Joseph Krist

Publisher

We are troubled this week by the initial signs coming out of Puerto Rico in the wake of the acceptance of the Plan of Adjustment in Puerto Rico’s Title III proceedings. An all too familiar mantra is already being quietly recited – no oversight, no disclosure, no accountability but yes, lots of cash please. All that market participants asks for is a level of oversight that many mainland U.S. cities and counties have experienced since the 1970’s in exchange for being funded out of insolvency. Until that changes, the chances for real lasting economic and fiscal success remain much lower than they need to be.

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SOCAL GAS DEBATE

There are several municipalities which find themselves in the center of the debate over the use of natural gas to produce electricity as the result of their ownership of the local electric utility. The latest example is the City of Glendale, CA. The City is a significant participant in a number of power supply agreements providing revenues to back the bonds issued by joint action agencies (JOA). Like many others, Glendale’s municipal utility gains access to the benefits of scale resulting from large baseload generators through JOA membership. Glendale also owns its own generating assets to provide peaking power at times of high demand.

In 2019, the Glendale City Council postponed a final decision on investing in natural-gas-fired generators to replace the city’s aging gas plant. Now the plants are three years older and still need improvement. The utility released a final environmental impact report last week recommending one of two preferred paths for the city to take. One option would to spend $260 million on five new gas engines. Modern gas turbines are relatively less polluting than the ones in place now. The second option would see the city refurbish several existing gas turbines to comply with air-pollution rules, at a cost of $201 million. The City Council is expected to vote on those possibilities on Feb. 8.

Glendale is also expanding non-fossil fueled generation. It plans to install a 75-megawatt, 300-megawatt-hour battery system at the site of an existing plant.

BACK TO THE FUTURE IN N.J.

In many areas, the use of human toll collectors is a blast from the past. A variety of electronic devices have been developed and installed on roads all over the country. In many ways, the technology is considered to be accepted. Even privacy concerns have not stopped its expansion. The latest holdout to begin the move to All Electronic Tolling (AET) is New Jersey.

The South Jersey Transportation Authority is soliciting bids for a vendor to design, develop, install, test, operate and maintain a “fully functional, turnkey all-electronic toll system” for the Atlantic City Expressway. The current schedule calls for a contract to be awarded as early July of this year. The anticipation is that an all-electronic tolling could be operational on the Expressway by spring 2025.

The solicitation makes clear that the system being sought could be extended to the New Jersey Turnpike Authority, which runs the Turnpike and Garden State Parkway. The vast majority of drivers on New Jersey’s toll roads are EZ-Pass customers. How big a majority? Try 85% on the Expressway, 89% on the Turnpike and 88% on the Parkway.

The data would seem to indicate that privacy-based opposition to mileage taxes or fees only extends so far. The reality is that electronic license reading technology is already widely used for a variety of reasons which are likely more invasive of privacy. Unless you go out of your way to avoid it (it’s hard to do) and you turn off your cell phone, you are already dealing with it.

NUCLEAR BOOST IN WEST VIRGINIA

The West Virginia legislature passed a bill to repeal state codes which restrict the use of nuclear power. Existing law states that “the use of nuclear fuels and nuclear power poses an undue hazard to the health, safety and welfare of the people of the State of West Virginia…and the purpose of this article to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

The purpose of this article was to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

SOLAR POWER

For a long time, Arizona was thought to be a perfect place for widespread adoption of solar power. This was especially true for rooftop solar. The only problem seemed to be the complete lack of support on the part of legacy electric generation utilities. There are moves underway in several states to modify the rules which require power companies to take “excess” power and to reflect that in rates. Without such a process (net metering), solar power is less attractive economically.

One of the major players in the efforts to slow solar in Arizona has been the municipal utility, the Salt River Project. Salt River effectively designed a rate structure that was seen as penalizing customers who installed rooftop solar.

Customers sued SRP claiming it was violating federal antitrust laws through its activities. The customers were appealing a trial court ruling in favor of SRP. In a unanimous decision, a three-judge panel of the 9th Circuit Court of Appeals rejected SRP’s contention that its restrictive rates were protected under federal law.

The judges ruled that there is sufficient evidence that can show the price structure was designed to deter the competitive threat of solar energy systems and force consumers to exclusively purchase electricity from SRP. This one case where the effective self-regulation of municipal utilities worked against SRP. Because they make their own rates without state regulation or approval required, SRP could not lean on the argument that the state through its regulators had approved its conduct.

The decision throws the case back to the original trial judge. There a ruling will be made as to the extent of the utility’s conduct and the damages to SRP customers.  The dispute has been going on since 2014 when SRP adopted a new pricing plan which says that solar customers who still need to be hooked up to the utility for times when solar is not available can be charged up to 65% more than prior plans. Yet at the same time rates for non-solar customers went up about 3.9%.

WHILE THE DEBATE CONTINUES

The decision comes in the midst of robust debates over how to support rooftop solar in two big states. Efforts are underway in California and Florida to reduce the impact of net metering requirements. In California, the Public Utilities Commission has proposed significant changes to net metering which would reduce the economic benefit to solar power owners.

Currently, net metering requires utilities to credit customer bills for “excess” power at full retail rates for solar exported to the grid. The plan would also levy monthly fees on customers who install solar power. The utilities are trying to present the issue as one of economic justice claiming that poorer customers are subsidizing solar. That argument is belied by data from Lawrence Berkeley National Laboratory which shows that households earning less than $50,000 a year made up 13 percent of solar adopters in 2019, and those earning less than $100,000 a year made up 42 percent.

THAT DIDN’T TAKE LONG

On January 22, three California assembly persons introduced Assembly Bill 1400 which would create a centralized state-run financing system known as CalCare, a plan that legislative analysts estimated could cost between $314 billion and $391 billion a year. It came in the wake of a proposal by the Governor to extend MediCal to all adults who meet the income limits.

The funding method for the single payer proposal was  CA ACA11 (21R), which would have increased taxes on businesses and high earners. ACA 11 also would need a two-thirds vote in each house as well as voter approval. The bill faced a Jan 31 procedural deadline and sponsors admitted that the votes are not there.

MEAG

The Municipal Electric Authority of Georgia (MEAG) is a participant in multiple large-scale generation projects with Georgia Power.  As a participant, MEAG does not have a final say about which units to operate or close. That is Georgia Power’s call. Among those generation assets are substantial base load generation plants fueled by coal.  In 2021, coal comprised 9% of MEAG’s delivered energy, up from 2% the prior year as an increase in natural gas prices made coal more economical.

Now the Southern Company – Georgia Power’s parent – has submitted its next resource proposal to state regulators. They must approve the plans. In its submission, GP pledged to close a total of 12 coal units by 2028 – representing a loss of 3,500 megawatts, which the utility plans to offset with 2,356 megawatts in natural gas.  Those units include two in which MEAG maintains ownership shares.

The next coal plant scheduled to be retired is Plant Wansley later in 2022.  MEAG has a 15.1% ownership (269 MW) in Units 1&2.  It also owns shares in Plant Scherer with 30.2% ownership in Units 1&2 (489 MW). Some 500 MW of power to replace those losses will be available upon completion of the expansion of nuclear generation which is currently scheduled to become operational in 2022 and 2023.

One potential risk to ownership in these plants is the liability associated with the disposal of coal ash. The U.S. Environmental Protection Agency announced plans in January to crack down on dangerous coal ash waste sites, including the enforcement of an Obama-era rule designed to limit the chances of coal ash toxins leaking into groundwater or waterways. Georgia Power is seeking permits to install a cover over coal ash ponds at five plants, leaving the toxic waste where it sits in unlined pits and submerged at varying depths in the groundwater.

VIRGIN ISLANDS REBOOT

The last few years have focused so much attention on the effort to restructure Puerto Rico’s debt that it is easy to overlook the other perennially troubled U.S. Virgin Islands credit. The underfunding of pensions and long-term operating and financial strains have put the electric utility serving the islands on the edge of bankruptcy and held down the general credit of the government.

Now the Virgin Islands is looking to refinance some $800 million of debt. The debt in question is known as matching fund debt in that it is payable from taxes on the production of rum by the federal government which are then redistributed back to the Virgin Islands to repay debt issued against them. Moody’s rates the existing matching fund bonds Caa2 and Caa3.

The proposed deal would call for debt to be issued with a final maturity of 2039 by a special purpose entity which would sell the bonds and apply matching fund revenues sold by the government to the corporation to repayment of the bonds. The 2039 maturity coincides with the remaining term of the existing agreements between the government and the rum producers which generate the revenues.

The goal is to stabilize the island’s pension system which is woefully underfunded. Government actuarial consultants say the system has $5.8 billion in net unfunded pension liability. The government’s actuary estimates that the transaction would assure the pension system would not run out of assets in the next 30 years. A variety of assumptions underly the transaction including a 6% investment discount rate and maintenance of current levels of rum production.

The proposed transaction provides an excellent opportunity for the market to exert its influence and insist on full and timely financial reporting. Simply restructuring debt without improving some of the conditions which created the need for the restructuring does nothing for the long-term creditworthiness of the USVI. Without it, the U.S. Virgin Islands could be the next Puerto Rico.

ILLINOIS BUDGET

Governor Pritzker has outlined his budget proposal for the State of Illinois for FY 2023. The Governor proposed a $45.4 billion general funds budget for the upcoming fiscal year. The proposed budget is a 3.4% reduction in comparison to the current year. The lower spending is accompanied by proposals for a one-year freeze of the 39.2 cents per gallon motor fuel tax, lifting the 1% sales tax on groceries and a property tax rebate of up to $300 equal to the property tax credit available on income taxes. 

Pension funding was addressed. The state has made its required minimum contributions during the Pritzker administration and the budget proposed continues that. The Governor then proposes an additional contribution above the minimum for fiscal 2023 of some $500 million. The proposal would reflect this would be the first time since 1994 that the state would reduce the pension debt by more than the minimum requirement. 

FOOD DRINK AND RECREATIONAL TAXES

There are numerous credits backed in one way or another by revenues generated from the sale of food and drink. The businesses which generate those revenues directly or indirectly were among the hardest hit during the pandemic. Now, we see evidence of the magnitude of the impact on those businesses and by extension the revenues foregone through the lack of economic activity.

We came across some interesting data from CivMetrics. They recently published data on restaurant booking data. At various points in the pandemic, the review of data from Open Table, the online booking service has been used to pinpoint turns in the perceptions of the pandemic and the removal or reimposition of limits due to the pandemic. The data shows that there is a long way to go for recovery.

The surveys cover bookings in the same week of 2022 versus 2019. Of the 40 large cities in the dataset, only four cities’ bookings are actually up. They are in Florida or Arizona. The increases are in the single digits except for Fort Lauderdale. The real story is the lingering damage to the industry in the largest cities. Philadelphia sees bookings down over 70%. New York remains 66% lower with cities like San Francisco and Seattle still experiencing declines of over 70%. Chicago bookings are down 65%.

FEDERAL FUNDS SUPPORT CREDIT IMPROVEMENT

One of the fiscal problem children in New York State has been the City of Long Beach. The city has a history of poor financial management and performance. It also found itself facing a significant liability from a property tax challenge. That litigation gave rise to an initial award amount from the City to the taxpayer of some $150 million. The city was under enormous pressure to stave off a downgrade to less than investment grade.

Now, the City’s fortunes have improved somewhat. The original property tax award has been lowered by half. The $75 million is still substantial but more manageable. The plan is to issue debt to fund the $75 million (judgment bonds are a tried-and-true method) award. This happens in a period where the City’s unaudited figures for fiscal 2021 show significant improvement in the city’s reserves and liquidity.

Put it all together and it provides a basis for Moody’s to improve the outlook for the City’s general obligation bond rating of Baa3 to positive from negative. A combination of current results improvement and the property tax settlement are the basis for the move.

The long-term fiscal issues which hammered Illinois’ credit bled down to credits dependent upon the fiscal support and condition of the state to maintain their own ratings. Ratings for some units of the state’s university system were under particular stress. Moody’s Investors Service has revised Northern Illinois University’s outlook to positive from stable. It is still a Ba2 non-investment grade credit but fiscal 2021 operations were nearly balanced, with a small deficit to potentially balanced operations projected for fiscal 2022 and beyond. 

Northern Illinois University is a multi-campus public university centered on its main campus in the City of DeKalb, IL Three satellite campuses that primarily serve graduate students. The university has a broad array of undergraduate and graduate academic programs, including concentrations in education, business, engineering, health and human science, law, and visual and performing arts. Fall 2021 total full-time equivalent student enrollment was 13,153.

Running against some trends, NIU has seen five years of enrollment growth. Last year, the growth was in the double digits. It still remains dependent on the state for approximately 40% of its revenue and that limits the available ceiling for rating improvement. The near-term fiscal improvement by the State still limited by the significant liabilities it faces going forward. The ability of NIU to maintain positive results awaits the impact of the loss of non-recurring federal pandemic support.

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