Joseph Krist

Publisher

In between songs in the Broadway show “American Utopia”, the legendary musician David Byrne takes a few minutes to discuss voting, its importance, and low participation rates. He very effectively uses light to illuminate the small segment of the audience which 20% accounts for. The point was that in a democracy the ballot box is one of the most effective tools one has and that, if left unused, it was hard to blame the system for much.

That comes to mind when you realize that Mayor-elect Eric Adams of New York was elected this week with a less than 1in 4 turnout rate. He won the nomination with 28% of the vote cast out of 948,000 in June. So, in an era where serious policy questions found their way to the ballot – voting rights, transit, climate policy – there is no way to discern what the public might want or support as well as what is a realistic policy ask which municipal bond investors can make. It leads to Inaction and inaction now is not a realistic option. 

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MUNICIPALS GET THE SHORT END OF THE STICK

The battle between the “progressive” wing of the Democratic party against the more moderate has created one major casualty – the municipal bond market. There were four main asks made by the market – direct pay bonds, increased private activity issuance, the SALT deduction and tax-exempt refunding. None of these were included in the most recent ”framework” being circulated. Municipal bond provisions were characterized by Progressives as a subsidy for the rich. The focus on the tax benefits created for municipal bond investors diverted attention away from the realities of the market.

With rates low on a historical basis, it is easy to minimize the cost to issuers and states and municipalities from being unable to use these tools. It is more difficult to point to the costs of not having these tools available in that low-rate environment. Nonetheless it is disappointing to see that the sector which will be counted on greatly to execute many of the infrastructure projects associated with progressive causes are not being given the flexibility to do so on a cost-effective basis.

Municipal bonds face some real hurdles. There is no core of legislators on which the market can rely for expertise and support. The task faced by lobbyists for the industry is made more difficult by the fact that there is not a strong group of legislators forming a caucus to support municipal bonds.

AUSTIN BACKSLIDES ON CLIMATE

It is hailed as a progressive outlier in Texas but the City of Austin finds itself in a less progressive situation at its city-owned electric system. This week, Austin Energy announced that it will not retire its stake in the Fayette coal power plant next year. Closing Austin’s portion of the plant by 2022 was an important step to achieving carbon-reduction goals outlined in Austin Energy’s Resource, Generation and Climate Protection Plan to 2030. It was considered a key component in support of the City’s announced goal of net zero emissions by 2040.

Austin Energy said it was unable to reach an agreement on the closure with the Lower Colorado River Authority, which co-owns the plant. Five years ago, Austin’s share of the Fayette coal plant was found to be responsible for “80 percent of the utility’s greenhouse gas emissions and 28 percent of all Austin’s greenhouse gas emissions.” The utility already plans to retire a natural gas fired plant (DP2) in March, 2022 as a part of that plan. It is an older, less efficient steam unit, it costs more to operate than newer units. The plant requires more natural gas per megawatt hour of power it produces than newer, more efficient units. DP2 is at least 30 percent less efficient than newer combined cycle gas plants.

So where does this leave Austin’s power generation profile? As of November 1, the sources were solar at 52.5%; natural gas at 19.5%; coal at 14.5%; nuclear at 10.9%; and biomass at 2.5%. That leaves Austin one-third dependent on fossil fueled plants for its power. That creates a serious hurdle for the City to overcome as it seeks to meet its stated energy policy goals. For now, the utility is focused on operating a wood fueled biomass plant in east Texas.

The wood-fired plant was under a “seasonal mothball” status, meaning it was made available to run only during the higher energy demand summer months. Improved operations and current market conditions make the biomass plant more economical to run year-round. The wood waste fuel that powers the plant is delivered directly to Nacogdoches and stored onsite with a 10-day supply.

The utility purchased the biomass-fueled power plant in 2019. The largest biomass plant in the country, Nacogdoches began commercial operation in 2012 under a 20-year power purchase agreement with Austin Energy. Purchasing the plant saved the utility approximately $275 million in additional costs over the remaining term of the agreement.

OPIOD LITIGATION

In 2014, the California counties of Santa Clara, Los Angeles and Orange along with the city of Oakland, filed litigation against four manufacturers of opioids seeking monetary damages for the costs incurred in fighting the opioid epidemic.  The central question at issue in the litigation was whether the companies were liable for creating “a public nuisance” under California law. It has taken a long time for the case to reach the trial stage but it did and now the initial result is in.

The suit was tried in Orange County State Superior Court in a bench trial. The judge has now ruled that the companies did not have liability. The ruling covered a number of potential factors. The core finding is that “any adverse downstream consequences flowing from medically appropriate prescriptions cannot constitute an actionable public nuisance.” The fact that the manufacturers may have employed questionable marketing tactics in its dealings with potential prescribers, the prescription requirement effectively protects the companies from liability.

The decision could impact other opioid litigation involving California. Johnson and Johnson had made a national settlement offer after its initially lost a liability case in Oklahoma with a $465 million liability. California had delayed participation in a national settlement pending this case among other court actions.

CLEAN ENERGY CONNECT

“Do you want to ban the construction of high-impact electric transmission lines in the Upper Kennebec Region and to require the Legislature to approve all other such projects anywhere in Maine, both retroactively to 2020, and to require the Legislature, retroactively to 2014, to approve by a two-thirds vote such projects using public land?” The most expensive ballot referendum campaign in Maine history was also the second most expensive political campaign overall in Maine history mercifully came to an end.

The vote to stop construction on the New England Clean Energy Connect project was not close with 60% of the vote in favor of the question. It is fair to point out that the vote may have been as much about the project sponsor Avingrid as it was about anything else. Avingrid is the subsidiary of a Spanish company that has been acquiring investor-owned power companies in the U.S. for several years. Their long game has been to establish an offtake network for renewable power generation.

In the meantime, Avingrid has developed a reputation for poor service and underinvestment in its infrastructure. (Full disclosure – I am an Avingrid customer in New York State. Why ratepayers in Maine hate Avingrid is no surprise to me.) That reputation is helping to put Avingrid’s plan to acquire Public Service of New Mexico in doubt. It is likely that the Maine vote is more reflective of Avingrid’s horrible image in Maine than it is a statement against renewable power.

One other factor impacting the vote negatively was the fact that the power would mostly be sold in Massachusetts. While the cost of the project would ultimately be borne by the buyers of the power, the environmental impact of the line was an issue for Maine residents.

ELECTIONS AND POLICY

Much emphasis has been put on who won the elections across the country with lots of attention paid to gender and ethnicity in regard to who won and lost. From our vantage point, we are more interested in what the policy implications of some of those victories will be.  While each race had its own set of local concerns that drove issues and campaigns, a few themes emerged fairly consistently across the board.

Buffalo showed that the electorate does not embrace socialism. In this case, the incumbent mayor had to mount a write-in campaign after losing the primary to an avowed socialist. It’s not that socialism has never had its day in the U.S. It’s just hard to reconcile that hard red nature of somewhere like North Dakota today with its history some 110 years ago as a laboratory for socialist thinking. For now, it does not seem to be a viable policy option.

Seattle and Minneapolis showed that the electorate is not in favor of defunding the police and mass decriminalization. While those two cities were probably the most prominent example of anti-police sentiment, the reality is that a recent crime spike did lead people to opt for the status quo. Voters in Minneapolis made two statements this week when they reelected the incumbent mayor and voted down a ballot item which called for eliminating the Minneapolis Police Department and replacing it with a Department of Public Safety.

The vote came after a fiscal 2022 budget process that produced maintenance of and increases to police budgets. The votes reflected concerns over the level of violence associated with protests. Minneapolis, along with Seattle and Chicago becomes the third major city to undergo significant civil unrest followed by major increases in violent crime.

Virginia Beach voters approved significant capital financing for resilience projects. Residents approved a referendum  that will allow the city to issue up to $567 million in bonds to cover the cost of accelerating a flood protection program designed to deal with stormwater and sea level rise problems.  A total of 21 projects were offered by the city to fund through a three-phase bond issuance program.

The projects were specifically identified in the referendum ranging from the conversion of a city-owned golf course into a park with stormwater storage to extensive storm drain improvements and road elevation to the construction of flood barriers.  The City effectively made the case that bonds would allow the projects to be completed in about half the time it would have taken to finance the projects without bonds.

Road and bridge infrastructure saw lots of support. Increased or extended sales taxes were approved in Fulton Co. (Atlanta) and five other Georgia counties; bonds were approved for the State of Maine; four of five Texas county bond issues passed; localities in Washington, Virginia, Ohio, and Colorado passed as well. All were primarily for traditional transit infrastructure.

A constitutional amendment guaranteeing clean air, water, and a clean environment (no specifics) passed in New York State. Our view on this amendment was covered in the 11/1 MCN.

Voters in Columbus OH by an 85% majority rejected Issue 7 which would have set aside $87 million of the city’s general fund to “promote and fund” programs for “clean energy education and training,” “energy conservation and energy efficiency initiatives” and others. The originators of the ballot referendum petition supporting the plan have been unwilling or unable to give specific answers as to where the money would go, who would administer it and how they came up with the $87 million price tag.

The issue was not whether Columbus voters want clean energy. The issue was over who sponsored the plan and who would control the funding.

BOSTON

Boston voters took a different path and elected a strongly progressive candidate as mayor. The results will provide an opportunity for a major American city to consider a number of progressive causes. The new mayor favors rent control and free transportation. It is not clear whether the City would need state legislative approval especially in the case of the MBTA which is a state agency. The mayor-elect made clear that she hopes to apply Green New Deal concepts to the city. It will be a good opportunity to see how viable the progressive agenda is when it comes time to execute on the idea.

The ”local Green New Deal” advocated by the mayor-elect includes achieving 100 percent renewable electricity by 2030 and carbon neutrality by 2040, repairing and retrofitting buildings to reduce emissions, growing a “green work force” to maintain the city’s new climate-friendly infrastructure, planting more trees and greenery to eradicate heat islands, and divesting from not just fossil fuel companies but also private prisons and gun manufacturers. 

The end of transit fares is a key component of the plan. The plan counts on increased state and federal funding for the loss of revenue from and an end to fares on MBTA facilities. That funding would come from an increase in state gas taxes. That creates one inconsistency right away – gas taxes to fund mass transit to eliminate cars?  At a time when the consensus is that gas taxes are an outmoded and inefficient way to fund transportation?

ILLINOIS UPGRADES

Two of the State of Illinois’ revenue backed issuers got good ratings news this week from Moody’s. The Illinois Toll Road received an upgrade to Aa3 from A1. The rating reflects the gradual and steady resurgence in traffic volumes as the limitations of the pandemic are diminished. Authority revenues declined sharply to a trough in April, with monthly traffic 51.3% down and monthly toll revenues 39.1% down compared to April 2019. As the pandemic slowed, results at the toll roads began a sustained and steady recovery to current levels, with September 2021 traffic approximately 3% below September 2019 traffic levels.

Commercial traffic has shown much more resiliency than passenger traffic, with fiscal year 2020 commercial traffic down only 1.5% from the prior fiscal year 2019, and commercial traffic in the first nine months of 2021 approximately 6% above the first nine months of 2019.

Moody’s affirmed the Chicago (City of) IL O’Hare Airport Enterprise’s A2 rating on $986 million senior lien revenue bonds and A2 rating on $395 million passenger facility charge (PFC) revenue bonds. The enterprise has $8.6 billion of senior revenue bonds and $395 million of PFC bonds outstanding. The outlook was revised to stable from negative. The airport’s recovery from the pandemic has slightly trailed the national average, which is normal for airports with high exposure to slower-to-recover international traffic. As we go to press, the pandemic restrictions on foreign travel to the U.S. will be relaxed so that credit impediment will be out of the way.

FEES UNLOCK THE PORTS

In an effort to break the accumulation of containers clogging the country’s major ports, the port operators are turning to charging for the storage of containers awaiting shipment. This past Monday, the ports of Los Angeles and Long Beach began to impose a new congestion surcharge on container cargo. The two ports handle one-third of US container trade. The growing accumulation of containers awaiting transfer to trucks and trains inhibits the ports from accepting any more containers. This also inhibits the revenues during those delays in offloading by limiting volume.

According to Moody’s, the inventory of containers at marine terminals was 40% above pre-pandemic levels and the length of time a container typically waited was 100% above pre-pandemic levels. The number of container ships at anchor increased to 73 in the fourth week of October. That is a huge increase since some 15 ships were at anchor at the end of June. The problem is reinforced by the fact that more ships were waiting longer as days at anchor increased to 12 from five over the same period. Shortages of warehouses, trucks and the chassis used to remove import containers from terminals means terminals cannot clear storage fast enough to accommodate new inbound cargo.

The surcharge will be set at $100 per container per day, and will increase by $100 per day throughout the penalty period. Effectively, the $100 daily escalation makes one container incurring four days of penalties equivalent to 10 containers incurring one day of penalty. Compare that to what both ports currently earn for container throughput – roughly $75 for Los Angeles and $65 for Long Beach per 40-foot container in fiscal year 2021 The move will increase revenue not only through the separate fee but also by accelerating the movement of containers through the ports thereby increasing basic port revenues.

CLIMATE

The State of California currently plans an end to oil production in the state by 2045.  One major municipality – Long Beach – has announced plans to accomplish its climate goals involving oil and gas production by 2035. In fiscal year 2020, revenue from oil production funded $18.9 million of the city’s budget. Some $3 million of that is from a barrel tax for funding specific to the police and fire departments. By 2035, the city expects the oil fields to cease production and in between now and then, the city will fund the abandonment of oil fields.

The plan is to use revenues from remaining oil fields to fund the cost of the gradual closure of oil production wells. This has sparked dismay from environmentalists even though the potential costs including those associated with the transition away from production has been estimated by city staff at between $81 and $146 million. 

Its largest employer may be a Chevron oil refinery but the City of Richmond, CA continues its efforts to take a forward approach to climate change. That economic aspect makes it interesting to see that the Richmond City Council could vote next month on a proposed ordinance that closes a loophole in the city’s natural gas ban, which applies to new structures and major renovations. Gas-powered appliances and fireplaces are now exempt from the ban but would not be under proposal, which would leave electricity as the city’s primary power source.

The city would join some 50 others in California which have enacted similar restrictions. This places California as an outlier in that many states have enacted preemption legislation to prevent their municipalities from following suit in their states. Unsurprisingly, the real estate and construction industries are pushing back hard against the proposal.

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.