Joseph Krist

Publisher

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GOOGLE AND NEW YORK CITY

We see a number of positive factors in the announcement that Google is going to purchase for $2.1 billion an existing building to add to its office space in New York. Google already leases 1.2 million square feet in the building. Ownership represents the kind of statement that cities are looking for in the post-pandemic environment. This is especially true for New York City. Google also announced plans to increase staff by 2,000 on top if the 12,000 corporate employees it already employs in Manhattan.

Google notes that the purchase does not alter plans to delay full office returns until the first quarter of 2022. At the same time, Google reiterated that “As Google moves toward a more flexible hybrid approach to work, coming together in person to collaborate and build community will remain an important part of our future.”  The purchase will close by the first quarter of 2022 and the site is expected to open by mid-2023. The building will be part of a five building “campus” comprised of other owned buildings.

The move does not appear the result of tax breaks so the gradual expansion of Google in the City has drawn much less opposition than did the plan to subsidize Amazon’s proposed Queens campus.  It is an important step in the City’s recovery process. The timing works well as part of the larger recovery process currently underway in the City. We now have a major business real estate investment, the reopening of Broadway and numerous other cultural and entertainment venues. Restrictions on international visitors are being relaxed. All of these are important factors in assessing the outlook for the NYC economy going forward.

NATURAL GAS LOSES IN MICHIGAN

While recent legislative debates have increased attention on the potential role of nuclear as a source of “green” energy, natural gas has been in the spotlight as utilities explore the feasibility of using it as a bridge to the end of fossil fuel use to generate electricity. Utilities are seeking to use natural gas (as a clean alternative to coal) for incremental growth in generating resources. Environment and climate change are challenging the notion that natural gas is actually a clean alternative.

The situation has been coming up as utilities seek to replace legacy fossil fuel powered generating capacity while increasing the resilience and diversity of their generating resources. For coal centric utilities, the move to green energy has been frought with concerns with cost, reliability, and the need to rapidly decarbonize. This has led utilities, including many smaller ones, to look into the use of natural gas (as opposed to coal or oil) to meet local energy demand while also satisfying the environmental concerns of its customers.

Those efforts have led to mixed results. The latest example is the Grand Haven, MI municipal electric utility. Plans for a $27 million power plant in Grand Haven have been dropped by the Board of Light and Power, which cited community opposition as the reason. The plant would have been financed through a $45 million bond issue. It was intended to replace a coal fired plant which closed in 2020.

The move highlights the complexity of issues confronting utility managers as they operate in a non- fossil fuel environment. Grand Haven is unique in that in additional to traditional uses of the power and steam produced by a generating plant, the city uses power from generating sources it owns to heat its sidewalks to remove snow. Now it will have to find resources to fund snow removal by more traditional means.

We see Grand Haven as an example of the environment facing municipal utility operators as they try to adapt to consumer demands and environmental regulation realities. Municipal utilities, given their status as government entities are, on a practical basis often more accountable to their local customer bases than the managements of investor-owned utilities. The Grand Haven general manager summed it up well – “We’re a community-owned utility. If the community doesn’t want us to do something, we don’t want to do it.”

KEYSTONE STATE P3 MOVES FORWARD

The Commonwealth of Pennsylvania decided to take a public-private partnership approach to the rehabilitation of eight major bridge crossings throughout the state. Now it is moving forward with that process pursuant to authorizing legislation. Act 88 of 2012, the state’s transportation P3 law, allows PennDOT and other state agencies, transportation authorities and commissions to partner with private companies to participate in delivering, maintaining and financing transportation-related projects. The law created the seven-member Public Private Transportation Partnership Board, appointed to examine and approve potential public-private transportation projects.

Upon board approval, the department or appropriate transportation agency can advertise a competitive RFP and enter into a contract with a company to completely or partially deliver the transportation-related service or project. The plan for the eight bridges was approved in November, 2020. Now, the state’s Public-Private Transportation Partnership Office announced that three teams will be invited to submit proposals.

The teams include some of the usual suspects in the large P3 universe. Each of the groups includes one of three established participants – Macquarie Infrastructure Developments; Kiewit; and Cintra Infrastructures SE. The firms have all participated in a variety of P3 projects across the country.

HOUSING IN CALIFORNIA

Two pieces of legislation designed to increase the production and availability of “affordable’ housing in California have been enacted. SB 9 authorizes a local agency to impose zoning and design requirements unless those standards would have the effect of physically precluding the construction of up to 2 units or physically precluding either of the 2 units from being at least 800 square feet in floor area, prohibiting the imposition of setback requirements under certain circumstances, and setting maximum setback requirements under all other circumstances.

The law limits how much an existing structure can be demolished to affect the development of existing units. The idea is to supplement existing housing rather than the outright removal and replacement of existing single family to facilitate development. That will limit the amounts of new units produced and addresses existing homeowner concerns.

SB 10 would, notwithstanding any local restrictions on adopting zoning ordinances, authorize a local government to adopt an ordinance to zone any parcel for up to 10 units of residential density per parcel, at a height specified in the ordinance, if the parcel is located in a transit-rich area or an urban infill site. It is a follow up to a previous legislative effort to facilitate and encourage more dense multifamily housing development around transit facilities. Areas around BART stations are a good example.

Those efforts were portrayed as engines of gentrification. We disagree. Housing is at the center of concerns which many have about the sustainability of a California without an economic middle. It is widely recognized that outmigration is fueled in large part by the cost of housing. As median single family home values are at the million-dollar level, the ability to sustain a middle-class life is significantly impacted.

INFRASTRUCTURE BILL DEBATE HIGHLIGHTS CLIMATE/JOB CLASH

As Congress debates and attempts to legislate the proposed $3.5 trillion infrastructure bill, concerns have been expressed about the ability of the economy as currently structured to facilitate many of the proposed programs and facilities. Specifically, there are real worries based on current conditions that there will be an insufficiency of skilled trades workers. This is true for both legacy type infrastructure projects as well as the emerging clean energy industry jobs.

On the green side comes one example from California. The California Solar and Storage Association asked the Superior Court of California in San Francisco to overturn a new requirement that installers be “certified electricians.” The industry employs 35,000 in California.

One of the subplots to the green energy debate is the issue of how much skill in the sense of true skilled tradesmen (electricians) is needed for both individual and commercial solar installations. The question is one of how much skill does it take to put the pieces of the erector set together versus what it takes to connect the system up and get it working.

The industry believes that the vast majority of the work is construction rather than electrical. This means that one or two certified electricians might be all that is needed to safely and correctly connect and get the system operating. The California requirement would likely require many more electricians. This then raises issues of equity in that the use of certified electricians will likely require the use of unionized electricians. Historically, skilled trade unions have been slow to deal with diversity and training of minorities.

INFRASTRUCTURE BILL AND THE TAX EXEMPTION

Don’t look now but the tax-exempt status of municipal bonds is again under attack. Much of the industry’s focus has been on items like advance refunding capability and private activity and direct pay bonds. All of these have garnered support in the market as well as Congress.   At the same time, the debate over the ultimate size of the pending reconciliation bill has renewed focus on how the plan would be paid for.

This has led to some on the progressive side of things to target tax exempt income. The proposed 3% high income surcharge is included in the budget reconciliation bill now being debated by Congress. The provision would impose a tax equal to 3% of a taxpayer’s modified AGI in excess of $5 million, or $2.5 million for a married individual filing separately. The legislation defines MAGI as adjusted gross income reduced by any deduction allowed for investment interest, which does not include tax-exempt income.

Proponents of this provision insist the tax-exempt municipal bond income would not be considered to be included in calculating modified adjusted gross income. As it stands, the language of the proposal does not make this crystal clear.  So far, comments on the provision rely on staff and outside attorney interpretations to support the view that the limit does not apply to municipal bond income. The proof will be in the details.

STATE RATINGS CONTINUE POSITIVE STREAK

As states continue to return to the market for general obligation debt, the positive impact of the first stimulus bill of 2021 continues to be reflected in the ratings of state GO debt. The latest beneficiaries were two states whose tourism-based economies absorbed significant hits as the result of pandemic induced shutdowns.

Nevada saw its rating outlook from Fitch revised to stable from negative. Given the crushing impact of the pandemic on Las Vegas, this is an impressive turn. Hawaii. S&P took a similar action for general obligation debt from Hawaii.

HYDROPOWER UNDER PRESSURE

There could probably not be a worse time for hydroelectric resources to be unable to generate their maximum amount of electricity. The debate over climate change and the vicious ongoing drought have put hydroelectric facilities under the microscope. Many see hydro as an important component of the effort to deal with climate change while others see dams as major environmental problems due to their impact on fish.

Now, the ongoing drought is casting a new light on hydroelectric facilities. The US Energy Information Agency has released its latest Short Term Energy Outlook (STEO) and the news about hydro is not good. EIA forecast that electricity generation from U.S. hydropower plants will be 14% lower in 2021 than it was in 2020. The dry conditions have reduced reservoir storage levels in some Columbia River Basin states.

According to the U.S. Department of Agriculture’s National Water and Climate Center (NWCC), reservoir storage in Montana and Washington is at or above average. However, as of the end of August 2021, reservoir storage in Oregon measured 17% of capacity, less than half its historical average capacity of 47%. Idaho reported reservoir storage at 34% of capacity, lower than its historical average capacity of 51%.

California contains 13% of the United States’ hydropower capacity; in 2020, hydropower plants in California produced 7% of the country’s hydropower generation. The reservoir at Lake Oroville, the second-largest reservoir in California, hit a historic low of 35% in August 2021, prompting the Edward Hyatt Power Plant to go offline for the first time since 1967. So far this year, hydropower generation in California has been on the lower end of its 10-year range.

The latest STEO expects hydropower generation in the Northwest electricity region, which includes the Columbia River Basin and parts of other Rocky Mountain states, to total 120 billion kWh in 2021, a 12% decline from 2020. We expect hydropower generation in the California electricity region to be 49% lower in 2021 than in 2020, at 8.5 billion kWh.

EQUITY AND TRANSIT

Minneapolis was at the center of the events which have continued to propel race issues to the front of almost any debate on public policy issues. One of the issues which continues to receive attention is the issue of equity. These issues touch on zoning policies, housing and education policies, and the availability of jobs. One of the early sectors to see the impact of this debate is transportation.

Much of the focus has been on how and where infrastructure is funded and constructed. This has put the location of roads and highways at the front of that debate. One segment of that debate is around the funding of mass transit. One of the early progressive targets has been the fare-based system of funding mass transit. This has led to the adoption of a variety of programs in cities across the country which seek to lower or eliminate fares for the lowest income passengers on those systems.

Now, after enacting zoning changes and developing a police reform program on the City ballot this November, the issue of assistance to low-income public transit patrons is back in the news in Minneapolis. It seems that 600,000 metro Minnesotans are currently eligible for a program initiated in 2015 which provides for reduced fares for income qualified riders.  So how frustrating is that only less than 5% of eligible riders are signed up for the program. It’s an example of even the best-intentioned programs like this in the end rely on individuals being motivated enough to participate.

WATER

Indian Wells Valley Groundwater Authority was established after legislation was enacted in 2014 to manage groundwater supplies. The law was a reaction to the results of prior droughts which led to large scale pumping of water sourced in aquifers. The Sustainable Groundwater Management Act (SGMA) was designed to protect the most overdrawn groundwater basins, often in rural regions, by requiring plans to balance the amounts of water being pumped from, and recharged into, aquifers by 2040.  Indian Wells is a groundwater management agency (GMA).

In its role as a GMA, Indian Wells plans to significantly raise the fees it charges to local systems which use groundwater. The increases – $2,100 per acre foot of water – would be especially meaningful for large industrial customers. One of them, Searles Valley Minerals, is the only U.S.-based company to produce a critical ingredient for the pharmaceutical glass used in COVID-19 vaccine vials. SVM also provides some water supplies to the unincorporated rural community of Trona (pop. 1,900). 

So far, the two large industrial customers are refusing to pay the higher charges leading to threats of cutoffs in the water supply. A lot of the pressure comes from the fact that Indian Wells Valley is home to the Navy’s largest single landholding in the world, the Naval Air Weapons Station China Lake, covering 1.1 million acres. The Navy was instrumental in the creation of the Groundwater Authority and has maintained tight controls on water demand which could impact the naval facility. Now, the drought is severely pressuring local supplies.

The rate increases are the subject of litigation. One proposed alternative would raise fees and reduce water usage to the authority’s preferred target, but over the two-decade period set up by the law.  Any decision on such litigation could be precedent setting so it should be of interest to all water investors.

SEC ENFORCEMENT

Recent testimony by the head of the Securities and Exchange Commission (SEC) indicated that the municipal bond market was expected to undergo closer scrutiny from the Commission. Even before those expanded efforts bear fruit, the SEC is already active in this area.

The Securities and Exchange Commission charged a San Diego County school district, Sweetwater Union High School District, and its former Chief Financial Officer, with misleading investors who purchased $28 million in municipal bonds. The District and the CFO are alleged to have provided investors with misleading budget projections that indicated the district could cover its costs and would end the fiscal year with a general fund balance of approximately $19.5 million, when in reality the district was engaged in significant deficit spending and on track to a negative $7.2 million ending fund balance. 

The SEC order issued upon settlement of the case indicates that the CFO managed the bond offering for the district and was aware of reports showing that the projections were untenable and contradicted by known actual expenses. Nevertheless, the District and the CFO included the projections in the April 2018 bonds’ offering documents and also provided them to a credit rating agency that rated the district, while omitting that the projections were contradicted by internal reports and did not account for actual expenses. Additionally, the complaint alleges that the CFO signed multiple certifications falsely attesting to the accuracy and completeness of the information included in the offering documents.

This is the fifth announcement of this kind regarding school district issuers since March of 2019.

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.