Joseph Krist

Publisher

________________________________________________________________

This week, we get to see how policy matters. The immigration policies of the Trump Administration had consequences and we see them in California’s population trends. We see the results of a regulatory “soft touch” approach which let a major infrastructure facility be vulnerable to just about any hacker who wanted to create some disruption. We see approvals move forward on major wind generation now. The impact of environmental regulation and economics on coal will continue.

On other fronts, we see Puerto Rico moving a bit closer to a resolution of its ongoing bankruptcy and debt restructuring efforts. At the same time, we see some issuers taking steps reminiscent of other declining credits such as pension bonds.

________________________________________________________________

CALIFORNIA

The news this week that California’s population had declined has been taken by a variety of interests as a sign that their views have been vindicated. Among them are that the State’s politics and taxes are driving people away. It is a long running debate that likely will not go away soon.

The decrease was very small – 0.46% — a decline in 2020 of 182,083 Californians. Most of the loss appeared to occur in the second half of 2020, during the worst of the pandemic. For the first time in its 170-year history, California will lose a congressional seat, with the new population numbers from the 2020 census trimming its delegation in the House to 52 members. The State estimates that more than half of that drop — roughly 100,000 people — was the result of federal policies that blocked international immigration and global lockdowns imposed to curb the pandemic, including restrictions on H-1B and other visas during the last year of the Trump administration.

The immigration impact is real. Enrollment of international students in the state, for example, declined last year by 29%. The Public Policy Institute of California analyzed 2020 census data and found that 4.9 million people moved into California from other parts of the country, while 6.1 million Californians left. It is likely driven by the State’s ongoing struggle to expand the development of affordable housing. The lack of immigration definitely influences the numbers as the historic source of replacement residents for those who leave has been essentially shut off.

The PPIC study showed that those who move in are “more likely to be working age, to be employed, and to earn high wages — and are less likely to be in poverty — than those who move away.”  Another issue is the impact of the pandemic. California’s overall death rate by 19% in 2020. Some 51,000 more lives were claimed last year than would have been normally, according to the state’s estimate.

Now, the Governor has released his May update to his proposed budget. Since his initial proposal in January, California received significant aid through the stimulus passed in the first quarter. Like so many other states, its fiscal position and outlook are much better than expected. The governor puts the surplus at $75.7 billion. Under the governor’s proposal households earning up to $75,000 in adjusted gross income will be able to receive $600 direct payments if they did not receive a payment in the first round this year. The governor puts the surplus at $75.7 billion.

The Governor also hopes for $5 billion to double rental assistance to get 100% of back rent paid for those who have fallen behind, along with as much as $2 billion in direct payments to pay down utility bills. The plans come in the midst of the effort to recall Governor Newsom. It is a good time for the governor to have money to spend.

CYBER ATTACK ONLY A MATTER OF TIME FOR MUNI UTILITIES

It involves a private provider but the news that Colonial Pipeline it had shut down its 5,500 miles of pipeline,  as part of its effort to recover from a cyber attack is troubling for any utility operator. The pipeline carries 45%  percent of the East Coast’s refined gasoline and jet fuel supplies. The pipeline transports 2.5 million barrels each day, taking refined gasoline, diesel fuel and jet fuel from the Gulf Coast up to New York Harbor and New York’s major airports. 

The pipeline connects Houston and the Port of New York and New Jersey and also provides jet fuel to most of the major airports, including in Atlanta and Washington, D.C. The U.S. Department of Transportation has declared a state of emergency in the 17 East Coast states it supplies in an attempt to avoid fuel shortages. Now Colonial has admitted that it paid $5 million in ransom as it ramps its facilities back up to capacity.

Increasingly, we see that ransomware is paying off for the criminals. As it becomes clear that ransoms are being paid, we expect to see additional attacks. It is  reminder of how important a credit factor the cybersecurity should be. It is also a reminder that the tough talk about not paying ransoms is just that – talk. It will stay that way until investors demand real answers as to an issuers cybersecurity strategy.

MUNICIPAL UTILITY COAL EXPOSURE

We have frequently commented on the decline of coal and the increasing pace of closures of coal fired generation across the country. Given the heavy environmental orientation of the Biden Administration, the ownership and operation of coal generation is increasingly problematic. Not only is it a credit issue but as ESG investing continues to grow, it has the potential to be a cost issue.

Some of those investors will want to shun utilities with continuing coal generation exposure on their balance sheets. Fortunately, the number of municipal system owned and operated coal plants is not that large. The agencies include Nebraska PPD and Omaha PPD, CPS of San Antonio, Sikeston, MO, and Muscatine, IA. Another credit in that category is Illinois Municipal Power through its exposure to the Prairie States mine mouth generation plant. IMPA is merely an owner but not an operator.

Operators won’t be able to ignore reality for long. For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity.  For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity. Utilities ran their coal plants far less in 2020 than a decade earlier, with utilization rates dropping to just 40 % from 63% in 2011. At the same time, utilities retired a significant number of their coal plants, dropping the nationwide capacity from 317 gigawatts in 2011 to 223 gigawatts in 2020.

Shipments to power providers dropped 22% from 2019 to 2020. The 428 million short tons the industry received last year marked the lowest shipment level since the U.S. Energy Information Administration began publishing such data in 2007.

BLOWIN’ IN THE WIND

The Biden administration approved construction of The Vineyard Wind project off the coast of Massachusetts. The 84 turbine project would be the largest offshore wind project permitted off the US. The turbines will be able to generate 800-megawatts of electricity. The next largest such projects are rated at 30 and 12 megawatts.

This project could also create a bit of a template for other offshore wind projects. A consistent source of opposition to these projects comes from fishing interests which fear the impact of these constructions to their fishing grounds. Vineyard Wind promised compensation funds for lost revenue for fishing interests in Rhode Island and Massachusetts of $25.4 million, which could lessen the impacts.

Commercial fisherman are center stage in a fight against submerged turbine technology off the coast of Maine. Governor Janet Mills seemingly tried to appease fishermen’s concerns by putting forward a bill that would place a 10-year moratorium on wind development in state waters. In response the fisherman are getting behind a bill which would prohibit state officials from permitting or approving offshore wind projects along the coast.  The bill would not stop wind farms in federal waters in the Gulf of Maine.  

PROVIDENCE PENSION BONDS

It will require state legislative approval but the City of Providence is looking for authorization to issue up to $700 million of pension obligation bonds. It is another BBB issuer looking to borrow its way out of problems. The City only reported $52 million of GO debt when it issued bonds in January of this year. That works out to $296.97 per capita. The pension debt alone would be $3931 per capita. So the pension plan and approved debt if issued would put per capita debt at over $4000 or some 14 times the existing per capita debt burden.

We find it interesting that the finance staff of the City are recent appointees to a second term administration and that this idea is being floated now. Is it a plan that needed the right audience? The plan may indeed provide a way out for a city facing significant tax assessment litigation and that is already making its actuarially required contribution. One can see how it makes sense to the City but it is also a big bright distress signal. If you go down the list of prior pension borrowers, it seems to be the beginning for the ride down the credit rabbit hole.

New Jersey, Illinois, Detroit were all pension bond issuers and all of those issues were followed by ratings declines. What recent municipal bankruptcies show is that pension bond investors increasingly find themselves facing bigger haircuts in restructurings. Providence is assuming 25 year money at 4%. The question is will this be enough to entice investors in a clearly weakened asset class?

GAS TAXES

They may not be a part of the Biden Administration infrastructure proposal but increases in gas taxes are not being excluded from state plans to fund infrastructure. The Missouri Legislature approved the first gas tax increase in Missouri in nearly 25 years.  The plan will increase the tax by 2.5 cents per gallon annually over five years, starting October 1.  Currently, Missouri has the third-lowest gas tax, 17-cents, in the country, behind Alaska and Hawaii. By 2025, the gas tax would be 29.5 cents.

One feature helped to get it through. The legislation comes with a 100 percent rebate for Missourians, as long as they keep their receipts for an entire year. Drivers would apply for the rebate once a year. Even with that carve out, proponents estimated that the increase would be able to generate $500 million a year once fully in place. The legislation also includes an increase in annual fees for electric vehicles raising it 20 percent over a five-year period. 

In Washington, the Governor vetoed a bill which would have banned the sale or registration of new gas vehicles of model year 2030 or later in the state of Washington. Vehicles prior to model year 2030 would not have been affected. An amendment to the bill tied this goal to the implementation of a road usage fee in Washington state. It stated that the guidelines would not take effect until 75% of cars in Washington were covered by a road usage fee.

Washington is one of these states that has added an electric vehicle fee – an extra $150 registration fee per year. The Governor wants the ban on new registrations to be separated from the issue of vehicle mileage taxes. It is surprising given the Governor’s well known stances on the environment. Transportation makes up 45% of Washington state’s emissions, the largest sector. Recently, the Governor supported a 2035 date for the end of internal combustion powered cars.   

DETROIT

The City of Detroit operates under the terms of a City Charter which is approved by a vote of the people. The charter was last revised in 2012. It establishes the ground rules for government operations, details the roles of the executive and legislative branch, enables the election process and mandates the departments, programs and services the city must provide. Now, as the City moves forward after its emergence from bankruptcy anew element of uncertainty has been introduced to the outlook for the City’s credit.

The Detroit Charter Revision Commission (DFRC) was impaneled in 2018 by Detroit voters to address quality-of-life issues, such as water access, affordable transit, affordable housing and responsible contracting. That commission has recommended a series of changes to the charter which would increase and redirect spending.

The governor, in an April 30 letter to the commission, concluded provisions of the revised charter could spur another financial crisis and send Detroit back into active oversight of the Financial Review Commission, which was installed as one of the conditions of its bankruptcy.  The charter commission faces a choice. It could make changes to address Governor Whitmer’s objections and then resubmit a modified plan for her approval.  The commission also could opt to submit the proposed charter to city voters for approval notwithstanding Whitmer’s objections.

An analysis from Detroit’s chief financial officer warned that the proposed charter changes would cost the city $850 million annually due to spending requirements on infrastructure investments, contracts, transportation, salaries, transportation, and information technology. 

That would likely throw the issue into the courts. The August primary will be the final election to take place during the Detroit Charter Commission’s term.  The attorney general’s review concluded that the proposed charter includes provisions that are inconsistent with requirements of the Home Rule City Act and other applicable state and federal laws.  If approved, the charter would go into effect in 2022.

PUERTO RICO

The Puerto Rico Oversight Board approved its proposed Puerto Rico General Fund budget for fiscal year 2022. The proposed $10.1 billion budget for government operations increased slightly from the previous year’s budget. It allocates 72% of funding to education, public safety, health, economic development and pension payments. The board said the budget “fully funds the public employees’ pension through the Paygo system that replaced the insolvent pension trust. The budget also includes Medicaid funds for which the U.S. Congress has not yet extended incremental funding to ensure the continuation of much needed healthcare programs.” 

As the budget process unfolds, the Restructuring Support Agreement (RSA) which would restructure the debt of the PR Electric Power Authority (PREPA) continues to be the subject of several motions in US Bankruptcy Court. Filings by the Authority and the Oversight Board were notable for their support for the RSA. It has not been clear that this was the case. As this process unfolds, legislative actions are being introduced which would effectively cripple the ability of PREPA and the Oversight Board to move forward on PREPA’s much needed reform.

It is likely that much of what the legislature could try to do to implode the RSA would not withstand court scrutiny. Nonetheless, the continuing resistance and obstruction to efforts to create an efficient, resilient, and reliable electric utility are troubling.

DETAILS AND THE AMERICAN RECOVERY PLAN

The American Rescue Plan Act of 2021 will provide $350 billion in emergency funding for state, local, territorial, and Tribal governments.  The U.S. Treasury has released detailed guidelines for how governments can spend the money.

Recipients can use funds to: Support public health expenditures, including funding COVID-19 mitigation efforts, medical expenses, behavioral healthcare, mental health and substance misuse treatment and certain public health and safety personnel responding to the crisis; rehire public sector workers, providing aid to households facing food, housing or other financial insecurity, offering small business assistance, and extending support for industries hardest hit by the crisis.  Governments can also fund premium pay for essential workers; and, improving access to clean drinking water, supporting vital wastewater and stormwater infrastructure, and expanding access to broadband internet. 

The State of Illinois has raised one issue. It was a borrower under the Fed’s Municipal Liquidity Facility. It would like to pay the Fed back and use some of the funds to be distributed under the ARPA. As they stand, the Treasury guidance does not include that purpose as a permissible expense.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change  without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.