Joseph Krist

Publisher

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PREEMPTION

We recently discussed the issue of preemption of the rights of local governments by state legislators seeking to prevent localities from imposing restrictions on things like the use of natural gas. As localities have increased their use of their regulatory powers to dictate local energy policy, Republicans have turned to state level preemption legislation in an effort to stem that regulatory tide.

Now the recent stimulus bill includes what might be considered a form of preemption. As enacted, it includes a provision that could temporarily prevent states that receive government aid from turning around and cutting taxes. They are prohibited from depositing the money into pension funds and cannot use funds to cut taxes by “legislation, regulation or administration” through 2024. The law says that states and territories that receive the aid cannot use the funds to offset a reduction in net tax revenue as a result of tax cuts because the money is intended to be used to support the public health response and avoid layoffs and cuts to public services. 

Republicans in Congress don’t like the requirement. They are invoking states rights as an argument against the provision. At the same time, they worked very hard against the plan to prevent a so-called blue state pension bailout. States are required to submit regular reports to the Treasury Department accounting for how the funds are being spent and to show any other changes that they have made to their tax codes. The treasury is expected to offer guidance on the eligible purposes which the funding could be spent on.

The debate sheds light on the emerging divide between state governments and their fiscal interests and county and municipal governments who have not fared as well as pandemic restrictions hurt local sales tax and property tax revenues. These are often key sources of revenues for localities.

UBI AND STOCKTON

The concept of universal basic income programs is getting a wider hearing especially given the leading position in polling for the office of New York City Mayor by Andrew Yang. Mr. Yang has been the most prominent proponent of the concept and it is the cornerstone of his campaign. He is selling it as a cure for homelessness and a significant cutback in local social service spending. Proponents of a UBI cite a recent report documenting the results of an experiment in Stockton, CA which provided a UBI to some 125 residents of the city.

Prior to this, Stockton was likely best known to municipal bond investors as one of the California cities which filed for bankruptcy in the aftermath of the Great Recession. It was a particularly contentious process and it shed light on the economics of the city and its residents. You will hear a lot about the Stockton UBI experience so it is worth it to see just what happened.

The Stockton Economic Empowerment Demonstration, or SEED, was the nation’s first mayor-led guaranteed income initiative. Launched in February 2019 by former Mayor Michael D. Tubbs, SEED gave 125 Stocktonians $500 per month for 24 months. The cash was unconditional, with no strings attached and no work requirements. The report focused on several key questions. How does guaranteed income impact income volatility? How do changes in income volatility impact psychological health and physical well-being?

To qualify or be considered for SEED, recipients had to be at least 18 years old, reside in Stockton, and live in a neighborhood with a median income at or below $46,033.The study came to several primary conclusions. Guaranteed income reduced income volatility, or the month-to-month income fluctuations that households face. Unconditional cash enabled recipients to find full-time employment. Recipients of guaranteed income were healthier, showing less depression and anxiety and enhanced wellbeing. The guaranteed income alleviated financial scarcity creating new opportunities for self-determination, choice, goal-setting, and risk-taking.

Whenever programs like this are proposed, issues over what the money would be spent on arise usually in opposition to them. The study addressed those concerns directly. Consistently, the largest spending category each month was food, followed by sales/merchandise, which were likely also food purchases at wholesale

clubs and larger stores like Walmart and Target. Other leading categories each month were utilities and auto care or transportation. Less than 1% of tracked purchases were for tobacco and alcohol. In February 2019, 28% of recipients had full-time employment. One year later, 40% of recipients were employed full-time.

In the end, it was clear that the recipients were benefitted in ways which bode well for the program. The author’s however point out that there are many issues facing eligible communities. The study concludes that guaranteed income should not be considered as a singular approach for household stability, “Additional policies to implement alongside a guaranteed income include: protection against predatory financial actors and instruments like caps on adjustable interest, second-chance banking, third-party targeting of financially vulnerable populations, and exorbitant fines and fees from the criminal justice system; address the unique barriers that women face in the market through paid family leave and universal child care.

We take the same approach to this issue that we take with new technologies or processes. The studies to date have involved small numbers of individuals. It is comparable to a technology which works on a prototype but is not as successful when it is attempted at scale. UBI opens a debate about a variety of issues starting with how it is funded. Mr. Yang proposed a national value added tax (VAT) which many see as regressive. This study did not address the issue of how to fund such a program. If a UBI comes at the expense of a variety of other approaches, it is not clear what the net benefit is.

AFTER THE FIRE

Last week saw public transit begin to show signs of a comeback. New York, the MTA reports said subway ridership on Thursday was the highest single day total since the pandemic began, with 1,863,962 paid trips taken. There were an additional 1.13 million daily trips recorded on MTA/NYCT buses, putting the overall system trip total at around 3 million for the day. 

Pre-pandemic daily ridership regularly exceeded 5 million rides per day. So the current ridership represents an overall rate of 46% of pre-pandemic levels. As the economy reopens, we do not expect a full return to pre-pandemic levels but a steady increase in ridership is to be expected. This is especially true if the currently closed cultural and entertainment facilities reopen as planned in the fall.

That could become even more likely if current trends in air travel take hold. The Transportation Security Administration screened 1,357,111 passengers at airports across the country on March 12, the highest number since March 15th, 2020. It’s an indicator of why these businesses are counting on pent up demand driving the economic recovery.

WHAT A DIFFERENCE A BILL MAKES

The scope of the recently enacted stimulus legislation has triggered a reboot for the credit outlook for states. Moody’s has announced that its overall outlook for state credit ratings is now stable. They expect state fiscal positions to be maintained and even bolstered in light of the relief package and the fact that revenues held up better than almost anyone expected.

That perception of a stronger fiscal position created a real stumbling block that hindered passage. Ironically, there has been much huffing and puffing over the issue from “red state” politicians. The package includes restrictions on what the money can be spent on. While the “red state” politicians complained about a bailout for what they saw as poorly managed states and pension funds, those same parties are now complaining that the bill stands in the way of tax cuts in those states.   

Underpinning all of this is the fact that we have recently witnessed what happens when Keynesian economics are applied in full measure. The majority of Americans have seen their economic experience shaped by the idea of government as an impediment to growth and that any tax is likely a bad tax. That image helped to support a less tempered approach to the recovery from the 2008 recession. There were complaints at the time that the federal recovery response was inadequate.

While state and local government fared relatively poorly in that recovery – many services never returned to pre-2008 levels and employment at the state and local level reflected that – there were significant reserves built up because of those aggressive cost control actions. It can be argued that in the short term, state government is much better positioned to benefit from the expected economic recovery.

CULTURAL FACILITIES

The combination of vaccine availability and the warmer weather is giving cultural institutions a chance to reestablish themselves in the post-pandemic economy. Those which are able to operate in some fashion outdoors – music and the other performing arts – mostly did not in the summer of 2020 but are gradually announcing summer shows. Now that the industry received direct aid in the stimulus, they are in a better position to determine their best course forward.

The Los Angeles County Museum of Art announced that it will reopen April 1 after a yearlong closure. Museums are allowed to reopen indoor spaces at 25% capacity with safety protocols in place. LACMA will require guests to wear a face mask, undergo online health screenings and make an online reservation for timed entry. In New York, the famous Shakespeare In The Park summer series will occur this summer after it was cancelled in 2020.

With indoor dining (albeit limited) returning in jurisdictions including New York City and even California’s Disneyland scheduled to soon reopen, the outlook for the local economies they support improves. The symbiotic relationship between these larger entities and their surrounding economies and dependent businesses drives a more positive outlook. As generators of retail sales taxes, those dependent businesses are especially important to local economies and employment.  

PUBLIC PRIVATE BROADBAND INITIATIVE

Vermont has approved a plan to help more Vermonters in some of the hardest-to-reach corners of the state get connected to broadband quickly and cost-effectively.  It is a problem confronting many rural locations which was highlighted by the need to run schools on line rather than in person. In this case,  the plan provides for offering up to $2,000 per unserved location for infrastructure connection costs. If broadband companies fully enroll for the discounts, more than 10,000 customers who currently do not have broadband could be connected by the end of next year. It seeks to address the costs of extending basic infrastructure to support broadband to widely dispersed customer bases in rural areas.

Vermont Electric Cooperative (VEC), established in 1938, is a non-profit, member-owned electric distribution utility that provides safe, affordable, and reliable electric service to approximately 32,000 members in 75 communities in northern Vermont. We have long advocated for federal support for expanding the role of rural electric co-ops to achieve the same positive results with broadband which their service areas enjoyed with the connection  to electric power.

ELECTRIC VEHICLE ECONOMICS

At the current global average battery pack price of $135 per kilowatt-hour (kWh) (realizable when procured at scale), a Class 8 electric truck with 375-mile range and operated 300 miles per day when compared to a diesel truck offers about 13% lower total cost of ownership (TCO) per mile, about 3-year payback and net present savings of about US $200,000 over a 15-year lifetime. This is achieved with only a 3% reduction in payload capacity. 

This is according to research from the University of California and the Livermore Lab. The estimated average distance traveled between 30-minute driver breaks is 150 miles and 190 miles for regional-haul and long-haul trucks respectively in the US.  Thirty minutes of charging using 500 kW or mega-Watt scale fast-chargers would add sufficient range without impairing operations and economics of freight movement. 

Realizing the full economic potential of electric trucks therefore requires surviving a long period of infancy marked by low demand for vehicles and charging, and consequently, higher cost of new vehicles and slow return on charging infrastructure. Binding targets for vehicle sales, supported by targeted subsidies indexed both to international battery prices and cumulative sales can deliver the scale of adoption needed to launch this new industry on a sustainable future trajectory.

THE ELECTRIC GRID AND MUNICIPALS

The recent ice storms and resulting power outages in Texas have rightly focused much attention on “the grid”. One of the major issues which arose in Texas had to do with its lack of connection to other sources of transmission outside of the state. The issue is forcing consideration of alternative sources of generation and transmission. Increasingly there are more examples of local government initiatives to address the concern.

The latest is found in Camarillo, California. There the City Council approved a contract with the Clean Coalition to oversee the design of solar-based microgrids at five critical city facilities that will incorporate Tesla batteries. The city council also directed city staff to enter into a contract with Tesla for a 1-MW/ 4-MWh battery to be installed at the city’s wastewater treatment plant.

The battery will be paid for by the California Public Utilities Commission’s Equity Resiliency Self-Generation Incentive Program (SGIP).  Without the rebate, the battery would cost about $2.2 million, with permitting and other costs increasing its final price to $3 million installed. The battery, which can power the wastewater treatment plant for about 11 hours before being recharged, comes with a 15-year warranty and 10 years of O&M coverage.  By charging the battery during off-peak hours and using it on peak, Camarillo will save at least $90,000 a year.

Tesla has contracted for about 160 battery projects under the California SGIP, of which 125 are with public entities. In Camarillo, the sites will be typical municipal facilities – city hall, a police station, a wastewater treatment plant, a library and the public works yard. Now the issue, is how to fund the full project.

The city council will have to decide if the city should pay for and own the microgrids or use a power purchase agreement (PPA) model.  Private providers can take advantage of federal investment tax credits for the facilities. However, the city applied for grants from the Federal Emergency Management Agency’s (FEMA) Building Resilient Infrastructure and Communities $500 million grant program that could cover up to 75% of the project’s capital cost.

PENNSYLVANIA GAS TAX PROPOSAL

Pennsylvania, Gov. Tom Wolf (D) has proposed phasing out the gas tax as the main funding mechanism for the state’s highway fund, and he has established a commission to recommend options for replacing it with alternative revenue sources. It is likely that much attention will be focused on vehicle mileage taxes (VMT) as the likely replacement.

A flat fee per mile based on vehicle weight and measured by the odometer would be the simplest version of a VMT tax to administer and avoids most privacy issues. The concern about “tracking” drives much opposition. Odometer readings could be done at yearly inspections or by installing an on-board-unit (OBU) that electronically transmits VMT to a central computer.

Today, about 56 percent of the state’s transportation tax revenue is raised through motor fuel taxes. The Tax Foundation estimates that a VMT would, if we assume a flat rate, need to be levied at 8 cents per mile to raise $8.4 billion.  That would be some 56% of the Commonwealth’s estimated annual revenue requirement to cover transportation funding. And funding via the gas tax is getting harder. In 1994, a passenger car averaged 20.7 miles per gallon (MPG) and drivers paid 3.2 cents in state and federal tax per vehicle mile travelled. In 2018, a passenger car averaged 24.4 MPG and drivers only paid 2.1 cents per vehicle mile traveled.

ANOTHER NEW TECHNOLOGY FOR THE MUNI MARKET

Global aluminum production reaches 50 million tons per year.  When processing bauxite by various methods, red slurries are formed, which are removed from the process in the form of pulp and stored in sludge storage.  Now, a Canadian company has developed a technology for the integrated processing of red mud with the production of target valuable products – iron-containing pigments and coagulants, aluminosilicate materials, amorphous silicon dioxide, precipitated calcium carbonate, titanium, zirconium, scandium and other rare-earth elements.

The plan would be for a plant to process the mud and develop a source of rare earth elements. Developers are looking forward at space and cost limitations at existing storage sites and deciding that the economics of storage will be less favorable than the economics of mud processing. It is also being sold as a green technology reflecting its role as a reducer of waste.

Given those characteristics, such a project would seem to be ripe for tax exempt private activity bond financing. And the State of Louisiana seems to agree. The board of trustees for the Louisiana Public Facilities Authority approved a “significant allocation” of tax-exempt private activity bonds that will be used to fund the construction of the new facility in St. James Parish.  The authorization by the board is for no more than $850 million. Governor John Bel Edwards approved private activity bonds up to $250 million for the project so far. 

The project would be built in Gramercy, LA at an existing aluminum smelter where there are 35 million tons of bauxite residue at the site. The residue is estimated to contain 10 rare earth elements and 15 minerals — among them titanium, iron and other metals — that have been identified as strategic and critical by the U.S. Defense Logistics Agency. 

Every project stands on its own. One can’t help but look back on previous projects which sought to address widely agreed upon environmental problems. The nature of the problem, the apparent lack of other solutions, and regulatory mandates all pointed to real markets for products which ultimately failed to support successful investments.

This would not be the first non- U.S. technology to find a home in the municipal market during its developmental phase. For those of us with significant high yield experience projects like this make one remember medium density fiberboard, paper deinking, plant waste processing, and nuclear waste processing. Waste management in its broadest sense has been a continuing source of investment risk in the high yield space and this is just its latest manifestation.

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