Joseph Krist

Publisher

Recently we sat down with the Daily Bond Buyer and discussed some current trends I see in municipal credit. It’s available at https://www.bondbuyer.com/podcast/unexpected-turns .

MISSOURI SHOWS US A GAS TAX

Missouri Gov. Mike Parson has signed into law raising the state’s gas tax, The law will gradually raise the state’s 17-cent-a-gallon gas tax to 29.5 cents over five years. The first 2.5 cent increase is slated to take effect in October, which will bring the gas tax to 19.5 cents. Once fully implemented, the gas tax hike could generate more than $500 million annually for state, county and city roads. The Missouri Department of Transportation estimated that the state faces a $745 million annual funding gap for roads and bridges.

Now opponents to the increase are working to get a refund if they keep track of their receipts. to force the issue to a vote by the people. Since voters approved a constitutional amendment in 1996 requiring all tax increases over a certain amount to go to a statewide vote, not a single general tax increase has passed. The expectation is that if the proposed initiative gathered enough signatures, it could be on the ballot in 2022. This despite provisions in the law allowing residents to get a refund if they keep track of their receipts.

That provision makes it likely that the tax will not generate sufficient funds to close the existing gap between what the state needs for transportation and what the net proceeds of the proposed tax would generate after refunds. It shows how hard it is to raise gas taxes.

CRYING WOLF?

There has been nothing but lamentation and fiscal gnashing of teeth in the oil and gas producing states since the Biden Administration announced that it was suspending the acceptance for consideration applications for leases of Federal land for oil and gas exploration and production operations. While the spigot of new leasing applications has been turned off, that doesn’t mean that new leases are not being approved.

Approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president. The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data.  Some 2100 of those approvals came after January 20.

New Mexico and Wyoming have been leading the steady opposition to the lease suspension. Nonetheless, New Mexico and Wyoming had the largest number of approvals. This news comes as gasoline prices have steadily increased since the reopening of the economy. This increases the likelihood of some increased production and that at least some of the approvals will result in new drilling. Drilling on public lands and waters is estimated to account for about a quarter of U.S. oil production.

The continued growth in oil/gas leasing comes as more evidence of the decline of Wyoming coal comes in. The Energy Information Administration (EIA) on Wednesday said U.S. coal production fell in 2020 to its lowest level since 1965. U.S. coal production totaled 535 million short tons (MMst) in 2020, a 24% decrease from the 706 MMst mined in 2019. Coal production in Wyoming, where more coal is produced than in any other state, was 21% lower in 2020 than it was in 2019, while the second-largest producer West Virginia experienced an annual decline of 28%. U.S. coal-fired generation fell 20% year-on-year and exports were 26% lower in 2020 than in 2019.

GARDEN STATE OUTLOOK

The trend of improved ratings on state general obligation credits continues. The latest beneficiary is the State of New Jersey. Moody’s affirmed the A3 rating on New Jersey’s outstanding general obligation debt, and revised the outlook to positive from stable. This ultimately benefits some $40 billion of state agency and local debt with a state backup. The State was able to weather the pandemic storm.

It applied much of the revenue windfall resulting from the stimulus to address longstanding credit weaknesses. Specifically, Moody’s cited the fact that “The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management. These actions include debt reduction and avoidance and acceleration of pension contributions.”

The budget included a $6.9 billion pension payment and a $3.7 billion debt defeasance fund to pay down obligations. These items were keys to the improved outlook. While the budget also included recurring expenses which were not totally offset by recurring revenues, the pension payment was the largest in 25 years and it reverses a trend of consistent underfunding under the Christie administration which contributed to some 11 negative rating actions during that administration.

MAINE PUBLIC UTILITY VETO

Gov. Janet Mills on Tuesday vetoed LD 1708, An Act to Create the Pine Tree Power Company. The bill aimed to create a nonprofit, consumer-owned utility that would take over Central Mainer Power and Versant Power. It was approved by the legislature but not with a veto proof majority. It comes as the utilities are perceived to provide significantly less reliable service since CMP was purchased by a foreign owner. (Full disclosure – the owner Avingrid is also my utility supplier. Maine, we feel your pain.)

And the Governor seems to agree. In her veto message, the governor called the recent performance of Maine’s utilities “abysmal” and said that “it may well be that the time has come for the people of the State of Maine to retake control over the [utilities’] assets.” 

There does seem to be a consensus in favorable of a decarbonized grid in Maine but it has not produced clear results. The effort to import hydroelectric power from Quebec requires a transmission line which has encountered significant opposition. The effort to develop off shore renewables has been strongly opposed by the state’s lobster industry.

It’s another good example of the clash of interests which arises from the effort to significantly alter the energy production, distribution, and consumption chain. It is that environment that means that unless the Legislature is able to override the governor’s veto by two-thirds supermajorities in both the House and the Senate, the question of consumer ownership of Maine’s two investor-owned utilities will not be on the November 2021 ballot. The Legislature will reconvene on July 19 to vote on the veto and on all other vetoes Mills has issued since July 1.

While the veto process plays out, it is of note that a law was enacted which requires the Governor’s Office of Policy Innovation and the Future to define “environmental justice,” “environmental justice populations,” “frontline communities” and other terms. Officials will also have to develop methods to incorporate equity into decision-making at the Public Utilities Commission, the Department of Environmental Protection and other state agencies.  These definitions would guide the development of future legislation.  It could provide a good starting point for the process of actually developing consensus about what the terms mean on a granular level.

Maine joins several other states in such an effort. It’s clear that economic and environmental justice mean different things to different people. Seven states have adopted definitions of “environmental justice” or related terms in state law. Several states have also implemented definitions as part of agency initiatives related to pollution reduction and toxic facility siting.

New Jersey passed an environmental justice law in September 2020. It requires the state’s Department of Environmental Protection to deny permits for new polluting facilities deemed to have a negative environmental or public health impact on overburdened communities. Notably, it requires the department to consider “cumulative impacts” when making its decision: factors outside the facility in question, such as other existing sources of pollution, that could collectively create a higher burden for the community.

VIRGIN ISLANDS

Well before the pandemic, the U.S. Virgin Islands was a very troubled credit. This while relying on tourism, rum, and oil production. Oil production reflected the presence of what in its day was the largest oil refinery in the western hemisphere. For years, it was operated by a consortium consisting of the Venezuelan state oil company and the Hess Oil Company. As the politics of Venezuela became more unstable and incompetent, the refinery fell on hard times. As the source of over 1100 jobs on St. Croix, the loss of those jobs was problematic.

The refinery filed for bankruptcy in 2015. The economic failings of the plant created operating issues for any subsequent buyer and/or operator. ArcLight Capital purchased the refinery out of bankruptcy in 2016 for $190 million​. The current owner, Limetree Bay Refining LLC is controlled by EIG Global Energy Partners, which said it became the “reluctant” owner of the troubled refining operation in April as part of a restructuring. They are even more reluctant now since the most recent effort to restart the refinery earlier this year was halted in May under EPA orders. The operation had resulted in significant pollution – air, water, and directly.

Now Limetree has filed for bankruptcy protection. In the absence of any interim funding, Limetree’s refinery operations are forecast to burn through nearly $7 million over the next three weeks. The refinery only had about $3.5 million in cash on hand when it filed its Chapter 11 petition. The plant employed roughly 400 people as of the date of the bankruptcy filing, most of whom were required to be U.S. Virgin Island residents.

Full operations have not occurred since 2012 but there remained a significant economic interest in having it operate as a source of both employment and revenues. With the U.S.V.I. already dealing with legacy budget and pension issues and a utility on the constant edge of insolvency, this just one more brick on its credit load.

COULD LITHIUM REVIVE THE SALTON SEA?

Much attention has been focused on the need to develop significant sources of lithium to supply the production of batteries. Batteries will be a key towards moving renewables to the center of the energy supply as the nation moves to decarbonization. The attention comes from the need to mine lithium and there are environmental concerns being raised in regard to environmental destruction and possible pollution associated with lithium extraction.

While those issues are hashed out through the political process, the need for lithium batteries continues to substantially increase. This has led to the development of other sources of lithium including the extraction of the mineral from brine. The issue has been one of availability of lithium and the extraction process is one way to address that.

That’s where the Salton Sea comes in. The body of water was an accidental creation. When irrigation canals from the Colorado River jumped their levees near the U.S./Mexico border in 1905 on the desert east of San Diego, millions of gallons of fresh water spilled into the Salton Trough, historically an arm of the Lower Colorado River Delta at the head of the Gulf of California. When the water finally stopped, it filled a trough 45 miles long, 17 miles wide, and 83 feet deep.

Over time, the lake became an inland resort. Then in the late 1970’s, continuing drought and the fact that the “sea” was not fed by any flowing waters (rainfall became the primary source of replenishment caused the Sea to begin to shrink. The lack of new water and increased temperatures badly impacted the native fish species. The reduced attraction of the Sea became a vicious circle leading to the abandonment of seaside communities and businesses.  The waters continued to recede and the exposed lake bed became a source of toxic dust impacting nearby communities.

Most of the lithium used for batteries today comes from either South America or Australia and it is processed in China.  It makes sense that it would be more economical to develop lithium sources in closer proximity to end user customers. That’s why GM has recently invested in one domestic provider of lithium derived from brine.

The Salton Sea region is unique in that some researchers estimate it contains enough lithium in the geothermal brines that it could supply a third of the world’s current lithium demand. The lithium also could be processed in tandem with developing geothermal power plants that could generate significant clean energy and local jobs. That has led to increased investment in the development of geothermal power in the Sea. Now, the demand for lithium has led to new development of facilities to extract lithium from brine in the waters.

The potential exists for such a project to be a source of jobs and tax revenues for Imperial County.  

PENNSYLVANIA ROAD FUNDING DEBATE CONTINUES

The latest party to weigh in on what the funding mechanisms should be for transportation, particularly roads, in Pennsylvania is the 42-member Transportation Revenue Options Commission. The Commission was created in March and charged with developing recommendations and changes environment.  Road funding has been an ongoing problem for the Commonwealth given opposition to higher gas taxes or tolls.

The recommendations are sure to be contentious. The proposal calls for changes in three phases: the first two years, the next two years and five years or longer, with the new or increased charges starting at various times because some of them would require approval by the General Assembly. The largest new revenue source and the most dramatic change would the enactment of a tax of 8.1 cents a mile for each mile a vehicle is driven. That move — which wouldn’t begin until the third phase and would require legislative approval and a pilot period to test a collection method — is projected to generate $8.9 billion a year.

Other fees: A fee of $1 for every package delivered by major companies like Amazon, FedEx and UPS, as well as local groceries and restaurants. No government is charging such a fee at this time. Transportation networks such as Uber and Lyft would be charged fees of $1.11 for each trip. Existing taxes and fees like the vehicle rental fee would increase by $3 to $5; vehicle registration would double to $76 for passenger vehicles initially, then be replaced by a fee based on the value of the vehicle; and aircraft registration and jet fuel taxes would increase.

All of this is designed to replace the existing $8.1 billion of revenue derived from taxing fuel and the existing fee infrastructure.

PR

U.S. District Court Judge Laura Taylor Swain issued a preliminary ruling rejecting creditor objections to the document filed by Puerto Rico’s Financial Oversight and Management Board (FOMB), but delaying a final approval until the fiscal panel and insurers conclude negotiations. The hearings analyzed whether the disclosure statement provides accurate information to creditors, retirees, public employees, contractors and other parties who will be affected by the POA, which would restructure approximately $35 billion in commonwealth debt and $50 billion in pension liabilities, and include an 8.5 percent cut to monthly retirement payments. 

The deal reduces the outstanding general obligation (GO) and Public Buildings Authority (PBA) debt as well as other claims by almost 80%, from $35 billion to $7.4 billion in new GO debt that would be issued by the commonwealth government. The government’s debt service would be $1.15 billion, or 8% of fiscal year 2020 own-source revenues. The rulings and agreements reached with bond insurers allow the process of approval of the Plan of Adjustment offered by the Commonwealth.

Judge Swain established a preliminary calendar for the Plan Of Adjustment discovery and confirmation process. A U.S. District Court Judge will oversee the discovery process lasting from Aug. 3 to Oct. 11, assuming the order for the disclosure statement is issued. The confirmation trial will commence on Nov. 8 and end on Nov. 23. That trial will include cross-examination of witnesses. The judge said that objections to the proposed confirmation order should be filed on Oct. 22, while the FOMB’s reply should be filed on Oct. 29. 

There still remains the possibility of additional delays. As outlined by Judge Swain “in order for there to be a practical possibility of holding confirmation hearings beginning in November, as proposed by the oversight board, discovery will need to begin immediately” and “Fulfilment of the oversight board’s request to begin confirmation hearings in November is dependent on the government entities’ cooperation in discovery… The court expects the oversight board and the Fiscal Agency & Financial Advisory Authority to fully respond to every request,”.

The continuing political opposition to parts of the Plan does cast a pall over the proceedings. The Governor and his party are doing everything they can to avoid having to agree to cuts to pension payments. There is still plenty of room for mischief.

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