Joseph Krist

Publisher

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ILLINOIS UPGRADE

In perhaps the surest sign that state credits are coming out of the pandemic in much better than expected shape, Moody’s upgraded the State of Illinois’s general obligation (GO) rating to Baa2 from Baa3. In connection with this action, ratings on Build Illinois sales tax revenue bonds were upgraded to Baa2 from Baa3, and annual appropriation bonds issued by the Metropolitan Pier and Exposition Authority Ratings were upgraded to Baa3 from Ba1.

Total debt affected amounts to about $33 billion, including $27.7 billion of general obligation bonds, $3 billion of Metropolitan Pier and Exposition Authority bonds, and $1.9 billion of Build Illinois bonds. The outlook remains stable. The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act.

The Metropolitan Pier and Exposition Authority upgrade stems directly from the upgrade of the State.  The credit is supported by the state’s commitment to provide funds for debt service when pledged taxes on Chicago-area meals, hotel stays and other tourist activity is insufficient. That commitment was tested during the pandemic but the State did step up and assist the Authority to keep current on debt service.

Illinois nonetheless is far from being out of the woods. The failure of the income tax amendment in November was telling in terms of where the State’s politics are. The return to fiscal stability and strength remains a long way off.

SUMMER ELECTRIC OUTLOOK

The U.S. Energy Information Agency has made an assessment of regional electric reliability based on estimated demand and projected available generation capacity. The highest risk of electricity emergency is in California, which relies heavily on energy imports during normal peak summer demand and when solar generation declines in the late afternoon. Although California has gained new flexible resources to help meet demand when solar energy is unavailable, it is at high risk of an electricity emergency when above-normal demand is widespread in the west because the amount of resources available for electricity transfer to California may be limited.

The Electric Reliability Council of Texas (ERCOT) typically has one of the smallest anticipated reserve margins in the country, meaning it has relatively little unused electric generating capacity during times of peak electric load. ERCOT’s anticipated reserve margin increased from 12.9% last summer to 15.3% for this summer as a result of adding new wind, solar, and battery resources. Although ERCOT’s anticipated reserve margin is higher this summer, extreme summer heat could result in supply shortages that lead to an electricity emergency.

The Midcontinent Independent System Operator (MISO) and ISO-New England have sufficient resources to meet projected peak demand. However, if above-normal levels of electricity demand (which NERC calculates based on historical demand) occur in these regions, demand is likely to exceed capacity resources. In that case, additional transfers of electricity from surrounding areas will be needed to meet demand.

NEW YORK CITY

It looks like the next Mayor of New York will be Eric Adams. It is a big win for the city’s business community, especially the real estate industry given Mr. Adams long history with that sector. The win also is seen as a blow to those who support things like defunding the police. That issue was prominent in the campaign although the result argues that those arguments did not resonate. One thing that characterized the debate was a general lack of knowledge on the part of voters as to how much the City actually spends on criminal justice.

Now, we have some real data from the City’s Independent Budget Office (OMB) about how much is spent on criminal justice by the City. Spending by the agencies involved in the criminal justice system has grown from $5.1 billion in 2001 to $9.2 billion in 2020, an increase of 83 percent over two decades. When adjusted for inflation, though, the growth in spending is a far more modest 1.3 percent.  Funding from the city typically covers about 90 percent of the cost to support the system—$4.6 billion in city-generated funds in 2001 and $8.2 billion in 2020.  The police and correction departments have consistently absorbed most of the funds for the justice system. But over the past two decades, the two departments’ share of system spending has declined from 84 percent in 2001 to 79 percent in 2020.

Conversely, despite the decline in the number of arrests over that period, there has been no corresponding decline in the share of criminal justice spending on the offices of the District Attorneys or Special Narcotics Prosecutor.  A number of expenses such as pension and fringe benefits for criminal justice agency staff, as well as debt service and the cost of legal settlements are not part of the budgets of the individual agencies involved in the justice system. The city budget carries these expenditures centrally. When the “fully loaded” costs of the system are taken into account, projected spending totals $14.1 billion for 2021 (as of the 2021 Adopted Budget), compared with direct agency costs of $8.3 billion.

The largest agency in the system is the New York Police Department. The NYPD budget pays for all patrol and enforcement activity, as well as traffic enforcement, transit police, and school safety officers. The police budget increased by 43 percent from 2001 through 2013, from $3.4 billion to $4.9 billion, and by another 24 percent to just over $6 billion in 2020. In total, the budget grew by 77 percent from 2001 through 2020. Adjusted for inflation, police department spending over this period was largely flat, with spending about 2 percent less in 2020 than in 2001.

The Department of Correction (DOC) is the second largest agency within the criminal justice system. DOC oversees security and operations for jails on Rikers Island, as well as the city jails and court pens in each borough. In 2001, DOC’s budget was $835 million. It increased 31 percent, to $1.1 billion, in 2013 and another 19 percent, to $1.3 billion, in 2020. Over the entire 2001 through 2020 period, the DOC budget increased by 56 percent.

Spending did not keep pace with inflation, however, decreasing by 13 percent since 2001 in real terms. The budget for alternatives to incarceration and community programming increased 163 percent (46 percent with inflation), from $285 million in 2001 to $752 million in 2020. As a result, spending for this category has grown from 6 percent to 8 percent of the overall criminal justice system budget over the period.

PR

The Puerto Rico Oversight Board approved a $10.1 billion budget which was the product of collaboration by the governor, the legislature, and the Oversight Board. It represents the smoothest process of developing and approving the Commonwealth’s budget since the establishment of the Board. The fiscal 2021-2022 General Fund budget is $10.112 billion. The major expense categories are  $2.12 billion for health, $2.06 billion for pensions, $1.88 billion for education, $1.28 billion for the Department of Public Safety and Corrections, $416 million for economic development, and $371 million for the courts and the legislature.

The start of fiscal 2022 also saw the Board approve the operating and maintenance budget for the Puerto Rico Electric Power Authority of $3.13 billion, up from $3.06 billion in the previous fiscal year. The authority’s revenue is expected to be $3.1 billion, up from $2.9 billion. The approved budget for the Puerto Rico Aqueduct and Sewer Authority anticipates $1.03 billion of revenue in fiscal 2022, $43 million less than the previous fiscal year due to lower population and lower demand.  

The Highways and Transportation Authority budget calls for $681 million in operating and capital expenses in fiscal 2022, down from $862 million in fiscal 2021. Operating and capital revenues are projected to decline to $710 million from $862 million. No general fund transfers into the Authority are planned in the budget. That is a savings of some $250 million relative to the subsidy provided in FY 2021.

OPIOID SETTLEMENTS

Fifteen states have reached an agreement with Purdue Pharma, the maker of the prescription painkiller OxyContin.  The proposed settlement would provide some $4.5 billion from the family which owned Purdue Pharma an increase from the starting bid of $3 billion. The plaintiffs (including the states, some 3000 governmental plaintiffs) are also obtaining a significant amount of documents from the company. The negotiations were under the auspices of a bankruptcy court where Purdue Pharma’s bankruptcy filing occured.

The terms of the proposed settlement call for the Sacklers to pay $4.325 billion. Trustees appointed by a national opioid abatement fund would oversee Sackler charitable arts trusts worth at least $175 million. Those funds would go toward addressing the opioid crisis. The settlement is key to the company’s hopes of emerging from bankruptcy. Creditors have until the 14th of July to approve the deal. If sufficient approvals are achieved than the plan could be confirmed in the second week of August. That would make $500,000,000 immediately available to plaintiffs.

The plan doesn’t produce a windfall like the ones from the tobacco settlements. This means that any hoped for new securitization of payments will not be viable. There is less money and the payment period is only 9 years. There is no evergreen recurring annual payment after that time.

New York and Massachusetts were in the lead in terms of pursuing the documents from the company. The other joining states were Colorado, Hawaii, Idaho, Illinois, Iowa, Maine, Nevada, New Jersey, North Carolina, Pennsylvania, Virginia and Wisconsin. There are still states holding out from the settlement. Other litigation remains unresolved. Distributors are facing a bench trial in a West Virginia federal court and they and other manufacturers are being tried before a jury in a New York state court. 

WAYNE COUNTY UPGRADE

Wayne County, MI has certainly seen its share of fiscal difficulties especially when its major other governmental entity declared bankruptcy. The City of Detroit has been able to start its recovery process and get out from under state control. While that process unfolded, the County dealt with several fiscal issues as well. While the City’s credit faces some concerns resulting from proposed City Charter provisions, the County had slowly but steadily moved forward.

It’s reward? Moody’s has upgraded to A3 from Baa1 the issuer rating of Wayne County, MI. It also maintained a positive rating outlook. ” The upgrade of the issuer rating to A3 reflects the county’s material bolstering of operating fund balance and liquidity aided by restructuring of retiree benefits which greatly reduced the county’s annual fixed cost burden. Also considered is an expanding tax base, which creates some cushion against the state’s strict property tax caps that can result in revenue losses during time of tax base contraction.”

The historic risks which result from dependence on the auto industry continue. The County remains the economic center of Michigan even after the decline of auto manufacturing. Plans to build electric cars in Michigan will help as well.

CLIMATE WATCH

Missouri enacted legislation prohibiting local governments from banning natural gas hookups on newly-built buildings. A law to restrict local limits on natural gas and propane was enacted on Ohio. In Indiana, legislation making local zoning boards the arbiters of solar siting is designed to hinder solar development at the local level.

Preemption bills were introduced in 19 states this year –  Alabama, Arkansas, Colorado, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, Texas, Utah, West Virginia, and Wyoming). Fifteen of these bills have been enacted into law or awaiting final signature from the state’s governor (AL, AR, FL, GA, IN, IA, KS, KY, MS, MO, OH, TX, UT, WV, WY). Four other laws went into effect last year (AZ, LA, OK, TN). 

The Ohio legislation was backed by the Ohio Oil and Gas Association and the Ohio Chemistry Technology Council, would block any city or county from issuing any law or zoning code that “limits, prohibits, or prevents” people and businesses from obtaining natural gas or propane service. The Florida legislation recently passed, preempts local governments from blocking or restricting the construction of “energy infrastructure,” including the production and distribution of electricity. Prior to the rule, the county commission was required to grant a special exception for a major utility on an agriculturally zoned property.

In Florida, the Sand Bluff solar project was to be connected to an existing Gainesville Regional Utilities substation in Alachua County and produce about 50 megawatts of electricity a day. Issues of racial and environmental justice were raised and they were enough to discourage approval. It is the last time a county level approval would be required under the new Florida legislation.

Maine enacted a law which would prohibit state and local governments from licensing or permitting the siting, construction or operation of wind turbines in the state territorial waters that extend three miles from shore. The ban would have no effect on activities in federal waters beyond the three mile limit. It’s another example of the conflict between labor and the environment coloring so many aspects of the effort to decarbonize.  In this case the law placates Maine’s lobstermen.

COSTS OF COAL EVEN AFTER ITS GONE

Appalachian Voices been an advocate for post-coal Appalachia as the region transitions from the mineral extraction industry. Recently, they studied the magnitude of the cost involved with reclaiming old abandoned mining sites. As more coal companies declare bankruptcy, fewer companies remain to take over mines, so the number of companies forfeiting reclamation bonds and deserting their cleanup responsibilities will only increase. In many states, the funds generated by bonding programs may fall short of the actual reclamation costs that are passed to state agencies and taxpayers.

Using state and federal reclamation data, the organization estimated the amount of outstanding reclamation at active SMCRA permits for seven Eastern coal mining states: Alabama, Tennessee, Virginia, Kentucky, West Virginia, Ohio, and Pennsylvania. The total estimated cost of outstanding reclamation is $7.5 to $9.8 billion dollars across all 7 states. Total available bonds across the seven eastern states amount to about $3.8 billion dollars.

Without federal funding, it’s likely that the states would foot the bill. The silver lining of the problem is that addressing the reclamation backlog could put a substantial number of people back to work. If the remaining 633,000 acres in need of reclamation were reclaimed, this would create between 23,000 and 45,000 job-years across the Eastern states. It is likely not a long term fix but it could lessen some of the issues resulting from the demise of coal.

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