Joseph Krist

Publisher

ESG BOYCOTTS – WHAT THE DATA TELLS US

We’ve been following the efforts of some conservative State Treasurers to support a boycott of banks and other financial institutions which are seen as hostile to the fossil fuel industry. There have been several issues over the years like municipal disclosure. A question always asked by issuers is how many basis points will it cost me not to comply. It has not been easy to answer. In the case of the State Treasurer boycotts we do have some data which helps to answer a similar question. How much does the bank boycott add to my financing costs and the burden on taxpayers? An analysis by two researchers one with the University of Pennsylvania and one with the Board of Governor of the Federal Reserve has an answer.

Here is what they had to say. The state of Texas enacted laws in 2021 that prohibit municipalities from contracting with banks that have certain ESG policies. This led to the exit of five of the largest municipal bond underwriters from the state. We find that municipal bond issuers with previous reliance on the exiting underwriters are more likely to negotiate pricing and incur higher borrowing costs after the implementation of the laws. Among remaining competitive sales, issuers face significantly fewer bidding underwriters and higher bid variance, consistent with a decline in underwriter competition. Additionally, underpricing increases among issuers most reliant on the targeted banks and bonds are placed through a larger number of smaller trades.

Overall, our estimates imply Texas entities will pay an additional $303–$532 million in interest on the $32 billion in borrowing during the first eight months following the Texas laws. That extra cost comes from the fact that issuers with significant reliance on the targeted banks opt into negotiations to soften the large volatility and higher borrowing costs which the study observed among competitive sales. Nevertheless, borrowing costs still increase by approximately 10 basis points for issuers with an additional standard deviation of reliance on the targeted banks. Borrowing costs increase by up to 45 basis points for issuers that had previously raised the majority of bond financing through the exiting underwriters.

It comes down to a question of how much is too much to pay for what will ultimately be a failed policy based on ideology. Are the states and financial officers enforcing these laws doing the best they can for their ultimate client the taxpayer? Is it the place of financial officials to act in other than a fiduciary interest for their client the taxpayers? We always caution against policies clearly rooted in ideological grounds. That applies to the entire ideological spectrum of ideas.

MAINTENANCE AND MASS TRANSIT

Two of the nation‘s major subway systems are under pressure to address safety issues. The Orange Line is one of the MBTA’s busiest routes, averaging about 101,000 trips each day. Now the “T” will have to find another way to move those passengers for a month beginning August 18.  Last week, the federal government ordered MBTA to conduct a “stand-down” and require workers to attend safety briefings before being allowed to return to work in maintenance yards and shops. The “T” has faced three “runaway” train incidents since May.  projects include track replacement, upgraded signal systems and station improvements. The agency will also complete track maintenance required by directives from the Federal Transit Administration.

The Washington Metro system has been working all year on addressing serious maintenance and safety issues associated with a substantial portion of its rolling stock. The system has faced reduced demand not just from the pandemic but from service reliability issues which had plagued WMATA over the last couple of years. Just this week, a new chief operating officer begins his efforts to end a train shortage and get Metrorail back to full service.

NYC CONGESTION PRICING

New York’s Metropolitan Transportation Authority (MTA) has released a preliminary schedule of charges to be levied under its congestion pricing plan. The proposal makes clear what many allege. The plan is clearly designed as a money grab more than it is a plan to reduce congestion or improve the environment.

The MTA released seven different scenarios for the tolling plan, with peak-period toll rates to enter the “Central Business District” below 60th Street of anywhere from $9 to $23, depending on the version implemented. In virtually all configurations of the plan, “peak” would run from 6 a.m. to 8 p.m. on weekdays and 10 a.m. to 10 p.m. on weekends. That clearly is designed to impact those coming into the City for Broadway shows, other cultural events, and sports events.

The CBD Tolling Alternative, TBTA would toll vehicles entering or remaining in the Manhattan CBD via a cashless tolling system. The toll would apply to all registered vehicles (i.e., those with license plates) with the exception of qualifying vehicles transporting persons with disabilities and qualifying authorized emergency vehicles. Passenger vehicles would be tolled no more than once a day. Vehicles that “remain” in the Manhattan CBD are vehicles that are detected when leaving, but were not detected entering in the same day. Given that they were detected leaving, they must have driven through the Manhattan CBD to get to the detection point, and therefore “remained” in it during a portion of the day. These vehicles would be charged that day for remaining in the Manhattan CBD.

The MTA’s assessment is required by the federal government in order to implement congestion pricing, because some of the roads are part of the National Highway System and receive federal funding. There will be six public hearings about the congestion pricing options. One component which caused potential opposition has to do with the treatment of commuters from New Jersey. This iteration of the plan would call for the entire amount of the tolls on the bridge and tunnels leading into Manhattan from New Jersey collected by the Port Authority to be credited against the congestion fee.  

The debate which will follow will be robust. There are many ways to address congestion which the city has not tried. Designated pick-up/drop off areas for Uber and other vehicles have been tried in Washington, D.C. Much congestion in the city stems from double-parked delivery vehicles. Those vehicles collect tickets but those fees are waived under an agreement reached by the DeBlasio administration. Philadelphia established areas on city streets for delivery vehicles to park. Such a plan would reduce the barriers which trucks create for smooth traffic flow.

When you see how the city has not tried alternatives, it makes it clear that this is not an environmental issue but a revenue raising issue. That is why the fee once imposed, isn’t going anywhere even if every vehicle is a non-polluting electric vehicle. Has the city made parking more expensive? The MTA analysis seems to be skewed towards the congestion pricing model. The analysis presents nine alternatives. Four would meet the goal of reducing congestion. Only one of those alternatives also would raise money for the MTA – no surprise, it’s congestion pricing.

Then there is the whole issue of how to deal with vehicles entering from New Jersey. Significant political opposition comes from the Governor of New Jersey. It matters because he can hold up actions by the Port Authority and the Gateway Tunnel project needs a cooperative relationship between the Governors. The dispute has generated the phenomenon of “crossing credits”. That’s what we call discounts proposed to reflect the $16 toll cars pay to enter the city under the Hudson River.

Parts of the plan seem to have been conjured up in a vacuum. One idea explored was to encourage remote work to reduce car traffic. And that makes sense if you are trying to convince drivers to subsidize people who are simultaneously being encouraged not to drive or use mass transit thus generating no revenue. The plan has already been flagged as being negative for environmental justice issues. Every congestion pricing scenario will result in more truck traffic on the Cross-Bronx Expressway and RFK Bridge. That will not reduce pollution in those areas.

In the case of the New Jersey side of the equation, more commuters use mass transit than use their cars to enter Manhattan. Other sources of concern exist as well. Some of the scenarios offered consider offering discounts for all tunnel commuters but not all bridge commuters, something that could drive traffic to already overwhelmed bottlenecks, like the Holland Tunnel.

WHEN ARPA FUNDS CURRENT EXPENSES

There is a significant legal battle unfolding in the NYS courts over cuts to the NYC education budget. In June, the City Council enacted a budget that included reduced spending on the public school system. The budget reflected the estimated loss of some 120,000 students with much of that loss attributable to the impacts of the pandemic. As is the case in many districts across the country, much outside aid to local school systems is tied in some major way to enrollments. The usual formula includes a reliance on the data point of average daily attendance.

The Adams administration crafted a budget that reflected attendance trends and current realities. It resulted in what is considered a cut of $200,000,000 in FY 2023. Here is where ARPA money fits in. These same attendance trends had been established during the DeBlasio administration but the choice then was to use ARPA money to support school budgets. Now that use of funds from a finite short-term source to cover a long-term expense is becoming a problem.

The situation also puts a spotlight on the teachers’ unions. It was only 3 or 4 years ago that images of thousands of teachers and students clamoring for better pay were generating favorable responses and support. Now a combination of factors has rapidly turned that supportive atmosphere around. Much of this has to do with teacher resistance to in-person versus on-line learning. It highlighted the child care role that schools serve for those parents who work. The teachers were seen as putting their interests above those of the children of many who were considered essential workers during the pandemic.

Nevertheless, the teacher’s union took the city to court and challenged the education appropriations even though they had been enacted through the normal budget process. The teachers feared layoffs. The initial decision in the litigation called for the city to restore the cuts to the education budget. Upon appeal, that order was reversed. It is likely that an appeal of that ruling will be undertaken by the teachers’ union to the state’s highest court.

We find the efforts by the teachers’ union in this case to be troublesome. Any budget process at any level of government is ultimately a political act. To have the courts intervene at this level of budget making is a concern. We do not think that budget making is sacrosanct in any way but in this case the court is being asked to override a decision undertaken through a public process by duly elected representatives. Outside of the large urban school districts in NY, school budgets are the closest thing you get to true democracy. Would the union take the view that a court should overrule a legally conducted budget election because the residents did not think that teachers should be getting a raise?

SHOW ME CANNABIS

Voters in Missouri will be asked to approve amending the Missouri Constitution to remove bans on possessing, consuming, delivering, manufacturing and selling marijuana for personal use by adults over the age of 21. The ballot petition calls for a proposed registration card for personal cultivation of marijuana as well as provisions to allow people with nonviolent marijuana-related offenses to petition to have their records expunged. A 6 percent tax on the retail price of marijuana would be imposed.

Medical marijuana has been legal in Missouri since 2020 when 65% of voters approved it. The sponsors behind the petition estimated that legalization would generate some $40 million annually to the State. The approval of the ballot item occurred as once again the Senate will be asked to consider the Cannabis Administration and Opportunity Act.

Two provisions to note are that the law would transfers federal jurisdiction over cannabis from the Drug Enforcement Agency to the Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau (TTB) within the Treasury Department, and implements a regulatory regime similar to alcohol and tobacco, while recognizing the unique nature of cannabis products.  It hopes to eliminates the tax code’s restriction on cannabis businesses claiming deductions for businesses expenses, and implements an excise tax on cannabis products. The goal is to allow the industry to be a fully banked business.

UPDATES

The Port of Oakland filed a complaint for injunctive relief on July 25 with the Superior Court of California in Alameda County.  A temporary restraining order was granted on Tuesday, Aug. 2. In addition, a hearing on the motion for a preliminary injunction is scheduled for Aug. 29. Members of the California Trucking Association and the Owner-Operator Independent Drivers Association had blocked access to the Port in late July to protest new state employment laws.

The Jacksonville Electric Authority (JEA) is letting their customers know that retail rates could be as much as 45% higher by 2032. The projected 4.5% annual need cites the fact that “the biggest driver of our longer-term need for rate increases is driven by the combination of capital projects, Plant Vogtle, primarily.” JEA has already increased its base rate by three percent last year.

The National Indian Gaming Commission announced figures this week which showed that revenues nationwide totaled $39 billion in 2021. The onset of COVID-19 in the spring of 2020, every tribe shut down their gaming facilities.  The result was a decline of nearly 20 percent in gross gaming revenue. Once facilities began to reopen, revenues picked up and steadily increased. According to the fiscal year 2021 figures, gross gaming revenue at tribal casinos increased by 40.2 percent from the year prior. Compared to pre-pandemic levels, they increased by 12.9 percent.

On August 1, 2022, Chief Justice John Roberts granted energy companies’ application for an extension of time within which to file a petition for writ of certiorari for review of the Fourth Circuit’s decision affirming the remand order in Baltimore’s climate change lawsuit against the companies. The deadline for filing a petition for writ of certiorari is now October 14, 2022. This comes as the parties in a similar suit from Boulder, Colorado are in the midst of arguing a procedural issue in front of the Supreme Court. The industry continues to make every effort to get these claims shifted to the federal courts which have fairly consistently kept the cases in state court. This is one of them.

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