Joseph Krist

Publisher

________________________________________________________________

P.R. LITIGATION

Challenges to the Plan of Adjustment in the Puerto Rico Title III proceedings have been expected and predictable. Two appeals have been made to the U.S. District Court for Puerto Rico and arguments have been submitted. One is Puerto Rico-based credit unions and the other is the Teachers Union. For arguments, the issues in the two cases have essentially been combined. The teachers and the credit unions want to have the court issue a stay against the implementation of the plan.  They are asking for time to pursue appeals in the Court of Appeals for the First Circuit. While located in Boston, this is the traditional forum for litigation involving the Commonwealth.

The predictability of litigation like this was quite strong. It was a question of which group or entity would file an appeal. In prior decisions, the presiding judge in the Title III proceedings has ruled on claims of illegal takings by the Board. The main thing this accomplishes is delay. We do not see it changing the ultimate outcome of the Title II process. The bondholder creditors and the Oversight Board had hooped to move forward with implementation of the Plan and its refinancing by March 15. This litigation will likely delay that.

In the meantime, the actions of the Puerto Rico Senate in refusing to act on legislation needed to amend the Commonwealth’s budget just reinforce the view that the political establishment still does not understand their situation. The politicians try to portray this as just the normal course of politics when it is actually just another example of why the market remains highly skeptical about the ongoing willingness to pay even its restructured debts.

It’s hard not to look at Puerto Rico as a credit and then look at the ongoing debt problems of Argentina where political will has always been the issue in its IMF debt dealings. That is not a place which Puerto Rico should aim to aspire to.

PLANT BASED BUT NOT GREEN

A study, funded in part by the National Wildlife Federation and U.S. Department of Energy, found that ethanol is likely at least 24% more carbon-intensive than gasoline due to emissions resulting from land use changes to grow corn, along with processing and combustion.  In 2005, Congress enacted legislation creating the U.S. Renewable Fuel Standard (RFS). That legislation requires the nation’s oil refiners to add some 15 billion gallons of corn-based ethanol into the nation’s gasoline annually. The policy was intended to reduce emissions, support farmers, and cut U.S. dependence on energy imports.

That law spurred the issuance of tax-exempt bonds to fund ethanol refineries. These were issued primarily in the high yield market. Those refineries competed to process local corn into ethanol. Corn cultivation grew 8.7% and expanded into 6.9 million additional acres of land between 2008 and 2016. For ESG investors, it is important to note that the study showed corn planted for ethanol increased annual nationwide fertilizer use by 3 to 8%, increased water quality degradants by 3 to 5%, and caused enough domestic land use change emissions such that the carbon intensity of corn ethanol produced under the RFS is no less than gasoline and likely at least 24% higher. 

In reality, the oil companies hate the rule and consumers appear agnostic. In terms of other negative impacts, corn prices have led to higher food prices. RFS increased corn prices by 30% and the prices of other crops by 20%. From many perspectives, the ethanol program looks like a back door subsidy to growers given the new study that shows ethanol to be a net carbon contributor.

The future of ethanol requirements is in the hands of the U.S. Environmental Protection Agency (EPA). As manager of the nation’s biofuels program, it will set the regulations to replace the current standards which expire this year. EPA plans to propose 2023 requirements in May.

HARVEY, ILLINOIS

A long saga comes to an end as the SEC asked the U.S. District Court in Illinois to approve its request to close its case against the City Of Harvey, IL. The economically challenged municipality near Chicago’s South Side has a long history of poor management. In June 2014, the SEC filed a complaint alleging that the City misused municipal bond proceeds and lacked adequate internal controls to prevent this misuse. In December 2014, the City entered into a Consent Judgment that permanently enjoined the City from future violations of the antifraud provisions of the federal securities laws. The Consent Judgment also required that the City hire an Independent Consultant and that the City implement the Independent Consultant’s recommendations.

As is often the case, the entrenched powers at City Hall did not move forward as quickly as the Court had expected.  In October 2020, the SEC filed a Motion to Enforce the Consent Judgment, asserting that the City had not fully implemented the Independent Consultant’s prior recommendations. As part of the Order granting the SEC’s Motion to Enforce the Consent Judgment, the Court ordered the City to re-hire the Independent Consultant and ordered the Independent Consultant to prepare an updated report on whether the City was in compliance with his prior recommendations after re-hiring him.

On January 4, 2022, the SEC filed an updated report from the Independent Consultant which reported that the City had implemented changes resulting in improvement of the City’s internal controls and that the City now was in substantial compliance with his prior recommendations. The SEC then moved to have the case terminated although the Consent Decree remains in effect.

NYC BUDGET

Mayor Eric Adams presented his first budget proposal for FY 23. The budget reduces the FY23 budget by $2.3 billion as proposed by Mayor DeBlasio. The plan reflects the new priorities of a new administration and a different attitude about spending. It also revives a term we had not seen since the Bloomberg administration – PEG. A Program to Eliminate the Gap (PEG) is being relied upon to lower overall spending and is also relied upon to fund programs more in line with the new Mayor’s priorities.

This budget maintains the Police Department at current levels. It also addresses the issue of the size of the City’s workforce. The DeBlasio administration’s standard response was always to increase spending and headcount. The Adams administration reduced the budgeted city headcount by 3,200 in FY22 and 7,000 in FY23 by eliminating vacancies and without laying off a single employee.

This plan also increased budget reserves to a total of $6.1 billion — more than $1 billion more than the FY22 level, and the highest level achieved in city history. There is now $1 billion in the General Reserve, $1 billion in the Rainy Day Fund, $3.8 billion in the Retiree Health Benefits Trust, and $250 million in the Capital Stabilization Fund. The administration has removed $500 million in unidentified labor savings from the FY23 budget and future plan years. That may reflect the likelihood that labor negotiations will lead to higher rather than lower wages.

The new priorities of this administration are reflected by several program proposals. The budget would increase the New York City Earned Income Tax credit (to $250 million in FY23) and it would guarantee annual funding for the Fair Fares program for the transit system ($75 million in FY23) which provides fare relief to low income riders. Child care has become a much bigger issue as lower income workers were impacted by the need to go to work while school openings were in doubt.  

The budget seeks to support the expansion of child care facilities. It would use tax incentives specifically to create more childcare space with a property tax abatement for property owners who retrofit property ($25 million in FY23) and tax credits for businesses that provide free or subsidized childcare ($25 million in FY23). It also seeks to address the need for summer jobs for young people by expanding the Summer Youth Employment Program. The budget would baseline the funding for 100,000 summer jobs for city youth, including 90,000 in the SYEP ($79 million in FY23 for a total baselined investment of $236 million).

The City will still face out-year gaps of $2.7 billion in Fiscal Year 2024, $2.2 billion in Fiscal Year 2025, and $3 billion in Fiscal Year 2026. It also acknowledges the challenges ahead. This plan is submitted when the City faces an unemployment rate of 8.8 percent. While down from 20% at the peak of the first wave, it is still much higher than the state and country overall. The local economy has recoveredjust 55% of the 933,000 jobs lost at the height of the pandemic. This lags behind the state, which has recovered 63%, with the U.S. at 84%.

Return-to-office progress peaked at over 35% in early December, crashed dramatically to just over 10% by January, and still has not recovered. Office vacancy rates are at 20%, a 40-year high. Some offsetting good news is that better than expected Wall Street activity and growth in residential real estate helped fuel a $1.6 billion increase in Fiscal Year 2022 tax revenue projections over November.

MEMPHIS UTILITY BLUES

Last winter saw the Texas power grid implode and the aftermath focused attention on management and governance at municipal utilities impacted. This winter has seen a winter storm create havoc at the utility serving Memphis, TN with customers without power for over a week. Events like this focus attention on the management of a utility. Memphis is no exception.

The storm came as Memphis was in the midst of several controversial issues including a potential termination of its relationship with the Tennessee Valley Authority. The attention on management has shed light on a serious governance issue. It has been acknowledged that the three-year terms of all five members of MLGW’s governing board are long expired. Four of the five ended nearly three years ago.

The most recently appointed commissioner’s term expired more than 18 months ago. It is all legal. A commissioner can continue to legally vote on MLGW matters after their three-year term expires. The mayor said that he made a decision to not appoint or reappoint anyone to the MLGW board until officials closed the bidding process for seeking power suppliers that might replace TVA. The Mayor cites a need for “consistency” in not appointing board members.

MLGW commissioners are nominated by the mayor and confirmed by City Council. Failing to reappoint a sitting commissioner or appoint a replacement means there is no public hearing. There are also conflict of interest concerns involving one commissioner. Commissioners serve “until the expiration” of their three-year terms and “until their successors are elected and qualified,’’ which technically allows a commissioner to serve longer than three years without a reappointment. 

The TVA contract renewal is a huge decision for the utility. It has been the source of much of the concern. In the case of MLGW, it is a real issue. One board member is in a business relationship with the wife of a TVA officer. That job was created after MLGW’s board first voted to seek bids from alternative electricity suppliers some 13 months ago. While it may be legal under Tennessee law, the situation raises serious governance issues which the parties have been unwilling to address to date.

D.C. PENSION INVESTIGATION

The major pension funds servicing the bulk of government retirees from the District of Columbia all have very strong funding positions. While the funding of pensions remains a significant issue nationwide, the District has long been a positive outlier. Consequently, the funds and the Board of Directors who oversee them have not drawn much attention.

That has changed for now as it has been revealed that the US Department of Justice (DOJ) has been investigating the Board with an apparent focus on investment manager compensation. The first subpoena was issued in August, 2021 but the Board did not disclose it. The information came to light in in a whistleblower lawsuit filed in December against the Board by the agency’s general counsel.

At this point, the issue seems to be one of governance. The strong funding status of the funds does not obviate the need for strong ethical standards and oversight. All the pensioners should be worried about is whether the money is there for them.

HIGH TIDE

NOAA is the federal agency tasked with, among other things, monitoring sea level changes. The Sea Level Rise Technical Report provides the most up-to-date sea level rise projections available for all U.S. states and territories. The new report is the first in 5 years. The findings reinforce trends already apparent.

Sea level along the U.S. coastline is projected to rise, on average, 10 – 12 inches (0.25 – 0.30 meters) in the next 30 years (2020 – 2050), which will be as much as the rise measured over the last 100 years (1920 – 2020). Sea level rise will create a profound shift in coastal flooding over the next 30 years by causing tide and storm surge heights to increase and reach further inland.  

Rise in the next three decades is anticipated to be, on average: 10 – 14 inches for the East coast; 14 – 18 inches for the Gulf coast; 4 – 8 inches for the West coast; 8 – 10 inches for the Caribbean; 6 – 8 inches for the Hawaiian Islands; and 8 – 10 inches for northern Alaska.

TRI-STATE COOP RELENTS

At least one local distribution cooperative in Colorado has managed to reach an agreement with Tri-State Generation its wholesale power supplier. Over recent months, Tri-State has been in the spotlight for its efforts to bind its customers to them even though many face mandates to lower fossil fueled energy consumption. Tri State has been exceptionally dependent upon coal.

Now, one distribution coop – La Plata -has reached an agreement with Tri-State which keeps La Plata as a member but provides for the coop to be a partial requirements customer. The historic model was for all requirements contracts. La Plata’s existing contract with Tri-State allows the Durango-based cooperative to generate just 5% of its own power. Members now can choose to obtain up to 50% of their power requirements from their own direct generation or through purchases.

LaPlata will, if the contract gets final FERC approval, begin taking power from private renewable providers to satisfy 50% of La Plata’s requirements.  The partial requirements contract will save La Plata $7 million a year. It will offer an immediate 50% cut in La Plata’s carbon footprint when it begins purchases in 2024. It also supports La Plata’s goal which is to decarbonize 50% by 2030 as compared to 2018. 

As the process unfolds (a FERC hearing is scheduled for May), Tri-State has stopped raising rates and is now lowering them, 2% last year with another 2% reduction schedule for this fall. It is working with La Plata to install a 2-megawatt community solar project. That indicates that Tri-State has realized the benefits of a more flexible approach with its members.

That may not be enough for all of them. One utility with 100,000 customers wants out of its relationship with Tri-State. The FERC determination in the La Plata case will be looked closely by the six other Tri-State members who have indicated they are studying their options.

NUCLEAR

The newly enacted Bipartisan Infrastructure Law created the Civil Nuclear Credit Program (CNC), allowing owners or operators of commercial U.S. reactors to apply for certification and competitively bid on credits to help support their continued operations. Under the law, applications must prove that the reactor will close for economic reasons and demonstrate that closure will lead to a rise in air pollution. DOE must also determine that the U.S. Nuclear Regulatory Commission has reasonable assurance that the reactor will continue to operate safely. 

Proving that nuclear closures contribute to increased carbon emissions may get a lot easier. EPA data has been released for the Northeast. New York passed a law in 2019 requiring the state to eliminate carbon dioxide emissions from power plants by 2040 but over the last two years, CO2 from power plants has climbed nearly 15 %.  In the six New England states, power emissions are up 12 % over the last two years. And in Pennsylvania, emissions from electricity generation have grown 3 %.

That likely reflects the replacement of nuclear with natural gas fired generation. Nationwide, power plant emissions were down 4% between 2019 and 2021, even after accounting for a 7% increase in electricity emissions last year. Nuclear power currently provides 52% of the nation’s 100% clean electricity from the current fleet of 93 reactors.

The emissions problem is expanding the potential audience for nuclear. Some 16 states have passed some form of support for nuclear whether through direct operating subsidies, repeal of limits on nuclear projects, or authorization for small modular reactors (SMR).  After the experiences in Georgia and South Carolina, modular would appear to be the way to go for nuclear advocates.

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.