to the city and the affiliated employers. For the city, the net effect of these changes would reduce its current year pension contribution by $430.0 million, the 2022 contribution by $330.5 million, and the 2023 contribution by $65.1 million. The net effect of these changes reverses in future years, with the city’s 2024 and 2025 pension contributions increasing by $357.5 million and $443.5 million, respectively.

ANOTHER PRIVATE COLLEGE CLOSURE

The private college space, especially for smaller liberal arts colleges has been under pressure for some time. The pandemic certainly has added unique pressures to institutions with unique niches. Mills College in Oakland, CA has since 1852 certainly fit into that category. Now, the Mills College Board of Trustees has decided that after fall 2021, Mills will no longer enroll new first-year undergraduate students. It will focus resources on building degree pathways for its remaining students, and will supporting the new first-year undergraduate, transfer, and graduate students who still decide to matriculate this fall. Mills will most likely confer its final degrees in 2023, pending further consideration and action by the Board of Trustees.

Like many other smaller liberal arts schools, Mills’ finances have been in decline for over a decade. In the late teens, layoffs including tenured faculty occurred. The school was already selling assets like manuscripts in an effort to raise cash. It’s narrow and unique appeal that served it well over many years now no longer works as well when the cost is over $50 K annually.

SOUTHERN COMFORT

Virginia is poised to become the first former Confederate state to legalize marijuana.  The governor has weighed in with proposed changes to a bill passed by the Commonwealth’s General Assembly. That bill would legalize cannabis possession beginning July 1, 2024. Among the changes from the Governor is one which would authorize legalization to begin this July, 2021.

The General Assembly will take up the proposals when it reconvenes April 7 for a one-day session to consider any vetoes or amendments the Governor  proposed to this year’s legislation. A regulated consumer industry would not begin until 2024, and several aspects regarding reclassifying drug- and alcohol-related crimes face a requirement that they must be voted on again next year by the General Assembly.

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