Joseph Krist

Publisher

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THOUGHTS FOR A NEW YEAR

This is our last issue for 2021. We will return with our January 10 issue.

As we look out towards the horizon, we have more than a few things which occur to us. This is not going to be a set of predictions but rather things which we will be focusing attention on to see what they indicate for the longer term. Clearly, 2022 will be a very political year as all of the potentially controversial and complicated issues will get a lot of attention as the political battle for control in Washington and across statehouses across the country unfolds.

That said, we focus on the more munibond centric issues which await. In New York State, the issue of pandemic response is rearing its head as we go to press. The Governor is facing an emerging challenge in the rise of the omicron variant. Many of the sectors most vulnerable to the pandemic were also important economic supports. The closure of some businesses and institutions and reinstatement of masking requirements comes at a difficult time.

The shift to a new mayoral administration in New York City in the midst of a potential pandemic reemergence creates unwanted uncertainty. The new mayor already faced challenges but now the potential negative impact of the pandemic creates even more pressure on an untested administration. For both Governor and Mayor, time is a real issue. The Governor’s proposed budget is due in mid-January and the first fiscal update from the new Mayor is due around the same time.

This all comes at a time of huge uncertainty for the City of New York. On my most recent visit this week to the City, it was a true sign of life and hope to see the theater marquees and other attractions lit up and operating. Now, some of those lights will dim again and some of the optimism which they reflected will ebb as well. It bodes poorly for the many spaces which remain vacant throughout Manhattan.

The pandemic also challenges the issue of congestion pricing scheduled to begin in 2022 for the central business district of Manhattan. The idea is ostensibly twofold – one the reduction of congestion and its use of fossil fuels and two a way to raise money for mass transit. Here’s the rub. If mass transit is permanently impacted by post pandemic employment realities, the punitive impact on private transit use is increased thereby diminishing support for the concept.

All you have to do is try to drive through Manhattan and you can see the many impacts of poor policy on congestion which go way beyond the number of cars.

The empty Ubers, the double-parked commercial vehicles, the lack of a viable policy for commercial vehicle needs, the issue of outdoor “temporary” restaurant spaces on public streets and sidewalks all contribute to congestion. All will be there even with emission free electric vehicles.  

In California, the more things change the more they remain the same. At year end we see the state proposing to effectively raise the cost of solar power. This while trying to decide whether fire, rain, snow or the lack thereof can be managed. The decision as to whether or not to reconsider the announced closure of the state’s last operating nuclear generating plant in 2025 will have major implications for the national energy debate.

Public transit faces more issues than ever. Primary among them is funding under the realities of the pandemic and its long-term impact on patronage both in terms of number of passengers as well as timing and patterns of that utilization. Just maintaining existing infrastructure is a great challenge. Funding it in an environment of lower demand and lower tolerance for increasing fares and tolls will be difficult at best. All of this against a growing back drop of reduced or subsidized fare programs across the country.

The ESG investment sector will have lots to think about. It remains a concern that there remains so much unsettled about the definition of what ESG investing truly means, what new disclosure pressures and requirements are needed to bring more clarity to the issue of what exactly is meant by ESG as an investment principle. Too much of the answer to those questions is obscured by the “black box” nature of the many and diverse methods of evaluating projects and investments. This merely sustains the view that the ESG tag is currently much more of a marketing tool or a political tool. “Greenwashing” is a real problem.

If it is a valid investment category, a much narrower set of definitions and standards must be adopted, disclosure standards must be promulgated, and methodologies for evaluation and valuation must be developed and articulated. The “black box” approach is not serving the sector well.

In the interim, we are beginning to see rating actions based on social factors. Moody’s lowered its outlook to negative from stable on bonds from North Idaho College. North Idaho College is a community college with its main campus located in Coeur d’Alene, ID, It serves 4500 students from a five-county region. The outlook reflects “governance credibility and board structure risks. These risks are highlighted by board dysfunction, with a small group of publicly elected board members and significant turnover at key senior leadership positions. Disputes between board members and with college leaders have been public, including the dismissal of the college’s former president and complaints against the actions of the board.”

That is about as clear as it is going to get. It is the type of action which should get the attention of ESG investors. The fights have drawn extra attention. The state accreditation body is conducting a review of the College and the management issues.

TEMPLE UNIVERSITY HOSPITAL

Temple University Hospital System is the largest Medicaid provider in the Commonwealth of Pennsylvania. It serves as the essential facility of last resort in Philadelphia. Over the years, the level of service provided, impoverished demand base, and continuing challenges to Medicaid funding have always pressured the system’s finances. This has caused its ratings to hover broadly over the investment grade/non-investment grade boundary. Given the impact of the pandemic on its core source of demand, one might have feared for the system’s financial well-being.

That is not the case. This week, Moody’s announced that it upgraded Temple University Health System’s (PA) revenue bond rating to Baa3 from Ba1. In conjunction with the rating improvement, the outlook has been revised to positive from stable. In spite of the headwinds that the system generally faces, growth in cash reserves and better than budgeted operating performance were achieved for two consecutive years. That in the midst of the pandemic. There was also a helpful asset transfer – the recent sale of Health Partners Plan, Inc. (HPP), added some $300 million to TUHS’ balance sheet after FYE 2021. That sort of improvement moved the ratings metrics favorably generating a strong case for an upgrade.

Going forward, the outlook change reflects Moody’s view that the results are sustainable. It also anticipates that regardless of the upcoming 2022 political environment in 2022 (the Governor’s race and a major US Senate race), the current funding position of the system in the overall Medicaid funding structure in Pennsylvania will remain essentially status quo.  

MUNIS AND SOLAR

Municipal electric utilities are right in the middle of the ongoing energy debates. They face all of the pressures on an operating basis that their investor-owned counterparts face. One of the states where the debate is unfolding across all provider sectors is Colorado. Recently, we have seen the investor-owned sector and the rural coop sector face challenges to their dependence on fossil fueled (primarily coal) generation. Utilities are increasing efforts to change supply relationships and withdraw from existing power supply relationships.

Now one Colorado municipal electric utility is taking its own steps in the drive to renewable energy. Platte River Power Authority this week issued a request for proposals (RFP) to obtain up to 250 megawatts (MW) of new photovoltaic solar generating capacity that could begin producing noncarbon energy by 2025. Platte River’s needs to replace power currently obtained by direct ownership interests in Craig Unit 1 and Unit 2. These are coal fired units. Unit 1 is scheduled to go offline in 2025 and Unit 2 is scheduled to do so in 2028.

The plan did force Platte River to be proactive in the potential redevelopment of the site. Its situation reflects one of the issues facing other utilities – that of the link between generation infrastructure and transmission infrastructure. Platte River may not be the largest or primary owner of the Craig generation plants but one of its two transmission lines initiates at the plant. Developers are encouraged to consider proposing projects that could interconnect with Platte River’s transmission system directly. That is designed to encourage a solar facility to locate near the Craig site.

Within each project proposed, developers are encouraged to include a battery energy storage component capable of providing 100% of the project’s nameplate capacity for at least four hours and be dispatchable by Platte River when needed. By using the existing transmission infrastructure, some of the coal decommissioning impact would be mitigated and the site maintained as a useful piece of the clean energy infrastructure. The issue will reappear across the electric utility spectrum.

NATURAL GAS REGULATION

New York City is poised to be the largest locality to enact its own ban on the use of natural gas in any new construction. Developers in New York City will have to install electric heat pumps and electric kitchen ranges in newly constructed buildings. The regulation will require buildings up to seven stories tall to be all-electric by 2023 and larger buildings to do so by 2027. The bill would not affect existing buildings.

The announcement comes as the gas industry continues its efforts to drive preemption legislation at the state level. The industry is positioning the question as one of choice – like helmet laws for motorcyclists, vaccinations and as a concern of the elderly and low- income individuals. The industry also hopes that fears of requirements to end the use of all natural gas appliances (not a part of any of the 50-odd local gas bans) will drive opposition.

MTA FARE INNOVATION

The Metropolitan Transportation Authority announced that beginning March 1, it will operate a pilot program to test a series of temporary promotional changes to fare structures for New York City Transit, the Long Island Rail Road and Metro-North Railroad. The Authority already has a plan – ‘City Ticket’ – which offers a reduced, flat fare for commuter rail travel within New York City on weekends.

The new plan would expand to cover all weekday off-peak trains at a fare of $5. This is a $2.75 or 35 percent discount from the LIRR’s current weekday fare between eastern Queens and Brooklyn, which is $7.75. The plan will be available to users of the Authority’s OMNY program. OMNY is the One Metro New York contactless fare payment system used on public transit in New York City and the surrounding area. OMNY users would be charged the standard $2.75 pay-per-ride fare for their first 12 trips starting every Monday. Any further trips through the following Sunday would be free of charge.

It is a positive factor to see the MTA using the realities of the pandemic and its impact on utilization to take a flexible approach to its fare system. With NYC lagging behind the nation in terms of returns to offices and use of mass transit, flexibility will be the characteristic of successful operators in the mass transit space.

TRI STATE GENERATION FACES A NEW DEPARTURE

United Power, the largest electric cooperative in the Tri-State Generation and Transmission Association filed notice of its intent to withdraw from the association, effective January 2024, with the Federal Energy Regulatory Commission. The FERC oversees Tri-State. Two other members have left and eight others are actively evaluating leaving as well. Tri State depends on coal as the primary fuel source for its generation and this has become an increasingly contentious issue between Tri State and its member co-ops.

As has been the case when confronted with a request to leave by a customer, Tri State seeks to extract a huge financial compensation from the departing utility. In this case, United estimates that the appropriate charge would be up to $300 million. Tri State thinks that the number should be closer to $1.5 billion. It will be left to the federal Energy Regulatory Commission (FERC) to decide which is the valid number.

The coal component of the dispute is real. United Power, for example, already has 84 megawatts of renewable generation on its system, including 46 megawatts of utility-scale solar. It is home to a 4-megawatt battery storage project, the largest in Colorado, and has more than 6,800 rooftop solar systems. As is the case with all of Tri State’s customers, United must obtain 95% of its needs from Tri State. As for the price of departure, two already departed small utilities paid a total of $174 million to Tri State. United is 20% of Tri State’s demand.

SMALL COLLEGES CONTINUE UNDER PRESSURE

Hartwick College is a small, tuition dependent private liberal arts and sciences college in Oneonta, NY with fall 2021 enrollment of 1,151 full-time equivalent students and fiscal 2021 operating revenue of about $44 million. A trend of declining enrollments is exacerbated by the weakening demographic outlook which colleges are beginning to confront. Hartwick’s current fiscal 2022 budget projects that the college will have a fifth consecutive year of negative cash flow from operations and further unrestricted liquidity declines. The College is undertaking a fundraising campaign but it will have to make a serious investment in recruitment to arrest the long-term trends.

If the pandemic turns out to have a serious impact on operations in the next few months, the position of already challenged institutions will continue to weaken. It is a class of credits in the education space worth watching. The weakening demographics are real and will impact many institutions to different degrees.

LEGAL CHALLENGE TO TOLL INCREASE

On January1, a $1 toll increase is scheduled to take effect on the seven Bay area bridges under the control of the Metropolitan Transportation Commission. The $1 hike is the second part of a three-series toll increase by 2025 authorized under Regional Measure 3, or RM3 as passed by voters in 2017. Despite the voter approval and the collections under the first of the planned increases, legal challenges have forced the funds collected to be placed in escrow.

That lawsuit will have the same impact on the funds collected under the next toll increase. Howard Jarvis Taxpayers Association filed the suit alleging the bridge toll may be considered a “tax,” which would be in violation of Prop. 26. Government taxes require a two-thirds majority vote in the Senate, and the related legislation only received a 54% majority. The same argument is being made in a case against a sanitation fee levied in Oakland which awaits final adjudication in the California Supreme Court.

In the meantime, substantial funding for mass transit remains in limbo. Projects at BART which do not receive any outside funding cannot be undertaken. It is ironic that an organization would sue to overturn a vote of the people in the name ostensibly of protecting those same people.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.