Joseph Krist

Publisher

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GREEN POLITICS

In our April 19 edition we highlighted the plan’s by Columbus, Ohio’s electric utility to move to a 100% renewable generation base for its customers beginning this June. It was a way to undertake a policy through sale of a service to customers who want it through the utility. This was accomplished in response to a voter initiative.

Now a long time green power advocate has obtained a ruling from the Ohio Supreme Court against the City of Columbus. The ruling covers the City’s refusal to certify an ballot initiative which called for the city to redirect $87 million — almost one-tenth of its general fund budget — to a private organization for “clean energy programming.” The order requires city council “to find the petition sufficient and proceed with the process for an initiated ordinance,” as outlined in city code. The court ordered the city to either adopt the proposed ordinance or place it on the next general election ballot, as the city code requires.

The initiative would require that $57 million of the total be given to a private organization to assist residents in purchasing electricity generated from wind, solar, fuel cell, geothermal or hydropower producers. Distributions of public dollars through private organizations have a long history of issues including transparency and accountability. It would be troubling if this initiative would pass from both a budgetary point of view but also a governance standpoint.

As this process unfolds, the City has contacted residents and customers asking them if they wish to stop the city from automatically enrolling them in the City utility’s new green-energy aggregation program. That plan would lock in for one year an electricity-generation rate of 5.499 cents per kilowatt hour. That rate is almost 10% higher than the 5.03 cents per kWh that Columbus’ AEP Ohio customers currently pay on the “Generation Services (Supply)” line item portion of their electric bills. That default AEP rate is not fixed for one year. In fact, it expires at the end of May. The City’s program starts June 1. The AEP Ohio default price has changed six times between the start of 2020 and April 2021, ranging between low of 4.64 cents per kWh last July to a high of 5.42 cents per kWh in January 2020.

SUTTER HEALTH

This week, Moody’s reaffirmed its negative outlook on the A1 rating for debt issued by Sutter Health. The Northern California system is in the process of finalizing a $575 million settlement of a class action lawsuit. The resolution of that case, while costly, did stand to reduce pressure on the credit. Now however, a second significant class action suit against the system is beginning to move forward with certification of the class. 

The latest class action lawsuit claims Sutter violated antitrust and unfair competition laws, which caused certain individuals and employers in certain parts of Northern California to overpay for health insurance premiums for health insurance purchased from Aetna, Anthem Blue Cross, Blue Shield of California, Health Net or United HealthCare (together, the “Health Plans”) from January 1, 2011 to the present. Sutter denies that it has done anything wrong or that its conduct caused any increase in the price of premiums that individuals and employers paid for health insurance from those Health Plans. 

The case moves as the system reports weak 2020 financial results. In maintaining the negative outlook Moody’s cited an already high cost structure and the fact that Sutter Health’s nursing union contracts are expiring this summer. The potential for costs increasing faster than revenues is a real risk and we believe that this would generate a downgrade.

REOPENING QUICKLY BENEFITS SOME RATINGS

It makes sense that we see ratings respond to the increasing level of economic activity. Places like Disneyland reopened after 419 days, many businesses will be permitted to fully operate in the New York metropolitan area beginning in the middle of the month. Outdoor facilities are well positioned as operators of indoor facilities approach reopening cautiously. Broadway shows will resume until after Labor Day.

As more people get vaccinated, facilities like airports and ancillary credits (parking, rental cars) are moving quickly to financial improvement as passenger volumes grow.  1.63 million passengers went through TSA screening at airports across the nation on Sunday, May 2, the highest number since March 2020, despite it still being about 35 percent lower than pre-pandemic levels.

As hospitality businesses reopen, the flow of taxes generated by these entities will recover and coverage levels for revenue bonds they secure are quickly improving. Those more dependent on outdoor facilities will show that improvement more quickly than those for indoor facilities. Holders of debt payable from tribal gaming operations will benefit as we see capacity restrictions relaxed. The Seminole Tribe saw the negative outlook on its Baa2 rated revenue bonds lifted to stable.  

THEY LOVE NEW YORK

Over the years, there has been a consistent story line that says that New York State’s fiscal and public policies drive residents to leave. That view was revived in this year’s NYS budget process. The issue came up as the Legislature debated whether or not to raise taxes on the high end of the income scale. Opponents as expected claimed that taxes were high enough and would continue to drive residents to states with lower or no income taxes.

Now the results of the 2020 Census are available and surprise, surprise New York State saw its population increase over 2010 levels. This has been lost on many as the emphasis has been on the loss of one seat in the House of Representatives for New York State. While important, Census figures are used to distribute from more than 300 federal programs, including unemployment insurance, job training grants and the Special Supplemental Nutrition Program for Women, Infants and Children. It has been important to get the count right.

The unexpected results have raised questions about how a ten year data trend could be reversed. It comes down to the fact that the trend was based on annual population estimates derived from computer models. The estimates program showing New York losing population started with the 2010 census and updated those figures annually based on births, deaths and the movement of residents in and out of the state. The estimates showed New York gaining less population from immigration and losing more residents to other states as the decade unfolded.

Those estimates are based on a national file of addresses. If an address is not on file then no count of residents at that address occur. It’s been a problem for some time. The Census did start a program in 2000 that would enable localities to update the address data base. It turns out that NYC was one of the more aggressive localities in terms of its efforts to get more addresses in the data base.

In New York City, the process of finding and entering missing addresses began in 2016, and by the time the census was conducted for 2020, there were 122,000 additional housing units on the list of households to be counted.  The State managed to get another 80,000 addresses into the data base. New York’s master address list grew by 693,000 statewide, and after invalid addresses and vacant units were filtered out, the census counted population in 446,000 additional housing units compared with 2010.

NYC AND OPEB

With the pandemic and its current impacts on government fiscal positions, it has been easy to overlook issues which occupied attention in the pre-pandemic era. One of those issues is that of OPEB (Other Than Pension Employment Obligations) and their role as a future credit drag. These benefits are primarily for medical care. One example of the potential impact is the City of New York.

Most New York City employees become eligible for city-paid health benefits for the years from their retirement to when they become eligible for Medicare after 10 years of service. In addition, the city pays their Medicare Part B premium once they move onto Medicare. In fiscal year 2020, the city spent $2.7 billion on health insurance and Part B premiums and other Medicare supplements for retired city employees and their families.

According to the City Comptroller’s annual report, future retiree health benefits currently represent a $109.5 billion unfunded liability to the city. This liability has more than doubled over the fifteen fiscal years since 2005. Retiree health benefits could be d through collective bargaining or state and local law, depending on the particular benefit. The City’s Independent Budget Office (IBO) has suggested one way to deal with the issue is to link the OPEB benefit to residency.

IBO estimates that 34 percent of retired city employees who faced a residency requirement while they worked for the city now reside outside of New York City and the six counties that satisfy residency requirements for active employees as of December 2020,. This figure excludes those who retired from the Department of Education, city university system, public housing authority, and NYC Transit, and a number of other smaller agencies who did not face a residency requirement when working for the city. The linkage of benefit to residency would only cover retirees who had been required to live in the city or in the six suburban New York counties as a condition of employment. They are primarily the uniformed services.

The idea for linking benefits to residency reflects the fact that retirees residing outside the New York City area tend to have been retired for longer than their counterparts residing in the area, and are therefore more likely to have shifted from a city-sponsored health insurance plan to Medicare. As retirees shift to Medicare, the costs of their city-sponsored health insurance plans ends, but the city still offers some less costly benefits such as Medicare wraparound services and reimbursements for Medicare Part B premiums. Retirees would need to continue to meet the residency requirements for active employees to qualify for pre-Medicare health insurance coverage supplemental Medicare benefits once they shift to Medicare if a residency requirement be adopted.

According to the IBO,  non-Medicare retiree health premiums cost the city about $9,000 per individual, and $23,000 per covered family In 2020. The combined costs of Medicare Part B and SeniorCare were approximately $4,000 per individual and $8,000 per family. Assuming that roughly the same number of retirees continue to maintain their primary residence outside of the city and its surrounding counties, eliminating pre-Medicare coverage for nonresident city retirees would save the city $202 million annually; if the Medicare supplemental coverage were also eliminated for nonresidents, total savings would reach $416 million.

WHERE THE CHARGERS ARE

We saw some data this week that shows where electric vehicle charging infrastructure is being installed in the U.S. It should be no surprise that the leader is California with just under 37,000 chargers installed. New York has the next highest number of chargers at nearly 6,500. Texas and Florida are next. As of March 2021, there are 25 states that have at least 1,000 non-residential electric vehicle (EV) charging units (public and private).

Oklahoma had the highest share of DC fast chargers, accounting for 64% of the 1,044 non-residential chargers in the state. The availability of charging infrastructure has long been recognized as a major catalyst in the drive to electrify vehicles. a study published in the journal Nature Energy by the University of California Davis included a survey of electric car buyers in California which indicated that 20% of respondent buyers had gone back to gas vehicles. The reason most cited by far – availability of charging infrastructure.

TEXAS POWER CRISIS WAKE

The weather may have warmed up but the after effects of the February cold snap linger on. CPS Energy, the municipal electric utility serving San Antonio obtained a temporary restraining order against the state grid operator ERCOT. CPS Energy sought the order to keep it from being forced into default and to prevent ERCOT from seizing collateral payments.

The judge specifically cited attempts by ERCOT to charge its losses across viable utilities — those that haven’t sought bankruptcy protection. ERCOT is now seeking to recover $47 billion in electricity charges and $6 million associated with a software error by attempting to seize money it held as collateral to secure participating utilities charges. Already the largest electric co-op in Texas has declared Chapter 11.

The issue is based on the fact that the system’s independent monitor, believes that ERCOT could have lowered prices sooner than it did. In addition to the monitor, the state’s influential lieutenant governor and its attorney general support the view that prices could have been lowered sooner. As it stands, CPS has gone on record as being willing to pay their share but on a more manageable timeline. That puts the customer base at risk and risks hampering economic competitiveness of the revenue base.

CHICAGO

It continues to defy common sense when you come across situations like the one we find in Chicago. In the aftermath of the Detroit and Puerto Rico bankruptcies, many investors focused on Chicago as a potential source of major credit risk. The City has long known that it has credit problems rooted in pension underfunding and a lack of political will. So it is disturbing to see how poorly informed the major decision makers have been regarding the City’s fiscal position on a regular or timely basis.

The Chicago City Council’s Finance Committee this past week endorsed a proposed ordinance, which would require the city’s Department of Finance and the Office of Budget and Management to provide monthly reports on city revenue collections. Both departments would be required under the ordinance to publish monthly reports on their websites detailing “total collections for each revenue category” from the previous month. The reports must include the difference between anticipated corporate fund revenues and actual collections and show how monthly collections in each tax and fee category compare to the same month the year before.

If the information has indeed been lacking as the City deals with its ongoing credit issues, it’s just another weight pulling the City’s credit perception down. It is also a case study of why disclosure continues to be the major issue plaguing our market.

On a positive note, McCormick Place has not hosted an event since March 6, 2019. The 230 cancelled events translate into a loss of $234 million in local and state taxes and $3 billion in economic activity from the 3.4 million attendees. The operator, the Metropolitan Pier and Exposition Authority, reports a $58 million operating loss for fiscal 2021. Tax collections so far are just $35.6 million, down 73% from last year. The Authority will continue to need to restructure its debt to align revenue requirements with expected near term revenue pressures. McCormick Place hosts its first event in mid-July.

THE STATE OF STATE INFORMATION TECHNOLOGY

Now that we are entering the reopening phase of the U.S. economy, it is easy to forget some of the issues which arose at this time last year. As individuals were forced out of work and school due to the pandemic, computers became the primary interface with the world. Quickly it became apparent that the technology capabilities of the public sector had not come close to keeping up with the state of the art.

For those of us with the experience of having to use some of these systems, it really was not surprising that government websites crashed under the strain of thousands if not millions of initial jobless claims, efforts to purchase health insurance through state marketplaces, and the volume of normal transactions which would often have been accomplished through in person contacts.

Now, with governments in far better shape fiscally than many expected one would think that the experience of the pandemic should create support for investment in system upgrades. Whether expectations are realistic or not, the last year has shown the importance of upgrading government IT systems. As the nation moves forward technologically, it will be important for government to be able to instill confidence in its capability to handle technology. Many of the things being proposed to deal with technological change in sectors like transportation will require the existence of and confidence in robust public sector technology capabilities.

It is pretty clear from the last 12 months that government IT systems remain dated and inadequate. In addition to the maddening service delays which result, aging systems run and maintained by government IT staff are also more vulnerable to cyber attack.

FOXCONN AND WISCONSIN

When it was announced four years ago, many thought the deal between the State of Wisconsin and the manufacturer Foxconn was a bad one. Offered as a way to reemploy factory workers from declining industries, the deal was subject to a lot of suspicion. Foxconn had already established a record of an inability to follow through on its promises.

Since then, the problems at the plant site are well documented. The original contract with nearly $4 billion in state and local tax incentives was struck in 2017 by then-Gov. Scott Walker. The planned factory was supposed to employ 13,000.  Foxconn continually scaled back its plans for the site and failed to meet hiring requirements which were part of the deal. The state told Foxconn last year that it would not award it tax credits because the company had made substantial changes in its manufacturing plans and was out of compliance with the tax credit agreement. Foxconn employed 281 people in 2019 in Wisconsin.

Foxconn promised to locate its North American headquarters in Milwaukee and hire 500 employees, something which has not happened. It also promised to open “innovation centers” in Green Bay, Eau Claire, Racine and Madison that would employ up to 200 people each. Buildings were purchased, but the company did not move forward with its plans. In 2018, Foxconn said it planned to invest $100 million in engineering and innovation research at the University of Wisconsin-Madison but, the research center and off-campus location have not been established.

The deal  reduces Foxconn’s maximum tax breaks in the state to $80 million and significantly reduces the amount of jobs and capital investment Foxconn is required to make. Moody’s has concluded Foxconn won’t bring an influx of new workers or residents to Racine County. The separate development agreement between Foxconn, Mount Pleasant and Racine County remains unchanged. Local governments expect special assessments and revenue generated by Foxconn’s projects will cover the costs. Foxconn must make these minimum tax payments regardless of the project’s completion. 

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