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Muni Credit News March 11, 2024

Joseph Krist

Publisher

INTERMOUNTAIN POWER

Utah lawmakers passed a measure Thursday that allows the state to purchase a coal-fired power plant operating in Delta that now serves California customers and some local cities.  Of particular angst to some lawmakers is the fact that California receives 98% of the power but Intermountain Power Authority (IPA) is using Utah water and stopped using Utah coal to run its 1,900-megawatt plant. When it transitions to natural gas as mandated by California’s clean energy standards, it also plans to purchase that fuel from Wyoming, not Utah.

The situation is driven by two concerns. One is the desire of many Utah legislators to find a way to save a coal plant. The move is being positioned as one of concern over access to water rights. The sponsors claim that the law is not intended to interfere with the Intermountain Power Agency’s transition to natural gas and potentially hydrogen in the next few years. It is being pitched as an issue of state and local control.

The second is that the plant is operated by the agency via the Los Angeles Department of Water and Power. It pays local taxes but it does so after doing what many other entities of its type do – the plant has appealed its county tax assessment 26 of 38 years. The real issue is that the bill’s sponsors feel that the plant operated with little Utah government oversight, despite being set up decades ago as a political subdivision of the state. They believe that a “California controlled” entity should not have control over the IPA budget.

PURPLE LINE BLUES

The Maryland Transit Administration will seek approval next month for as much as $425 million in “relief payments” related to delays in the Purple Line light rail project. The extra payments are the result of a roughly 234-day delay that will push the line’s completion back from spring of 2027 to December of that year. The Maryland Transit Administration took over the utility related work in 2020 as the original contractor began to exit from the project.

The Administration did complete the utility work in October. In December, operations and maintenance facility work was complete. The project is now 65% complete, with 13 of 21 stations in active construction. Additionally, nearly 17,000 linear feet of track has been laid. That gets the Administration out of direct construction activities.

Now construction is in the hands of Purple Line Transit Partners, the private consortium building the line. Partners will receive an initial $60 million from the state. Additional payments will be made as the company hits certain milestones such as the delivery of rail cars. The utility work payment is on top of $449 million in payments spread out over the next several years that is part of an increase already in the proposed Consolidated Transportation Program.

Seven months ago, the Board of Public Works approved an additional $148 million in payments to Purple Line Transit Partners. The money covered cost overruns and delays that pushed the project to spring of 2027. The additional funding being sought pushes the cost of the project to about $4 billion. Including financing over the 36-year life of the project, the cost is $10 billion.

NY HOSPITAL MERGER

Northwell Health (A3 stable) and Nuvance Health (Baa3 negative) signed a definitive agreement to merge later this year. The parties expect to close toward the end of 2024. It is a positive development for the Nuvance credit which is teetering around investment grade at Baa3 with a negative outlook. Northwell is a much larger entity generating some $16 billion in annual revenue compared to Nuvance Health’s $2.6 billion.

Nuvance Health’s weaker financial performance would be modestly dilutive to Northwell Health.  If the affiliation closed today, Northwell Health’s operating cash flow margin would decline by 30 – 60 basis points and days cash position would decline by a modest three days.

SMALL COLLEGE DOWNGRADES

Moody’s downgraded Hartwick College’s (NY) issuer and revenue bond ratings to Caa1 from B2. As of June 30, 2023, the college has approximately $35 million in outstanding debt. The outlook was revised to stable from negative. Ongoing deep operating deficits and a high reliance on large supplemental endowment draws is weakening already thin liquidity through at least fiscal 2024. 

S&P revised its outlook to negative from stable and affirmed its ‘BBB-‘ long-term rating on Champlain College in Vermont. The school has a debt service coverage covenant of 1.10x, which was not met in fiscal 2023 with debt service coverage of negative 0.43x. Based on the legal documents, the remedy for this covenant violation was to hire an independent consultant, which was fulfilled. “The negative outlook reflects our opinion that the college’s enrollment could continue to decline in the near term, leading to ongoing operating pressures. This could further pressure financial resources and weaken them to a level commensurate with a lower rating.” 

S&P lowered its long-term rating to ‘BBB’ from ‘BBB+’ on the Albany College of Pharmacy and Health Sciences (ACPHS).  “The downgrade reflects our view of the effects of ongoing demand challenges on the college’s enrollment and financial operations, as well as its weakened financial resources over the last two years relative to historical performance”. ACPHS’ operations are generally reliant on student-derived revenues that may likewise remain pressured.  

EMINENT DOMAIN

In 2022, NV Energy filed a court complaint to use the power of eminent domain in building a gas pipeline crossing property owned by an entity called Mass Land Acquisition (MLA). MLA’s parent is a company called Blockchains which hopes to develop a “cryptocurrency city”. MLA contested the eminent domain request all the way to the Nevada Supreme Court. The landowners argue that NV Energy’s use of eminent domain violates the state Constitution, which “expressly prohibits a private party from using the power of eminent domain to transfer interests in property from one private party to another.”

NV’s position is that state law and the Nevada Constitution actually clearly allows them to use eminent domain because they provide a “public use,” which specifically includes utilities and pipelines for petroleum or natural gas. The municipal bond angle – the Las Vegas Valley Water District and Southern Nevada Water Authority filed amicus briefs supporting the NV position.

The South Dakota Legislature passed three bills intended to strengthen landowner protections while maintaining a regulatory path forward for the Summit Carbon project. Carbon capture pipeline operators will have to pay $500 for access to survey land. Counties through which the pipelines run could collect a surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion.

The bills restrict easement durations, terminating them if a pipeline does not secure a Public Utilities Commission permit within five years or if the easement goes unused for the same period. Additionally, easements cannot extend beyond 99 years and must be documented in writing and recorded in a county register of deeds office. Current law says the Public Utilities Commission may overrule counties’ pipeline setbacks. The legislation establishes that the commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. 

PIPELINE PLANS EXPAND

Summit Carbon Solutions plans to expand its carbon dioxide pipeline footprint in Iowa by about 50% — or about 340 miles according to a new regulatory filing in Iowa. That is in addition to the existing proposal for 690 miles of pipe through Iowa. Summit has more than doubled its number of ethanol plant partners in Iowa to a total of 30 out of 42 in the state. Two large ethanol producers — POET and Valero — that had initially agreed to be part of Navigator CO2’s competing pipeline have since signed with Summit.

The project now includes 57 ethanol producers in five states and is expected to transport more than 16 million metric tons of carbon dioxide each year. The system has a total capacity of about 18 million metric tons. More than half of the corn Iowa farmers produce is used to make ethanol. Summit filed requests with the IUB to schedule public meetings in 22 counties for its expansion plans. The company proposed the first meeting for Adams County on April 22. The rest would be held over the course of about three weeks, ending May 9.

NUCLEAR

The Nuclear Regulatory Commission released a long-awaited proposal – “Part 53” – aimed at speeding up licensing for advanced reactors. Part 53 is meant to offer a “voluntary” alternative to advanced nuclear applicants under a framework that would be applicable to all reactor technologies; use information from risk assessments to focus safety analyses on important issues; and ensure plants are regulated based on how they perform and not just how they are designed.

Advanced nuclear reactors are being developed under the existing Part 50 program which is designed for traditional large scale reactors. The uncertainty associated with this process has likely slowed development. The rulemaking process is likely to make implementation of Part 53 delayed until 2027. Recent setbacks in the industry have likely bought regulators some time to effectively catch up in terms of new regs.

SOLAR

The US solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, a 51% increase over 2022. This is the first year where new solar exceed 30 GWdc of capacity for the first time. Residential solar grew 12%, adding 6.8 GWdc of capacity as installations in California were accelerated as customers rushed to take advantage of more favorable net metering rules before the switch to net billing in April. Commercial solar saw a similar increase in California, leading to national growth of 19% over 2022. Community solar grew just 3% compared to 2022. Nationally, utility-scale installations spiked to 22.5 GWdc of capacity, a 77% increase over 2022. 

The result – Overall, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time.

Nevertheless, the California Public Utilities Commission issued a proposed decision that found that the Net Value Billing Tariff (NVBT) policy supported by solar advocates ​“conflicts with federal law and does not meet the requirements” of AB 2316, the 2022 state law that ordered the CPUC to create an affordable and equitable community-solar program.

The California investor-owned utilities argued that the community-solar and battery projects envisioned for NVBT fall under federal law that governs larger-scale generators operating in wholesale energy markets. What are the points of interpretation driving the arguments? AB 2316’s requirement that any new program must not increase costs for nonparticipating customers? An interpretation of the Public Utility Regulatory Policies Act (PURPA), a 1978 law that requires utilities to purchase power from certain non-utility-owned generators under structures governed by the Federal Energy Regulatory Commission.

BOSTON

The Boston Policy Institute (BPI) is a newly launched non-profit focused on analysis about the Commonwealth of Massachusetts and the City of Boston. Among its first efforts is a recent report on the impact of office building values on city revenues after the pandemic. The Fiscal Fallout of Boston’s Empty Offices raises several issues which put the City of Boston under more fiscal pressure than some other major cities.

The reports premises are based on the role of office buildings in the City’s tax base. More than one-third of Boston tax revenue comes from commercial

property taxes, by far the highest proportion among major U.S. cities.

This leaves Boston especially vulnerable to falling real estate values. The value of office space is projected by the BPI expected to decline 20–30 percent by

2029, and overall commercial real estate prices by 12–18 percent.

A second estimate is that Boston will face a cumulative revenue shortfall of $1.2

billion to $1.5 billion over the next five years. Boston will have few ways to compensate for this lost tax revenue. Massachusetts precludes cities from introducing local sales and income taxes; and fully offsetting the decline in commercial real estate would require a 25 percent to 30 percent increase in residential property taxes.

Whereas property taxes comprised roughly 55 percent of city revenues in 2002, today they account for 75 percent. Current estimates suggest that more than 20 percent of all office space in Boston is vacant. As is the case in other cities like New York and Chicago, remote and/or hybrid work is poised to be a long term drag on valuations for office real estate.

It remains a situation worth watching as the budget season unfolds.

NEW JERSEY GAS TAX

Funding for New Jersey’s Transportation Fund has been a major concern during the FY 2025 budget process. Now a plan has been advanced which would raise the state’s gas tax by some 10 cents per gallon over a period of ten years. It would also impose a fee ranging from $250 to $290 a year on electric vehicles over that period. Electric vehicles would be charged a $250 fee in the first fiscal year. That would increase by $10 a year after that, capped at $290 by the end of the five-year period.

Currently, the state collects 42.3 cents for each gallon of gasoline sold and 49.3 cents on every gallon of diesel — the seventh-highest rate in the nation. The level of the tax is determined annually through a formula established through a deal with the State Legislature in 2016 for the gas tax to be adjusted each October to ensure it generates about $2 billion a year in revenue to support the TTF.

The new tax is proposed to be in addition to rates derived from the formula. The higher gas tax and new electric car fee would take effect in July if approved by the Legislature and signed into law. The Governor has also proposed eliminating a sales tax exemption on electric car sales.

MISSISSIPPI

S&P Global Ratings revised the outlook to negative from stable and affirmed its ‘AA’ long-term rating on Mississippi’s general obligation (GO) debt. Elevated credit risks stemming partly from persistently weak economic and demographic trends, which could result in an increasingly challenging budget environment as the state manages through its phased-in income tax reductions…The risk of future budgetary pressure is further elevated due to pension contributions falling short of their actuarially determined contribution amounts in each of the past three years and a relatively high level of unfunded pension liabilities.”

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.

Muni Credit News March 4, 2024

Joseph Krist

Publisher

TOWN AND GOWN AND TAXES

Newark, DE is the home of the University of Delaware. It is the dominant property owner in the city and obviously plays an outsized role in the local economy. It also is exempt from property taxes. This has always been an issue as it is in many “college towns”. The university is not ignorant which is why in lieu of property taxes, UD began making an annual payment of $120,000 in 1965. The annual payment level has remained at that level. It has been estimated that adjusting for inflation and enrollment which has quadrupled since 1950, that payment today would be almost $1.2 million since.

The City has been under pressure to find additional revenues and the tax exemption makes it harder to maximize property tax revenues. UD also added an annual police support subvention payment of $60,000 in 2001 but that has remained at that level as well. Newark City Council voted unanimously to advance a resolution seeking a charter change to levy a $50 fee per student per semester on the University of Delaware. The fee would apply to all full-time and part-time students, undergraduate or postgraduate, and would be adjusted annually using the previous 12 month Consumer Price Index.

The city is not requiring the fee be charged to students directly – that decision is up to the university. The next step is legislation in the state legislature to approve the charter change. Two-thirds of state lawmakers in both chambers now have to approve a bill for the city to amend its charter to levy the fee, and the governor would have to sign it. The City Council would then vote on it a final time.

The expected hue and cry from campus touches on all of the current political issues playing out on college campuses. Here’s one example of how the University may be generating its own trouble. The school makes its payments to the city through a credit card. This means that, according to the city, Newark absorbs $400,000 in processing fees a year despite requests asking the school to use a different payment method.

CHICAGO

Chicago’s progressive mayor ran on a platform of raising taxes on the rich. One of his main proposals concerned a levy on real estate transactions valued at $1million or more. Specifically, he proposed increasing one-time real estate transfer taxes on properties over $1 million, while reducing levies on transactions below that. The tax would also be graduated, with properties between $1 million and $1.5 million incurring a duty increase of $10 per every $500, and properties over that facing charges of $15 for every $500.

The tax was going to be submitted to voters on the March 19 primary ballot. Before it could get to the vote, the large real estate interests sued in Cook County Court to have the ballot item declared misleading. As we went to press last week, a County judge found against the ballot item. The Chicago Board of Elections could still appeal. In an interesting twist, it’s too late to remove the item from the ballot. This will allow a vote to occur on the item if the appeals process can reach a conclusion by the date of the vote.

Even if the ballot item is declared ultimately illegal, voters can still cast a vote for it. While the results of the ballot votes will not be publicly released if it is declared illegal, exit polling could generate some interesting insight into what the public thinks.

In the meantime, S&P announced that it has lowered its outlook on the City of Chicago’s general obligation debt to negative. S&P currently rates the City at BBB-. S&P cited rising public safety labor costs, recent legislative changes to pension contributions and the ongoing costs of migrant arrivals. It seems to feel that the city and state have not provided enough clarity as to total cost and funding related to migrants and charged that the City is unwilling to raise revenues.

Are they talking about Chicago or “stable” New York City?

NYC BUDGET

The combination of it being state budget season in NY and the ongoing asylum migrant crisis have led to several cases of whiplash in terms of the public utterances of the Mayor. The swings back and forth have made an analysis of the city’s budget that much more difficult.

The Adams Administration included a second round of reductions to agency budgets in its Program to Eliminate the Gap (PEG) in the Preliminary Budget and Financial Plan for fiscal year 2025. This PEG follows a first round of reductions from the Administration’s November Plan, and totals just over $3 billion for 2024 and 2025, although there were restorations of previous cuts that offset a portion. (All years refer to City fiscal years.)

While the third round of reductions for the Executive budget has been called off, the cuts included in the two most recent plans have the potential to substantially impact the life experiences of New Yorkers. Separately, shortly after the November Plan was announced, the Administration announced a 20% reduction to the estimated cost of providing services for asylum seekers—which was reflected in the Preliminary Budget. Last week, the Administration announced an additional 10% reduction in those costs, which is anticipated to be reflected in the Executive Budget. The NYC Independent Budget Office has taken its shot at explaining what’s going on.

The wild swings in the Mayor’s outlook have caused real tensions with groups facing the largest proposed cuts. Some of the areas proposed for cuts in both plans include those that largely contract with nonprofit organizations for the provision of human services: Department of Education early childhood programs, programs for justice-involved individuals (including criminal justice contracts, re-entry services, and mentorship programs), and older adult centers. There are no ready replacements for the services these entities provide and the impacted populations usually are among the lower income segments.

The Department of Cultural Affairs also received cuts in both plans and has reduced subsidies to the 34 members of the Cultural Institutions Group and grants to over 1,000 smaller organizations through the Cultural Development Fund (CDF) by 13% and 11%, respectively, since the Adopted Budget. IBO analysis of detailed CDF grant data showed that about 80% of this year’s grantees received smaller or no awards than last year, and generally organizations that received smaller awards last year received disproportionately larger cuts to their grants this year. 

The Preliminary Budget included cuts from the November Plan that were either partially or fully restored. Partial restorations included one police officer academy class and one year of Summer Rising programming that will provide enrichment for about 100,000 elementary and middle school students this summer. Full restorations included the Parks Opportunity Program (a six-month job training program for thousands of low-income New Yorkers) and litter basket service.

Among new cuts in the Preliminary Budget, the City reduced the overall budget for asylum seekers by 11% in 2024 and by 20% in 2025. The City’s share of the overall costs was also reduced by 36% over 2024 and 2025, partly due to additional State funding. Some cuts have resulted in reductions to full-time headcount at agencies such as the Department of Buildings and the Department of Parks and Recreation, which could contribute to concerns about adequate staffing for service provision.

CONGESTION PRICING – THE COST OF EXEMPTIONS

As the public comment period continues into March, various parties are making their case for their vehicle or class of vehicles be exempt from the charge. This has led to studies of possible results for given vehicle classes. This week, the NYC Independent Budget Office analyzed what the impact on congestion fee revenues would be if yellow cabs were exempted.

According to the MTA, taxis and for-hire vehicles made up more than half of the vehicles in the CBD prior to the Covid-19 pandemic. Under the proposed schedule, taxis and for-hire vehicles such as Uber and Lyft are exempt from the congestion toll, and instead are subject to a per trip surcharge paid by the passenger on any trips entering, exiting, or within the central business district (CBD). The MTA’s proposed surcharge is currently set at $1.25 for yellow taxis, green cabs, and traditional for-hire vehicles such as livery cars.5,6 A higher surcharge of $2.50 is set for high-volume for-hire services such as Uber and Lyft.

Based on current yellow taxi trip data—provided by the New York City Taxi and Limousine Commission (TLC)—IBO estimates an exemption just for yellow taxis would cost the MTA $35 million per year in foregone surcharge revenues, or about 3.5% of the authority’s $1 billion annual revenue estimate. While both industries still have ridership below pre-pandemic levels, yellow taxi ridership has been notably slower to recover. TLC trip data indicates that in October 2023, total yellow taxi trips entering, exiting, or within the CBD were at 49% of prepandemic levels, while high-volume for-hire vehicle trips were at 88% of pre-pandemic levels.

HOUSING AND TRANSIT

The MBTA Communities Law was passed in January 2021. It requires MBTA communities to establish multifamily zoning no more than half a mile from a commuter rail station, ferry terminal, or bus station, and the zoning districts must have no age restrictions and must be sustainable for families with children. In December 2023, Milton Town Meeting voters approved zoning changes that allow for more multifamily housing so that the town could comply with the MBTA Communities Law.

Milton is one of approximately 177 communities subject to the MBTA Communities Law and one of 12 that had a deadline of Dec. 31, 2023, to enact a compliant zoning district. Recently, the Town held a referendum on the plan. The result – 5,115 Milton residents voted “no” while 4,346 others voted “yes.” Now the Town faces consequences. The Massachusetts Attorney General is suing the Town for being out of compliance with the law.

Milton will no longer be eligible for a recent $140,800 grant for seawall and access improvements, which was contingent upon compliance with the law. The town will also not be eligible to receive MassWorks and HousingWorks grants and will be at a competitive disadvantage for many other state grant programs.

NEW JERSEY TRANSPORTATION

Gov. Phil Murphy wants to tax the wealthiest corporations in New Jersey to create a dedicated fund for NJ Transit. His proposed new “Corporate Transit Fee” would tax businesses that earn more than $10 million in profits.  The proposal would raise the corporate tax rate to 11.5% for affected businesses, instead of the 9% currently in effect. It would replace a previous fee program which expired at year end.

The original corporate tax surcharge raised about $1 billion annually, and the new one is expected to raise about $800 million. It comes as the state faces a funding shortfall for transit estimated at $1 billion. The Governor is fighting opposition from commuters to an announced 15% increase in fares scheduled to take effect on July 1. It is a reversal from his last budget address, when Murphy pledged to end the previous surcharge on wealthy companies’ taxes.

On another front, the Governor has proposed ending a sales tax exemption for electric vehicles. Since 2004, New Jersey residents were exempt from paying the 6.625% sales tax when buying, leasing and renting new or used fully electric vehicles, based on the zero-emission light duty vehicle tax break. The exemption did not apply to plug-in hybrid cars. Ending the sales tax waiver on electric vehicles over three years is also expected to net about $70 million a year based on current estimates.

Data from the New Jersey Department of Environmental Protection and the state’s Motor Vehicle Commission shows that as of June, 2023 there were just over 123,000 electric vehicles on the road in New Jersey. That represents just about 1.8% of the light-duty vehicles on the roads in the state. The New Jersey Coalition of Automotive Retailers (NJCAR) said in 2023 nearly 80% of car sales were gas-powered vehicles, about 11% were electric cars and roughly 9% were hybrid or plug-in hybrid.

CALIFORNIA PUBLIC POWER SOLAR

The Pasadena City Council unanimously voted on Monday to allow Pasadena Water and Power to enter into a $512.2 million, 20-year power contract with Southern California Public Power Authority for solar photovoltaic and battery energy storage. The City needs to replace its lost share of power from the Intermountain Power Project in Utah. This contract comes on the heels of contracts for 25 MW geothermal energy, and one third share of a 117 MW solar energy project through the Authority.

Beginning on December 31,2027, the contract will cover the daily delivery of a maximum of 105 megawatts of solar photovoltaic energy and up to four hours of dispatchable battery energy storage, not exceeding 55 megawatts. It is a 20-year fixed price contract.

SOONER TAX CUT

Oklahoma has eliminated its sales tax on groceries. The bill won’t go into effect until 90 days after the session adjourns on May 31. The bill also contained language that prohibits cities and towns from increasing the taxes on groceries until June 30, 2025. The state portion of the grocery tax generated $400 million each year. It comes as tax cuts in general are a major topic of the current legislative session. Other proposals would lower income taxes. The politics of the issue drove passage of the grocery cut (lower the regressive tax first) before an income tax cut which has been seen as favoring high income taxpayers.

MORE HOSPITAL CREDIT PRESSURE

Palomar Health is the largest public health care district in the State of California, with over $1 billion of revenues reported for fiscal 2023, and generating over 24,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. It’s operations have been under heavy stress but a decline in cash to only 39 days at year end has increased that strain.

The district’s Moody’s ratings were put on negative outlook in mid-2023 so the stress was becoming clear. Now, Moody’s has placed Palomar Health’s (CA) A1 general obligation (GO) rating and Baa3 revenue bond rating under review for downgrade. The change covers approximately $712 million of revenue bonds outstanding and $646 million of GO bonds outstanding.

As is often the case, potential covenant compliance issues are dictating the timing. The current trend of financial results puts financial covenants at risk for a breach at June 30, 2024, which could result in the acceleration of outstanding debt. Obviously, the district will have to articulate a plan to avoid covenant violations to support its ratings.

CARBON PIPELINES

The South Dakota House of Representatives approved Senate Bill 201, a bill which provides new regulations on pipeline transmission infrastructure and also allows counties to charge carbon dioxide pipeline developers $1 for every linear foot of pipe that runs in the county. The bill reinforces language on federal preemption of local ordinances and regulations affecting carbon dioxide pipelines.

Under existing law, if the South Dakota Public Utilities Commission does not determine that a carbon dioxide company’s pipeline route is “unreasonably restrictive,” proposed pipeline routes, like those by Summit Carbon, cannot violate county ordinances and local zoning and building rules. The law has allowed some counties along Summit Carbon’s pipeline project to implement a range of restrictive setback ordinances. 

STADIUMS

The Utah legislature will be asked to consider a bill which creates the Utah Fairpark Area Investment and Restoration District. The bill authorizes the district to levy: an energy sales and use tax; a telecommunications license tax; a transient room tax; a resort communities sales and use tax; an additional resort communities sales and use tax; and an accommodations and services tax. It provides for an increase in a car rental tax and provides for how the additional revenue is to be spent. The state would own the stadium and the land underneath it. 

The legislation comes following statements from both Major League Baseball and the National Hockey League regarding potential expansion. It is designed to allow the State of Utah to be in a position to fund half of the cost of a proposed stadium for baseball. Salt Lake City is positioned to be the recipient of a hockey team either through expansion or the relocation of the Arizona Coyotes.

Arizona is under tremendous pressure to solve its arena problems soon and there is an existing arena in Salt Lake City. Baseball will take longer to resolve stadium issues in Oakland/Las Vegas, Tampa Bay, and now Chicago. There will be no expansion until those items are resolved. The bill also sets a deadline to get an MLB franchise deal which must occur before 2034.

The issue of public financing and/or funding for proposed facilities in each of these cases has been controversial. One irony of the current cast of characters is that the White Sox ownership threatened to move in the mid 80’s. There was this new domed stadium sitting empty in Tampa Bay that was calling to the Sox to move. That was solved when the State of Illinois stepped up with state tax support for bonds to build the current stadium. Now, the Sox are doing it again.

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.

Muni Credit News February 26, 2024

Joseph Krist

Publisher

TRANSPORTATION

The increasing prevalence of e-bikes and other lithium-ion battery powered vehicles is leading to calls for increased regulation. The issues range from the use and storage of vehicles powered by lithium-ion batteries, to where they can be ridden, parking and insurance. It’s become clear that in today’s urban landscape, the explosion of the food delivery business ensures that the vehicles are here to stay.

The latest city to look at regulation is San Francisco. The City and County Board of Supervisors voted to create safety standards for some devices powered by lithium-ion batteries. Since 2017, the number of fires in the city associated with a lithium-ion battery has increased every year with a high of 58 in 2022. The data for 2023 is still being compiled. During that six-year period one person was killed and eight others were injured.

In New York City, the batteries are controversial as they tend to be owned by residents of large buildings. Fires attributable to the batteries pose a greater threat in those environments. Recently, the FDNY asked Congress to adopt national standards for the batteries. In 2023 alone, the city saw 268 fires caused by the batteries. The fires killed 18 New Yorkers, and left another 150 injured. 

SOUTH CAROLINA PUBLIC SERVICE

The South Carolina Public Service Commission unanimously approved Santee Cooper’s long term Integrated Resource Plan. After it’s ill-fated involvement in the failed Sumner nuclear expansion, the Authority moved away from nuclear going forward. The plan is controversial nonetheless as it includes the expansion of natural gas as a fuel of choice.

Santee Cooper is looking to partner with Dominion Energy on a gas plant that would be located on the Edisto River at the former site of a coal plant. The real controversy arises over the fact that it would require new pipeline projects that have not been disclosed to the public. The plan puts new focus on Santee Cooper’s management and its efforts to recover politically from its nuclear difficulties.

An independent consultant retained by the Commission also warned that Santee Cooper did not meaningfully evaluate alternatives to the gas plant and recommended that the utility accelerate solar and storage builds in the near term.

HOUSING AND TRANSIT

Two issues – climate change and housing shortages – are increasingly seen as two sides of the same issue. Climate advocates continue to advocate against cars and for mass transit. At the same time, the accessibility of mass transit remains an issue as there continues to be a disconnect between the location of transit relative to housing. Ironically, the role of local planning and permitting agencies is increasingly seen as one of obstruction.

This first became an issue in California. The expansion of BART farther away from the Bay Area has increased accessibility but expected housing development has not occurred as hoped. Efforts to revamp zoning restrictions to facilitate the development of housing near BART stations were stymied by local opposition driven by fears of gentrification. Those fears drove opposition to legislation which would have addressed those concerns and the effort failed in the legislature.

Now, the effort to link transit and development is spreading. In Colorado, a new bill (HB24-1313) has been offered which would authorize a new process for approving development. It would provide for the state to analyze cities to determine where they have current or future transit lines as well as how much developable property is within a half-mile of rail lines and a quarter-mile of most high-frequency bus lines. The state would then set “housing opportunity goals,” or “HOGs,” for the cities. 

Such a designation would require a city would have to allow an average of 40 units per acre across all of its transit-adjacent areas, with exemptions for certain properties. It would also provide for denser housing within areas designated as transit centers (typically adjacent to a station) by allowing cities to allow higher densities of up to 300 units per acre in a transit center — in the range of eight to ten floors. 

If local governments don’t cooperate, the state could withhold millions of dollars in transportation funding. Cities that don’t participate could lose out on funding from the Highway Users Tax Fund which is a major source of funding for localities to maintain roads.

The Connecticut legislature is considering legislation to encourage development around transit facilities as well. A bill would follow up on legislation adopted last year which established a state development entity to operate programs to encourage transit adjacent development. It provided for Transit Oriented Community Districts which are designed to accommodate transit adjacent development.

A municipality can choose to create such a district and in doing so would be in place to receive financial assistance from the state.

LITIGATION

Earlier this month, a Contra Costa County Superior Court Judge California Attorney General Rob Bonta’s petition to link the state’s climate accountability case with lawsuits brought by the counties of Marin, San Mateo, and Santa Cruz, and the cities of Imperial Beach, Richmond, and Santa Cruz. Oakland and San Francisco’s climate lawsuits have been the subject of separate legal proceedings but after a ruling by the U.S. Ninth Circuit Court of Appeals the case will be sent back to the state courts. The Oakland and San Francisco suits will be merged into this suit.

CYBERSECURITY

Fulton County, Georgia is the latest victim of malicious hacking activities. A ransomware attack interfered with the county’s processing of certain taxes and water bills, property transactions, communications, and operations of its court system. The County is fortunate in that the bulk of revenues which could have been impacted by the event had already been collected. This includes taxes collected by the County for underlying levels of government.

This attack follows a 2018 event which impacted the county’s largest city, Atlanta. The City experienced some $17 million of additional costs related to recovery. The County has not released a cost estimate related to recovery.

This news coincides with an announcement of a successful criminal prosecution of the perpetrator of a 2020 hack against the University of Vermont Medical Center. That event significantly impacted the facility’s ability to provide services. It wasn’t just about financial and records information. It impacted the provision of things like chemotherapy for nearly one month. It had a huge impact on the over 1.1 million people across multiple states who are served primarily on the hospital.

UNIVERSITIES

Moody’s Investors Service has placed University of Idaho’s (ID) A1 issuer and revenue bond ratings under review for downgrade. The action affects approximately $130 million in rated debt outstanding as of June 30, 2023. The outlook has been changed to rating under review from stable.

The placement of University of Idaho’s (U of I) ratings under review for downgrade is prompted by the potential proposed purchase of the University of Phoenix by Four Three Education, Inc. in the next two to four months. The Regents of the University of Idaho is the sole member of Four Three Education, Inc. Four Three Education is planning to issue $685 million in bonds to finance the purchase through separately secured debt. 

Given the proposed substantial increase in financial leverage, uncertainty regarding Four Three Education’s operating performance prospects and exposure to potential future legal action from the United States Department of Education, a multi-notch downgrade is possible. There are a ton of questions associated with the plan. Away from general operating risks, there are issues specific to the University of Phoenix which could create significant financial liability risk.

It is not clear what, if any, financial entanglements with the University’s general revenue backed credit. Ther are concerns that a host of potential legal and regulatory actions could create additional risk. It seems that the UI credit could ultimately be available to support repayment of debt to finance the purchase. The lack of detail is a major source of downgrade pressure.

Moody’s downgraded Roosevelt University’s (IL) (Roosevelt) issuer and revenue bond ratings to B2 from B1. Roosevelt is a moderate sized private university offering undergraduate, graduate and professional degree programs at its campuses in downtown Chicago and in Schaumburg, a northwest suburb of Chicago, and online. The university enrolled 3,585 full-time equivalent students in Fall 2023, with operating revenue of approximately $92 million.

A period of declined enrollments and strained finances are the primary weaknesses. The concern is that the University might violate debt service and liquidity covenants supporting outstanding debt. Primary among them is an unrestricted cash and investments to MADS covenant that is tested twice annually. Roosevelt must maintain coverage of no less than 150% through fiscal 2024, no less than 162.5% in fiscal years 2025, no less than 175% in fiscal 2026, no less than 187.5% and 2027 and no less than 200% in fiscal 2028 and beyond.

Moody’s downgraded Robert Morris University’s (PA) issuer and revenue bond ratings to Ba1 from Baa3. The outlook remains negative. Robert Morris University is a private university with its main campus in suburban of Pittsburgh. The university enrolled 3,555 full-time equivalent students across its undergraduate and graduate degree programs in fall 2023 and generated $110 million of operating revenue in fiscal 2023.

The concerns are that the university will continue to take elevated draws on financial reserves as the result of material operating deficits over the next two to three fiscal years as it pursues a strategy to grow net tuition revenue and return to fiscal balance. The negative outlook also incorporates uncertainty over fall 2024 enrollment and fiscal 2025 net tuition revenue results.  

ILLINOIS BUDGET

Governor J.B. Pritzker proposed a FY 2025 budget totaling $52 billion. It comes as the issue of asylum seekers and migrants has moved to center stage in the state’s fiscal debate. Chicago has received nearly 36,000 asylum seekers who have arrived since 2022 primarily as the result of being shipped there from Texas. Illinois has spent some $638 million on services for migrants over the same period.

Chicago enacted a budget which increased spending on migrants by some $182 million in the current FY. The proposed state budget would include additional funding for migrant services. Overall, the budget proposal increases spending by 2%. Spending for K-12 education is increased by about $450 million. Pensions continue to be a concern. The Governor proposes increasing the funding target to 100% from 90% while extending the proposed full funding date to 2048.

To fund proposed increased spending for asylum seekers and education, the proposal includes tax increases. Primary is an increase in the sports wagering tax — paid by casino sportsbooks — to 35% from 15%, generating an estimated $200 million. Pritzker also wants to cap a deduction that allows corporations to reduce their taxable income for $526 million in savings.

CALIFORNIA WATER

The California Department of Water Resources on Wednesday announced an increase in its projected statewide water allocations for 2024. California’s snowpack currently stands at 86 percent of the average for the current date and 69 percent of the average for April 1. Forecasts anticipated the agency would be able to fulfill 15 percent of supplies requested from the State Water Project, up from an initial 10 percent allocation predicted in December. The projected 15 percent of fulfillment, which is subject to reevaluation this spring, would translate to about 200,000 acre-feet of additional water. Lake Oroville, the State Water Project’s largest reservoir, stands at 134 percent of its average for the current date.

L.A. PORT RECOVERY

The benefits of the end of the pandemic and the settlement of outstanding labor issues had the expected salutary effect on the finances of the Port of Los Angeles. The Port of Los Angeles handled 855,652 Twenty-Foot Equivalent Units (TEUs) in January, the second-best start to the year on record. January 2024 loaded imports landed at 441,763 TEUs, up 19% compared to the previous year. Loaded exports came in at 126,554 TEUs, an increase of 23% compared to last year. The Port processed 287,336 empty containers, up 14% over 2023.

The potential labor problems at the Port did drive significant volume to U.S. East Coast ports. Much of that was facilitated by moving freight through the Panama Canal. A severe drought has made travel through the Canal much more difficult and expensive. This has significantly reduced the attractiveness of the East Coast ports.

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.

Muni Credit News February 19, 2024

Joseph Krist

Publisher

PREEMPTION

Michigan’s new Clean Energy Future legislation takes effect this November. The law includes a provision that moves final authority for the permitting of large-scale renewable energy projects over to the Michigan Public Service Commission. Before that, such decisions were decided at the local township level. State legislators were concerned that local permitting hurdles would make the state’s efforts to achieve net carbon neutrality unachievable.

The Sabin Center for Climate Change Law at Columbia University reports that as of last year, the center counted nearly 300 projects that have faced serious opposition, and at least 228 local governments that either place onerous restrictions on wind and solar projects or ban them outright. The report calculates the number of challenged projects increased 39% and the number of local restrictions increased by 35% during the period of March 2022 to May 2023.

A new law passed by the Illinois General Assembly last year set statewide standards for wind and solar projects. It is a good example of the other side of the preemption issue. Most of what we have seen to date have been efforts by localities to adopt policies within their own jurisdictions. Those localities bridle at the idea that the state could override for those policies (usually social issues) but are happy to use the technique for climate goals.

Which leads us to…

PIPELINES

In South Dakota, legislation was rejected by a House committee which would have prohibited the use of eminent domain by carbon dioxide pipelines if more than half of the transported carbon dioxide is intended for sequestration rather than commercial uses such as carbonated beverages or enhanced oil recovery. The committee rejected a bill that would have required the pipeline project to have voluntary easements with landowners on 90% of the route before attempting to use eminent domain for the rest.

What drove the votes?  Two-thirds of corn grown in South Dakota is sold to ethanol plants, and ethanol producers have said they need the project to stay viable in markets that require fuels to reduce their environmental impact. Additional legislation has now advanced to the State Senate which would prevent counties from enacting local zoning rules strict enough to regulate gas or liquid pipelines out of existence. To offset the loss of local control, it provides

for counties to levy a per-foot surcharge on pipeline companies and codify certain landowner protections for things like disrupted drain tile.

In Missouri, the Missouri House approved legislation that will block cities and counties from requiring developers to install electric vehicle charging stations in new construction projects. the measure is aimed at preventing local governments from “overly burdening businesses with regulations”. The legislation came in response to a 2021 decision by the St. Louis County Council requiring developers to add electric car charging stations to parking lots. 

Under the terms of the bill, any city or county that requires the installation of charging stations in new construction projects must pay all of the costs and provide maintenance of the unit once installed. The measure also prohibits cities and counties from requiring more than five electric vehicle charging stations per parking lot in parking lots of less than 30 parking spaces. The measure now goes to the Senate, which has previously failed to advance earlier versions. 

House Bill 1034, a bill requiring hydrogen pipelines to be permitted by the South Dakota Public Utilities Commission, was passed by huge majorities. In Florida, legislation (SB 1084) advanced by the Florida Senate would preempt local governments from requiring a higher number of parking lot spaces to be reserved for electric vehicles. Sponsors made clear the measure would outlaw extra spaces even if developers want to put them in. The Florida Department of Agriculture and Consumer Services will have control over setting thresholds. They would be able to determine what percentage of spaces could be set aside for electric car charging. It would be against the law to exceed the limits.

NEW YORK CITY BUDGET

We know that there are many steps in the process of establishing a final budget but nevertheless the analysis of the Mayor’s proposed budget for FY 2025 from the Independent Budget Office (IBO) is useful. IBO starts with updated FY 2024 numbers which project a Current Year Surplus of $2.8 Billion more than the Adams Administration’s estimate. This higher surplus results from IBO’s forecast of approximately $900 million more in anticipated tax revenues in 2024 than the Administration’s estimates, coupled with IBO’s estimate that City-funded spending will total about $1.9 billion less than presented in the Preliminary Budget financial plan. 

A $3.8 billion surplus is projected for FY2025. The surplus is driven by IBO’s forecast of $2.0 billion more in anticipated tax revenues than the Administration’s estimate and the use of this year’s $2.8 billion surplus to prepay some of next year’s expenses but is tempered by IBO’s estimates of $1.5 billion in additional spending over the Administration’s projections. Although the outyear budgets are not balanced, IBO’s projected gaps are well within the range that the City has closed in the past. The City could roll forward some of the 2025 projected surplus to help close the gap in 2026.

On the spending side, IBO expects spending to come in notably lower than Preliminary Budget levels in two areas. IBO anticipates the City will spend $1.6 billion less on salary and fringe resulting from civilian, non-pedagogical vacancies in 2024. Current active full time headcount is approximately 285,000 positions, which is 5% lower than the peak of 300,000 positions in 2020.

IBO also estimates $2.4 billion less in spending on asylum seekers than what is reflected in the Administration’s estimates across 2024 and 2025. In addition, IBO forecasts lower charter school enrollment than the Administration, estimating $91 million in savings from 2026 through 2027 for charter school tuition costs. Spending continues to grow. In the current FY, spending has risen 7% since the adoption of the budget. City funded spending is up 3%.

As for the economy of the City, the sector that has gained the most jobs since the pandemic (nearly 138,000) is Health Care and Human Services. Most of that growth is concentrated in the low-wage ambulatory care subsector, which includes home health aides. Other sectors that have surpassed pre-pandemic levels include some of the highest wage industries in the City— particularly the finance and insurance sector and professional, scientific, and technical services. Employment in many low-wage industries continues to trail well behind pre-pandemic levels, notably retail trade and leisure and hospitality.

What drives spending? The Department of Education, Department of Social Services, and centrally budgeted costs such as fringe benefits, pension costs, and debt service, have the largest budgets by agency, in line with past years. As of the Preliminary Budget, they comprise nearly two-thirds of the City’s total expense budget.

TWO SIDES OF ENVIROMENTAL REVIEW

Two situations were reported this week which reflect different approaches to environmental laws and reviews. It may surprise you when you see which entities are taking the approach they are taking in regard to development. They both serve to undercut stereotypes about attitudes towards environmental regulation and both have potentially significant impacts on development.

The first is San Francisco where a State senator will introduce legislation which would effectively end environmental reviews for proposed developments in a large piece of San Francisco. The law would amend the California Environmental Quality Act (CEQA) to remove requirements for review to a 150 block area in downtown SF. It comes as 35 percent of office space remains empty four years after the onset of the pandemic in the city.

The proposal would limit reviews and the rights of individual entities to intercede in the environmental approval process. It highlights the contradictions in the concerns of advocates and interest groups. On one side are those who believe that the environmental process needs to continue to stymie “gentrification”. They are many of the same arguments made against prior proposals to encourage development around suburban transit facilities.

On the other side are the housing advocates who look at empty buildings and masses of homeless individuals and see a potential to significantly impact the supply of affordable housing. Those advocates find themselves to some degree on the same side as developers they historically oppose. Labor interests are also allied with the proposal. The law will waive environmental review for only projects that pay a prevailing wage. It would still require environmental review for hotels and waterfront property, as well as for the demolition of any building that housed tenants within the past decade.

In Montana, a state judge ruled that state officials have failed to impose adequate limits on the construction of new homes that rely on groundwater. At issue, was a proposed small housing development in ranch country. The project would have relied on new wells in an area where aquifer levels have been steadily declining. Nonetheless, the project received both county and state approval. The judge found that Montana’s policy for approving new developments violates state law.

BAD WEEK FOR AUTONOMOUS VEHICLES

Waymo announced a voluntary recall of its self-driving car software following two incidents involving its vehicles in Phoenix, Arizona. Waymo said the company chose to do the voluntary recall after consulting with the National Highway Traffic Safety Administration and its internal review of two incidents which took place in Phoenix on Dec. 11, 2023, in which two robotaxis crashed into the same towed pickup truck within minutes of each other.

Last week, a driverless Waymo car collided with a cyclist in San Francisco, causing minor injuries and the incident is now being reviewed by the state’s auto regulator. Tesla’s autonomous vehicle software was involved in a recent accident while being employed by the driver. The California DMV has filed formal accusations against Tesla saying that the company’s marketing and advertising is deceptive.

And then there is Cruise, the driverless car company owned by General Motors. Already under restrictions in SF, the company faces new charges. The California Department of Motor Vehicles is investigating allegations that a self-driving vehicle operated by Cruise nearly hit a 7-year-old boy after it failed to yield to him and his family while they crossed the street in San Francisco last year. The National Highway Traffic Safety Administration is investigating at least four incidents involving Cruise vehicles and pedestrians.

TURNPIKE KEEPS ON ROLLING

The pandemic was hard on New Jersey’s overall transportation systems. Low ridership on trains hurt revenues on New Jersey Transit and the PATH. So long as remote work predominated, toll revenues were hurt. Private bus services which had been a lynchpin of the New York metropolitan area transit in some cases found themselves out of business. One entity which has done just fine in the period of recovery from the pandemic has been the New Jersey Turnpike Authority (NJTA).

The Authority owns and operates the New Jersey Turnpike (NJT) and the Garden State Parkway (GSP). They serve as a key link in the I-95 corridor and are the gateway to the NJ shore, respectively. The system has established a history of continued demand for the roads through large rate increases, economic recessions, and other negative shocks like the recent pandemic. 

The Authority also has shown a much better record of toll adjustments. Historically, tolls were a very highly politicized issue. Now, under a state approved plan an annual toll indexation policy to ensure financial metrics has been established. There is still a potential for politicizing tolls as the Governor approves NJTA’s budget and toll rates. It is in a governor’s interest to support increases as excess Authority revenues can be transferred to the State.

Moody’s affirmed the Turnpike Authority’s senior revenue bond rating at A1 with a stable outlook this week.

COLLEGE CREDITS CONTINUE TO WEAKEN

Moody’s downgraded Allegheny College’s (PA) issuer and revenue bond ratings to Baa3 from Baa2 and maintained a negative outlook. One of the oldest private liberal arts colleges in the United States served 1,168 full-time equivalent students in fall 2023 and generated $67 million of operating revenue in fiscal 2023. Demand has been a problem and is not projected to improve.

Moody’s also downgraded Webster University’s (MO) issuer and revenue bond ratings to B1 from Ba3. The ratings have been placed under review for possible downgrade, previously the outlook was negative. A going concern opinion in the fiscal 2023 audited financial statement was an obvious issue as liquidity has dwindled. This has led the University to rely on through $40 million of outstanding lines of credit at fiscal end 2023 adds elevated credit risk. The lines are due on demand and collateralized by endowment funds. 

Another pressure source– employee costs. This week, the California State University system and the union representing 29,000 professors, lecturers, librarians, counselors and coaches reached an agreement which would immediately increase salaries for all faculty members by 5 percent, retroactively to July 1, 2023, with another 5 percent raise scheduled for July 1, 2024, if the state does not cut funding for the university system. The salary floor for the lowest-paid faculty members would immediately rise by $3,000 a year, and paid parental leave would grow to 10 weeks from six.

ROCKY MOUNTAIN HOMELESS

Denver, a city of 750,000, had received nearly 40,000 migrants, the most per capita of any city in the nation. Denver has spent more than $42 million on the migrants. If expenditures continue at the current pace of $3.5 million a week, the crisis could cost the city about $180 million in 2024, or 10 percent or more of its annual budget. The City has received only $9 million authorized in federal reimbursements. 

Denver does not allow local law enforcement to detain undocumented immigrants solely on the basis of their status and does not turn them over to federal authorities unless a judge has issued an arrest warrant. To become eligible for work permits, migrants must apply for asylum, a cumbersome process, and then wait 150 days. After pausing discharges of migrants in November because of the cold, Denver recently reinstated time limits for migrants in city-provided hotels. Stays will be up to 14 days for adults without children and 42 days for families. 

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.

Muni Credit News February 12, 2024

Joseph Krist

Publisher

PORT AUTHORITY BUS TERMINAL

The Port Authority of New York and New Jersey released a draft environmental impact statement and a revised project plan in support of its effort to replace the nearly 75 year old Port Authority Bus Terminal, the world’s busiest bus terminal. The estimated cost of the project is $10 billion. The revised plan would include a 2.1-million-sq-ft main terminal, a bus storage and staging facility and ramps directly connected to the Lincoln Tunnel. 

The storage and staging facility will be constructed first and serve as a temporary terminal while the existing building is demolished. That will occur in 2028. The new terminal would be completed in 2032. The Port Authority is currently applying for a federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to help finance the project. The authority is also negotiating plans for commercial development above the terminal with city officials via payments in lieu of taxes.

LONG ISLAND POWER AUTHORITY

New York lawmakers have introduced a bill, The LIPA Public Power Act which would allow the agency to distribute electricity themselves to Long Island and Rockaway residents without the need for a third-party company. The utility has effectively been managed by PSEG Long Island, an investor-owned, for-profit utility company whose contract is up in 2025. Storms have been at the center of the latest debate over LIPA. The proposed change stems from the utility company’s poor performance in responding to Tropical Storm Isaias in 2020.

As of October 2023, PSEG Long Island customers spend an average of 22.73 cents per kilowatt hour for their residential electricity, which is 11.92% higher than the average state price of 20.31 cents. If enacted, it would represent yet another change in the management and operation structure. It was a major storm that drove cries for the current arrangement. Now the winds are blowing in the opposite direction. It is not clear whether the bill has enough support to pass.

EMINENT DOMAIN

State regulators in South Dakota have rejected the initial permitting request from Summit Carbon Solutions for a pipeline through the state to transport carbon dioxide. Summit can try again and now the State Legislature is working on several pieces of legislation which would, if enacted, add protections for private property owners when pipeline companies conduct surveying, ensure better terms for landowners in agreements with pipeline companies, and add financial protections for landowners subjected to eminent domain.

Two bills failed to make it out of committee. One was a bill to prevent carbon pipelines from using eminent domain at all. The second would have required carbon pipelines to have a regulatory permit before pursuing eminent domain. The pending bills would require any person or entity looking to conduct an examination or survey on private property to have a pending or approved siting permit application with the state. It would also require 30-days written notice to the property owner. The notice must include a detailed description of the property areas to be examined, the anticipated date and time of entry, the duration of presence on the property, the types of surveys and examinations to be conducted, and the contact information of the person or agent responsible for the entry. 

The bill also would require entities seeking to enter private property for surveys to make a one-time payment of $500 to the property owner as compensation for entry, in addition to covering any damage caused during the examination. Property owners would also be given the right to challenge the survey or examination by filing an action in circuit court within 30 days of receiving the written notice. 

Under a second bill, carbon pipeline agreements would not be allowed to exceed 50 years and would automatically terminate if not used for the transportation of carbon dioxide within five years from their effective date. Landowners would be entitled to annual compensation for granting the easement, set at a minimum of $1 per foot of pipeline each year the pipeline is active. 

In Nebraska, a bill has been introduced to limit the use of eminent domain. Legislative Bill 1366 would provide that a local government, such as a city or county where eminent domain is to be used, or the Nebraska Public Service Commission, would have to vote to approve its use. The bill would also require “good faith” negotiations and providing an appraisal to a landowner, before eminent domain could be used.

The Nebraska Public Service Commission has the authority to approve only the routes of oil pipelines under current law. The proposed bill would expand that to CO2, gas and natural gas pipelines, the agency said, “and possibly other private chemical and water pipelines,” both within the state and those crossing state lines.

The North Dakota Public Service Commission decided that state rules preempt local ordinances on pipeline zoning issues. It cited state law changes in 2019 that said “the approval of a route permit for a gas or liquid transmission facility automatically supersedes and preempts local land use or zoning regulations except for road use agreements.” Before 2019, the law said state rules may supersede local ordinances, if the local ordinances are deemed unreasonably restrictive. 

The decision will enable Summit Carbon Solutions to reapply for a permit of some 350 miles of its planned pipeline in North Dakota. It was initially denied in late 2023. The reapplication proceedings could begin in one month.

MASS TRANSIT

The Washington Metro Area Transportation Authority (WMATA) is facing a $750 million budget gap for FY 2025. Earlier this year it proposed significant service cuts in the absence of additional funding for its operations from its intergovernmental funding partners. Under that plan, several stations would close permanently, rail service would stop at 10 p.m., about one-third of bus lines would be cut.

Now, the District of Columbia has made a funding proposal to increase its support for WMATA in an effort to stave off service cuts. D.C. Mayor Muriel Bowser and two Council members said the city is offering up to $200 million, on top of its fiscal 2024 operating subsidy. The funds would be used to help close WMATA’s fiscal 2025 budget deficit. The city’s proposed contribution, combined with proposed funding from Maryland and Virginia, would help WMATA cover $480 million of a $500 million gap.

PUERTO RICO ELECTRIC

The Puerto Rico Electric Power Authority (PREPA) is in the middle of its continuing fight to avoid paying off its billions of municipal bond debt. While this effort drags on, planning must be undertaken to improve and develop the electric grid on the island. This week, the U.S. Department of Energy delivered its views on efforts to diversify and strengthen the electric system in support of the Commonwealth’s climate goals.

DOE and FEMA conducted a two-year study which concludes that Puerto Rico can successfully meet its projected electricity needs with 100% renewable energy by 2050. Puerto Rico must increase new power generation infrastructure significantly—on the scale of hundreds of megawatts—to stabilize the grid and alleviate current generation shortfalls, including rapid deployment of utility-scale and distributed renewable resources and significant amounts of storage. 

Here is where the ongoing bankruptcy proceedings for PREPA get in the way. Outside funding for resilience components of the resource plan (solar, wind) to address economic equity concerns is available. On February 22, 2024, residents can apply for DOE’s Solar Access Program — a program designed to connect up to 30,000 low-income households with residential rooftop solar and battery storage systems with zero upfront costs. 

This program is being funded from the Puerto Rico Energy Resilience Fund, a $1 billion DOE program focused on improving the resilience of Puerto disadvantaged households and communities. Frequent outages continue to impact Puerto Ricans on a day-to-day basis, caused in part by the poor state of repair of the electric transmission and distribution grid and insufficiency of the current generation fleet, which is frequently unable to supply enough electricity to meet load under even normal, non-peak conditions.

This only addresses part of the problem for an agency with massive capital needs and questionable market access.

RATES, INFLATION AND BUDGETS

At some point, the realities of recent years’ inflation combined with the impact of pandemic costs was going to negatively influence budgets. On top of those factors, many governmental employers were emboldened by the pandemic to take more aggressive stances in their contract negotiations. When you put those factors together, it is a formula for budget imbalance and pressures to reduce expenditures. It’s not just a challenge for smaller less well-to-do communities. Larger richer communities are under the same pressure.

The latest example is Santa Clara County, CA. This week it issued a budget update. Last summer, the county avoided a strike with its largest union, SEIU Local 521, when it reached a deal that resulted in the largest increase in wages in two decades. Now, the cost of salaries and benefits is expected to rise $488 million, or 9.5%, between the current budget and the 2024-25 fiscal year budget. Mid-way through this year, county officials predict a $45.9 million balance at the end of the 2023-24 fiscal year. 

Like many counties, Santa Clara faces significant healthcare costs. The general fund balance is just about totally offset by a $42 million shortfall in the County’s health system.

NET METERING

The pendulum continues to swing back and forth when it comes to the level of compensation provided to utility customers with rooftop solar and excess power. Last year, states like Florida and California reduced the payment amounts available from utilities to their customers with solar. These moves have lowered the demand for solar by rendering it less economical and affordable. The outcry from customers has begun to generate support for increasing those amounts.

Two bills in the Hawaii legislature would seek to increase rates that residential and business rooftop solar system owners receive for helping Hawaiian Electric balance its power needs on Oahu, Maui, Molokai, Lanai and Hawaii island under a program approved by the state Public Utilities Commission in December and scheduled to begin March 1. Under the new system, participating customers receive a fixed fee plus bill credits for exported energy, which on Oahu is 32.9 cents per kilowatt-hour.

The legislation would mandate that program participants receive the “retail” rate credit for exported electricity, meaning the rate Hawaiian Electric customers pay for electricity, which is about 40 cents per kilowatt-­hour on Oahu. The same arguments against the increase we have seen in other states are being advanced in Hawaii. Primarily, the issue is that customers without solar power are “subsidizing” customers who produce their own power. The fixed cost base of legacy utilities would be spread among fewer customers.

Hawaii Electric claims that solar incentives between 2001 and 2015 reduced company revenues by some $105 million. That may be the real issue that the utilities have. Rooftop solar helps to weaken the monopoly on service that utilities benefit from.

In Utah, legislation has been introduced to increase the energy bill credits for energy generated by rooftop solar power. Under current laws and regulations, Rocky Mountain Power charges 10 cents for each kilowatt hour it provides. When it credits rooftop solar equipped customers, it only credits customers with about five cents per kilowatt hour. The legislation would require energy companies to credit solar owners at least 84% of the cost per kilowatt.

In North Carolina, the Court of Appeals heard arguments this week challenging Duke Energy’s net metering rates. The battle over net metering between Duke and the state has been going on for a decade. The solar industry and electric customers are claiming that the State Utilities Commission failed to follow the law when it relied on a Duke analysis of the costs of net metering in arriving at a rate. Other provisions of the law regarding timetables for adoption of new rates were drafted by Duke.

The solar industry hopes to see that the Utilities Commission conduct its own studies as required by law. In the interim, delay in the implementation of a new rate schedule would occur until a final approval from the state.

PENNSYLVANIA BUDGET

Pennsylvania Governor Josh Shapiro released his budget proposal for FY 2025. His plan would increase total authorized spending by 7% through the state’s general fund, while tax collections are projected to increase by $1 billion, or 2%. The budget proposal holds the line on taxes, and instead draws down the state’s cash reserve from $14 billion to $11 billion. The additional money is intended to fund several education initiatives.

Last year, state courts found Pennsylvania’s system of school funding unconstitutionally discriminates against poorer schools. To address that, the budget proposes a $1.1 billion increase, or 14% more, for public school operations and instruction. This is based on a school funding commission’s recommendation last month supported by his appointees. A significant portion, about $872 million, would go toward poorer schools.

A major reorganization of the state higher education system is designed to facilitate increased access and lower costs. Shapiro’s budget allots an extra $200 million, or 10% more, for the state’s higher education institutions. He hopes the program will enable tuition to be limited for qualifying students to $1000 per year. Other significant investment would go to public transportation, increasing state aid by about $280 million, or about 20%. More than half of that would go to the Philadelphia-area Southeastern Pennsylvania Transportation Authority, or SEPTA.

TRANSIT SUBSIDIES

Various strategies to combat the impact of the pandemic on mass transit utilization have been suggested in its wake. Recently, the Mayor of Boston claimed that the primary factor keeping workers on a remote basis is the cost of mass transit. Her remedy would be to put mass transit on a fare-free basis. A number of small and medium size cities have tried free fare experiments. Their use on larger systems has been limited.

In New York, the city maintains a program to limit the impact of transit costs on low income individuals. The City’s Fair Fares NYC program provides half-price transit trips to New York City residents between the ages of 18 and 64 with household income below 120 percent of the federal poverty level (currently $17,496 for an individual and $36,000 per year for a family of four), who do not otherwise qualify for reduced-price MetroCards or city-provided carfare.

The NYC Independent Budget Office (IBO) examined the cost of expanding the Fair Fares program to include New Yorkers who are aged 65 and older have disabilities, and whose income is less than 200 percent of the federal poverty level. IBO estimated the cost if Fair Fares were to completely cover the price of these riders’ transit, rather than the program’s current half-price subsidy. IBO estimates this Fair Fares expansion would cost between $27 million and $67 million per year, depending on the transit services included in the program.

NEW ORLEANS AND FLOODS

Some 19 years on from the disaster that was Hurricane Katrina, flooding remains a major issue for the city. New Orleans’ stormwater infrastructure is currently funded through property taxes. A proposal is being made that a more comprehensive funding source which would include currently tax-exempt properties be established. A stormwater disposal or drainage fee could be levied against all properties regardless of their property tax status.

The rate would be based on size for single-family properties. For all other properties, it would be based on the amount of impervious area. That allows the impact of large facilities with substantial footprints to be factored in. Think warehouse facilities and shopping malls. Stormwater fees are a long-standing tool in the municipal market and they have appeared in many forms. In this case, the fees would support the issuance of bonds.

That part of the proposal has become a real issue. The Sewerage and Water Board of New Orleans does not have a favorable image among its stakeholders. Support for the plan may require the creation of a separate entity to oversee collection of the fee and its use. The Sewerage and Water Board of New Orleans says it needs about $1 billion to upgrade the city’s drainage system over the next decade. Backers of the proposal estimate that a fee would yield some $38 million annually to support debt service.  They would like a new entity to oversee things.

HEALTH SYSTEM CREDIT PRESSURE

Novant Health operates 15 medical centers in North Carolina, including several regional referral centers. The Novant Health Medical Group has nearly 2,000 physicians and maintains numerous physician offices and outpatient centers. The system is headquartered in Winston-Salem, NC. As the result of the acquisition of New Hanover Regional Medical Center, it has major operations in three different North Carolina markets.

That acquisition has come with a cost. Moody’s Investors Service has placed Novant Health’s (NC) Aa3 long term rating under review for downgrade. Novant closed on its acquisition of three hospitals from Tenet Healthcare for $2.4 billion on January 31.  Novant Health financed the acquisition with a bridge loan, roughly doubling its debt load to some $5 billion.

The system will have to make the case that the benefits of the expanded system are enough to offset the major increase in debt. The risks from integration issues are present in all of these deals.  

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.

Muni Credit News February 5, 2024

Joseph Krist

Publisher

UPDATES

In our January 29, 2024 issue we discussed one Colorado River water users plans to retain water allotments even though they were not likely to use them. Now, the owner has announced that it had filed a motion to dismiss its diligence application for conditional water rights that date to 1966 and are associated with the construction of a 23,983-acre-foot reservoir on Thompson Creek. The motion was granted and the claim on water rights is now legally considered to be abandoned.

The Maricopa County Superior Court on Jan. 22 upheld the Arizona Corporation Commission’s approval for SRP to add capacity using natural-gas generators at the Coolidge Generating Station. The plant lies just east of the lower-income, historically Black community of Randolph. After an initial rejection of SRP’s plans, they reapplied and agreed to a modified plan under which SRP will reduce the number of new generators from 16 to 12, won’t add any more units there, and agreed to locate the new generators farther from the community and limit annual capacity to 30% averaged across the new units.

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DRUG COSTS

The North Carolina State Health Plan state funds to pay most prescription drug costs for 740,000 public workers, teachers, retirees and their family members. That puts the Plan in the position of having to fund the costs of an ever expanding portfolio of drugs prescribed to its members. The combination of demographic trends and drug development and marketing has increased demand for drugs. This is especially true of drugs now being offered for their weight loss inducing effect.

One class of drugs prominent in this emerging trend is that of drugs developed for diabetics which help weight loss. Much of the current demand for the drugs like Wegovy. This well advertised drug is used strictly for weight loss only on an off label basis. In June 2021, the insurance plan for North Carolina state employees was paying for 2,800 people to take weight-loss drugs. Last year, it paid for nearly 25,000. The Plan attributes some 10% of its prescription drug costs to weight loss drugs. Now the Plan will no longer cover these drugs.

It may seem a bit political but a truly diverse combination of private health providers is taking steps to limit payment for weight loss drugs for their covered employees. According to press reports, Ascension Health employs about 139,000 people and operates 139 hospitals in 19 states. Its employees must now pay out-of-pocket for GLP-1s such as Wegovy and Saxenda, which are FDA-approved for weight-loss, along with Adipex, Alli, Benzphetamine, Contrave, Diethylpropion, Imcivree, Lomaira, Orlistat, Phendimetrazine, Phentermine, Plenity, Qsymia, Resveratrol, and Xenical. The coverage exclusion will also apply to new weight loss drugs that become available in the future.

Even the Mayo Clinic will now provide a lifetime benefit of only $20,000 for the drugs for its employees. The University of Texas System Office of Employee Benefits stopped coverage of the drugs in September at the start of the fiscal year. Coverage of the medications for weight loss will end on April 1 in North Carolina.

LITHIUM

It is somewhat predictable that projects to derive lithium from California’s Salton Sea would be challenged by environmentalists. Last week ground was broken on a $1.85 billion construction project. By extracting boiling, mineral-rich brine from underground, the plant will create about 40 megawatts of steam power, then separate raw lithium out of the waste stream, and produce an expected 25,000 metric tons of commercial-grade lithium hydroxide each year. That’s enough for approximately 415,000 electric vehicle batteries. 

Now a coalition of environmental and “economic justice” advocates are threatening a lawsuit to halt construction. In this case the contention is that these mining activities will generate pollution which might be harmful to residents. Keep in mind that the existing situation at the Salton Sea is an environmental nightmare. The Salton Sea has been fed by pesticide- and fertilizer-laden runoff from area farms for more than a century as well as a sewage-polluted river from northern Mexico.

Under the current set of conditions, the dry lake bed of the Salton Sea generates huge amounts of dust which pollute the air with a variety of chemicals in the soil dating back to the formation of the Salton Sea. This would continue with or without the plant. The economic base which supported local residents is long gone.

An independent fiscal analyst hired by the county noted the project would generate nearly half a billion dollars over several decades in lithium production fees and property and sales tax revenues. An estimated 250 construction jobs and about 75 full-time jobs, with an average estimated annual salary of $85,000, are also projected to be created. Imperial County’s average income per capita in 2022 was $21,216.

There are more than a dozen existing geothermal steam plants at the Salton Sea. Steam is released from a boiling hot brine pool that sits as deep as 2 miles underground there, and which contains raw lithium and other minerals.

PARTISAN UTILITY MANAGEMENT

Nebraska is the only state with a one house legislature and the only state without an investor-owned electric utility. For many years, the elections for seats on the board of the state’s electric utilities were conducted on a non-partisan basis. From the perspective of the long-term investor, this was one of many factors which made the credits of the public power entities in Nebraska attractive.

Like so many utilities with aging generation stock, the public power agencies in Nebraska face some significant decisions. They were difficult enough given the many entrenched interests which might be impacted from increases in renewable power. More emphasis on ideology is not exactly what these agencies need in the current environment.

Now, partisan elections are being encouraged by sponsors a new bill which received a 29-16 vote in the Legislature which gave first-round approval to LB541 that would make elections for the Nebraska Public Power District and Omaha Public Power District boards partisan. The motivation is a belief that out of state “East coast money” is driving the election of people with a climate change agenda.

NPPD and OPPD have been holding public hearings dealing with proposals to increase the share of renewables in their respective generation bases. This has generated opposition. The utilities also depend on coal and nuclear for their baseload supplies. Both sides of the issue have seen increasing sums spent on power district board elections.

The bill is actually a softened version. Originally, a bill would have made all public power and irrigation district elections in the state partisan.

MENTAL HEALTH ON THE BALLOT

The ongoing dilemma as to how best to deal with homelessness and its companion issues of substance abuse and mental illness will be on the California ballot this March. In 2004, California voters approved Proposition 63, also known as the Mental Health Services Act (MHSA). The act taxes people with incomes over $1 million per year and requires that the money collected from the tax be used for mental health services. The tax typically raises between $2 billion and $3.5 billion each year. It is clearly not succeeding in its efforts to deal with homelessness.

Nearly all the money from the tax—at least 95 percent—goes directly to counties, which use it for mental health services. The rest of the money goes to the state to support mental health programs. Counties can only spend the MHSA money on certain types of services, but have flexibility in how to provide those services. The services include treatment for people with mental illness and prevention programs for people who may develop a mental illness. While counties can spend MHSA money on treatment for drugs and alcohol, the people receiving treatment must also have a mental illness.

Proposition 1 increases the share of the MHSA tax that the state gets for mental health programs from 5% to 10%. The proposition also requires the state to spend a dedicated amount of its MHSA money on increasing the number of mental health care workers and preventing mental illness and drug or alcohol addiction across communities. The increased state share will reduce the counties pool of funds to 90% of the tax.

Proposition 1 requires that counties spend more of their MHSA money on housing and personalized support services like employment assistance and education. While counties currently can use MHSA money to pay for these types of services, they are not required under MHSA to spend a particular amount on them now. Counties would continue to provide other mental health services under the proposition, but less MHSA money would be available to them for these other mental health services.

Proposition 1 would give up to $4.4 billion to the state program that builds more places for mental health care and drug or alcohol treatment. It would give $2 billion to the state program that gives money to local governments to turn hotels, motels, and other buildings into housing and construct new housing. The state government estimates that the bond would build places for 6,800 people to receive mental health care and drug or alcohol treatment at any one time. It also estimates that estimates the bond would build up to 4,350 housing units, with 2,350 set aside for veterans. The bond would provide housing to over 20 percent of veterans experiencing homelessness.

A November poll found that two-thirds of respondents support the plan.

REGULATION

In Iowa,  House Study Bill 608 would give the Legislature the power to intervene to halt eminent domain proceedings in the state. The bill would allow 21 members of the Iowa House or 11 Iowa senators to file a petition to halt an eminent domain process, stopping all associated hearings, trials or other proceedings. It would take a vote of at least 60% of the House and 60% of the Senate to resume the eminent domain proceeding. The eminent domain process could also continue if 60% of each chamber sign a letter attesting that they believe the use of eminent domain is constitutional in that case.

The target of the law, Summit has delayed its planned operation date for the pipeline, citing regulatory difficulties in several states. It now does not expect it to become operational until 2026, two years later than initially projected.

Two companion bills under consideration in the Virginia legislature would “Establishes a procedure under which an electric utility or independent power provider (applicant) is able to obtain approval for a certificate from the State Corporation Commission for the siting of an energy facility rather than from the governing body of a locality.” The legislation comes as some shore communities are attempting to regulate the siting of transmission lines related to wind generation. The primary opposition is from Virginia Beach.

P3 REVERSAL

In October, the Louisiana legislature approved a public-private partnership to build a $2.1 billion toll bridge over the Calcasieu River after officials renegotiated an initial deal rejected in October. The new structure would replace a 71 year old bridge which is well beyond its useful life. The renegotiated agreement would expand a 25-cent toll with a vehicle size limit for locals to all noncommercial vehicles in a 5-parish area. It would reduce the toll for large trucks from $12.50 with a transponder to $8.25. Large trucks without transponders would pay $12.36 instead of $18.73.

The new deal also returns 15% of any toll profits to the state, rather than no equity distributions included in the agreement presented in October. It also reduces LA DOTD retained costs from $415 million to $280 million, contingent on approval of design changes that would eliminate the need to relocate railroad and pipeline infrastructure. The state’s funding for the project remains essentially the same as proposed in October, with $800 million in public funds from federal grants, $250 million in vehicle sales taxes, $85 million in State General Obligation Bonds, and $150 million from the State General Fund.

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.

Muni Credit News January 29, 2024

Joseph Krist

Publisher

GOVERNMENT

CHICAGO CREDIT CURVE CONTINUES UPWARD

Another Chicago issuer got some good ratings news this week following on the improvement in the Chicago Public Schools credit. This time it was the City of Chicago itself. Moody’s Investors Service has revised Chicago (City of), IL’s outlook to positive from stable and affirmed the Baa3 issuer and the Baa3 rating on the city’s general obligation unlimited tax (GOULT) debt.

Moody’s based the outlook revision to positive on the basis of what they see as strengthened pension contribution practices and positive trends in the city’s financial position. A new pension funding policy was adopted in the fiscal 2023 budget under the prior administration. The reduction in uncertainty over whether a new Mayor and administration would continue those practices has been addressed. Those practices are continued in the fiscal 2024 budget which calls for pension contributions designed to keep the net pension liability (GASB NPL) from growing.

Moody’s also has affirmed the Baa1 rating on the city’s water revenue bonds, the Baa1 rating on senior lien sewer revenue bonds, and the Baa2 rating on the junior lien sewer revenue bonds. It is clear from Moody’s that the exposure of the sewer and water revenue bonds to the city’s credit challenges is the primary factor constraining the ratings despite otherwise strong attributes of the systems.

WEALTH TAXES

So far in 2024, lawmakers in 10 states – California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington – have proposed new taxes on “wealth”.  They are all variations on a concept driven primarily by Senator Elizabeth Warren. Each year an individual taxpayer would be assessed income taxes on increases in the value of assets they own. If their net worth exceeds a certain amount, the year over year increase would be treated as income for tax purposes.

One of the main sticking points holding back any effort to tax wealth is that the tax would be imposed merely because of a change in asset value. It would not be based on whether the change in value had actually been realized. No states currently assess any taxes on a living individual’s net worth or unrealized capital gains. 

Texas voters approved an amendment to their state constitution in 2023 which would effectively prevent taxes based on wealth or net worth. A campaign is underway which is expected to get an initiative on that state’s ballot in November which would eliminate the state’s capital gains tax. The Connecticut legislature is expected to consider a wealth tax which would eliminate the carried interest tax loophole.

WHAT ARE THEY THINKING?

One of the hallmarks of the U.S. securities markets is the respect in the U.S. for the rule of law. It has always been a significant factor driving the location and growth of the U.S. economy. Now, some are so ideologically driven that they seriously propose steps which would allow governments to ignore the rule of law. The most egregious one which we have seen has begun making its way through the Utah legislature.

The Utah Constitutional Sovereignty Act, or SB57, would allow lawmakers to reject any action from the federal government they view as unconstitutional, unless a court rules otherwise. Lawmakers could “prohibit the enforcement of a federal directive within the state by government officers if the legislature determines the federal directive violates the principles of state sovereignty”.

It is another attempt to limit the regulatory power of the federal government based on the 10th Amendment to the U.S. Constitution. It argues that only federal actions specifically authorized in the Constitution are legal. Many fear the legislation could be applied to any federal action which two thirds of the Utah Legislature does not like. Its sponsor claims that “we simply want to look at a process whereby we can vet, very carefully, any of those situations” “where we feel like the federal government steps over and reaches in and does some harmful things to our citizens, our state, our businesses. 

That is a pretty broad field of play and that is the concern. The claim is that it would rarely be invoked but that is always the claim of legislative sponsors of legislation designed to fight policies in court which they cannot win at the ballot box. The votes come as Utah’s fossil fuel industry has been fighting regulations limiting its ability to export its products from their landlocked locations. Some of those are federal but state permit issues are what has killed proposed shipment infrastructure for the export of Utah fossil fuel products.

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ENVIRONMENT

SOLAR

Recently we noted the role of Arizona’s public power entity as a hindrance to the use of residential solar power. Other municipal utilities are moving the other way. The latest example is CPS Energy, San Antonio’s municipally owned electric and natural gas utility. It announced the acquisition of the capacity of a 150 MW solar generation project in rural Texas. The utility currently has 551 megawatts of operating solar capacity and solar energy makes up roughly 7% of CPS Energy’s current power generation portfolio.

WATER

Here’s one example of why the current negotiations over the redistribution of water from the Colorado River and its surrounding region are so fraught. A private oil shale development company is seeking approval for the development of a reservoir on land under the supervision of the Bureau of Land Management. The particular tract for which the company is seeking a permit is within the boundaries of an area that the U.S. Forest Service and BLM are proposing to withdraw from eligibility for new oil and gas leases.

Conditional water rights are a unique provision of Colorado law which allow a would-be water user to reserve their place in the priority system based on when they applied for the right — not when they put water to use — while they work toward developing the water. Older waters rights get first use of the river.  An applicant must file what’s known as a diligence application with the water court every six years, proving that they still have a need for the water, that they have taken substantial steps toward putting the water to use and that they “can and will” eventually use the water. 

When the holders of conditional rights with older priority dates finally begin diverting water they have not used in decades, they may force junior rights holders to stop using water. That could potentially curtail users that have been receiving that water in some cases for decades. It has been estimated that there were conditional water rights associated with oil shale development on impacting 736,770 acre feet of water to be stored in 27 reservoirs in the mainstem of the Colorado River basin. 

WIND

The New Jersey Board of Public Utilities has awarded two new contracts for electricity from offshore wind farms. The projects are being undertaken in the wake of the decision by a previous developer to abandon its efforts to produce power from offshore windmills. At the time, the developer cited increases in costs due to general inflation, supply chain issues and interest rates.

The new contracts reflect those factors. The Board of Public Utilities estimates that under the contracts New Jersey awarded the monthly, the monthly bill of the typical residential customer in New Jersey would go up by $6.84. The two projects together would be capable of producing about 3,470 megawatts of electricity. New Jersey remains contracted with another offshore project, Atlantic Shores, for 1,510 megawatts. Combined, the three projects could produce more than one-third of the state’s 2040 target. 

On the West Coast, the Humboldt (CA) Bay Harbor District was awarded $426.7 billion dollars in federal grant funds to construct its offshore wind terminal in far Northern California. The District is constructing a terminal to serve the offshore wind generation industry. It plans to partner with an existing private terminal operator which is supplying $422 million of its own funds for the project.

Humboldt Bay is situated to be the first site to build a terminal for the construction and deployment of commercial offshore wind turbines on the West Coast. It will include a 1,200 foot wharf. The total cost is projected at $853 million. The target operation date is 2028. The Bureau of Ocean Energy Management auctioned off rights for the first offshore wind farms on the West Coast in December of 2022, and additional auctions are planned off the coast of Southern Oregon.

COAL

In 2020, the Wyoming legislature passed a bill intended to compel utilities to retrofit coal plants with carbon capture technologies rather than retire the facilities. It was portrayed as an effort to ensure reliability in a state where the coal industry is under attack. What was not clear to many was that costs associated with carbon capture adaptation could be passed through to customers. Now the potential cost to consumers is beginning to be assessed against utility ratepayers.

State regulators this month approved a $1.1 million annual “low-carbon” surcharge for Black Hills Energy. According to preliminary filings with the state, if the utilities move forward on a state-imposed mandate to retrofit coal-fired power plants with carbon capture technology the state’s ratepayers, it could mean up to $1 billion in additional costs for Black Hills Energy’s 145,000 customers in the state, and more than $2 billion for Rocky Mountain Power’s customers.

Black Hills Energy operates two units while Rocky Mountain Power operates three coal-burning units in the state that are subject to the law. The reality is that the real hope held by supporters is that federal funding would limit the impact on ratepayers. They believe that the recently expanded federal “45-Q” tax credit program for carbon capture facilities, along with technological developments could reduce the ratepayer burden.

The one common thread to the debate between “green interests” and the legacy fossil fuel interests is the hope that someone else will pay the bill. Electric cars, solar, wind, heat pumps all currently cost money and remain out of reach to many. A “surcharge” to keep the coal industry alive in Wyoming would likely deter potential large customers. Corporate customers are in a position to resist the surcharge effort especially if they have power supply agreements for power generated at non-fossil fueled plants.

It’s a prime example of the challenges facing climate activists, ratepayers and suppliers during the energy transition.

DALLAS FACES ENVIRONMENTAL REFUND OBLIGATION

In 2007, a gas company paid the City of Dallas $19 million for the right to drill for natural gas on city park land. In 2013, the Dallas City Council voted to stop renewing leases on land amid new restrictions on drilling within the city. That move led to a 2014 lawsuit filed by Fort Worth-based Trinity East Energy, LLC. A Dallas County jury in February 2020 agreed with Trinity East Energy that Dallas had improperly denied its permits to drill on city-owned park land and nearby private land in 2013.

The state Supreme Court rejected the city’s petition for review of those decisions in September 2023 and also declined another city motion for a rehearing of its petition to review the case on Dec. 29.  Now, the Council has is scheduled to vote Wednesday whether to approve up to $55 million in bond money to cover the total costs of the judgment. It would be the use of an old tool, the judgment bond which was designed for the occasional unfavorable legal judgment.

CHICAGO NATURAL GAS BAN

The new mayoral administration in Chicago has introduced the Clean and Affordable Buildings Ordinance (CABO). It would eliminate harmful natural gas emissions by setting an indoor emissions limit banning the combustion of fuels that emit more than 25 kg/btu – effectively requiring all new construction to switch to clean power sources like electric or other high efficiency systems. That is the same standard New York City set in a law enacted in 2021.

The following are exempted from the proposed emissions standard: commercial cooking, emergency backup power, crematoriums, wood fireplaces, industrial production, commercial laundry and labs and hospitals. The ordinance is not designed to force anyone to “give up their gas stove”. It is only targeted at new construction (including new additions to existing buildings). By amending building codes, the ordinance is designed to be immune to legal challenges to other “gas bans” imposed across the country. It would go into effect one year after passing City Council, in line with Chicago’s three-year building code cycle.

CAT BONDS

Since Hurricane Ian in 2022, the Florida Hurricane Catastrophe Fund has issued $1.9 billion in reimbursements to insurers and anticipates additional payments amounting to $8.1 billion by 2028. The fund also continues to make payments related to Hurricanes Irma and Michael, which struck in 2017 and 2018, respectively.

Now, the Fund plans to issue debt to provide between $1.5 million and $3 billion of new funding. According to the State, the bonds can be fit into the program’s existing debt structure which means that assessments to support bond repayment do not have to increase.

According to the Insurance Information Institute, the average insurance premium for homeowners in Florida has spiked by 42% year-over-year, to an average of $6,000 in 2023. At least a dozen insurance companies have stopped issuing new policies in Florida since January 2022 and three companies have announced their intentions to withdraw from the state in the past year.

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TRANSPORTATION

The U.S. Department of Transportation (DOT) today announced the approval of $2.5 billion in private activity bonds authority allocated for the Brightline West High-Speed Intercity Passenger Rail project connecting Las Vegas, Nevada, and Southern California. The 218-mile, high-speed rail line will primarily run along the I-15 median with trains capable of reaching 186 mph or more, cutting the trip to two hours – half the time to travel by car. 

DOT previously approved a private activity bond allocation of $1 billion for Brightline West in 2020, bringing the total allocation for this project to $3.5 billion. In December, DOT also awarded a $3 billion grant from President Biden’s infrastructure law to the Nevada Department of Transportation for this project. In June, DOT awarded a $25 million grant to San Bernardino County Transportation Authority (SBCTA) through the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) Program that will be used for the construction of the Brightline West stations in Hesperia and Victor Valley, California. 

We continue to note that high speed rail in the US continues to need public funding support. Both this project and its Florida counterpart were advertised as projects which were private which could serve as models for the future expansion if high speed rail. The reality has been that neither project would have happened without significant support from the Federal government.

MILEAGE FEES

Members of the far-right Arizona Freedom Caucus (in the state legislature) have offered a bill which would ban state, city, town and county governments from creating any tax based on miles traveled in a vehicle. The bill also would ban any of those government entities from tracking the number of miles a driver has traveled through odometer readings, traffic cameras or using phone tracking data.  It also includes provisions aimed at barring policies that reduce how much people drive.

The sponsor believes that mileage fees are part of a conspiracy to take away people’s freedom of movement. They believe that it is part of a plan to “force” people to use public transit and ban personal vehicles. A concurrent resolution being floated with the bill would put the issue of mileage fees to a ballot in November. 

PURPLE LINE

The ongoing saga of the effort to complete a light rail system in suburban Maryland known as the Purple Line continues. The latest turn of events is the news that Fitch Ratings had placed its ratings on debt issued to finance the project on negative outlook. The Negative Outlook reflects the project’s complex construction works that have led to delays approaching the design build (DB) and lenders’ longstop dates for a second time in the short two-year span since financial close on the first “renegotiation” of the P3 agreements behind the project.

The outlook change is an indication of the desire to see this impending second “renegotiation” concluded and executed. The removal of this source of uncertainty would alleviate the pressure on the project’s ratings. Fitch Ratings has affirmed the ‘BBB’ rating on approximately $100 million of private activity revenue bonds (PABs) series 2022A (green bonds) and $543.5 million of series 2022B PABs (green bonds) issued by Maryland Economic Development Corporation on behalf of Purple Line Transit Partners LLC (PLTP; limited liability company) for the Purple Line light rail transit (LRT) project (the project).

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.

Muni Credit News January 22, 2024

Joseph Krist

Publisher

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RATINGS

CHICAGO PUBLIC SCHOOLS

Moody’s Investors Service has upgraded the Chicago Board of Education, IL’s (CPS) issuer rating and debt ratings to Ba1 from Ba2. It has long been a troubled credit but never lost market access. That is reflected by the district having approximately $7.8 billion of general obligation unlimited tax (GOULT) debt outstanding in total. Moody’s based the upgrade on improvements in the CPS operating fund net cash and improved cash flows as reflected in part by reduced cash flow borrowing.

Moody’s also cited material increases in operating fund net cash, which is estimated to have reached about 13% in fiscal 2023 from under 5% five years prior. Enrollments are always a concern in aid-dependent urban school districts. This year, the actually increased by 1,000. It is a modest increase for sure but a welcome interruption to long-term trends. This will generate a small aid increase but also provides a higher base for adjustments if enrollments drop again.

The positive news doesn’t stop there. Moody’s maintained its positive outlook as a reflection of a trend of strengthening fund balance and net cash. At the same time, it’s less than investment grade current rating is weighed down by the fact that the district’s operating fund net cash remains the lowest of large school districts. Its limited available liquidity with a general fund net cash balance of less than 5%, and a high leverage ratio of nearly 500% of revenues are significant hurdles.

WMATA

The last few years have not been kind to the Washington Metropolitan Area Transportation Authority. Maintenance issues as well as issues with service and safety had put the Authority in a difficult spot. The pandemic led to extended stay at home provisions for many Federal government workers who mad up a good portion of ridership. Ridership and passenger revenues remain well below the pre-pandemic peak. Average daily rail and bus ridership experienced annual gains in 2023 but remain at approximately 60% of 2019 levels. Passenger fare revenues have also been negatively affected by a higher proportion of shorter-distance flat fare trips.

At the core of the problem is the fact that there is no predominant established reliable revenue stream to support operations. Farebox revenues cover only about 20% of expenses. This makes the system reliant on funding from state and local governments served by it. The District of Columbia, Montgomery and Prince George’s counties in Maryland, and in Virginia the cities of Alexandria, Fairfax, Falls Church and the counties of Arlington, Fairfax and Loudoun) are legally obligated (subject to certain restrictions) to cover the operating and capital costs of the transit system from their respective legally available funds, subject to annual appropriation.

WMATA has put up a budget for FY 2025 which covers a $750 million budget gap. Without additional funding subsidies from those governments, WMATA projects service cuts, which include the elimination of rail service after 10pm, the closure of 10 rail stations, increasing rail headway on all lines (ranging from 17% to 67%), and a one-third reduction in bus service. Subsidy increases from participating jurisdictions are subject to a 3.0% annual statutory cap under the terms of a 2018 dedicated capital funding agreement.

All of this contributed to Fitch Ratings’ move to put the Authority’s AA and AA- ratings for its two credits on negative outlook. It comes in the midst of the budget processes of all of the relevant governments including the States of Maryland and Virginia. Cutting service and raising fares is a recipe for trouble.

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SOCIAL

CHILD FOOD BENEFITS

The U.S. Department of Agriculture (USDA) administers a new program which provides funds to families with children who are enrolled in school breakfast and lunch programs will begin this summer. Summer EBT provides grocery-buying benefits to low-income families with school-aged children when schools are closed for the summer. Through this new program Summer EBT, states will provide families with $120 per eligible child for the summer to buy food at grocery stores, farmers markets or other authorized retailers – similar to how SNAP benefits are used. Native American tribes will utilize the WIC program.

Funding in the form of grants was authorized by Congress in 2023. An initial “test” for the current proposal was deemed a success leading to the rollout of the plan nationwide. Yet another time, a veritable list of usual suspects among the states has declined to participate in the program. They are essentially the same states who are ideologically opposed to any expansion of health or social services spending. Even when the Feds are covering costs with free money. Which states said no? AL, MS, ID, IA, GA, TX, SD, NE, WY, VT, AR, LA, FL, OK. They all have conservative Republican governors.

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GOVERMENT

NYC BUDGET

Mayor Eric Adams proposed a $109 billion budget for fiscal 2025. The mayor announced that the city would be receiving $2.9 billion more in expected tax revenues over the 2024 and 2025 fiscal years than initially expected. The City Council had projected some $1.5 billion of unanticipated tax revenues. The new number is good news but the Mayor’s handling of the issue of migrants and the budget is creating a whole other range of problems.

Since the first of the year, the Mayor has been announcing proposed draconian cuts in services in an effort to garner support for state and federal assistance. In the recent run-up to the budget, he has backpedaled on several of those proposed cuts to education, sanitation, and police and fire services. The Mayor’s lessening credibility on the City’s financial position and outlook will make his budget process much more difficult.

It has become clear that there will be no federal windfall for the city. This puts Albany center stage in the Mayor’s efforts to get the State to cover more of the costs of the migrants. He does not have a lot of credibility with the State Legislature already and this budget will not enhance his position. After the efforts to export the migrant problem to upstate communities, his “discovery” of new money will create a higher hurdle to overcome.

The proposed city budget comes on the heels of Gov. Kathy Hochul’s budget proposal for the State that included $2.4 billion to help New York City manage its migrant crisis — a $500 million increase over last year’s allotment. Nevertheless, the Mayor is holding out for more. Mr. Adams said that if the city received enough funding from the state, he would cancel further budget cuts that were planned for April. In the meantime, city agencies have reduced management and planning flexibility until the funding level is established. It is leading to worsening provisions of public services.

The Mayor comes into this budget cycle with lower credibility and an increasingly problematic federal investigation into his campaign financing practices. His relationship with an increasingly assertive City Council is poor and his budget plan is not helping his credibility with that body. It also does not help to find that the City has been providing inaccurate data regarding migrants and homelessness to make the situation look more favorable.

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ELECTRIFICATION

CHARGING INFRASTRUCTURE

So far only New York and Ohio have opened charging stations using bipartisan infrastructure law funding, and a handful of other states have broken ground on their EV projects. Now, the U.S. Department of Transportation announced the selection of 47 EV charging projects to receive nearly $623 million in funding under the 2021 bipartisan infrastructure law. As of last January, there were only about 20,000 publicly accessible, high-speed Level 3 chargers across the country.

The National Renewable Energy Lab estimates the country will have another 40 million EVs on the road over the next 25 years. It estimates that there would be a need for at least 182,000 Level 3 chargers across the country by 2050 to accommodate them. The issue gains greater currency as EV purchases grow and the pool of driving and operating issue increases. Currently, the press is full of reports from unhappy EV owners who forgot that batteries of any kind do not do well in sub-freezing conditions. That will increase the demand for charging at less distances between them.  

GENERATION

The U.S. Energy Information Administration released its most recent Short Term Energy Outlook. EIA projects solar power to be the leading source of growth in electricity generation in both 2024 and 2025 as 36 gigawatts (GW) and 43 GW of new solar capacity come on line, respectively. the solar share of total generation is expected to rise to 6% in 2024 and 7% in 2025, up from 4% in 2023. This will occur as overall U.S. electricity generation will grow by 3% in 2024 and be unchanged in 2025. 

EIA expects that electricity generation from coal will decline by 9% in 2024 and by 10% in 2025, due to a combination of higher costs compared with renewables and another 12 GW of coal-fired capacity retiring over the next two years. U.S. coal production will decline by more than 90 million short tons (MMst) to less than 490 MMst in 2024 and then fall below 430 MMst in 2025, the least coal produced in the United States since the early 1960s.

Electricity generation from natural gas will be unchanged in 2024 and 2025 compared with 2023. U.S. production of dry natural gas is estimated to increase between 1% and 2%, or about 1.5 billion cubic feet per day (Bcf/d) in 2024 and 1.3 Bcf/d in 2025, down from growth of 4.0 Bcf/d in 2023. The slowing growth reflects a drop in natural gas production associated with oil drilling in the Permian Basin.

Something to think about is after all of the efforts and ink spilled on the changing climate and the role of fossil fuel, EIA forecasts crude oil production in the United States reaching 13.2 million barrels per day (b/d) in 2024 and more than 13.4 million b/d in 2025, both of which would be new records.

SALT RIVER PROJECT VS. ROOFTOP SOLAR

Arizona’s Salt River Project is a public utility which has been less than enthusiastic about the adoption of rooftop residential solar. The use of solar in the Valley of the Sun has seemed to be a no-brainer but utilities have done all they can to make rooftop solar less economically attractive to its retail customers. The key to the situation lies in the methodology SRP has adopted to determine how much it pays for solar generated power.

Now, two customers and an advocacy group are challenging SRP’s current rate structure. They claim that the current scheme violates regulations because customers who buy some power from SRP but have rooftop solar are charged a different price for SRP generated power than those customers who do not have rooftop solar. They are asking the Federal Energy Regulatory Commission (FERC) to find that SRP’s current rate structure violates the Public Utility Regulatory Policies Act (PURPA).

The challengers contend that through the fixed charges, SRP’s solar customers with service at 200 amps or less pay $12.44 more a month than non-solar customers for the same amount of SRP-provided electricity. The challengers also claim that PURPA requires SRP to buy electricity from qualifying facilities at the utility’s system-wide marginal cost. Instead, the contention is that the price established by SRP is based on one particular low-cost generator.

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ENVIRONMENTAL

CLIMATE ON THE BALLOT

Washington voters will have the chance to repeal or uphold the Climate Commitment Act. The climate law requires the state’s biggest polluters, such as power companies and oil refineries, to start paying for their greenhouse gas emissions through buying allowances in auctions. So far, the auctions have raised roughly $1.8 billion. Organizers of an effort to repeal the 2-year-old climate act collected more than 400,000 signatures to put an initiative on the ballot.

Revenue from the program is earmarked to go back into green state programs such as buying electric school buses and making public transit free for children. Opponents blame the state’s cap and trade scheme for rises in gasoline and food. The initiative is technically an initiative to the Legislature. This means that the legislature can adopt the initiative as written, reject it or refuse to act on it. Voters will get a chance to vote on the initiative if the Legislature rejects it and refuses to act on it.

PREEMPTION CUTS BOTH WAYS

A lot of the efforts at preemption have been directed at overriding local ordinances and regulatory processes which have limited the use of fossil fuels. In those instances, legislation has generally been directed at localities and zoning and siting regulations which fossil fuel supporters feel limit their ability to extract their various substances and produce fuels and other products. Those efforts were always decried by environmentalists.

Now, the shoe is on the other foot. This time it is green energy advocates who are upset over efforts to move the regulation of renewable generation assets to the state level. The efforts reflect the perceived need to develop renewables to meet promised deadlines for carbon neutrality which have been made at the state level. The latest example is in Michigan where the legislature is considering bills which would put the authority for siting renewable energy projects with the State.

This would enable the State to effectively override local zoning ordinances which have been used to slow the adoption of solar and wind. In many cases, willing sellers or lessors who hope to retain their farm land are facing local limits on energy development. Michigan has adopted a plan committing to carbon neutrality by 2050. They won’t get there without solar and wind power.

INSURANCE

The Florida Senate Banking & Insurance Committee unanimously passed two bills that would allow pricier homes to be covered by Citizens Property Insurance, a state-run company, and to provide $100 million for a grant program to improve homes’ protection against windstorm damage.  SB 1106, raises the cap on homes that can be covered by Citizens from $700,000 to $1 million. The bill would place a surcharge of up to $2,500 on homes above $700,000 to keep Citizens from competing with private carriers. 

SB 7028, puts $100 million toward the My Safe Florida Home Program. That program offers up to $10,000 in matching grant funds to homeowners who make windstorm mitigation improvements, such as roof, windows and door upgrades. It’s clear that the insurance market continues to reflect a worsening perception of risk and the continuing withdrawal of major private insurers from the Florida market.

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.

Muni Credit News January 15, 2024

Joseph Krist

Publisher

CALIFORNIA BUDGET

Governor Newsome released his proposed budget for fiscal 2025. The 2024-25 Governor’s Budget proposes spending of $291.5 billion in total state funds, consisting of approximately $208.7 billion from the General Fund, $80.8 billion from special funds, and $2 billion from bond funds. Revenues for the General Fund include a transfer from the Budget Stabilization Account/Rainy Day Fund of $12,026 billion. Some 53% of GF revenues are projected to come from the personal income tax.

The budget shortfall facing lawmakers in 2024—estimated at $37.9 billion—is rooted in two separate but related developments during the past two years according to the Governor. They are the substantial decline in the stock market that drove down revenues in 2022 and the unprecedented delay in critical income tax collections.  The State pushed back its filing deadline until this past October as the State dealt with a number of natural disasters in the normal tax season.

The new estimate is significantly lower than the $68 billion gap estimated by the State Legislative Analyst in the fall. Last year, due to federal tax deadline delays and California’s subsequent conformity, the majority of the state’s revenues did not arrive until October and November. That means the correction that would have come as part of last year’s May Revision is instead being made in this January budget.

Had the filing delay not been in place, most of the revenue drop would have been reflected in lower tax receipts before the May Revision and incorporated into the 2023 Budget Act projections. This would have resulted in a larger budget gap in 2023, additional solutions to close it, and a smaller shortfall for 2024 than what is now faced. 

The governor proposed funding nearly $19 billion of the gap with drawdowns of the State’s reserves. The remainder of the gap would be addressed by reducing $12 billion from planned spending and delaying a little more than $7 billion in spending commitments into fiscal year 2026. The reductions are concentrated in cuts to spending on education, housing, and climate. In the smoke and mirrors category, using Prop 2 Debt Repayment Funding ($1.3 billion) to fund pension payments and delays in the distributions of funds to transit systems and to the state university system ae employed. 

NYC PROPERTY TAXES

The real property tax (RPT) is New York City’s largest source of tax revenue, comprising 44 percent of the City’s tax revenue collections in fiscal year 2023. Covid-19 pandemic’s effect on city property values led to swings in RPT revenue in 2022 and 2023, and RPT current forecasts through 2027 anticipate slower growth in tax collections. Property tax collections increased relatively steadily by an average of 6.4 percent per year from 2012 through 2021.

In anticipation of major declines in rental income for commercial properties and residential apartment buildings, the Department of Finance (DOF) sharply reduced the assessment of property values that were used to calculate the 2022 tax bills, which led to a 6.0 percent decrease in property tax collections that year. Annual RPT revenues rebounded in 2023, rising by 7.0 percent to a level just above 2021 revenues. Some of the rebound reflected adjustments to the prior year’s assessment adjustments.

In the current 2024 fiscal year, IBO forecasts a 3.6 percent increase in property tax revenue, followed by average annual growth of 3.2 percent from 2025 through 2027. This is about half of the annual growth seen in the decade prior to the pandemic. The bulk of revenue growth in IBO’s forecast comes from apartment buildings and commercial and industrial properties, which account for, respectively, 38 percent and 34 percent of aggregate gross levy growth from 2024 through 2027.

The IBO addressed the issue of office attendance declines and IBO’s baseline forecast accounts for some office market softening by projecting 2 percent annual growth in Manhattan office values throughout the forecast period, rather than the 5 to 6 percent growth seen before the pandemic. To address concerns about the issue, IBO tested by incorporating a 6 percent annual decline in the Manhattan office gross levy—rather than a 2 percent annual increase—calling this the “office doomsday” scenario. This substantially reduces IBO’s RPT forecast: IBO had baseline forecasted about $35.9 billion in revenues in 2027, and 3.2 percent annual growth from 2024 through 2027. But with this more pessimistic office outlook, IBO forecasts $1.3 billion lower revenues in 2027, and only 1.9 percent annual growth.

TAXES ON THE 2024 BALLOT

San Diego County voters will have the opportunity to vote on a proposal to raise local sales taxes to fund transportation improvements. The initiative hopes to provide funding for shoring up the coastal railroad route that is the only connection for freight and passenger trains between San Diego and Los Angeles. Previous efforts to get voter approval for taxes for transit failed. One lost at the polls by missing a two-thirds vote requirement. The other failed to get enough signatures to make the ballot.

This initiative is a “citizens initiative” which under California law requires only a simple majority vote – 50%+1 – in order to be enacted. The failed vote actually got a 57% majority so there is a real likelihood of passage.

NUCLEAR

The recent halt to plans for a demonstration small modular reactor in Idaho may have fallen through but proponents of the technology soldier on. The U.S. Nuclear Regulatory Commission (NRC) has voted to issue a construction permit to a private concern to develop a demonstration reactor to be built at the Heritage Center Industrial Park in Oak Ridge, TN. The project is the first non-water-cooled reactor to be approved for construction in the U.S. in over 50 years. 

The planned reactor will instead be a fluoride salt-cooled, high-temperature reactor (KP-FHR) technology. A separate application for an operating license and subsequent NRC approval will be required before operations can commence. Oak Ridge is no stranger to the development of new nuclear power technology. The funding is provided in part from a Department of Energy Advanced Reactor Demonstration Program (ARDP) award and will involve assistance from Oak Ridge National Laboratory and Idaho National Laboratory.

ESG, IDEOLOGY AND BACKLASH

We saw recent comments made by local municipal borrowers in Oklahoma after they had to delay bond issues and change underwriters due to anti-ESG legislation enacted in Oklahoma. The State Treasurer had released a list of financial institutions prohibited from doing business with governments in the state due to his determination that the companies violated the state’s 2022 Energy Discrimination Elimination Act by boycotting energy companies. The Texas Attorney General began maintaining his own list in 2021. There are similar stories of delayed issues there as well.

The Oklahoma localities are lobbying for changes to the law. At the time of enactment, it did not appear that the issue of local bond issuance was a paramount concern. Now there is sentiment being expressed that the State could do what they want with their resources but that the law was not intended to raise costs for local issuers and taxpayers.

Even at the state level, the policy has created issues. The Oklahoma Public Employees Retirement System voted 9-1 in August to retain BlackRock Inc. and State Street Corp. as investment advisers even though those banks were on the treasurer’s blacklist. A retiree and former president of the Oklahoma Public Employees Association in November filed a lawsuit against the state and its treasurer, calling the state’s anti-ESG legislation “government overreach” and a violation of free speech. The ERS cited a potential negative impact from the policy.

CLIMATE LITIGATION

The latest attempt to move lawsuits filed by states and localities against the fossil fuel industry into federal courts has failed. The U.S. Supreme Court declined to take up a challenge to a lawsuit brought by Minnesota Attorney General Keith Ellison against six fossil fuel companies. The industry has pretty consistently failed in its attempts to have suits dismissed at the state level. The case that has gone the furthest was filed by the city and county of Honolulu. That state’s Supreme Court recently ruled that oil companies did not have the arguments necessary to dismiss the case.

Proponents of sweeping bans on the use of natural gas appliances suffered another defeat in court. The 9th U.S. Circuit Court of Appeals declined to conduct an en banc hearing on a review an initial circuit court decision which invalidated a ban on gas appliances in new buildings enacted by the City of Berkeley, CA. Unless the city of Berkeley chooses to appeal the case to the Supreme Court, the 9th Circuit’s judgment is now final. It will apply to the eleven Western states within its territory.

The decision does not leave local government unable to regulate the appliances. Other approaches which have not been struck down include the use of building code requirements and overall limits on emissions designed to effectively diminish the use of gas, especially for cooking.  

WOOD

A producer of wood pellets for use in wood stoves is facing financial issues imperiling its ability to operate.  The situation threatens the credit supporting industrial development bonds issued in Alabama and Mississippi for manufacturing facilities operated by Enviva. The Alabama issue totaled $250 million while the Mississippi issue totals $100 million. The outstanding bonds are rated CC by Standard and Poor’s. In addition to the bonds, the company received significant economic aid from the State of North Carolina.

Enviva supplies European and Asian utilities with wood pellets as an alternative to burning coal.  After dismal third quarter 2023 results, Enviva announced it would delay completion of a new pellet plant in Mississippi. More concerningly, the company’s auditors issued a going concern letter. In November, Moody’s, S&P, Fitch all lowered ratings to the lowest levels above default.

According to Enviva, the company supports more than 1,800 jobs in mostly rural North Carolina at its four wood pellet production plants and Port of Wilmington facility and has invested more than $675 million in the state. That facility enables the export of the pellets to European and Japanese markets. In those markets, the choice is posed as wood or coal. On that basis, wood is less polluting and trees can be planted as trees are harvested. That results in wood pellets considered to be renewable biomass overseas.

The company cites collapsing prices for wood pellets, long-term contracts that lock Enviva into deals with customers at low prices, high interest rates that makes its loans more expensive to service, and operational issues at some of its plants. Enviva also faces significant litigation issues as the use of wood pellets as a “renewable” source of energy is highly controversial. The US takes a different approach to wood pellets than do European countries and Japan.

WESTERN HYDRO

The difficulty in long-term water use planning comes from the volatility of data relating to weather and water. A quick review of data from recent years provides a window into that volatility. Federal data shows that 2021 and 2022 were two of the three lowest years for hydropower generation nationwide since 2010. Much attention was paid to the impact of multiple atmospheric rivers in California and California increased its hydropower generation by 72 percent in federal FY 2023. At the same time, hydropower generation in Washington State—the national leader in hydropower—was down 23 percent compared to the previous 12-month period.

The latest water level data for Lake Powell, the reservoir in Arizona and Utah that feeds the Glen Canyon hydropower plant showed the surface of the lake level this week was 3,568 feet above sea level, according to the Bureau of Reclamation. On the same day last year, the water was at 3,525 feet—some 43 feet lower. That was close to the reservoir’s lowest level since it was initially being filled in the 1960s. It is at 35% of capacity.

If the level falls to 3,490 feet—78 feet below the current level—water will be too low to drive the turbines that generate electricity. If the level falls to 3,370 feet—198 feet below this week’s reading—it would reach “dead pool” status, when the water is too low to flow downstream from the dam. In October of this year, the Bureau of Reclamation reported that between October 2023 and September 2024, an estimated 9.4 million acre-feet of water would flow into Lake Powell. That estimate was cut to 7.6 million acre-feet just before the latest measurements.

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.

Muni Credit News January 8, 2024

Joseph Krist

Publisher

This week we highlight several of the sectors which we think will be of significant interest to municipal bond investors in the coming year. The pandemic may be “over” but its effects linger on. Whether it is the impact of remote work, the pressure on demand in sectors like senior living and hospitals, school enrollments, retail commerce or mass transit – the footprints of the pandemic continue to be trackable. The impact of inflation continues. The budget season will be more difficult as intergovernmental aid for the pandemic is effectively over.

So, with that backdrop, we’re off and running for 2024.

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ALTERNATIVE TRANSIT HITS POTHOLES

Just before Christmas, Electric scooter maker Bird Global filed for bankruptcy protection. The company operates a short-term scooter rental business in more than 350 cities. Its operations in the US are the subject of the filing. The increasing incidences of injuries through operation as well as restrictions on and concerns with the batteries powering scooters and bicycles have reduced demand.

This followed the November announcement that Revel would pull its mopeds out of New York and shut down the moped service in San Francisco after previously ending it in other cities. While the company had faced claims related to injuries and complaints about inadequately trained users. During the pandemic it was a way to avoid public transit especially for remote workers. Revel’s monthly ridership soared to a high of 582,159 rides in July 2020.

Revel’s moped ridership in New York fell to 136,802 rides in July, a 30 percent drop from 194,278 rides in July 2022. The drop coincided with a more popular e bike program through Citi Bikes and e bike ownership has grown significantly. In New York, there were five deaths involving Revel mopeds — four were Revel riders and one was a pedestrian struck by a Revel rider — between 2019 and 2021, according to city records.

KAISER PERMANENTE LAYOFFS JUST A SIGN

In October, employees at Kaiser Permanente facilities struck to achieve a new contract. The primary issue was wages especially in the wake of the pandemic. An agreement was reached but its impact has cut both ways. Now Kaiser has announced administrative layoffs in a move which mimics those being undertaken currently across the country.

The impact is subtle. Individual check-in sites have been replaced by central check-ins which effectively reduce that administrative headcount. The cuts are going on at facilities and systems large and small. The slower than expected recovery of utilization levels on both an inpatient and outpatient utilization continues to pressure operating results.

A glaring example is the projected closing of the last acute care hospital below 23rd Street in Manhattan. Mount Sinai (NY) announced the closing of the facility to take place this July. Various interests are trying to bring pressure on the money-losing facility to stay open. The facility’s increasing reliance on government payors has stressed operations for some time. Plans for a replacement with a heavy emphasis on outpatient care have not come to fruition.

The other way to deal with these pressures is further consolidation. Whether proposed mergers like that between Henry Ford Health and Ascension Health in Michigan will pass muster with an activist Federal Trade Commission is yet to be seen. Concerns about rural facility closings will continue and generate pressure in an election year. The Biden Administration continues to pressure small rural facilities to reduce themselves to clinics to feed distant acute care facilities.

RURAL HOSPITAL RECOVERY

The trend in recent years in the small rural healthcare sector has been towards downsizing and actual closures. The same pressures which drove those decisions have also made it hard to find viable financial recovery solutions. One facility in California however is showing that it is possible for these facilities to maintain themselves and survive.

A private operator had run Watsonville Community Hospital in California for years. The facility saw multiple management teams, declining results, and the apparently the theft of funds under the private management. The trends were so negative that a bankruptcy seemed like the option. In this case, the community seemed better prepared than most to deal with the issues.

In 2021, the Pajaro Valley Health Care District was created in anticipation of a Chapter 11 filing by the hospital. The District currently leases the facility. New management has succeeded in improving operating results. Now, the District hopes to get voter approval on March 5 for a $116 million bond issue. Proceeds would finance the purchase of the hospital and fund capital improvements. The district needs more than two-thirds of its voters to vote yes.

CALIFORNIA – NET METERING; WATER; GOVERNORS BUDGET

California regulators approved new rules to let water agencies recycle wastewater. California has been using recycled wastewater for decades. The prior uses were commercial. The Ontario Reign minor league hockey team has used it to make ice for its rink in Southern California. Soda Springs Ski Resort near Lake Tahoe has used it to make snow. And farmers in the Central Valley, where much of the nation’s vegetables, fruits and nuts are grown, use it to water their crops. 

Orange County operates a large water purification system that recycles wastewater and then uses it to refill underground aquifers. The Metropolitan Water District of Southern California, which serves 19 million people, aims to produce up to 150 million gallons (nearly 570 million liters) per day of both direct and indirect recycled water. A project in San Diego is aiming to account for nearly half of the city’s water by 2035.

The new rules require the wastewater be treated for all pathogens and viruses, even if the pathogens and viruses aren’t in the wastewater. That’s different from regular water treatment rules, which only require treatment for known pathogens. In San Jose, the Santa Clara Valley Water District recycles water and uses it irrigating parks and playing fields. 

These sorts of efforts may once again get support as the volatile nature of California’s water supplies become apparent again. After a winter of multiple precipitation rivers and record high snowpack, a level of muted optimism about the short-term water outlook arose. Now, just a year later, the headlines are about record low snowpack and probable diminishment of hydropower capacity.

The first snow survey of the season found the snowpack at 30% of average for the date, and 12% of the average for April 1, when snowpack is typically at its deepest. Data from electronic readings from 130 stations across California indicate the snow water content statewide is just 2.5 inches, or 25% of average for the date, compared with 185% at the same time last year.

Rainfall directly on reservoirs has offset a bit of the loss. California’s two largest reservoirs, Lake Shasta and Lake Oroville, are at 69% and 68% capacity, respectively. California’s water year runs from Oct. 1 through Sept. 30, with the majority of the state’s precipitation typically falling in January, February and March.

California’s NEM 3.0 net billing tariff was approved by state regulators at the end of 2022, and came into effect for distributed solar interconnection applications submitted on or after April 15. A survey from the California Solar and Storage Association reported that rooftop solar sales were down between 66% and 83% compared to the same time in 2022.  Industry analysts are predicting a 40% decrease in new residential solar in the state.

Efforts to get the new net metering regime overturned in the courts were dismissed at year end.

This week, the Governor will deliver his preliminary budget proposals. The backdrop is the recent Legislative Analyst Office estimate that the budget gap facing the State could be as high as $68 billion.

CARBON CAPTURE – DECISIONS LOOM

The ongoing efforts by Summit Carbon Solutions to construct a multi-state pipeline to take carbon produced at ethanol plants and inject it underground continue. The main battleground is in Iowa where a decision of whether to permit the project or not is pending before the Iowa Utilities Board (IUB). Two other companies have either abandoned their projects or withdrawn approval applications.

While that process unfolds, Summit continues its legal effort to eliminate local control over the regulation of its project. It recently filed suit against a fourth county in Iowa over the enactment of zoning regulations which would make it harder to build pipelines close to population centers. In other litigation by Summit, permanent injunctions against Shelby and Story counties that bar them from enforcing their ordinances were handed down by a federal District Court judge. Those counties recently appealed the judge’s decisions.

A third suit is pending. Summit also filed suit against a fourth county this week to overturn adopted County ordinances.

The Iowa House of Representatives approved a bill last year that would restrict the companies’ ability to use eminent domain to gain land easements until they obtained voluntary easements for 90% of their routes. The Iowa Senate did not consider the bill, but it could during the upcoming legislative session, which starts next week.

COMMERCIAL VALUATIONS

One of the concerns arising from the pandemic is the potential impact of WFH on the office real estate market. A couple of office building transactions in large cities have been sold at significant discounts to purchase price. The fear is that this is the start of a trend. The third-tallest tower in Los Angeles, has sold for $147.8 million — about 45% less than its last purchase price in 2014. One estimate says that 30% of downtown LA office space was available for lease or sublease in the third quarter. In Chicago, a smaller older building sold at an 89% discount to its last purchase price. With vacancies high and rents being discounted, newer stock is much more attractive than so-called Class B buildings.

WIND

The Vineyard Wind project off the island of Nantucket was one of the first approved for the New England coast. It had been anticipated that it would be the first to operate but that was not to be. Vineyard Wind instead is the nation’s second utility-scale offshore wind farm to start generating electricity having been beaten to the punch by the South Fork Wind off the Long Island coast. At present, Vineyard supplies 5 MW from one turbine. Ultimately, the project is designed for 62 turbines.

The short-term outlook for ocean wind power at scale is weak. A contract with New York to sell the state electricity from Empire Wind 2, a proposed 1,260-megawatt offshore wind farm that would be located southeast of Long Island was terminated. The same factors impacting this project are reflected throughout the industry – interest rates, inflation, supply shortages.

These pressures are changing the approach of some utilities to a wind based future. Vineyard is sponsored by Avingrid, a Spanish utility which owns CMP in Maine and NYSEG in New York. Avingrid had hoped to own significant distribution capability to use power from wind projects. Those efforts distracted from basic power supply and created widespread animosity towards Avingrid from both its Maine and New York customers.

That experience generated significant opposition to Avingrid’s acquisition of Public Service of New Mexico. After an intense and drawn out regulatory process, Avingrid threw in the towel on its efforts to acquire PSNM.

SENIOR LIVING

The facilities are in Michigan and Ohio. The management of the facilities is based in Louisiana. The conduit bond issuer is in Arizona. What could possibly go wrong? We are about to find out as the Great Lakes Senior Living Communities LLC is poised to default on its debt. Some $376.2 million of bonds were issued in 2019 and were outstanding as of Dec. 31, 2022, plus $19.5 million in fourth- and fifth-tier parity bonds issued in 2021 to fund additional capital needs on the project. The timing could not have been worse. With nursing homes at the center of the pandemic, it was effectively impossible for the projects to t projections.

The debt was downgraded in 2020 and results continued to be significantly below budget. The trend has continued and debt service reserves had to be tapped to cover debt service. Now, S&P has lowered its ratings to CCC and expects that a debt service payment may be missed. The project is already operating under forbearance agreements and debtholder control over its budget. Given the rise in interest rates, a refinancing would be more difficult given the operating position of the facilities.

The deal is just another example of the pitfalls of conduit financings. Like its counterpart agency in Wisconsin, the Arizona issuer has been involved in several other default situations. We have long considered the participation of conduits in already speculative credits to be problematic. It won’t be the last issue like this to run into problems in 2024.

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