Joseph Krist

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INFRASTRUCTURE PACKAGE ARRIVES

The President and the bipartisan group announced agreement on the details of a plan for investment in our infrastructure, which will be taken up in the Senate for consideration. In total, the deal includes $550 billion in new federal investment. The Bipartisan Infrastructure Deal will invest $110 billion of new funds for roads, bridges, and major projects, and reauthorize the surface transportation program for the next five years. The bill includes a total of $40 billion of new funding for bridge repair, replacement, and rehabilitation.

The deal invests $39 billion of new investment to modernize transit, and improve accessibility for the elderly and people with disabilities, in addition to continuing the existing transit programs for five years as part of surface transportation reauthorization.  This is the largest Federal investment in public transit in history, and devotes a larger share of funds from surface transportation reauthorization to transit in the history of the programs. Nonetheless, it represents a reduction of $10 billion from the original White House proposal for mass transit. The deal invests $66 billion in rail to eliminate the Amtrak maintenance backlog, modernize the Northeast Corridor, and bring world-class rail service to areas outside the northeast and mid-Atlantic. 

The bill invests $7.5 billion to build out a national network of EV chargers. The bill invests $17 billion in port infrastructure and $25 billion in airports to address repair and maintenance backlogs, reduce congestion and emissions near ports and airports, and drive electrification and other low-carbon technologies. $55 billion will be dedicated to replace all of the nation’s lead pipes and service lines. The deal’s $73 billion investment is meant to upgrade and expand the transmission grid and invests in demonstration projects and research hubs for next generation technologies like advanced nuclear reactors, carbon capture, and clean hydrogen.

The proposal has something for every region whether it be resiliency, grid expansion, mass transit, rail, rural broadband funding. This what legislation looks like. We expect to hear lots of complaints that the bill doesn’t satisfy everyone’s needs fast enough. There is something for cities as well as rural areas and funding for things like lead pipe remediation has numerous benefits in terms of freeing up local resources for other pressing issues.

The funding side may be more problematic. Negotiators agreed to repurpose more than $250 billion from previous Covid relief legislation, including $50 billion from expanded unemployment benefits that have been canceled. It also proposes to recoup $50 billion in fraudulently paid unemployment benefits during the pandemic. Increased IRS enforcement did not make the cut. It is the Democratic version of Reagan’s fraud, waste, and abuse.

Two major hurdles remain. The bill needs five more Republicans beyond the members of the negotiating group. But the Democratic side presents a hurdle of its own. Speaker Nancy Pelosi of California has said she will not take up the bipartisan infrastructure bill in the House until the $3.5 trillion “human infrastructure” package — expected to pour billions into programs to address climate change, health care, child care and education — passes the Senate.

PUERTO RICO

The Puerto Rico Aqueduct and Sewer Authority (PRASA) is in the midst of a marketing effort to facilitate a restructuring of the outstanding debt of PRASA. It has announced the sale of some $1.7 billion of debt. The proceeds will finance the purchase of outstanding debt carrying coupons ranging from 5.125% to 6%. That debt matures as soon as 2024 and as far out as 2047.

The new bonds will be backed by a net rather than the former gross revenue pledge.  That’s a distinction that practically speaking gets you a better spot on line in a bankruptcy but you need to cover expenses which generate revenue. A net pledge is certainly a standard security.

Bonds not tendered will remain outstanding. Bonds can be tendered for purchase as well as for exchange. 

On other fronts, Puerto Rico’s Financial Oversight and Management Board (FOMB) announced Tuesday that it had filed a sixth amended commonwealth Plan of Adjustment (POA) that reflects new agreements with bond insurers Ambac Financial Group and Financial Guaranty Insurance Company (FGIC). The deals settle both insurers’ asserted callback claims against the government of Puerto Rico and debts issued by the Puerto Rico Infrastructure Financing Authority (PRIFA).

PRIFA bondholders will receive $260 million in cash, including restriction fees and consummation costs. In addition, the agreement includes a contingent value instrument based on potential outperformance of Puerto Rico’s 5.5% sales and use tax relative to projections in the 2020 certified fiscal plan and Puerto Rico’s general fund rum tax collections relative to projections in the 2021 certified fiscal plan.

PORT REBOUND CONTINUES

The recovery of the economy is being reflected in the level of port activities seen in the first half of 2021. The Port of Los Angeles, the nation’s busiest facility, reported a 26.7% year-over-year increase in June, processing 876,430 20-foot-equivalent units compared with 691,475 the previous year. Long Beach reported a 20.3% year-over-year increase, handling 724,297 TEUs compared with 602,180 in 2020.

The Port of Oakland processed 222,483 containers in June, which is almost identical to the numbers posted in April and May. The 2021 figure is up 43.3% year-over-year. Six months into 2021, the port is up 11.4% compared with 2020. Port facilities in Seattle; Tacoma, Wash.; Alaska and Hawaii, saw volume jump 19.9% year-over-year to 344,280 containers compared with 287,036 in the year-earlier period.

The Port of Virginia notched a 33.5% year-over-year increase in volume, moving 281,346 TEUs, compared with 210,669 in June 2020. Officials said June marked the 10th consecutive month of record-breaking volumes, which pushed Port of Virginia’s fiscal 2021 number to a record 3.2 million containers. Since fiscal 2019, volume is up more than 25%.  The Port of Savannah in Georgia saw a 32% year-over-year increase, moving 446,815 containers in June. In 2020, the port processed 338,287.

The Port of Charleston saw a 40% year-over-year volume increase in June, moving 231,758 TEUs compared with 156,494. In fiscal 2021, ending June 30, Charleston handled 2.55 million TEUs, a 9.6% increase from fiscal 2020. With five automobile, truck and military vehicle plants in South Carolina, the port handles tens of thousands of vehicles each year. The port said roll-on, roll-off cargo increased nearly 61% compared with 2020, moving 23,096 vehicles.

Along the Gulf of Mexico, Port Houston reported a 39% year-over-year increase, handling 292,627 containers in June compared with 210,932 in 2020. Through the first six months, the port is running 13% ahead of last year’s rate.

MTA

It has become clear from the return of less than a quarter of the pre pandemic office staff to the office, that recovery in NYC especially Manhattan will take some time. That has had a real impact on operations of the MTA in particular, the subways. With staffing shortages limiting the number of trains, wait times are up. Crime on the subways has also heightened concerns about long wait times. It’s a vicious cycle.

One thing which the MTA can do on its own is raise fares. An increase had been anticipated and the plan was to raise subway fares by 4%. Now that demand for the subway remains depressed, MTA has decided to hold fares steady through year end. To some degree, things are beyond its control in terms of whether workers are required to return to offices.

For bondholders, it is a non-event. That fact of the matter is that the anticipated 2021 revenue from a fare increase was only about $17 million.  MTA has received $4 billion of federal pandemic aid so far, and expects to receive the remaining $10.5 billion through a multiyear reimbursement process that will cover its operating losses.

The transit agency has raised fares every other year since 2009. 

THE OTHER GOVERNOR FACING RECALL

Don’t look now but another governor is facing the potential of a recall election. The Alaska Supreme Court ruled that a campaign to recall Republican Gov. Mike Dunleavy may proceed. The Court found that the effort contains legally sufficient grounds to bring forth the matter to voters. The recall’s supporters specifically cited allegations that the governor violated the state Constitution by using his budget veto to punish judges for abortion-rights rulings, and that he used government funds for political purposes. 

The ruling does not indicate anything about the validity of any charges against the Governor. It specifically leaves it up to the judgment of potential signers of a recall petition to make that determination. The Governor has been a lightning rod as he imposed a strong view that spending needed to be cut. He sought to preserve the State’s annual Permanent Fund payment to state citizens even at the cost of substantial cuts to the State’s University and ferry systems.  

With the long-term decline in demand for oil, Alaska has faced steadily more difficult choices as Permanent Fund revenues slow and diminish. Like many other ideologically driven officials, the Governor has had a difficult relationship with the State legislature. Many saw the cuts to the university system as politically driven. Anger at that and cuts to the State ferry system which significantly increased inconvenience for already isolated coastal communities.

ZONING REFORM

Zoning regulations have come under increasing scrutiny in recent years. Advocates for affordable housing development have seized on single family zoning regulations especially as a major hurdle to increases in the affordable jousting stock. In California, housing is among the hottest of hot button issues. Previous attempts to expand housing availability in the state, like SB 50, have been beaten back. Opponents argue that such changes would lead to gentrification instead of expanded low income housing opportunities.

Now, Senate Bill 9, designed to allow up to four homes on most single-family lots and spur the construction of badly needed new housing has passed in the State Senate. It is expected to be taken up in the Assembly Appropriations Committee by Aug. 27. If approved, it would go to a final vote in the Assembly. Opposition comes from both local governments and private interests.

Looming behind all of these efforts across the country is the increasing g role of real estate developers and investors in the conversion of single family homes to rental rather than ownership status. Many opponents of the bill fear gentrification but also fear the development of more and more properties for rental purposes. The development of this sort of housing does nothing to solve the affordability gap which has arisen from the increasing number of housing units offered for rental rather than sale.

Housing advocates fear that an increasing number of housing units will be offered for rental rather than sale. They also argue that developers are likely to target Black and Latino communities in areas where land is cheaper, and demolish houses to build high-cost rentals that would limit the ability of people of color to build wealth.

UNIVERSITY SYSTEM OF CALIFORNIA TUITION AND VACCINATION

The University of California announced that COVID-19 vaccinations will be required before the fall term begins for all students, faculty and others, becoming the nation’s largest public university system to mandate the vaccines even though they don’t have full federal approval. The University of Vermont also announced it will require vaccines regardless of when approval occurs. They join eleven other state university systems poised to require vaccination. Several other states (including the state and city systems in NY) will require vaccinations upon full FDA approval of vaccines.

It is hard to know whether vaccine requirements will make an institution more or less attractive from a competitive standpoint. In states where the public system is not mandating vaccination, we note that many of the best-known private institutions in those states are. All of the Ivies are requiring vaccination as well as their major competitors.

There is no surprise as to where requirements lag. North Carolina, Tennessee, Texas, Utah, West Virginia, and Wisconsin are among the laggards. Ohio is apparently waiting for vaccination approval before it decides what to do at the Ohio state system. Ohio is one of the states where the politics of the pandemic have been problematic.

Our view is that vaccination requirements will be more of an attraction than a detriment to the institutions requiring them. In a first legal test of such a requirement, eight student plaintiffs had argued that requiring the vaccine violated their right to bodily integrity and autonomy, and that the coronavirus vaccines have only emergency use authorization from the Food and Drug Administration, and should not be considered as part of the normal range of vaccinations schools require. 

A conservative group of anti-vaccine doctors is bankrolling the litigation. They vow to go to the U.S. Supreme court if necessary.

While the vaccination requirement was rolled out, the University of California Regents, citing the need for financial stability and more grant aid, approved a tuition increase of 4.2% for incoming freshmen in the fall of 2022. The 4.2% increase in tuition and fees — $534 added to the current annual level of $12,570 — will apply only to incoming undergraduates entering in fall 2022 and stay flat for up to six years for them. Successive undergraduate classes would get a similar deal.

The regents’ action marked UC’s second tuition increase since 2011. It comes as the University admits its most “diverse” class ever but also one with significant affordability concerns.

MISSOURI MEDICAID EXPANSION

The Missouri Supreme Court unanimously upheld an expansion of Medicaid that had been secured via a ballot initiative. That could mean an additional 275,000 people will have access to it. Opponents of expansion in “red” states realize that ballot initiatives usually need legislative action to fund the program.  So, GOP legislators in those states refuse to enact enabling legislation. The Missouri court ruled that expansion was legal in that it did not require the legislature to appropriate money specifically for new patients under expansion. Since the state funded Medicaid for FY 2022, the legislature will have to appropriate funding or else provider payments might not be made.

The absurdity of the situation – a voter supported policy that someone else pays 90% of – is clear. Medicaid expansion itself ordinarily sees the federal government pays 90 percent of the cost of extending Medicaid to non-senior adults who earn up to 138 percent of the poverty line.  Because, MO was slow to expand, it will perversely benefit from provisions in the stimulus which provide for extra funding through the American Recovery Plan for states which expanded Medicaid during the pandemic.

PENNSYLVANIA AND FRACKING ROYALTIES

The Commonwealth of Pennsylvania Department of Conservation and Natural Resources’ Oil and Gas Fund — derived from natural gas drilling on state forest land — to the state’s general fund to help balance the annual budget. The ruling came in a case brought by the PA Environmental Defense Foundation which hoped that the Supreme Court would overturn a lower court decision which allowed the diversion of more than $110 million from the Oil and Gas Fund between 2017 and 2019, to pay operating expenses rather than using it for conservation purposes.

The decision does not however require the funds to be transferred back to the Oil and Gas Fund. The decision found the Commonwealth Court’s 2020 ruling was at odds with its own 2017 ruling on the same issue, when foundation members challenged the transfer of $594 million from the fund between 2008-16. Foundation officials argued that “all funds from the oil and gas leases, including the royalties, bonus and rental payments, are part of the public trust, and must be used to conserve and maintain the public natural resources, including our state forest.”

From our standpoint, the management of the fiscal potential of fracking has been poor. We see tremendous resistance to things like severance taxes and other charges which can be easily linked to the activities of the natural gas industry. For a long time, the evolution of the fracking industry and its taxation in Pennsylvania will be viewed as a substantial missed opportunity.

IS CARBON CAPTURE COMING TO THE MUNI MARKET?

The San Juan coal fired generating plant in New Mexico was one of the nation’s largest. It’s role in climate change was undisputed. So, it was a big deal when the plant was scheduled for closure in response to the market realities facing fossil fueled generation. That decision by Public Service of New Mexico, the plant operator, was accompanied by news that a private merchant generator wanted to take over the plant and use it as a showcase for carbon capture technology.

The technology is controversial and has never been implemented at industrial scale. In that way, it resembles any number of “new technology” projects which have made their way to the municipal bond market over the years, often without success. Medium density fiberboard, manure to methane, and paper deinking come to mind.

Farmington’s city-owned utility currently holds a 5% stake in San Juan. It will become the nominal owner when the other co-owners depart on June 30, 2022. And under the private generator Enchant’s agreement with Farmington, the city will then turn the facility over to Enchant to be operated as a merchant power plant. One that was able to run on coal but not emit carbon dioxide into the atmosphere.

So, it caught our eye that the private generator, Enchant, updated the progress being made on carbon capture installation and operation. When it announced the carbon capture plan in 2019, Enchant said it would begin construction on plant conversion by 2021 and start operating it with carbon capture in place by January 2023. Now those dates have been delayed until year-end 2024 to have carbon capture partially operational at San Juan, and mid-2025 for it to be fully functioning.

Enchant executives previously said they would use private investment to convert San Juan, the company is now seeking nearly $1 billion in low-interest loans from the U.S. Department of Energy and other federal entities to help fund the project. That’s where our interest as a muni market participant comes in. The ownership of the utility by a municipal entity leaves a door open for a project like this to seek tax exempt financing if federal financing is not available or sufficient.

RANSOMWARE BANS

The increasing frequency of hacking attacks on governmental entities has spawned a variety of responses.  The increasing number of ransomware attacks and a lack of information on how and for how much ransoms are paid have focused state legislators’ attention on the subject.  The payment of ransoms by primarily private sector players has raised concerns that the practice will continue to expand and include government payors. As is often the case, proposed legislation does not take a particularly deft approach. Suffice to say, the legislative sledgehammers are out. Well intentioned but likely off the mark.

Three states—New York, North Carolina and Pennsylvania—are considering legislation that would ban state and local government agencies from paying ransom if they’re attacked by cybercriminals. A similar bill in Texas died in committee earlier this year. The sponsors seem to believe that making it illegal to pay ransom will make it unattractive to hackers to attack systems as it would serve as a stop on negotiations.  As one sponsor put it “We’re saying we cannot negotiate with you. It’s not legal for us to pay anything. You need to stay away from North Carolina.”

At least there is some money -$15 million – in the North Carolina bill to fund local government efforts at improving system security. The need for funding remediation highlights one weakness that plagues many local government systems. That is the issue of outdated systems. In many cases, a combination of old technology and software combines with really poor system management to create vulnerabilities. They will exist without serious funding increases.

The issue may not be just with government data. Weak local governmental security practices still create environments which are attractive to criminals. Many local government systems hold a significant amount of citizen data – birthdates, addresses, social security numbers – which can still provide opportunities for criminal profit. And many of the services provided by government deal with life and death situations which require rapid reinstatement of systems.

The Pennsylvania legislation attempts a bit more subtle approach. In Pennsylvania, legislators are considering a broader ransomware bill that would make possessing, using or transferring ransomware a criminal offense, ranging from a first-degree misdemeanor to a first-degree felony, depending on the ransom amount.

Leave it to New York to take a more clumsy approach. One of two pending bills would ban ransom payments by businesses and health care entities as well as government agencies. It also would require agencies to report ransomware attacks to the state. Would it be effective? Even its sponsor thinks not. “We decided to introduce the bill like a blunt instrument to force this discussion. Granted, I understand this is probably not the way to go about it. How do we tell private businesses what to do?” “But we need to do something. If we continue to just stand back and do nothing, that’s not a solution.”

In many cases, local governments do not use well established security procedures which have been standard best practices in the private sector.  Remote access requirements which arose during the pandemic highlighted major flaws. A 2019 study by researchers at the University of Maryland, Baltimore County found that local governments “on average, they practice cybersecurity poorly.” And it is that flaw which is often at the root of local cybersecurity issues.

The rising concern with cybersecurity for governments has not been accompanied by standardization of practices or by sufficient funding of cybersecurity efforts at the local level. Stronger access procedures especially for remote workers and the availability of funding for remediation costs are the most logical step. Merely banning ransom payments on its own is not an answer. The FBI testified this week that “It would be our opinion that if we ban ransom payments, now you are putting U.S. companies in a position to face yet another extortion, which is being blackmailed for paying the ransom and not sharing that with authorities… It’s our opinion that banning ransomware payments is not the road to go down.” 

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