Joseph Krist

Publisher

NEW YORK CITY

The first quarter of fiscal 2023 has not been kind to the fiscal outlook for New York City. The pace of recovery in terms of employment and presence in the office significantly lags that of the country overall. We have documented the return of the cultural and entertainment sectors of the local economy which are still generating revenues but at rates which reflect lower attendance relative to pre-pandemic levels. Now, the economy in general and inflation specifically are pressuring retail sales. It is being accompanied by sharp declines in the financial markets. That sector is in the process of considering layoffs in response to lower merger activity and trading.

In terms of the return to the office, the City’s experience with its own employees is telling. Many do not see the role played in government by behind the scenes professional career staff. Jobs like those performed by the City’s lawyers, accountants, and other specialized professionals. The jobs which have real counterparts in the private sector which are generating better pay and much more flexible working conditions including remote work. Consequently, NYC reports significant shortages in departments which have legal or enforcement activities. The top reason cited – lack of flexible work requirements. The fiscal impact is to force the City to consider higher pay for those sorts of jobs as well as better working conditions generally.

At the same time, the Adams Administration has initiated its first PEG – Program to Eliminate the Gap – to address imbalances between revenues and expenses. It is troubling development that before the end of the first quarter of the fiscal year that a PEG – this one calling for a 3% cut in all agencies – is seen as needed. It raises overall governance concerns. While PEGs are not new to NYC government, the timing makes the recent budget process appear flawed. We already know that it was a contentious process with the City Council going to court over budget cuts it made only weeks before.

NUCLEAR

We have noticed an increasing amount of comment regarding the potential for nuclear power to address climate change. Much of that comment has been about traditional large-scale plants and has been colored by the fact that plants of that scale have been under the microscope lately for reasons not entirely linked to climate. Yes, large nuclear power has once again been viewed to be economically not feasible.

It is hard to argue against that point. The reasons for cost increases are many and varied but it is also hard to put a specific price tag on the cost of inept management by investor-owned managers of these projects. The Votgle plant in Georgia is seen as the poster child for these problems. It has not helped that many of the recent delays were based in poor management and record keeping. The regulatory history for that project is littered with examples of poor work that should have been done right the first time. The management issues which plagued the Sumner plant expansion in South Carolina were what stopped that plan.

So, now proponents of carbon-free generation are hoping that many of the issues which face the nuclear industry can be addressed through scale. The key difference is that we usually associate larger scale with economic efficiencies. In the case of nuclear, economics of scale may actually refer to small modular reactors. For some municipal energy consumers, their day as a test case could be on the horizon.

On a carbon impact basis, the case for nuclear is clear. That is what makes the knee jerk reaction to the potential use of these reactors so amazing. It is as if the critics are trapped in a 1970’s time warp. It’s not like there is no experience with small reactors. What do people think powers the Navy? The Navy has a strong record of operations and safety with its submarines and aircraft carriers. The largest carriers are powered by two reactors which have a generation capability of 125 MW. That is not to say that you just take a Navy reactor and stand it up on a land-based site but there is much that can be applied to land-based modular technology.

That is why some of the opposition seems more to reflect the past rather than the future. The argument is being made that renewables (wind, solar primarily) are intermittent and that there is a need for sustainable larger scale base-load generation. Another argument opponents make is that power demand growth in the US has slowed to a pace which will allow renewables to catch up and fill the supply void.

That’s great if you believe that battery technology, scale, and cost will be available within a reasonable time frame. Renewable advocates point to improvements in battery technology and lower costs. Here the issues over scale come back to bite opponents. Batteries will require significant development of lithium supplies. The mining of lithium in the US is running into major opposition on both environmental and cultural grounds. This could be a major impediment for the expansion of electrified transit.

One argument that we find astounding is the position taken by some that the case for nuclear power is offset by flat electric consumption. Yet many of those same people are the one’s pushing harder for more rapid EV adoption, more electric appliances all of which indicate a need for more power. The debate is also colored by the fact that the move to change electric use for environmental reasons may require some environmental damage to develop lithium supplies. Could that be a greater environmental threat than nuclear?

NUCLEAR FUNDING RACE

The Civil Nuclear Credit Program (CNC) was funded at $6 billion with a purpose of helping preserve the exiting U.S. reactor fleet in operation and saving jobs as a part of the Inflation Reduction Act. Pacific Gas and Electric was the first utility to announce that it intended to apply for some of the subsidy funds included in the Inflation Reduction Act for nuclear generation facilities. That funding would be used to keep the Diablo Canyon nuclear plant generating for some five more years as we noted last week.

Now, the owner of a recently shut down nuclear generator has announced that has applied for a federal grant under the CNC program. The Palisades Nuclear Power Plant near South Haven was shut down in May of this year after a fifty year operating life. Holtec, the private entity which took over ownership with a goal of decommissioning the plant by 2041 points to the CNC as a useful subsidy. Grant money alone would not be enough to get the reactor started.

GIG WORKER SETTLEMENT

The well documented efforts by the transportation network companies (TNC) to minimize the costs of their drivers have hit another road block in the state of New Jersey. A NJ Department of Labor and Workforce Development audit had found that Uber and a subsidiary, Raiser, owed four years of back taxes because they had classified drivers in the state as contractors rather than employees. The payment covers as many as 91,000 drivers who have worked in New Jersey in one of the years covered by the settlement. 

The process was complicated by the fact that Uber followed the TNC playbook. First, disrupt. Second, do it without regard for state and local laws and practices. Third, fight tooth and nail against all efforts by government to secure legal compliance. In the end it may have paid for Uber. Initially, the state represented that it had found a tax liability of over $500 million. That was based on data derived over the refusal of requests to provide information. Once Uber did, it allowed the Department to offer a lower liability figure.

THE WHEEL STOPS ON ATLANTIC CITY

Long one of the more regularly troubled local credits, Atlantic City has experienced recent credit improvement. Now that improvement has yielded positive news for holders of the City’s debt. Moody’s Investors Service has upgraded the City of Atlantic City, NJ’s long-term issuer rating to Ba2 from Ba3. The outlook remains positive. The improved patronage of the City’s gaming establishments has allowed the City to begin recovering from the pandemic. The upgrade also comes after continued scrutiny of the City’s operations and the oversight of the State of New Jersey.

The upgrade of the long-term issuer rating to Ba2 reflects the city’s improved financial performance and liquidity. The positive outlook reflects Moody’s expectations that, despite the lingering effects of the pandemic, the rise of inflation, and the risk of recession, Atlantic City will continue making strides in improving its governance and finances. While the economic headwinds have caused issues, the negative credit consequences are offset by the improved management of city operations and the more predictable PILOT payment structure for casinos.

The outlook also incorporates the continued state oversight. Those changes along with resolution of long-standing tax disputes with the City’s major employer the casinos have relieved destabilizing pressures on the credit.

SECOND CHANCE FOR TAMPA TRANSIT

In 2018, voters in Hillsborough County, FL approved a 1% sales tax to fund various transit facilities in the County. Opponents of the tax got it overturned when the Florida Supreme Court ruled that the referendum was unconstitutional because it relied on prescribed spending allocations set forth by voters, rather than elected members of the Board of County Commissioners. Now in 2022, proponents will have another chance to get voter approval.

It’s not clear if the new referendum will pass ultimate legal muster. It has been noted that this item includes a division of the revenues among several transit agencies in the County. 45% of proceeds are earmarked for the Hillsborough Area Regional Transit Authority (HART), 54.5% for the county and its cities — including Tampa, Temple Terrace and Plant City, divided based on population — and 0.5% for the Hillsborough Transportation Planning Organization.

Further, the referendum is more specific about the uses of the funds (estimated at $320 million in year 1 of full collections) in that it specifies spending levels for each agency receiving funds. Unlike in 2018, this referendum was placed on the ballot by a vote among Hillsborough County Commissioners. Since the 2018 ballot initiative was placed before voters by voters — not the County Commission — the spending allocations were ruled unconstitutional. The hope is that the vote of the County Commissioners gets around that obstacle.

THE COST OF RESILIENCE

The State of NJ will receive $26 million in grant funding for a road project designed to mitigate flood risk. The funds will pay for a two-mile section of Route 7 between Jersey City and Belleville, which periodically floods because of its proximity to the Hackensack River. The project will raise the bed of the road by some 3.5 feet. Floodwalls and pumping equipment are part of the project.

The $26 million represents the first year of project costs for the three year project. The total cost is $82 million. The grant program is intended to get construction going while the various impacted government entities complete a funding package. The project provides a window on the realities of the costs of this sort of infrastructure issues face communities dealing with climate change. $40 million per mile will give some communities pause.

RURAL HOSPITAL PRESSURES CONTINUE

Long before the pandemic, many rural hospitals and systems found themselves in difficult financial straits. Now that demand has faded with the decline of the pandemic, it is becoming clear that the pressure on these providers continues to increase. We cite two recent examples from the rural West.

Moody’s Investors Service has downgraded Yakima Valley Memorial Hospital Association’s (WA) revenue bond rating to Ba3 from Ba1. The outlook has been revised to negative from stable at the lower rating. It cited material and recent decline in operating performance, resulting in negative operating cash flow, and a significant drop in unrestricted cash through the first two quarters of 2022. This has placed the association at risk of covenant default. The reduced cash flow has put it very close to its days in cash on hand covenants. Failure to meet the days cash on hand covenant could lead to immediate acceleration of debt.

Like almost every other hospital, Yakima faces higher employee costs as the result of labor force shortages and inflation. The status of being a sole community provider makes the situation more pressing. Moody’s notes that these factors have had a higher than typical impact on Yakima. All may not be lost. Yakima is currently in negotiations to join MultiCare Health System. That Tacoma based system does not have a substantial presence in the Yakima region so from that standpoint it could make sense.

In rural Oregon, St. Charles is a four-hospital, not-for-profit, regional healthcare system headquartered in Bend, Oregon and serving the Central Oregon region.  The population of the region is approximately 230,000. Recently, Moody’s affirmed the system’s rating at A2 but assigned a negative outlook. The factors are familiar: chronic understaffing; the heightened use of travelers and increased rates; pronounced COVID surges in this part of the country; increased length of stay due to the shortage of post-acute beds; and high inflation. 

Like Yakima, the operating environment has pressured the balance sheet and reduced cash. The system is in danger of defaulting under its loan agreements concerning required cash levels. ailing to satisfy its 1.1 times debt service coverage requirement at the end of the fiscal year, which under its direct placement agreement with JPMorgan would result in an event of technical default. 

CALIFORNIA TRANSIT ON THE BALLOT

The focus is rightly on the mid-term election for Congress as we approach the election. There are a number of jurisdictions however, where transit funding is competing for attention and votes. We will focus here on some transit ballot initiatives on ballots in California.

Voters in San Francisco will be asked to approve the renewal of a half-cent sales tax which was first approved back in 1990. The tax was authorized for thirty years. Measure L would continue the local tax for another 30 years. The tax is estimated to raise $100 million annually. The amount is projected to increase to $236 million annually by fiscal year 2052-53. If approved, the transportation authority would be authorized to issue up to $1.19 billion in bonds that would be repaid with the proceeds of the tax. A vote of two thirds of those casting ballots is required to extend the life of the tax.

Across San Francisco Bay, Measure F in the city of Alameda would increase the transient occupancy tax from 10% to 14%. The tax collected from visitors would raise about $700,000 to $900,000 annually. Tax revenue would be applied for city services that include repairing potholes and deteriorating streets. The tax would continue until ended by voters. A simple majority is needed for passage. Measure L in the city of Berkeley would authorize issuance of $650 million in general obligation bonds for projects that include street repair. Two-thirds voter support is required for passage. Measure U in the city of Oakland would authorize issuing $850 million in general obligation bonds for city services. About $290 million would be allocated for street repair. A two-thirds supermajority is required for passage.

Several Marin County communities are being asked to authorize general obligation debt which would finance among other things road upgrades in their communities. Measure G in Larkspur would increase the city’s 1% sales tax by one-quarter cent. The tax is estimated to raise about $700,000 each year and would continue until ended by voters. Measure L in Sausalito would double the city’s 0.5% sales tax to 1% for essential services that include street maintenance. The increase is projected to raise $2.8 million yearly for the next decade. Measure J in San Anselmo would double the town’s sales tax from a half-cent to one cent. Additionally, the tax would be extended by nine years.

All of the local items will require a simple majority for approval.

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