Joseph Krist

Publisher

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GAS TAX POLITICS

The high cost of energy is emerging as an issue especially in the case of gasoline. Eight states are currently considering suspensions of both existing taxes and enacted future tax increases in order to provide some relief from higher prices for gasoline. Governor Newsome in CA is pushing a proposal to “pause” scheduled increases in the State’s gas tax. An annual inflation adjustment is set to take effect on July 1. Newsom’s plan is to delay the adjustment for a minimum of one year. The budget proposal could extend the tax freeze for the next two years “should economic conditions warrant it.” The governor’s office said a pause is expected to decrease fuel tax revenues by $523 million in 2022-23 based on an estimated 5.6 % inflation rate.

Maryland law authorizes fuel rates to be adjusted each July based on the consumer price index. Recently introduced legislation would repeal the rule for annual adjustments. A proposed Tennessee House bill would return the tax rates to where they were prior to a 2017 state law that raised the gas tax by 6 cents to 26 cents and increased the diesel rate by 10 cents to 27 cents. A year ago, Missouri Gov. Mike Parson signed into law a bill to raise the 17-cent fuel tax rate by 12.5 cents over five years. Now, a bill would seek to have the law overturned as a violation of the State’s Hancock Amendment requiring voter approval of tax increases above a certain level.

The Colorado legislature passed a significant transportation funding package just last year. That plan would impose a new 2-cents-per-gallon fee on gas and diesel. Annual penny increases to the fee on gas and diesel are set to follow each year through 2028. In Ohio, a pending bill would reverse legislative actions taken in 2019 which provided for raising the 28-cent fuel tax rate to 38.5 cents for gas and from 28 cents to 47 cents for diesel. The bill would return the gas and diesel tax to the 2019 rate. The rate reductions would begin no later than July 1, 2022. The tax rate would remain unchanged for five years.

In Virginia, there are three competing bills to attempt to lower fuel taxes. One would lower the tax rate on gas and diesel on July 1, 2022. The tax rate on gas would be trimmed by a nickel from 26.2 cents to 21.2 cents. The diesel rate would be reduced from 27 cents to 20.2 cents. The rates would be the same as they were prior to a July 1, 2021, rate increase. The tax rates would revert to their current amounts on July 1, 2023, and be indexed to annual changes in the consumer price index beginning July 1, 2024. Another bill would suspend collection of the state and regional taxes on gas and diesel until July 1, 2023. A third would suspend the imposition of any regional fuels tax in the state until July 1, 2023.

NYS BUDGET

Governor Hochul announced her formal fiscal 2023 budget plan as the process of adopting a budget by April 1 begins. The budget builds upon the numbers generated by the most recent Mid-Year update. The Update committed to bringing the State’s principal reserves (the rainy-day reserves and reserve for economic uncertainties) to 15% of State Operating Funds spending by FY 2025. The budget has no predicted budget gaps in the out years of the State’s financial plan through FY 2027. This in spite of significantly higher projected expenditure plans.

Since the Mid-Year Update, forecast revisions to the “baselevel forecast” provided new resources of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025. The improvement reflects strong tax receipts and reduced costs. On the strength of collections experience to date, the estimates for tax receipts have been increased by an average of $4.9 billion annually compared to the Mid-Year forecast.

The budget includes some $7 billion of one-time spending. This includes $2 billion for property tax relief (FY 2023), $2 billion for pandemic recovery initiatives (reserve funded in FY 2022),$1 billion to enlarge the DOT capital plan (deployed over three years, FY 2023-FY 2025), $1 billion for health care transformation (reserve funded from FY 2023 and 2024 operations), $1.2 billion for bonuses for health care/frontline workers (paid in FY 2023), $350 million for pandemic relief for businesses and theater/ musical arts (paid in FY 2023 and FY 2024). The baselevel forecast revisions leave surpluses of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025.

As was the case in California, the budget proposes significantly increased spending for Healthcare. The index the State uses to determine Medicaid spending is being revised. The new index would account for enrollment and population changes, which are significant drivers of costs, and supports additional Medicaid spending growth of $366 million in FY 2023, growing to $3.1 billion in FY 2027. In addition, the budget funds bonuses to aid Healthcare recruitment.

The Financial Plan continues to assume that the Federal government will fully fund the State’s direct pandemic response costs, but timing differences between State outlays and FEMA reimbursements will occur. In addition, COVID expenses related to the purchase of test kits for local governments and schools are assumed to be fully eligible for FEMA reimbursement. Pension estimates reflect the planned payment of the full FY 2023 Employees’ Retirement System (ERS)/ Police and Fire Retirement System (PFRS) pension bills in May 2022.

The Executive Budget proposes using $6 billion of cash resources for pay-as-you-go (PAYGO) capital spending over the Financial Plan to reduce debt service costs, ensure the State stays within the debt limit, and allow for a larger DOT capital plan. The PAYGO will be targeted to primarily avoid higher cost taxable debt issuances.

On the capital spending side, the importance of the Infrastructure Investment and Jobs Act to New York State is clear. The State is projected to receive $13.4 billion in new Federal funding over the next 5 years, of which $5.7 billion is expected to flow through the State budget, primarily for road and bridge projects. $7.7 billion will be disbursed by public authorities, primarily the MTA, and local governments. In total, the State is expected to receive funding for the following programs: Roads, Bridges, and Major Projects ($4.6 billion); Public Transit ($4.1 billion); Clean Water, Weatherization, and Resiliency ($3.2 billion) Broadband ($800 million); and Airports ($685 million).

Education remains at the core of the budget. New York State’s 673 major school districts estimated to enroll 2.4 million children in kindergarten through 12th grade. With total State, local, and Federal spending levels exceeding $75 billion, education is both the largest area of State spending and the largest component of local property taxes. New York State has ranked first nationally in school district spending per pupil for 15 straight years. The budget message refers to that as commitment while local taxpayers may feel otherwise. The Executive Budget increases School Aid by a total of $11 billion over 10 years – a 55% increase over that period.

The State’s unique political landscape is driven by Governor Cuomo’s resignation. The Governor needs to appeal to a variety of constituencies in her quest for election. At the same time, she is dealing with a supermajority legislature which will have its own agenda. The expectation is that the Legislature may have different priorities.

PUERTO RICO

“The agreement, while not perfect, is very good for Puerto Rico and protects our pensioners, university and municipalities that serve our people,” Gov. Pedro R. Pierluisi.

On January 18, Judge Laura Taylor Swain accepted a Plan of Adjustment in the Title III proceedings which have been underway since the Spring of 2017. The plan cuts Puerto Rico’s public debt by 80% and saves the government more than $50 billion in debt service payments. The agreement covers the commonwealth government’s general obligation bonds and its Public Building Authority, Employees Retirement System, and Convention Center District Authority bonds.

That is achieved through the forgiveness of $3 billion of pension bonds and slash $18.8 billion of general-obligation bonds and commonwealth-backed securities to $7.4 billion. Bondholders will receive new bonds in an exchange which will be accompanied by a total $7 billion upfront cash payment and a security, called a contingent value instrument, that pays if sales-tax revenue surpasses projections.

As for the future, there remain many obstacles to long-term success. The island remains climate-vulnerable. It has not been able to effectively use the need to rebuild the electric grid in a way which provides needed resiliency and reliability. It has been a significant squandering of an opportunity. The “favorable” treatment to pensioners shifts their continuing weight on the Commonwealth’s budget. The costs of pensions remain a significant risk as the result of the favorable bankruptcy treatment. Healthcare spending will remain another obstacle. The issue of unequal Medicaid funding remains.

In the end, the Commonwealth now needs to meet the test of governance. We believe that the ultimate risk to Puerto Rico from a credit perspective is the fact that lessons have not been learned from the bankruptcy. It is why so much concern is being expressed about the Commonwealth’s ability to function without some outside oversight.

This is one case where the threat of a significant cost of borrowing may not be incentive enough for Puerto Rico to improve its governance. Throughout this process, I am reminded of Argentina. The second half of the century saw Peronism insinuate itself into the nation’s politics in ways that can still be felt over a half century later. Repeated bailouts and IMF borrowings still weigh on that country’s economy. It also worked off a more solid economic base prior to its populist turn. Do we really want to be back at the debt negotiation table in 2035?

NATURAL GAS REGULATION

In 2021, lots of legislative efforts were undertaken to stem the tide of local natural gas regulations designed to end the use of natural gas in new construction. Those efforts at preemption are designed to shift natural gas regulation to the state level away from localities. With the start of the new year, some localities are undertaking more regulation in an effort to avoid preemption laws.

The 2019 California Energy Code allows local jurisdictions to establish stricter building codes if that local authority finds it necessary because of local climate, geological, topographical, or environmental conditions. The Contra Costa County Board of Supervisors approved an ordinance this week that bans natural gas from being used to power new homes and buildings in unincorporated areas of the county. The ordinance will prohibit the installation of natural gas piping in all new residential buildings and hotels, offices, and retail buildings in unincorporated parts of the county.

The ordinance anticipates a number of potential issues cited by opponents. The ordinance does not apply to future developments already approved before the new law is enacted. The ordinance also won’t prohibit emergency backup power sources, like generators, that run on fossil fuel sources. The new law would have to be approved by the California Energy Commission before being enacted. Staff recommended the county put the new ordinance in effect July 1.

NEW TACTIC IN CLIMATE CHANGE LITIGATION

As several lawsuits filed against oil and gas companies work their way through the courts, a series of decisions which keep much of that litigation in state courts rather than federal courts has led to an interesting change in strategy by those companies. We see the tactic as a sign that the long-term outlook for the defendant oil companies is not favorable in terms of the litigation.

The latest sign comes from Exxon’s response to litigation filed by eight California cities and counties which have accused Exxon and other oil firms of breaking state laws by misrepresenting and concealing evidence, including from its own scientists, of the threat posed by rising temperatures. Exxon is now turning to the Texas Supreme Court in an effort to fight the litigation. The company is headquartered in Texas so now it is using a Texas state law (Rule 202) to seek approval to sue individual California officials for limiting Exxon’s First Amendment right to free speech.

Exxon is contending that its misrepresentation of the impact of its products on the climate are protected free speech under the First Amendment. That’s right, lying is protected free speech. Exxon says that the actions of California governments are what they call “lawfare” – the use of litigation to achieve what it calls political ends. The effort attempts to make the litigation as difficult as possible including travel to Texas for depositions.

The emerging trend in the environmental litigation tied to climate change and the oil companies is that state law is likely to govern the outcome. That makes it more likely that ultimately the cases will be settled as the number of different plaintiff jurisdictions are involved makes the likelihood of an unfavorable (to the defendants) outcome. That does not mean that the cases will be resolved soon.

TRI STATE RESPONDS TO PRESSURE

We have been documenting the difficulties that utilities, especially rural co-ops face as they manage the uncertain landscape stemming from climate change. Over recent months, Tri-State Generation and Transmission Association has been at the center of controversy over its efforts to maintain its members as customers while slowly addressing its coal dependence for generation. It has been facing increasing pressure to either address the climate concerns of its retail distribution customers or to allow them to leave and obtain their electric energy elsewhere.

Now, Tri-State is taking a different approach. It has submitted for regulatory approval its “Responsible Energy Plan” in Colorado. State law requires utilities to provide a detailed plan to regulators as to how to cut carbon dioxide emissions associated with the power it sells by 80% from 2005 levels by 2030 and 100% by 2050.The plan commits Tri-State to reducing emissions from its electricity sales in Colorado (it serves customers in AZ and NM as well) by 80% in 2030, based on 2005 levels. In the near term, the company says it will cut emissions by 26% in 2025; 36% in 2026; and 46% in 2027.

It won’t be an easy process. The news also comes with confirmation that Tri-State will complete a 4% wholesale rate reduction for its members in March. The first 2% of the reduction was implemented in 2021. The effort is clearly in response to the concerns of the member retail distribution customers. It is more positive for the Tri-State credit.

FREE FARES IN L.A.

On the L.A. Metro system, the fare for one ride is only $1.75. Total annual fare revenue funds collected make up only 6 percent of total revenue. In March 2020, the system stopped collecting fares on its buses as a COVID-19 safety precaution. For the next 22 months, Metro waived fares for anyone who wanted to keep riding its buses. Recently, the free fare policy came to an end as ridership levels had improved to 80%.

It is estimated that ridership never dropped to less than 5% of pre-pandemic levels. Given the demographics of the riding public especially for buss customers, it is not surprising that ridership held up better than in most cities.  Now, with the surge of the latest COVID variant and the reinstatement of fares, it will be a real chance to evaluate the role of fares on ridership.

The results could have real implications for systems across the country. According to one study that surveyed which regional transportation investments can most reduce vehicle miles traveled, waiving fares would result in both fewer miles driven and fewer greenhouse-gas emissions, more than any other intervention, including congestion pricing or charging drivers a mileage-based fee. If the reinstatement of fares is shown to depress demand, that puts pressure on transit agencies to find other funding sources.

That has implications for New York’s planned congestion fee plan. Governor Hochul’s budget saw these fees as generating $15 billion for the MTA for capital projects through 2024. Congestion fee opponents look to those findings and can make the case that the congestion plan is what they have always contended it is: just another fee or tax.

COMPUTER CHIPS AND THE FUTURE

Intel announced that it will locate its next chip manufacturing facility in New Albany, OH. The 1,000 acre site is to be located just outside Columbus in adjacent Licking County. The project will represent a $20 billion investment directly employing some 3,000 workers. The announcement comes as legislation passed by the Senate remains stalled in the House holding up some $50 billion of support for the chip industry.

Intel has also expanded facilities in Arizona with a similar $20 billion investment announced there last year. Other projects include one from Taiwan-based T.S.M.C. It began construction last year on a $12 billion complex some 50 miles from Intel’s site near Phoenix. Samsung Electronics is locating a $17 billion factory in Taylor, Texas with construction set to begin in 2022.

The moves come in the wake of a shortage of chips and concerns that the concentration of chip production overseas puts the U.S. at risk. The plant would be the first in Ohio. Intel has stated that its expansion plans are not contingent on the federal assistance package but also cited the fact that geographic diversity increases the number of advocates for legislation supporting the chip industry.

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