Joseph Krist

Publisher

TEXAS CENTRAL

A lawyer for nearly 100 property owners will seek legal action against Texas Central, the consortium which hopes to build a bullet train between Dallas and Houston. The hope is that such a suit could result in an opportunity to depose Texas Central. This could force Texas Central to provide information desired by property owners who do not wish to accommodate the railroad’s planned right of way.

Texas Central secured eminent domain authority to seize private property from the Texas Supreme Court in July. Texas Central plans to obtain any and all federal Surface Transportation Board certifications required to construct and operate the project. The individuals actually running the enterprise all left after the decision was handed down, however. Now, the enterprise is being “managed” by a consultant but there has been no guidance as to whether the railroad intends to proceed as they claim.

How realistic is the plan? The mayor of Houston who is a big backer uttered a phrase on a promotional trip to Japan that may not be the most encouraging. “If you build it, people will take full advantage of it.” We’ve seen too many projects which have been built on that hope which do not succeed.

SMALL COLLEGE BLUES

Founded in 1815, Allegheny College in western Pennsylvania is one of the oldest small, private liberal arts colleges in the United States. The college served 1,545 full-time equivalent students in fall 2021 and generated $63 million in fiscal 2021. Now, like so many other small liberal arts institutions, the College’s finds that its finances are under pressure.

The reasons are common: elevated competition, shifting demand for the college’s core academic offerings, and weak demographics will continue to strain revenue and contribute to deep operating deficits in fiscal 2022 and likely fiscal 2023. Until it can rebalance its finances, it will continue to rely on endowment drawdowns. Allegheny College’s Baa2 issuer rating is largely supported by its solid wealth and liquidity. If trends continue that source of support will be diminished and then the new negative outlook will be borne out.

“The negative outlook reflects Moody’s expectations that significant student market and budgetary challenges will contribute to sizeable operating deficits through fiscal 2023 and likely drive at least some erosion to financial reserve levels. The outlook also incorporates the headwinds the college will have in implementing expense reductions due to human capital and shared governance constraints.”

Another institution in that class is upstate New York’s St. Lawrence University. Moody’s revised St. Lawrence University’s outlook to negative from stable while maintaining its A2 rating. The reasons will sound familiar. “The outlook revision to negative from stable is largely driven by a deeper than forecasted operating deficit in fiscal 2023 due to lower than projected fall 2022 enrollment.

While expense reductions and federal support alleviated structural deficits over the past several years, the need to adjust expenses to offset declining revenue will be challenging due to inflationary pressures, the university’s small scope of operations, and a high 67% reliance on student charges. Weak regional demographics, are a key driver of this outlook action. In a shrinking market, the university confronts elevated competition, which will continue to depress pricing flexibility and student-related revenue growth.”

In fall 2022, St. Lawrence enrolled 2,155 full-time equivalent students, and it generated approximately $130 million in operating revenue in fiscal 2022.

PUERTO RICO

The latest debt restructuring agreement dealing with defaulted Puerto Rico debt was announced. The Puerto Rico Oversight Board reached an agreement with bondholders owning some $1.09 billion in principal of debt issued for the Puerto Rico Public Finance Corporation. The debt was not secured by a revenue pledge, only by a covenant to appropriate funds from the legislature. It was clearly unsecured debt. Nevertheless, holders were able to obtain some limited recompense depending on when their bonds were issued. Overall, the settlement provides a recovery in the range of 6.4%.

In that sense, it is a win for bondholders given the haircuts taken by holders of debt with stronger security positions. We told the Daily Bond Buyer “in the case of annual appropriation debt, especially debt from a non-specific source of revenues, you pay your money and you take your chances. In the case of this appropriation debt, investing in that debt at the point in time it was issued clearly carried lots of risk. That risk continues to be highlighted by the clear language that the DRA debt is very appropriation reliant. I would argue that the buyers of this debt had to be willing to write it off or take a very long-term view in terms of recovery.”

The debt has been in default since August, 2015.

SANTEE COOPER

Last week we detailed issues facing the South Carolina Public Service Authority over its future sources of generation. (See MCN 10.31.22). Now in the wake of the decision by Central, the Santee Cooper Board of Directors announced that it had “discussed” plans for a new natural gas unit to partially replace retiring coal units. Specifically, Santee Cooper is proposing a 1×1 natural gas combined cycle unit with a summer capacity exceeding 338 megawatts (MW) to be located Hampton County, S.C. The plant design is expected to potentially convert to emissions-free hydrogen fuel when hydrogen is more commercially available. 

 The South Carolina Public service Commission will have the final say on Santee Cooper’s plans. Ultimately, resources proposed to Santee Cooper’s combined system will be analyzed as part of Santee Cooper’s 2023 Integrated Resource Plan to be presented to the South Carolina Public Service Commission, next May. The utility offers the standard response when the choice of natural gas is criticized. “Santee Cooper needs additional natural gas generation to provide the flexibility to add more solar power.” The citation of all of the potential limits on solar are repeated – “the sun rises, falls, or hides behind an afternoon thunderstorm” – that we hear across the country from natural gas proponents.

MILEAGE FEES

Efforts to locate electric car assembly and battery manufacturing facilities in Georgia are fast making it one of the centers of the US electric car industry. It makes sense then that the state legislature is considering the substitution of mileage fees revenues for those derived from gas taxes. A bipartisan committee of state lawmakers has been established to discuss the future of its gas tax and a possible transition to a tax based on miles-driven.  The committee hopes to submit formal recommendations in December.

As part of the process, the Georgia DOT will begin a pilot program in 2023.

STUDENT HOUSING P3

The last two years were not kind to the privatized student housing sector. The pandemic was about the worst thing which could have happened to credits supported by revenues tied to occupancy. There was concern that the vulnerabilities exposed during the pandemic period could produce more obstacles to the continued expansion of these projects. We may see one answer in a bond issue being sold to finance privately constructed and operated student housing in a more traditional campus setting.

Eastern Michigan University was established as the state teachers’ college in 1849. EMU Campus Living, LLC’s proposed $200 million Project Revenue Bonds will finance a project which will encompass all of the university’s on-campus housing. It entails the construction of two new on-campus apartment buildings (700 beds), renovations to 8 existing residential halls/apartments (2,029 beds), and the demolition of 7 residential facilities (1,966 beds). In total, EMU housing stock will shrink from 4,307 beds to an end-state of 3,041 beds.

As opposed to most privatized student housing models, this is more of a P3 project. The university will continue managing the residence life functions of the housing system, the facilities are on-campus and do not secure the deal. The physical operations are to be managed by the LLC. The University’s financial support for the project is the major new facet of this private student housing deal security.

The project bonds are secured by a net revenue pledge of the project and includes the trustee’s first-lien security interest in various agreements between EMU Campus Living LLC/CFP3 and, respectively, the from Moody’ Board of Regents of Eastern Michigan University, the issuer, the property manager and the developer. An occupancy agreement from the university to make 1.0x debt service coverage from subordinated general revenue in case of a debt service shortfall from project revenue means the University is not fully protected from the project.

That security structure earned a Baa2 project revenue bond rating from Moody’s. That reflects the perceived strength of the University’s overall credit. The rating acknowledges the recent financial improvement bolstered by federal COVID relief funding. The university used it to strengthen its balance sheet and liquidity. The overall project reduces bed count by some 29% but this reflects demographic and other demand factors pressuring many schools.

PENN STATION DEVELOPMENT ON HOLD

The realities of the impact of the pandemic on demand for office space in NYC are still being measured and felt. One can look at occupancy rates for offices, rental demand, the performance of the economy dependent on commercial real estate. That is what made the continuing push for significant midtown office development a bit puzzling. Now, we may be seeing a real sign of how the recovery is progressing.

The renovation and expansion of Pennsylvania Station has long been a regular feature of New York politics. Before he resigned in the summer of 2021, Andrew Cuomo championed the Penn Station renovation project. His successor, Governor Hochul moved forward with a funding plan dependent upon commercial development. Vornado (Steven Ross’ development company) was named as the lead developer for 18.3 million square feet of office space and 1,256 apartments. 

Now, the timeline for development is in jeopardy. This week, Vornado let investors know that “the headwinds in the current environment are not at all conducive to ground-up development.”  This puts the station renovations under pressure as the price for the transit amenities alone is estimated in excess of $7.5 billion under the general project plan. The Empire Development Corporation estimates that $4.1 billion in payments in lieu of taxes are expected from Vornado in exchange for development rights to fund New York’s share of Penn Station renovation. 

The real question is whether the demand for office space and mass transit will return fully in the long term. The short-term indicators are weak – at least to Vornado. They cite tenants taking less office space, regardless of demand in Class A developments near transit infrastructure. At the same time, the East Side Access station underneath Grand Central is scheduled to commence service in December. It will take time for all to assess the impact on transit and the use of these stations.

The Penn Station redevelopment could be a real indicator of where the greater NYC economy is heading. The last two decades have seen a consistent stream of developments in all five boroughs. The city got used to that financially. In the wake of the pandemic, the potential for a recession will pressure the city’s most economically productive sectors. That could dampen the momentum for growth in the city’s revenue base. This makes the decision to delay development a significant indicator for our outlook on the city’s credit.

LABOR, UNIONS, AND ILLINOIS

Illinois has a long history of contentious labor relations. The Haymarket bombing and the Pullman strike were just two examples. With the state and especially Chicago involved with organized labor, those contentious relations continued over into the public sector. That led to the enactment of laws and constitutional changes to solidify the rights of workers.

In 2018, the then Governor supported litigation which was ultimately decided in the US Supreme Court that sought to overturn a prior decision in 1977, in which the Court said nonunion employees could be required to pay a portion of union dues, known as agency fees, to cover the cost of collective bargaining and prevent “free riders” — workers who get the benefits of a union contract without paying for it. That case – the Janus case- was decided in favor of the plaintiff, Janus.

Since then, the Governorship has changed and some of the temperature has gone down. That may change as Illinois voters are being asked to vote on Amendment 1, the Illinois Right to Collective Bargaining Measure. It would amend the Constitution to state that employees have a “fundamental right to organize and bargain collectively through representatives of their own choosing for the purpose of negotiating wages, hours, and working conditions, and to protect their economic welfare and safety at work” and prohibit any law that “interferes with, negates, or diminishes the right of employees to organize and bargain collectively.”

The economy of the state continues to change with job sources like power plants and coal mines on the way out and new sources like electric auto and battery manufacturing. Unions are not as established at the companies developing those jobs, some of which are not nearly as hospitable to organized labor as was the case with traditional automakers and suppliers or in the electrical or coal industries.

There are three states where a constitutional right to organize exists – Hawaii, Missouri, and New York. This amendment is different in that it not only grants the right to collectively bargain but also seeks to prohibit the enactment of among other things, right to work laws. Language preempting right-to-work or other laws was not included in the state constitutions of Hawaii, Missouri, or New York. 

If approved, one can expect an immediate court challenge and that litigation will ultimately be decided by the U.S. Supreme Court.

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