Joseph Krist

Publisher

__________________________________

ALTERNATIVE ENERGY GETS A BOOST

Revolution Wind is projected to be a wind powered energy generation project to be built off the coast of Martha’s Vineyard. Last week, Rhode Island state regulators approved a 20-year power purchase agreement (PPA) for the power delivered by an offshore wind joint venture of Ørsted and Eversource Energy. Ørsted operates America’s only operating offshore wind farm – the 30MW Block Island Wind Farm, developed by Deepwater Wind – in Rhode Island. The five-turbine offshore wind farm has been in operation since 2016.

Revolution Wind would include about 50 turbines located in federal waters between Montauk, New York, and Martha’s Vineyard, Massachusetts. The state of Connecticut has also selected about 300 MW from Revolution Wind in a PPA. The project backers claim that Revolution Wind can deliver a quarter of Rhode Island’s total electric load. Once permits are in-hand, local construction work on Revolution Wind will begin as early as 2020, with offshore installation starting in 2022 and the project in operation by 2023. Offshore oceanographic and geophysical survey work began in 2018.

BALTIMORE HACKING TWIST

During the month that the City of Baltimore has spent recovering from the early May ransomware attack a persistent concern has been the discovery that the software which facilitated attack may have been something originally created by the National Security Agency. A program known as EternalBlue and other N.S.A. tools were stolen and released on the internet in 2017. Those tools have been cited in other attacks on municipalities. The NSA used EternalBlue for such spying for at least five years before the hackers stole the tool.

What’s maddening is that Microsoft issued a patch to combat these programs  2017. Yet, Baltimore never installed the patch. Apologists for the city suggest that

“the reality is that patching can be hard and requires resources that many municipalities don’t have.” To some extent true, but this seems to be more of an execution issue rather than a pure financial issue.

Some have suggested that the federal government should provide funding to protect local government computer stems. It would be a surprise to see that happen. Just the other day, the President said that people can vote twice, once electronically and once on paper ballots as a way to deal with foreign election interference. No one wants to admit that this is not just about money. It is about the relatively weak position that technology managers are in today versus the position of private vendors. The fear is that not only in terms of cybersecurity but also in terms of technology generally, states and municipalities are showing up at the tech gunfight with pea shooters.

IT’S A MORAL RATHER THAN A LEGAL OBLIGATION

The term seems almost quaint now. In an age of hyperlegalization, it is surprising  that the concept of the “moral obligation” has lasted this long. There was always a basic legal fact about all such debt. The obligation to pay was dependent upon an affirmative legislative act each year in order for debt serve to be paid. It was always thought that the failure to pay on appropriation risk debt would be considered to be tantamount to effectively defaulting  all debt. This led to an era of high acceptance of the “moral obligation” concept.

The “moral obligation” concept was born in a time when attitudes towards debts, defaults, and obligations were looked at much differently. In the ensuing 50 years, attitudes towards debt repayment, moral versus legal obligations, bankruptcy, and the like have all significantly changed. Increasingly, municipalities which helped to facilitate debt issuance, especially for private owned and operated projects, by putting their “moral obligation” pledge to make up revenue shortfalls at projects behind these deals. Investors historically looked at the practice as an extra source of security.

Now it is becoming clear that the “moral obligation” is not nearly as of much concern to borrowers as it once was. Penalties are hard to impose in this market as pools of investible cash wait n the sidelines and absolute l rate levels make the rate “penalty” much more manageable. So when faced with a choice between raising taxes, annoying constituents by cutting services, or sticking it to anonymous bondholders, the decision not to subsidize bad bond deals for private projects is not that hard a decision.

There are two ways for investors to react. They can scream and holler about a city’s willingness t meet a contingent liability. The second choice  to install some discipline into the investment process and buy deals that make economic sense. That decision does not need a court imprimatur, investors can do it themselves.

So against that backdrop, we view the announcement that a Missouri Circuit Court Judge issued a decision granting summary judgment in favor of Platte County in its declaratory judgment action against UMB Bank, N.A., the Trustee for bonds issued to finance a parking facility at a retail complex in the County. The bonds were secured by limited sales tax revenues and a “moral obligation” on the part of the County to appropriate funds to cover any debt service shortfalls. In the face of a budget shortfall away from this obligation and lacking political support for paying, the County has declined.

It is easy to lump this situation in with decisions in Detroit and Puerto Rico and see it as part of a trend. I see this as different from PR in that (not that it’s a better result for creditors) if the security requires regular appropriations for annual debt service then the County is likely within its rights to fail to appropriate. The retail facility is constantly offered for sale. There are relatively new current owners. The project defaulted on its mortgage. That’s not enough to trigger the “moral obligation” in the County’s view. Other smaller communities have done this and the predicted financial and market Armageddon hasn’t happened to them  at least from their point of view. The County budget is tight so they’ve decided it is worth this.

It’s not so much that courts are seemingly siding with bondholders. Populism is a real thing west of the Hudson, so the onus is on the investor to understand the legals. A moral obligation, like many other things is for better or worse not what it once was. It is also a trend. A hotel in Illinois, an ice rink in Minnesota, parking facilities all have been the subject of non-appropriation actions. This one won’t be the last.

ILLINOIS

As we post this week’s edition, the Governor was poised to sign several pieces of significant legislation to implement  several provisions of the budget. The Legislature took advantage of the ability to coordinate which resulted from the Governor’s decisive election margin in the Fall. The Governor had been upfront during the campaign about his priorities so the political atmosphere had changed significantly than was the case during the Rauner administration.

Two pieces have a direct credit impact The first is the approval of legislation to lay the groundwork for voters to vote on a constitutional amendment to convert the state’s income tax from a flat tax to a graduated rate schedule. The second piece included a vote to raise vehicle fees, double the gas tax to 38 cents per gallon, expand casino gambling in the state, and legalize recreational marijuana and sports betting.

The casino legislation will allow a casino to be opened in Chicago and established provisions for the distribution of revenues to among others the City of Chicago. The marijuana legislation provided a structure for revenue allocation and distribution of those revenue. Included among the revenue dedications, the law provides for 10% of marijuana derived revenue to be applied specifically to the State’s unpaid bill backlog. The new budget also includes an elimination of the state’s franchise tax, the reinstatement of a tax incentive to help manufacturers and a new tax incentive to support data centers in Illinois.

Clearly, the state is on a different track under the new Governor. At the same time, the State still faces significant problems. The largest of the festering problems is that of pensions. That is the one area that proved most difficult to address. The difference now is that the Legislature and the Governor are no longer locked into a ideological battle that yielded at best a stalemate while the State’s ratings were battered. Pension reform will be a long process given the need to amend the State Constitution to enable real change to occur.