Joseph Krist

Publisher

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ALL FORMS OF PUBLIC TRANSIT SEE DECLINES

The latest example of the impact upon all forms of mass transit of the pandemic comes out of the Pacific Northwest. Annual ridership aboard Washington State Ferries plunged by nearly 10 million customers in 2020 – a drop of 41% from the previous year – to roughly 14 million. Stay-at-home orders, remote work and decreased tourism because of COVID-19 are the main reasons for the system’s lowest yearly count since 1975.

The impact of empty offices was very clear. For the first time since it began operations in 1951, WSF carried more vehicles (7.6 million) than passengers (6.4 million) last year. This shift in ridership was fueled by a dramatic decline in walk-on customers on routes that serve downtown Seattle and more people choosing to drive on board because of the pandemic.

We find the latter comment to be interesting. The assumption is that the empty streets in big cities will remain the norm. That idea may be misplaced. If the private vehicle is seen as a “safe space” in comparison to traditional public transit or even Lyft and Uber. the constituency for space for private vehicles could be larger than anticipated. In recent months, state ferry ridership has returned to about 60% of pre-pandemic levels. Total vehicles are near 70% of 2019 numbers, while walk-ons are around 20% of last year. 

The increase in remote working continues to impact the ferries. The largest year-to-year dip came on the Seattle/Bremerton run, where ridership was down 64%. The Seattle/Bainbridge Island route had the second biggest decrease at 59%, falling out of the top spot as the system’s busiest for the first time since 1958. The pressure on office space will continue as firms extend remote work options.

In New York, the Metropolitan Transit Authority said it would delay fare increases until the local economy showed signs of a recovery and there was greater clarity about how much federal aid the agency could expect.  MTA is hoping that it could receive additional direct operating aid of up to $8 billion to offset revenue losses stemming from the pandemic.  The Biden Administration is seeking $20 billion for the country’s “hardest hit public transit agencies” in its stimulus proposal. Subway ridership has levelled off at around 30% of pre-pandemic levels, traffic on the M.T.A bridges and tunnels has rebounded to about 84% of normal.

MUNICIPAL BROADBAND

As the Biden Administration takes shape and policy priorities are established, potentially challenged private interests are already challenging those which are seen as challenging their interests. One which amused/annoyed us was an opinion piece in The Hill from an analyst at the Technology Policy Institute. Municipal broadband is a bad idea for cash-strapped towns is the name of the piece. The piece is based on data derived from a research report commissioned from the TPI in 2019.  

The piece comes with it a pile of data and equations and assumptions and a variety of statistical data manipulations seeming to indicate that a serious conclusion will result from the report. At the end of the day, though the really telling conclusions won’t be a shock. They won’t be a shock because the Institute is funded by the Koch family and the telecommunications industry. “The presence of a municipal network did not appear to generate a statistically significant improvement on broadband adoption or in economic conditions. My findings do not show that municipal broadband will necessarily fail. ”

 

In short, a thesis offered and the thesis fails to be proven. That is the amusing part. The annoyance comes from the following comment. “The private sector should continue to support universal broadband, and governments should aid them in doing so.” And “a municipal network might yield benefits on the margin, such as in areas without other coverage.” As the great philosopher Homer Simpson said, “duh”.

What you don’t see is that some of the same entities sponsoring this research are some the worst offenders in terms of providing slow overpriced broadband service. That’s the case even when these providers are granted an effective monopoly in a given service area. (Full disclosure: I am a Spectrum customer in upstate NY. Enough said.) What is also annoying is that these are many of the same arguments advanced against public broadband reflect prejudices leveled against the TVA some 90 years ago. 

We’ve been down this road before. Like the electric distribution industry, both the municipal and private sectors have roles to play in the expansion of rural broadband.

NEW YORK STATE BUDGET 

Governor Cuomo released his formal budget proposal for FY 2022 beginning April 1. The expectation that a Democratic Congress and President would be able to deliver significant additional aid to states and localities underpinned the proposal. The budget statement said that in April, it projected a $63 billion, four-year revenue loss. At the time, 1.8 million New Yorkers had lost their jobs as the virus’s spread was peaking. But in the third quarter of 2020, the economy recovered faster than expectations. While the economic improvement is beneficial, it has not been enough to offset dramatic revenue loss and revenues are estimated to remain down $39 billion over four years, including losses of $11.5 billion in FY 2021 and $9.8 billion in FY 2022.

It came in two forms which depend on two scenarios: one assuming a federal aid package of $6 billion, and another with the full $15 billion that the State is seeking. The latter figure is the estimated shortfall being faced. If the federal government provides a $6 billion aid package the state would be unable to fill its budget gap. This would require, under the Governor’s plan,  cuts of about $2 billion in school funding, $600 million in Medicaid funding and $900 million in general reductions.

On the revenue side of things, a legalization of recreational cannabis could raise about $350 million. Bowing to political realities, some 100 million would be directed to a “social equity fund”. Issues related the reparative economics and justice movements have held up prior legalization which is supported by a majority of residents. The fund is an effort to address those concerns.

Tax receipts have shown sustained strength through December 2020 and into the important first week of collections in January 2021. PIT collections, the largest source of State tax receipts, were $2.25 billion above the estimate in the Enacted Budget Financial Plan through the first three quarters of FY 2021. Sales and use tax collections through the same period were $512 million higher than expected. At the same time, business tax collections, principally related to audits, have been weaker than expected, which party offset the significant improvements in PIT and sales tax collections.

COURT DROPS THE HAMMER ON LONG BEACH, NY

The City of Long Beach last week found itself on the losing end of  a damages decision from a Nassau County Supreme Court in the 31-year-old case of Haberman v. Zoning Board of Appeals of City of Long Beach. Yes, a zoning dispute has managed to survive in the courts  since the 1980’s. The Long Beach City Zoning Board revoked building permits to construct condominium towers  in the oceanside community. The revocation was based upon its determination that the builder had not abided by a previous stipulation of settlement between the parties.

The developer sued to overturn the revocations and won his case. Appeals by the City made their way through to the State’s highest court where they did not succeed in 2017. Over the ensuing years, the parties have litigated the damage claim portions of the case. It is this litigation which resulted in a $131 million judgment from the County Supreme Court.

While the City has consistently argued in court that no monetary damages were appropriate, its financial disclosures have been more realistic. : in Long Beach’s latest official statement from August 2020, the city estimated the judgment would cost it $55 million. At this point the City may appeal although the ever accruing interest on the damage amounts should motivate a settlement as well as a consistent record of ultimate losses on appeal.

The City’s credit was already facing enough pressure. It’s Baa2 rating was assigned a negative outlook in August, 2020. Those pressures include very weak financial position and a history issuing debt for operational expenses. local government has a high level of turnover which complicates a negotiated settlement in the zoning case as well as the City’s efforts to collect recovery monies from Superstorm Sandy damages. The City’s debt was described as above average but manageable in August but a final settlement could create what will effectively become a long term liability.

CLIMATE CHANGE LITIGATION

The U.S. Supreme Court heard arguments this week in a case brought by the City of Baltimore against the major oil companies seeking compensation from oil and gas companies for damages to public lands, buildings, infrastructure like roads and bridges; as well as for the cost of mitigation measures. Baltimore is one of 24 jurisdictions which have filed similar actions.

The argument until now has been over whether the litigation is a state or a federal matter. The energy companies fear that they will not fare as well in state courts as they would in federal court. The question presented is whether federal law permits a court of appeals to review all of the grounds for removal encompassed in a remand order where the removing defendant premised removal in part on the federal-officer or civil-rights removal statutes.

The district court remanded the case to state court, and petitioners appealed. The court of appeals affirmed. Now the energy companies are appealing that decision. What is different now is that the energy companies are asking the Court to rule on issues not previously argued.

The companies want the Court to rule on not just the specific  jurisdiction issues raised in this case but to also rule on the issue of whether or not any of the pending climate change litigation of this sort must be heard in federal rather than state courts. If the Supreme court agrees to decide not just the individual jurisdiction issue in the Baltimore case but also the question of whether any climate change cases like this must be heard in federal rather than state courts, the efficacy of the use of litigation to fight climate change will be lessened.

Not every environmental cause will be lost in the federal courts. A federal appellate court ruled against the Affordable Clean Energy rule. The rule was an effort to relax emissions limits with an eye towards making the economics of coal generation more favorable.  The limits were part of the Obama  administration’s Clean Power Plan which had mandated that power plants make 32% reductions in emissions below 2005 levels by 2030.

AIR TRAVEL AND AIRPORTS

The U.S. Department of Transportation released its January 2020 Air Travel Consumer Report (ATCR) on reporting marketing and operating air carrier data compiled for the month of November 2020. The 10 marketing network carriers reported 389,587 scheduled domestic flights in November 2020 compared to 374,538 flights in October 2020 and 655,072 flights in November 2019. That is a year over year decline of just over 40%.

Of those 389,587 scheduled flights, 0.5%, 2,106 flights, were canceled. Factoring in the cancellations, the carriers reported operating 387,481 flights in November 2020, compared to 372,544 flights in October 2020 and the all-time monthly low of 180,151 flights in May 2020. Airlines operated 649,511 flights in November 2019. That still nets a 40% decline in flights.

This data comes as North America (ACI-NA), the trade association representing commercial service airports in the US and Canada, has reported its financial projections that US airports will lose at least $17bn between April 2021 and March 2022. The $17bn loss was in addition to another $23bn deficit that US airports were expected to incur between March 2020 and March 2021.

None of this is a surprise. The It will take time for airport and related credits to recover. The timing of that recovery is vaccine dependent.

ROAD FUNDING DEBATES

This year it looks like road funding will be at the center of many state budget debates. It may yet be that the negative impact of the pandemic on traffic levels and revenues (tolls and fuel taxes) becomes the mother of invention in state legislatures. And it is happening in all areas of the country.

In Texas, in spring 2020, the Texas Comptroller certified that state motor fuel tax, Proposition 1, and Proposition 7 revenue was a total of $13.9 billion for the 2020-2021 biennium. In July 2020, in the midst of the COVID-19 pandemic, the Comptroller’s certified revenue estimate reduced this figure to $11.96 billion. The $1.9 billion cut in revenue amounts to 14% of the TxDOT budget. Right now, Texans pay 20 cents of state motor fuel tax on every gallon of gasoline or diesel. 15 cents is deposited into the SHF, and 5 cents goes toward education. Texas has the lowest motor fuel tax among the ten most populous states, while Texas also has significantly more lane miles than any other State. The State is responsible for maintaining over 197,000 lane miles.

The state motor fuel tax has not been adjusted since 1991.53 As a result, the tax has lost half of its purchasing power since then. If Texas had indexed the tax to the CPI in 1991, the tax would have grown to approximately 40 cents, and the state would be collecting twice the state motor fuel tax as it currently is today. The state motor fuel tax is the second largest revenue source for transportation, next to FHWA reimbursements. The Texas A&M Transportation Institute has indicated that peak motor fuel revenue will be around 2030.

So the committee explores several alternatives. It offered some surprising commentary on the use of P3s, especially since Texas is one of the larger implementers of P3s to develop road infrastructure. It addresses head on one issue which troubles some namely the transfer of revenues and profits to foreign entities. one of the things holding back widespread P3 use is the issue of the fact that many of these proposals are driven by foreign companies.

Comprehensive development agreements (CDA) are the Texas form of public-private partnership for roadway projects. “While Texas is in the early stages of its currently authorized CDAs, and they have been effective at alleviating traffic in highly congested areas, it should continue to be reviewed if the transfer of locally collected Texas toll or tax dollars to international and often foreign based firms is in the best interest of the public when building future projects. Specific contract clauses embedded within a CDA, such as the duration of the agreements, use of public subsidies, non-compete clauses and termination for convenience provisions, should also continue to be reviewed to ensure these agreements protect the interest of the citizens of Texas.

MUNICIPAL UTILITIES AND NATURAL GAS

With oil no longer a serious source of fuel for power generation and coal on a steady economic decline as well, natural gas is in line to next face the same pressures which are impacting other fossil fuels. While cleaner than oil or coal, the production of natural gas raises its own set of environmental concerns. This is leading to a turn in public opinion regarding natural gas and creating a political environment which supports limits on the use and production of natural gas.

To date, only a small number of communities have enacted legislation to limit and/or ban the use of natural gas. These limits take the form of regulations which no longer allow natural gas to be used in new construction. That raises the issue of what the longer term impact will be on the demand for natural gas going forward. We think that the movement against natural gas raises issues for those utilities which have locked in long term natural gas supply contracts.

Municipal utilities had initially sought to take advantage of the favorable economics of gas in recent years. They did this via the use of prepaid gas contracts. Typically, a municipal gas prepayment bond involves tax-exempt bonds issued by a conduit entity, such as a large financial institution or the commodity subsidiary or a large financial institution. The proceeds from the bonds are channeled through the conduit entity, which buys the gas and immediately resells it to the utility. The conduit entity is set up as a non-profit and is, therefore, able to issue tax-exempt bonds.

The utility or utilities participating in the transaction are offered locked-in gas prices discounted to the market price for terms of up to 20 or 30 years. Utility participants can also benefit from receiving priority treatment in the event of shortages or curtailments. Public power utilities are also able to participate in more than one prepayment transaction simultaneously as a way of diversifying their sources of natural gas supplies. Starting in 2018, some gas prepayment transactions were structured to include a pool of smaller public power utilities.

Typically, gas prepayment transactions are not viewed as debt of the public power utility participants but rather as an operating expense because the utility’s only obligation is to pay for gas received. There is no claim on municipal revenues on behalf of gas prepayment bondholders. Municipal utilities are also permitted to reduce participation in the prepayment transaction by providing notice, usually a few weeks or days. That allows utilities to lessen or eliminate the amount of gas they are required to buy, if their needs fluctuate or they can find better pricing.

So the investor needs to pay close attention to the details of the transaction to understand who their ultimate obligor is in the event that a utility, through economics and/or regulation withdraws from a prepayment agreement. The pressure on natural gas continues. In Connecticut, Gov. Ned Lamont made his opposition to new natural gas generation quite clear this week. He publicly opposed the proposed Killingly Energy Center, a 650-megawatt natural gas power plant.  He implied his intention to slow walk the permitting process.

MICHIGAN

Michigan has been in the news for all kinds of negative reasons over the last year but we have not been able to see the fiscal impact of the pandemic. At the onset of the pandemic, Michigan had nearly completed a full recovery from the Great Recession. Michigan endured more than a decade of job losses during the early 2000s, during which time wage and salary employment in Michigan dropped by almost 18% relative to January 2000. As the labor market began recovering from the Great Recession, steady job growth continued each year through 2019, although by the end of the decade annual gains were slowing. Still, by the end of 2019, total employment was within 5% of the January 2000 level.

The State has released the results of its Consensus Revenue Estimating Conference. The State Department of the Treasury, and the House and Senate Fiscal agencies contributed to the findings. It updates estimates made in May and August 2020. Total FY 2020 General Fund and School Aid Fund revenue was approximately $762 million above the August forecast. The impact of store closings and stay at home orders is reflected in sales tax data. In FY20, sales and use tax collections from online shopping and mail order businesses totaled over $493 million, an increase of over $318 million from the FY19 level of only $175 million.  Since the beginning of the pandemic, collections from online retailers have averaged $65 million per month, up from about $17 million per month in the twelve months prior to the pandemic.

Revenues will be impacted by the income tax rate reduction under MCL 206.51(1), which limits revenue growth to inflation from FY 2021 levels. Michigan had a real stake in the results of the effort to deliver additional federal funds to states. The State estimates that each additional $100 per week in federal unemployment benefits increase withholding and income tax by $4.6 million, assuming current levels of unemployment. Increasing the stimulus payments to $2,000 would increase Michigan personal income by almost $14 billion and may increase sales and use tax by $375 million.

Michigan will remain at the mercy of the overall economy. It will need additional federal help. The pandemic arrived in Michigan just as the auto industry was truly beginning to grapple with the realities of  a future dependent on electric vehicles. This creates an air of uncertainty as well as anticipation as the move to EVs accelerates. It will require adaptability not only by the auto companies but among all the ancillary businesses which support the industry.

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