Joseph Krist

Publisher

NATIVE AMERICAN GAMBLING SETTLEMENT

The Seneca Nation in upstate New York has been in a long dispute with the State of New York over how much money generated from its casino operations needed to be paid to the State. That dispute resulted in more than $600 million of gaming revenue owed to the state and various local governments being placed in escrow.  This caused the State, and the cities of Niagara Falls (Baa3 positive), Buffalo (A1 stable) and Salamanca, which host Seneca Nation casinos to have to annually adjust their budgets to reflect revenue receipts below what were assumed under the agreements. The ongoing uncertainty acted as a negative weight on those cities’ credits.

Recently, the State of New York and the Seneca Nation of Indians announced a resolution of the contract dispute. The agreement calls for the Seneca Nation release the money held in escrow and begin negotiations on a new gaming revenue compact with the state. This will result in a significant revenue boost as well as reducing the liability side of the City of Buffalo’s balance sheet. In the cases of Niagara Falls and Salamanca, the benefit will be primarily on the balance sheet as opposed to the income statement as the transfers from the State will, net of repayment of the advances, not generate significant new revenues.

The State of New York, along with the local governments, will also benefit from the resolution. In fiscal 2020, the state received $88 million in payments from the Seneca Nation when the budget assumed receipts of $303 million. In fiscal 2021, the state received $60 million when it had projected receipts of $515 million. In the fiscal 2022 financial plan, the state’s estimate as of November for current-year receipts was $663 million. The State was in a better position to handle the shortfalls than were the cities.

In recognition of that fact, the State agreed to advance revenues to the three host cities if needed to achieve balanced budgets. The largest of the three cities, Buffalo, had been able to do that without casino payments. Niagara Falls and Salamanca have needed the funds to achieve balance. All three have availed themselves of the state transfers at some point during the process of resolving the dispute. Niagara Falls and Salamanca relied heavily on state advances and as result will receive a relatively small cash infusion when the escrowed funds are disbursed

The original compact between the State and the Seneca Nation is nearly 20 years old. The settlement also calls for the negotiation of a new compact between the Seneca nation and the State. While the outcome of those talks is uncertain, a major source of uncertainty for the host cities has been alleviated. The dispute had lingered since 2017. The end of the current uncertainty is credit positive for each of the governmental entities involved.

TEXAS POWER MARKET DRIVES A MUNICIPAL DOWNGRADE

One of the municipal utilities that found itself at the center of the Texas energy crisis of 2021 was CPS of San Antonio. The price explosion in the energy market stemming from the winter freeze impacted CPS as much as any of the large utilities. It faces some $1 billion of charges for purchased power during the freeze. It is disputing some 58% of that total. The utility was seen as clumsy in its response to customers. There was also significant management upheaval.

All of that creates a difficult political environment for the municipal utility. It was considered to be an achievement when CPS was still able to obtain approval for a 3.85% base rate increase in January 2022 from the Board and City Council. It is expected that additional increases will be required over the next five years. The absolute level of those increases will depend on the regulatory treatment of the proposed charges.

The unique nature of the Texas power grid and market create specific challenges which CPS does not control. It is widely agreed that state grid remains vulnerable to a repeat of last year’s weather event as meaningful and significant improvement to physical assets of the generation/transmission system has not occurred.  While the uncertainty of the ultimate outcome of the dispute over the gas charges remains an issue, CPS has been able to generate access to outside financing of its cash needs. It has increased its use of a greater set of hedging tools to reduce its natural gas price risk.

This has all led to Moody’s lowering of the City of San Antonio, TX Combined Utility Enterprise’s (CPS Energy) senior lien revenue bond rating to Aa2 from Aa1 and junior lien revenue bond rating to Aa3 from Aa2. It is still a solid credit and there still remains financial flexibility. The retail service area is not open to competition, the utility serves several Federal military installations and there is no major customer dominance. Approximately 90% of customers are residential.

That is why Moody’s emphasizes that. ESG factors are material drivers of this rating action. “Winter Storm Uri’s extreme nature and enduring cost impact to CPS Energy, and the fact that meaningful reliability improvements have yet to be implemented at scale in the ERCOT market and the state’s energy supply chain, are considered in our assessment of environmental risk. Strained customer relations in the wake of the storm and the need to rebuild management credibility after a wave of executive departures also raise the risk profile as it relates to social and governance considerations.”  

ILLINOIS PENSION FUNDING

One approach to the issue of funding pension liabilities is to “buy out” the pension rights of pensioners through a payment to pensioners. Pensions have been a long-time challenge in the State of Illinois and the state has already undertaken a buyout program beginning in 2018. It is one of the few big issues on which there is bipartisan agreement. The existing buyout programs began under the administration of former Gov. Bruce Rauner. Under the Pritzker Administration, the legislature in 2019 extended it to June 30, 2024. The buyouts are funded by $1 billion in general obligation borrowing capacity of which $115 million in authority remains.

The program offers eligible members who no longer work for the State a lump sum payout equal to 60% of the present value of their vested pension benefit to leave the system. For some of those who are still working for the State, they have the option of receiving a lump sum benefit when they retire plus an ongoing annual payment but at a 1.5% non-compounded COLA instead of the compounded 3% COLA they are currently set to receive.

Recent legislation has begun moving through to a vote which would extend the program until June 30, 2026. The plan asks for an additional debt authorization for another $1 billion. The buyout programs cover the three largest of the funds – the Teachers Retirement System (TRS), the State Employees Retirement System (SERS), and the State Universities Retirement System (SURS). The legislation is expected to pass although there is not a lot of hard data for legislators to rely on when evaluating the program. There was testimony in committee that TRS saved $90 in the state’s contribution to pensions.

ENVIRONMENTAL LITIGATION

Last week, oral arguments began in the City of Baltimore’s litigation against BP, Exxon Mobil Corp. and 24 other oil companies which broadly alleges that the companies failed to adequately disclose the impact of their operations on the climate. The oral arguments before a Virginia appeals court will be the first since a U.S. Supreme Court ruling in May found that appellate judges could consider a broader range of factors when deciding whether liability lawsuits should be heard in state or federal court.

A 2019 ruling in federal district court sent the Baltimore case back to state court. In this appeal to the Circuit court, the companies emphasized two grounds for removing the case to federal court that it said the court had not yet considered: that the claims “arise” under federal law and that the city’s “alleged injuries” are connected to the production of oil and gas from the outer continental shelf and are subject to a 1953 federal law that regulates that production. “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.” The oil companies argued that “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.”

Baltimore has noted that a previous appeals court ruling that found the city’s claims involve the companies’ alleged “concealment and misrepresentation” of the dangers of climate change and “do not implicate any body of federal common law and are unconnected to any operations on the Outer Continental Shelf.”

The companies claim that Baltimore is seeking to upend international agreements and that a decision in the City’s favor would ““undermine national energy objectives, including federal efforts on the climate, energy independence, the stability of the electric grid, and energy affordability.”

The fossil fuel defendants will do all that they can to get their case before the U.S. Supreme Court where they believe that the current justices are more inclined to rule in their favor. This is but one of nine climate liability cases which were sent back to circuit courts across the country after the Supreme Court ruling. If the companies offer the same arguments, the cases will be put before the U.S. Supreme Court. 

OIL/GAS ROYALTY CHALLENGE

The North Dakota State Board of University and School Lands is appealing several 2021 rulings from a lower court in a case about oil and gas royalties. The appeal challenges part of a 2021 law that put a limit on how far back the state can retroactively collect unpaid royalties. Legislation last year that capped the length of time for which the state could seek to collect unpaid royalties at seven years. The defendant is a producer who is challenging the claims.

The Supreme Court has heard other issues in the case already and released a ruling in 2019 favorable to the state, which has since sought to collect what could amount to hundreds of millions of dollars in unpaid royalties from a number of oil and gas companies. This litigation flows from those efforts to collect the payments.

The total amounts in question are about $69 million for the years before August, 2013. So, it is not huge money but obviously the State wishes to secure as much legal support for the royalty charges as a general concept. That puts it closer to an issue of principal.

MICHIGAN LANDS GM EV PLANT

GM finally confirmed that it will build a new factory in the state capital, Lansing and expand capacity at its existing EV plant in Lake Orion outside Detroit. The combined investment by GM is being announced as $7 billion. GM projects that it will create 4,000 permanent jobs at the two facilities. The Lansing plant will produce batteries for EVs and is scheduled for 1,700 jobs. The existing Lake Orion plant will expand by 3 million square feet and build electric pickup trucks. It will add 2,300 jobs.

The announcement came as it appeared that Michigan might be losing out in the race for jobs related to electric vehicles. Many of the production facilities were being announced in less labor friendly states. Now this substantial investment keeps Michigan in the game. The importance of the plants to the State was made clear as some $825 million of incentives and tax breaks were offered to encourage GM to locate in Michigan.

PURPLE LINE CONTRACT

The Maryland Board of Public Works has announced its approval of a new contractor to manage the private public partnership building the Purple Line in Maryland. The new $3.43 billion construction contract is between the P3 consortium and a team led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. The financial agreement is between the state and the private consortium, known as Purple Line Transit Partners and led by infrastructure investor Meridiam. 

The total cost of the project is now over $9 billion. It was supposed to be complete by this March under the original plan but now full construction will resume in the spring. The new expected completion date is the fall of 2026. The new contract will create a cost increase for the State that will raise its annual payment requirements to the financial partners of an average of $240 million annually. That is $90 million higher per year.

Maryland transit officials have committed federal funding and fare revenue from all state transit systems, including commuter rail to fund the payments. That will require the use of other state funds to replace the “lost” revenue from the state transit system, most likely other taxes and fees.

OPEB THREAT TO NEW JERSEY RATING

The last few years have seen steady progress made in New Jersey as it sought to balance its budget and address long standing concerns about its pension liabilities. The continued efforts under the Christie administration to avoid full funding of actuarily required pension contributions played a substantial role in the series of downgrades to the State’s ratings that impacted the State. While much attention was paid to pension liabilities, other post-employment benefits (OPEB) seem to fall of the radar of many.

Now a recent disclosure by the State has refocused attention on the issue of OPEB. The state disclosed that its reported Education Retired Fund OPEB liability would increase to about $67.8 billion in the 2021 valuation from $41.7 billion the prior year. Faster growth in Medicare Advantage expenses for retirees accounted for about $12.3 billion of the total $26.1 billion increase. The state cited “claim and premium experience, primarily resulting from higher-than-expected Medicare Advantage claims leading to an increase in projected Medicare Advantage premiums for Plan Year 2023.”

The actuary revised projected medical cost increases for fiscal years 2023 and 2024 to 22.6% and 18.5%, respectively, from assumed growth of 4.5% in the preceding year’s valuation. As of the state’s fiscal year 2020 financial reporting, before the latest increase, New Jersey’s OPEBs accounted for 28% of total long-term state liabilities. The state in its 2020 annual comprehensive financial report said that its roughly $1.6 billion contribution (which is made on a pay-as-you-go basis) for OPEBs and its liability had both declined in the year ended 30 June 2020. The State had been relying on Medicare Advantage products to drive cost savings. Clearly, the latest disclosure shows that the effect has not been so positive.

WHILE THE TURNPIKE GETS AN UPGRADE

The New Jersey Turnpike was one credit that seemed poised to be hurt by the limits on economic activity that have resulted from the pandemic. Quickly, it became clear that the road’s role as a major freight conduit was helping to generate higher than expected toll revenues. The initial pandemic shock resulted in a material traffic decline of 22.5% for calendar year 2020 compared to calendar year 2019.

The availability of a vaccine allowed traffic to steadily recover throughout 2021. Monthly traffic levels in 2021 steadily improved to the point where they were only about 4.5% below 2019 levels for the second half of 2021 through the end of November. Remaining concerns on the part of car motorists continues to hold down traffic.

The pandemic did provide an opportunity for the Turnpike Authority to implement its policy of annually indexing tolls to inflation. Over the years, the process of raising tolls became increasingly political and concerns about the ability of the Authority to maintain its financial position hurt its ratings. That concern is mitigated by the indexing policy.

Those factors as well as the improved credit position of the State of New Jersey have led Moody’s to upgrade the Turnpike Authority’s rating from A2 to A1. The improved position of the State reduces pressure on state authorities to upstream increasing amounts from those authorities to the State general fund. The “upgrade reflects the credit positive impact of the implementation of NJTA’s new annual toll indexation policy, the better-than-expected traffic and revenue rebound from the pandemic driven declines, increased clarity on the pace of new debt to be issued to fund new capital investments, and a signed new multi-year subordinate transfer agreement with the state. “

At the same time, the relationship with the state holds down the Turnpike’s rating. Moody’s refers to that relationship when it notes that “NJTA is a component unit of the state, annually transfers funds to the state and the Governor approves NJTA’s budget and toll rates, limiting NJTA’s autonomy and independence. Owing to this relationship, we currently constrain NJTA’s rating to two notches above the state’s general obligation rating.”

TRANSIT AND LABOR SHORTAGES

We continue to see that worker shortages are impacting mass transit systems including ferries. Last week, the Washington State Ferries (WSF) announced that “most” of their routes were placed on reduced, alternate schedules, citing crew shortages brought on by the pandemic and a “global shortage of mariners.” That system has been cancelling trips since the Fall.

Trucking shortages are impacting a whole host of operations. North Dakota Gov. Doug Burgum signed an executive order waiving hours of service requirements for 30 days for truck drivers delivering milk in North Dakota. The emergency measures come after a major milk distributor in North Dakota went out of business, due in part to a lack of certified drivers, putting rural consumers and more than 50 school districts at risk of losing milk deliveries. North Dakota currently has 49,858 drivers with a commercial driver’s license (CDL), down from 52,824 in 2017.

The pandemic provided an opportunity for drivers and mass transit employees to examine their working conditions. The nature of the services lends itself to erratic hours, overtime, and now those issues are causing more to look to other jobs. This will drive pressures on costs.

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