Joseph Krist

Publisher

NATIVE AMERICAN GAMBLING SETTLEMENT

The Seneca Nation in upstate New York has been in a long dispute with the State of New York over how much money generated from its casino operations needed to be paid to the State. That dispute resulted in more than $600 million of gaming revenue owed to the state and various local governments being placed in escrow.  This caused the State, and the cities of Niagara Falls (Baa3 positive), Buffalo (A1 stable) and Salamanca, which host Seneca Nation casinos to have to annually adjust their budgets to reflect revenue receipts below what were assumed under the agreements. The ongoing uncertainty acted as a negative weight on those cities’ credits.

Recently, the State of New York and the Seneca Nation of Indians announced a resolution of the contract dispute. The agreement calls for the Seneca Nation release the money held in escrow and begin negotiations on a new gaming revenue compact with the state. This will result in a significant revenue boost as well as reducing the liability side of the City of Buffalo’s balance sheet. In the cases of Niagara Falls and Salamanca, the benefit will be primarily on the balance sheet as opposed to the income statement as the transfers from the State will, net of repayment of the advances, not generate significant new revenues.

The State of New York, along with the local governments, will also benefit from the resolution. In fiscal 2020, the state received $88 million in payments from the Seneca Nation when the budget assumed receipts of $303 million. In fiscal 2021, the state received $60 million when it had projected receipts of $515 million. In the fiscal 2022 financial plan, the state’s estimate as of November for current-year receipts was $663 million. The State was in a better position to handle the shortfalls than were the cities.

In recognition of that fact, the State agreed to advance revenues to the three host cities if needed to achieve balanced budgets. The largest of the three cities, Buffalo, had been able to do that without casino payments. Niagara Falls and Salamanca have needed the funds to achieve balance. All three have availed themselves of the state transfers at some point during the process of resolving the dispute. Niagara Falls and Salamanca relied heavily on state advances and as result will receive a relatively small cash infusion when the escrowed funds are disbursed

The original compact between the State and the Seneca Nation is nearly 20 years old. The settlement also calls for the negotiation of a new compact between the Seneca nation and the State. While the outcome of those talks is uncertain, a major source of uncertainty for the host cities has been alleviated. The dispute had lingered since 2017. The end of the current uncertainty is credit positive for each of the governmental entities involved.

TEXAS POWER MARKET DRIVES A MUNICIPAL DOWNGRADE

One of the municipal utilities that found itself at the center of the Texas energy crisis of 2021 was CPS of San Antonio. The price explosion in the energy market stemming from the winter freeze impacted CPS as much as any of the large utilities. It faces some $1 billion of charges for purchased power during the freeze. It is disputing some 58% of that total. The utility was seen as clumsy in its response to customers. There was also significant management upheaval.

All of that creates a difficult political environment for the municipal utility. It was considered to be an achievement when CPS was still able to obtain approval for a 3.85% base rate increase in January 2022 from the Board and City Council. It is expected that additional increases will be required over the next five years. The absolute level of those increases will depend on the regulatory treatment of the proposed charges.

The unique nature of the Texas power grid and market create specific challenges which CPS does not control. It is widely agreed that state grid remains vulnerable to a repeat of last year’s weather event as meaningful and significant improvement to physical assets of the generation/transmission system has not occurred.  While the uncertainty of the ultimate outcome of the dispute over the gas charges remains an issue, CPS has been able to generate access to outside financing of its cash needs. It has increased its use of a greater set of hedging tools to reduce its natural gas price risk.

This has all led to Moody’s lowering of the City of San Antonio, TX Combined Utility Enterprise’s (CPS Energy) senior lien revenue bond rating to Aa2 from Aa1 and junior lien revenue bond rating to Aa3 from Aa2. It is still a solid credit and there still remains financial flexibility. The retail service area is not open to competition, the utility serves several Federal military installations and there is no major customer dominance. Approximately 90% of customers are residential.

That is why Moody’s emphasizes that. ESG factors are material drivers of this rating action. “Winter Storm Uri’s extreme nature and enduring cost impact to CPS Energy, and the fact that meaningful reliability improvements have yet to be implemented at scale in the ERCOT market and the state’s energy supply chain, are considered in our assessment of environmental risk. Strained customer relations in the wake of the storm and the need to rebuild management credibility after a wave of executive departures also raise the risk profile as it relates to social and governance considerations.”  

ILLINOIS PENSION FUNDING

One approach to the issue of funding pension liabilities is to “buy out” the pension rights of pensioners through a payment to pensioners. Pensions have been a long-time challenge in the State of Illinois and the state has already undertaken a buyout program beginning in 2018. It is one of the few big issues on which there is bipartisan agreement. The existing buyout programs began under the administration of former Gov. Bruce Rauner. Under the Pritzker Administration, the legislature in 2019 extended it to June 30, 2024. The buyouts are funded by $1 billion in general obligation borrowing capacity of which $115 million in authority remains.

The program offers eligible members who no longer work for the State a lump sum payout equal to 60% of the present value of their vested pension benefit to leave the system. For some of those who are still working for the State, they have the option of receiving a lump sum benefit when they retire plus an ongoing annual payment but at a 1.5% non-compounded COLA instead of the compounded 3% COLA they are currently set to receive.

Recent legislation has begun moving through to a vote which would extend the program until June 30, 2026. The plan asks for an additional debt authorization for another $1 billion. The buyout programs cover the three largest of the funds – the Teachers Retirement System (TRS), the State Employees Retirement System (SERS), and the State Universities Retirement System (SURS). The legislation is expected to pass although there is not a lot of hard data for legislators to rely on when evaluating the program. There was testimony in committee that TRS saved $90 in the state’s contribution to pensions.

ENVIRONMENTAL LITIGATION

Last week, oral arguments began in the City of Baltimore’s litigation against BP, Exxon Mobil Corp. and 24 other oil companies which broadly alleges that the companies failed to adequately disclose the impact of their operations on the climate. The oral arguments before a Virginia appeals court will be the first since a U.S. Supreme Court ruling in May found that appellate judges could consider a broader range of factors when deciding whether liability lawsuits should be heard in state or federal court.

A 2019 ruling in federal district court sent the Baltimore case back to state court. In this appeal to the Circuit court, the companies emphasized two grounds for removing the case to federal court that it said the court had not yet considered: that the claims “arise” under federal law and that the city’s “alleged injuries” are connected to the production of oil and gas from the outer continental shelf and are subject to a 1953 federal law that regulates that production. “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.” The oil companies argued that “the causes of action don’t matter as long as the plaintiff’s theory rests centrally on the production and sale of fossil fuels and the use of fossil fuels.”

Baltimore has noted that a previous appeals court ruling that found the city’s claims involve the companies’ alleged “concealment and misrepresentation” of the dangers of climate change and “do not implicate any body of federal common law and are unconnected to any operations on the Outer Continental Shelf.”

The companies claim that Baltimore is seeking to upend international agreements and that a decision in the City’s favor would ““undermine national energy objectives, including federal efforts on the climate, energy independence, the stability of the electric grid, and energy affordability.”

The fossil fuel defendants will do all that they can to get their case before the U.S. Supreme Court where they believe that the current justices are more inclined to rule in their favor. This is but one of nine climate liability cases which were sent back to circuit courts across the country after the Supreme Court ruling. If the companies offer the same arguments, the cases will be put before the U.S. Supreme Court. 

OIL/GAS ROYALTY CHALLENGE

The North Dakota State Board of University and School Lands is appealing several 2021 rulings from a lower court in a case about oil and gas royalties. The appeal challenges part of a 2021 law that put a limit on how far back the state can retroactively collect unpaid royalties. Legislation last year that capped the length of time for which the state could seek to collect unpaid royalties at seven years. The defendant is a producer who is challenging the claims.

The Supreme Court has heard other issues in the case already and released a ruling in 2019 favorable to the state, which has since sought to collect what could amount to hundreds of millions of dollars in unpaid royalties from a number of oil and gas companies. This litigation flows from those efforts to collect the payments.

The total amounts in question are about $69 million for the years before August, 2013. So, it is not huge money but obviously the State wishes to secure as much legal support for the royalty charges as a general concept. That puts it closer to an issue of principal.

MICHIGAN LANDS GM EV PLANT

GM finally confirmed that it will build a new factory in the state capital, Lansing and expand capacity at its existing EV plant in Lake Orion outside Detroit. The combined investment by GM is being announced as $7 billion. GM projects that it will create 4,000 permanent jobs at the two facilities. The Lansing plant will produce batteries for EVs and is scheduled for 1,700 jobs. The existing Lake Orion plant will expand by 3 million square feet and build electric pickup trucks. It will add 2,300 jobs.

The announcement came as it appeared that Michigan might be losing out in the race for jobs related to electric vehicles. Many of the production facilities were being announced in less labor friendly states. Now this substantial investment keeps Michigan in the game. The importance of the plants to the State was made clear as some $825 million of incentives and tax breaks were offered to encourage GM to locate in Michigan.

PURPLE LINE CONTRACT

The Maryland Board of Public Works has announced its approval of a new contractor to manage the private public partnership building the Purple Line in Maryland. The new $3.43 billion construction contract is between the P3 consortium and a team led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. The financial agreement is between the state and the private consortium, known as Purple Line Transit Partners and led by infrastructure investor Meridiam. 

The total cost of the project is now over $9 billion. It was supposed to be complete by this March under the original plan but now full construction will resume in the spring. The new expected completion date is the fall of 2026. The new contract will create a cost increase for the State that will raise its annual payment requirements to the financial partners of an average of $240 million annually. That is $90 million higher per year.

Maryland transit officials have committed federal funding and fare revenue from all state transit systems, including commuter rail to fund the payments. That will require the use of other state funds to replace the “lost” revenue from the state transit system, most likely other taxes and fees.

OPEB THREAT TO NEW JERSEY RATING

The last few years have seen steady progress made in New Jersey as it sought to balance its budget and address long standing concerns about its pension liabilities. The continued efforts under the Christie administration to avoid full funding of actuarily required pension contributions played a substantial role in the series of downgrades to the State’s ratings that impacted the State. While much attention was paid to pension liabilities, other post-employment benefits (OPEB) seem to fall of the radar of many.

Now a recent disclosure by the State has refocused attention on the issue of OPEB. The state disclosed that its reported Education Retired Fund OPEB liability would increase to about $67.8 billion in the 2021 valuation from $41.7 billion the prior year. Faster growth in Medicare Advantage expenses for retirees accounted for about $12.3 billion of the total $26.1 billion increase. The state cited “claim and premium experience, primarily resulting from higher-than-expected Medicare Advantage claims leading to an increase in projected Medicare Advantage premiums for Plan Year 2023.”

The actuary revised projected medical cost increases for fiscal years 2023 and 2024 to 22.6% and 18.5%, respectively, from assumed growth of 4.5% in the preceding year’s valuation. As of the state’s fiscal year 2020 financial reporting, before the latest increase, New Jersey’s OPEBs accounted for 28% of total long-term state liabilities. The state in its 2020 annual comprehensive financial report said that its roughly $1.6 billion contribution (which is made on a pay-as-you-go basis) for OPEBs and its liability had both declined in the year ended 30 June 2020. The State had been relying on Medicare Advantage products to drive cost savings. Clearly, the latest disclosure shows that the effect has not been so positive.

WHILE THE TURNPIKE GETS AN UPGRADE

The New Jersey Turnpike was one credit that seemed poised to be hurt by the limits on economic activity that have resulted from the pandemic. Quickly, it became clear that the road’s role as a major freight conduit was helping to generate higher than expected toll revenues. The initial pandemic shock resulted in a material traffic decline of 22.5% for calendar year 2020 compared to calendar year 2019.

The availability of a vaccine allowed traffic to steadily recover throughout 2021. Monthly traffic levels in 2021 steadily improved to the point where they were only about 4.5% below 2019 levels for the second half of 2021 through the end of November. Remaining concerns on the part of car motorists continues to hold down traffic.

The pandemic did provide an opportunity for the Turnpike Authority to implement its policy of annually indexing tolls to inflation. Over the years, the process of raising tolls became increasingly political and concerns about the ability of the Authority to maintain its financial position hurt its ratings. That concern is mitigated by the indexing policy.

Those factors as well as the improved credit position of the State of New Jersey have led Moody’s to upgrade the Turnpike Authority’s rating from A2 to A1. The improved position of the State reduces pressure on state authorities to upstream increasing amounts from those authorities to the State general fund. The “upgrade reflects the credit positive impact of the implementation of NJTA’s new annual toll indexation policy, the better-than-expected traffic and revenue rebound from the pandemic driven declines, increased clarity on the pace of new debt to be issued to fund new capital investments, and a signed new multi-year subordinate transfer agreement with the state. “

At the same time, the relationship with the state holds down the Turnpike’s rating. Moody’s refers to that relationship when it notes that “NJTA is a component unit of the state, annually transfers funds to the state and the Governor approves NJTA’s budget and toll rates, limiting NJTA’s autonomy and independence. Owing to this relationship, we currently constrain NJTA’s rating to two notches above the state’s general obligation rating.”

TRANSIT AND LABOR SHORTAGES

We continue to see that worker shortages are impacting mass transit systems including ferries. Last week, the Washington State Ferries (WSF) announced that “most” of their routes were placed on reduced, alternate schedules, citing crew shortages brought on by the pandemic and a “global shortage of mariners.” That system has been cancelling trips since the Fall.

Trucking shortages are impacting a whole host of operations. North Dakota Gov. Doug Burgum signed an executive order waiving hours of service requirements for 30 days for truck drivers delivering milk in North Dakota. The emergency measures come after a major milk distributor in North Dakota went out of business, due in part to a lack of certified drivers, putting rural consumers and more than 50 school districts at risk of losing milk deliveries. North Dakota currently has 49,858 drivers with a commercial driver’s license (CDL), down from 52,824 in 2017.

The pandemic provided an opportunity for drivers and mass transit employees to examine their working conditions. The nature of the services lends itself to erratic hours, overtime, and now those issues are causing more to look to other jobs. This will drive pressures on costs.

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.

Joseph Krist

Publisher

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GAS TAX POLITICS

The high cost of energy is emerging as an issue especially in the case of gasoline. Eight states are currently considering suspensions of both existing taxes and enacted future tax increases in order to provide some relief from higher prices for gasoline. Governor Newsome in CA is pushing a proposal to “pause” scheduled increases in the State’s gas tax. An annual inflation adjustment is set to take effect on July 1. Newsom’s plan is to delay the adjustment for a minimum of one year. The budget proposal could extend the tax freeze for the next two years “should economic conditions warrant it.” The governor’s office said a pause is expected to decrease fuel tax revenues by $523 million in 2022-23 based on an estimated 5.6 % inflation rate.

Maryland law authorizes fuel rates to be adjusted each July based on the consumer price index. Recently introduced legislation would repeal the rule for annual adjustments. A proposed Tennessee House bill would return the tax rates to where they were prior to a 2017 state law that raised the gas tax by 6 cents to 26 cents and increased the diesel rate by 10 cents to 27 cents. A year ago, Missouri Gov. Mike Parson signed into law a bill to raise the 17-cent fuel tax rate by 12.5 cents over five years. Now, a bill would seek to have the law overturned as a violation of the State’s Hancock Amendment requiring voter approval of tax increases above a certain level.

The Colorado legislature passed a significant transportation funding package just last year. That plan would impose a new 2-cents-per-gallon fee on gas and diesel. Annual penny increases to the fee on gas and diesel are set to follow each year through 2028. In Ohio, a pending bill would reverse legislative actions taken in 2019 which provided for raising the 28-cent fuel tax rate to 38.5 cents for gas and from 28 cents to 47 cents for diesel. The bill would return the gas and diesel tax to the 2019 rate. The rate reductions would begin no later than July 1, 2022. The tax rate would remain unchanged for five years.

In Virginia, there are three competing bills to attempt to lower fuel taxes. One would lower the tax rate on gas and diesel on July 1, 2022. The tax rate on gas would be trimmed by a nickel from 26.2 cents to 21.2 cents. The diesel rate would be reduced from 27 cents to 20.2 cents. The rates would be the same as they were prior to a July 1, 2021, rate increase. The tax rates would revert to their current amounts on July 1, 2023, and be indexed to annual changes in the consumer price index beginning July 1, 2024. Another bill would suspend collection of the state and regional taxes on gas and diesel until July 1, 2023. A third would suspend the imposition of any regional fuels tax in the state until July 1, 2023.

NYS BUDGET

Governor Hochul announced her formal fiscal 2023 budget plan as the process of adopting a budget by April 1 begins. The budget builds upon the numbers generated by the most recent Mid-Year update. The Update committed to bringing the State’s principal reserves (the rainy-day reserves and reserve for economic uncertainties) to 15% of State Operating Funds spending by FY 2025. The budget has no predicted budget gaps in the out years of the State’s financial plan through FY 2027. This in spite of significantly higher projected expenditure plans.

Since the Mid-Year Update, forecast revisions to the “baselevel forecast” provided new resources of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025. The improvement reflects strong tax receipts and reduced costs. On the strength of collections experience to date, the estimates for tax receipts have been increased by an average of $4.9 billion annually compared to the Mid-Year forecast.

The budget includes some $7 billion of one-time spending. This includes $2 billion for property tax relief (FY 2023), $2 billion for pandemic recovery initiatives (reserve funded in FY 2022),$1 billion to enlarge the DOT capital plan (deployed over three years, FY 2023-FY 2025), $1 billion for health care transformation (reserve funded from FY 2023 and 2024 operations), $1.2 billion for bonuses for health care/frontline workers (paid in FY 2023), $350 million for pandemic relief for businesses and theater/ musical arts (paid in FY 2023 and FY 2024). The baselevel forecast revisions leave surpluses of $5.0 billion in FY 2022, $6.4 billion in FY 2023, $5.3 billion in FY 2024, and $5.5 billion in FY 2025.

As was the case in California, the budget proposes significantly increased spending for Healthcare. The index the State uses to determine Medicaid spending is being revised. The new index would account for enrollment and population changes, which are significant drivers of costs, and supports additional Medicaid spending growth of $366 million in FY 2023, growing to $3.1 billion in FY 2027. In addition, the budget funds bonuses to aid Healthcare recruitment.

The Financial Plan continues to assume that the Federal government will fully fund the State’s direct pandemic response costs, but timing differences between State outlays and FEMA reimbursements will occur. In addition, COVID expenses related to the purchase of test kits for local governments and schools are assumed to be fully eligible for FEMA reimbursement. Pension estimates reflect the planned payment of the full FY 2023 Employees’ Retirement System (ERS)/ Police and Fire Retirement System (PFRS) pension bills in May 2022.

The Executive Budget proposes using $6 billion of cash resources for pay-as-you-go (PAYGO) capital spending over the Financial Plan to reduce debt service costs, ensure the State stays within the debt limit, and allow for a larger DOT capital plan. The PAYGO will be targeted to primarily avoid higher cost taxable debt issuances.

On the capital spending side, the importance of the Infrastructure Investment and Jobs Act to New York State is clear. The State is projected to receive $13.4 billion in new Federal funding over the next 5 years, of which $5.7 billion is expected to flow through the State budget, primarily for road and bridge projects. $7.7 billion will be disbursed by public authorities, primarily the MTA, and local governments. In total, the State is expected to receive funding for the following programs: Roads, Bridges, and Major Projects ($4.6 billion); Public Transit ($4.1 billion); Clean Water, Weatherization, and Resiliency ($3.2 billion) Broadband ($800 million); and Airports ($685 million).

Education remains at the core of the budget. New York State’s 673 major school districts estimated to enroll 2.4 million children in kindergarten through 12th grade. With total State, local, and Federal spending levels exceeding $75 billion, education is both the largest area of State spending and the largest component of local property taxes. New York State has ranked first nationally in school district spending per pupil for 15 straight years. The budget message refers to that as commitment while local taxpayers may feel otherwise. The Executive Budget increases School Aid by a total of $11 billion over 10 years – a 55% increase over that period.

The State’s unique political landscape is driven by Governor Cuomo’s resignation. The Governor needs to appeal to a variety of constituencies in her quest for election. At the same time, she is dealing with a supermajority legislature which will have its own agenda. The expectation is that the Legislature may have different priorities.

PUERTO RICO

“The agreement, while not perfect, is very good for Puerto Rico and protects our pensioners, university and municipalities that serve our people,” Gov. Pedro R. Pierluisi.

On January 18, Judge Laura Taylor Swain accepted a Plan of Adjustment in the Title III proceedings which have been underway since the Spring of 2017. The plan cuts Puerto Rico’s public debt by 80% and saves the government more than $50 billion in debt service payments. The agreement covers the commonwealth government’s general obligation bonds and its Public Building Authority, Employees Retirement System, and Convention Center District Authority bonds.

That is achieved through the forgiveness of $3 billion of pension bonds and slash $18.8 billion of general-obligation bonds and commonwealth-backed securities to $7.4 billion. Bondholders will receive new bonds in an exchange which will be accompanied by a total $7 billion upfront cash payment and a security, called a contingent value instrument, that pays if sales-tax revenue surpasses projections.

As for the future, there remain many obstacles to long-term success. The island remains climate-vulnerable. It has not been able to effectively use the need to rebuild the electric grid in a way which provides needed resiliency and reliability. It has been a significant squandering of an opportunity. The “favorable” treatment to pensioners shifts their continuing weight on the Commonwealth’s budget. The costs of pensions remain a significant risk as the result of the favorable bankruptcy treatment. Healthcare spending will remain another obstacle. The issue of unequal Medicaid funding remains.

In the end, the Commonwealth now needs to meet the test of governance. We believe that the ultimate risk to Puerto Rico from a credit perspective is the fact that lessons have not been learned from the bankruptcy. It is why so much concern is being expressed about the Commonwealth’s ability to function without some outside oversight.

This is one case where the threat of a significant cost of borrowing may not be incentive enough for Puerto Rico to improve its governance. Throughout this process, I am reminded of Argentina. The second half of the century saw Peronism insinuate itself into the nation’s politics in ways that can still be felt over a half century later. Repeated bailouts and IMF borrowings still weigh on that country’s economy. It also worked off a more solid economic base prior to its populist turn. Do we really want to be back at the debt negotiation table in 2035?

NATURAL GAS REGULATION

In 2021, lots of legislative efforts were undertaken to stem the tide of local natural gas regulations designed to end the use of natural gas in new construction. Those efforts at preemption are designed to shift natural gas regulation to the state level away from localities. With the start of the new year, some localities are undertaking more regulation in an effort to avoid preemption laws.

The 2019 California Energy Code allows local jurisdictions to establish stricter building codes if that local authority finds it necessary because of local climate, geological, topographical, or environmental conditions. The Contra Costa County Board of Supervisors approved an ordinance this week that bans natural gas from being used to power new homes and buildings in unincorporated areas of the county. The ordinance will prohibit the installation of natural gas piping in all new residential buildings and hotels, offices, and retail buildings in unincorporated parts of the county.

The ordinance anticipates a number of potential issues cited by opponents. The ordinance does not apply to future developments already approved before the new law is enacted. The ordinance also won’t prohibit emergency backup power sources, like generators, that run on fossil fuel sources. The new law would have to be approved by the California Energy Commission before being enacted. Staff recommended the county put the new ordinance in effect July 1.

NEW TACTIC IN CLIMATE CHANGE LITIGATION

As several lawsuits filed against oil and gas companies work their way through the courts, a series of decisions which keep much of that litigation in state courts rather than federal courts has led to an interesting change in strategy by those companies. We see the tactic as a sign that the long-term outlook for the defendant oil companies is not favorable in terms of the litigation.

The latest sign comes from Exxon’s response to litigation filed by eight California cities and counties which have accused Exxon and other oil firms of breaking state laws by misrepresenting and concealing evidence, including from its own scientists, of the threat posed by rising temperatures. Exxon is now turning to the Texas Supreme Court in an effort to fight the litigation. The company is headquartered in Texas so now it is using a Texas state law (Rule 202) to seek approval to sue individual California officials for limiting Exxon’s First Amendment right to free speech.

Exxon is contending that its misrepresentation of the impact of its products on the climate are protected free speech under the First Amendment. That’s right, lying is protected free speech. Exxon says that the actions of California governments are what they call “lawfare” – the use of litigation to achieve what it calls political ends. The effort attempts to make the litigation as difficult as possible including travel to Texas for depositions.

The emerging trend in the environmental litigation tied to climate change and the oil companies is that state law is likely to govern the outcome. That makes it more likely that ultimately the cases will be settled as the number of different plaintiff jurisdictions are involved makes the likelihood of an unfavorable (to the defendants) outcome. That does not mean that the cases will be resolved soon.

TRI STATE RESPONDS TO PRESSURE

We have been documenting the difficulties that utilities, especially rural co-ops face as they manage the uncertain landscape stemming from climate change. Over recent months, Tri-State Generation and Transmission Association has been at the center of controversy over its efforts to maintain its members as customers while slowly addressing its coal dependence for generation. It has been facing increasing pressure to either address the climate concerns of its retail distribution customers or to allow them to leave and obtain their electric energy elsewhere.

Now, Tri-State is taking a different approach. It has submitted for regulatory approval its “Responsible Energy Plan” in Colorado. State law requires utilities to provide a detailed plan to regulators as to how to cut carbon dioxide emissions associated with the power it sells by 80% from 2005 levels by 2030 and 100% by 2050.The plan commits Tri-State to reducing emissions from its electricity sales in Colorado (it serves customers in AZ and NM as well) by 80% in 2030, based on 2005 levels. In the near term, the company says it will cut emissions by 26% in 2025; 36% in 2026; and 46% in 2027.

It won’t be an easy process. The news also comes with confirmation that Tri-State will complete a 4% wholesale rate reduction for its members in March. The first 2% of the reduction was implemented in 2021. The effort is clearly in response to the concerns of the member retail distribution customers. It is more positive for the Tri-State credit.

FREE FARES IN L.A.

On the L.A. Metro system, the fare for one ride is only $1.75. Total annual fare revenue funds collected make up only 6 percent of total revenue. In March 2020, the system stopped collecting fares on its buses as a COVID-19 safety precaution. For the next 22 months, Metro waived fares for anyone who wanted to keep riding its buses. Recently, the free fare policy came to an end as ridership levels had improved to 80%.

It is estimated that ridership never dropped to less than 5% of pre-pandemic levels. Given the demographics of the riding public especially for buss customers, it is not surprising that ridership held up better than in most cities.  Now, with the surge of the latest COVID variant and the reinstatement of fares, it will be a real chance to evaluate the role of fares on ridership.

The results could have real implications for systems across the country. According to one study that surveyed which regional transportation investments can most reduce vehicle miles traveled, waiving fares would result in both fewer miles driven and fewer greenhouse-gas emissions, more than any other intervention, including congestion pricing or charging drivers a mileage-based fee. If the reinstatement of fares is shown to depress demand, that puts pressure on transit agencies to find other funding sources.

That has implications for New York’s planned congestion fee plan. Governor Hochul’s budget saw these fees as generating $15 billion for the MTA for capital projects through 2024. Congestion fee opponents look to those findings and can make the case that the congestion plan is what they have always contended it is: just another fee or tax.

COMPUTER CHIPS AND THE FUTURE

Intel announced that it will locate its next chip manufacturing facility in New Albany, OH. The 1,000 acre site is to be located just outside Columbus in adjacent Licking County. The project will represent a $20 billion investment directly employing some 3,000 workers. The announcement comes as legislation passed by the Senate remains stalled in the House holding up some $50 billion of support for the chip industry.

Intel has also expanded facilities in Arizona with a similar $20 billion investment announced there last year. Other projects include one from Taiwan-based T.S.M.C. It began construction last year on a $12 billion complex some 50 miles from Intel’s site near Phoenix. Samsung Electronics is locating a $17 billion factory in Taylor, Texas with construction set to begin in 2022.

The moves come in the wake of a shortage of chips and concerns that the concentration of chip production overseas puts the U.S. at risk. The plant would be the first in Ohio. Intel has stated that its expansion plans are not contingent on the federal assistance package but also cited the fact that geographic diversity increases the number of advocates for legislation supporting the chip industry.

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.

Joseph Krist

Publisher

________________________________________________________________

CALIFORNIA BUDGET

Governor Gavin Newsome released his 2022-23 state budget proposal — a $286.4 billion budget plan. The budget projects the state will collect a $45.7 billion general fund surplus in the next year, of which $20.6 billion is discretionary. The plan is being called “The California Blueprint”.  The Budget reflects $34.6 billion in budgetary reserves. These reserves include: $20.9 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $9.7 billion in the Public School System Stabilization Account; $900 million in the Safety Net Reserve; and $3.1 billion in the state’s operating reserve. The Rainy Day Fund is now at its constitutional maximum (10 % of General Fund revenues) requiring $2.4 billion to be dedicated for infrastructure investments in 2022-23.

The Budget accelerates the paydown of state retirement liabilities as required by Proposition 2, with $3.9 billion in additional payments in 2022-23 and nearly $8.4 billion projected to be paid over the next three years. And in spite of all of this, the Budget projects the State Appropriations Limit or “Gann Limit” will likely be exceeded in the 2020-21 and 2021-22 fiscal years. Any funds above this limit are constitutionally required to be allocated evenly between schools and a tax refund. The Budget includes total funding of $119 billion for K-12 education. K-12 per-pupil funding totals $15,261 Proposition 98 General Fund—its highest level ever—and $20,855 per pupil when accounting for all funding sources.

The surplus allows the State to restore business tax credits, including research and development credits and net operating losses that were limited during the COVID-19 Recession, and proposes an additional $250 million per year for three years for qualified companies headquartered in California that are investing in research to mitigate climate change. The Budget also allocates $3 billion General Fund over the next two years to reduce the Unemployment Insurance Trust Fund debt owed to the federal government.

The plan also reflects the substantial infusion of federal funding to the State under the Infrastructure Investment and Jobs Act. California is estimated to receive almost $40 billion of formula-based transportation funding for the following programs over the next five years: Existing surface transportation, safety, and highway performance apportioned programs. A new bridge replacement, rehabilitation, preservation, protection, and construction program. A new program that will support the expansion of an electric vehicle (EV) charging network. A new program to advance transportation infrastructure solutions that reduce greenhouse gas emissions.  A new program to help states improve resiliency of transportation infrastructure.  Improving public transportation options across the state, with increased formula funding for transit.

The “Blueprint” is not without controversy. The Budget includes an additional $9.1 billion ($4.9 billion General Fund and $4.2 billion Proposition 1A bond funds) to continue to fund the construction of the State’s high speed rail line. It also includes funding to make California the first state to realize the goal of universal access to health coverage for all Californians by closing a key gap in preventative coverage for individuals ages 26 to 49, regardless of immigration status.

The Blueprint does highlight potential threats to the State’s fiscal position. The COVID-19 Pandemic remains a risk to the forecast. Strong stock market performance has generated a significant increase of volatile capital gains revenue that is approaching its prior peak levels (as a share of the state’s economy) in 2000 and 2007. A stock market reversal could lead to a substantial decrease in revenues.

WATER NOT EVERYWHERE

The first few days of 2022 have generated very mixed news on the water supply crisis in the American West. The U.S. Bureau of Reclamation announced that it plans to adjust management protocols for the Colorado River in early 2022. The plan is to reduce monthly releases from Lake Powell in an effort to keep the reservoir from dropping further below 2021’s historic lows.  this past November was the second-driest on record and inflows came up 1.5 million acre-feet short of the Bureau’s projections from the previous month. 

The current level of the reservoir leaves available water at 27% of capacity. That is a drop of 164 feet from what constitutes full capacity.  Worse, it is just 11 feet above the bureau’s target of a 35-foot buffer before it enters into a zone where the generation of hydropower by water flowing through the Glen Canyon Dam becomes unreliable.

In contrast, the year-end snow and rain storms in California set records for snow in the Sierra watershed and began contributing to increased flows and storage at previously drought impacted facilities.  Lake Oroville, the northern California dam and hydroelectric facility has seen all the extremes of climate impacts over the recent five years. It has gone from effectively overflowing resulting in damage to hydro facilities. More recently, hydro generation was suspended due to the low level of water available in the lake for five months.

The Northern Sierra and Trinity Mountains currently have 128% of their normal snow levels for Jan. 11. That has generated enough water to raise Lake Oroville’s level by 89 feet. That is enough water to meet release obligations to agricultural customers and create enough flow to allow limited hydroelectric generation. Initially, one of three turbines will operate with the other two pending continued increased water levels. When the Lake is full, it provides about 1% of California’s peak statewide electricity demand. As of 9 a.m. Tuesday, the lake was at 730.08 feet and 42% of its total capacity. 

PUERTO RICO

As we go to press, the Financial Oversight Board faced a 1/4/22 deadline to file the latest iteration of the modified Plan of Adjustment in Puerto Rico’s ongoing Title III proceedings. In issuing her latest orders in the case, Judge Swain indicated that a resolution to the proceedings may occur with the next 4-6 weeks. She issued decisions upholding the board’s interpretation of Act 53, the locally enacted debt and pension law associated with the Plan of Adjustment. Act 53 has language saying there will be no cuts to pensions. The Oversight Board has contended that it’s plans to freeze accruals of pension benefits and eliminate cost of living adjustments is necessary to allow the Commonwealth to balance its budgets.

The judge ruled that Act 53 language clearly only bars modifications of the monthly benefit amount, to which board has agreed. It splits the baby in that it slows but does not reverse the impact of pensions on the Commonwealth budget. The other major legal issue overhanging the process is the continuing litigation against the constitutionality of PROMESA which is being brought by two individual bondholders. They object to the use of what are effectively bankruptcy proceedings under law and procedures which do not apply to states versus territories. There had been some thought that Judge Swain might await the outcome of those challenges to the underlying law before approving a Plan of Adjustment.

The judge had prior ruled on the issue of PROMESA legality in its favor as part of the Title III proceedings. The U.S. DOJ is charged with defending the law and it does not intend for proceedings on that litigation until the first week in February. It does not appear that Judge Swain will wait for that issue to be decided.

Regardless of how the proceedings are ultimately solved it is hard to not see this whole mess as a gigantic lost opportunity. The Commonwealth government continues to undermine long-term confidence through its policies and actions. It has continued to be an impediment to a solution. The legislature continues to move in a populist manner denying reality about its short-term economic realities and its true potential.

The actions in regard to pensions reflect the continued stubbornness on the part of the political establishment as the process unfolds. It raises the issue of whether sustained sound financial operations can continue in the absence of outside supervision and/or oversight. Whenever the issue is raised, all sorts of culturally based objections are raised with the citizenship of residents always cited. If the Commonwealth truly wanted to address this concern, the Title III action certainly provided an opportunity for reform. 

NEW JERSEY TRANSIT

This week I had occasion to use subway and commuter train service in the NY Metro area for the first time since the onset of the pandemic. The train line was operated by NJ Transit and ended at a newly remodeled station operated by the NY MTA. It was a reminder of the complexity of financing the region’s mass transit resulting from the number of different entities involved in their provision. For NJ Transit, that funding comes from the New Jersey Transportation Trust Fund Authority (“TTFA”).

The Authority issues Transportation Program Bonds secured under a legal structure that requires annual legislative appropriation of contract payments for TTFA debt service. The legislature could fail to appropriate even though the source of revenues (the Transportation Trust Fund) cannot be used for anything else if not first appropriated for debt service. There would not be much motivation to fail to appropriate. The State secures between 90 and 95% of its state level debt through appropriation mechanisms so non-appropriation is simply self-destructive. In the case of the transit bonds even more so given the essentiality of TTFA-financed projects, the dedication of revenue to transportation and the importance of maintaining market access.

This week, Moody’s raised its outlook on the Authority’s Baa1 rating on outstanding Transportation Program Bonds to positive. In the end, the rating remains tied to that of the State’s GO rating currently at A3. That relationship will remain as bondholders do not have a direct lien on dedicated revenue, and there are no remedies in the event of non-appropriation.

MUNICIPAL SOLAR

The City of Manchester, NH has put into operation the largest solar generation facility in the state to be developed by a municipality. Covering 12 acres at the site, the solar array — the largest municipal array in the state — is expected to offset more than 2,700 metric tons of CO2 per year — equivalent to avoiding the emissions from the burning of 3 million pounds of coal to generate electricity. It is built on the site of a former landfill. This helps to mitigate concerns over aesthetics and siting. It offers an example of how municipal assets – especially stranded assets like landfills and brownfield sites – can be transitioned to environmental uses.

It is a small scale private public partnership. In this case, the design, development, and operation of the project is being undertaken by a private entity. The City was able to provide a site and facilitate approval. Manchester estimates that it is poised to receive energy savings and tax revenue estimated at more than $500,000 over 20 years at no cost to the city.

THE GREEN DEBATE BEGINS

There are signs that 2022 may be the time for the “green” investment market to settle on criteria to objectively answer the question, How Green Is My Investment? The municipal market is beginning to see the use of “green verifiers”, private third parties who offer to “certify” the “greenness” of a given security. At the same time, the analyst community is in the midst of their process of establishing recommended standards and disclosure metrics for use by the municipal market. The issue of disclosure is also tied to the existence of standards.

For much of the green investment boom, it can be argued that Europe has moved ahead of the U.S. in its process of green investing. That process is far from complete by the ongoing effort by the European Commission to develop a “taxonomy” to be used to classify what counts as sustainable investment. The document is not officially released but press accounts claim that nuclear and natural gas generation will be treated positively in the final document.

If that plan were attempted to be adopted in the U.S., the inclusion of natural gas and/or nuclear generation in any plan to address carbon-based climate change would be controversial at best. And that will be the central issue for the municipal utility sector. The entire range of possible approaches are already being followed by municipal utilities.

Some are better positioned than others in terms of their fossil fuel generation. Some are clearly looking at natural gas as a bridge fuel to the post fossil fuel world. Others are going the nuclear route. For some, renewables are more or less feasible than others. There are those utilities which stand to lose some significant segment of supply regardless of the process.

ENERGY, EMPOLYMENT, AND THE ECONOMY

The current debate over the Build Back Better legislation drags on. As the process unfolds, West Virginia Senator Manchin has emerged as everyone’s favorite bogeyman as the effort to legislate significant climate mitigation legislation continues. For many, the process of dealing with climate change seems straightforward. After all, who wouldn’t want to save the planet? Well, if you are employed in the energy industry and the push for renewables continues the question is being asked by workers in that industry in places like West Virginia is what is in it for me economically?

A recent report from a consortium of groups seeking to advance nuclear as a carbon free option sheds light on the economic realities facing workers and policymakers as the debate over the future of generation unfolds. The data does provide fuel for those arguing that renewable energy will not provide the thousands of good paying jobs to offset employment declines associated with reduced fossil fuel use. The data helps show why there is a high level of skepticism

Ohio had the highest number of coal electric power generation workers at the end of 2019 but shed 25 percent of its coal generation workforce—just over 4,000 jobs—between 2016 and 2019.

The median hourly wage for all energy workers in the U.S. is $25.60, 34 percent higher than the national median hourly wage of $19.14. The overall hourly wage for energy jobs is also 95 percent and 120 percent higher compared to the retail and accommodation and food service industries, respectively.

Utility and mining and extraction workers have the highest absolute hourly wages of all industry segments. Utility employees receive a median hourly wage of $41.08—115 % above the national median wage of $19.14 and 10 percent higher than the overall median wage for all utility workers, which is $37.50. At $27.19 per hour, electric power generation workers earn a premium that is 42 % higher than the national median wage of $19.14; this technology sector represents almost 11 percent of all energy jobs.

The nuclear, electric power transmission and distribution, natural gas, and coal industries support the highest wage premiums compared to the national median. These four energy industries support hourly wages that are at least 50 percent higher than the national median hourly wage of $19.14. The nuclear industry in particular supports a high hourly wage; at $39.19, these jobs earn 105 percent more than the national median but account for less than one percent of total energy jobs.

Electric power transmission and distribution jobs comprise about one in ten energy jobs and support hourly wages of $31.80—66 percent above the national median—while natural gas and coal workers earn a respective 59 and 50 percent above the national median (see Table 6). Natural gas jobs represent 7.6 percent of total energy employment while coal jobs account for 2.2 percent of all energy jobs.

Nuclear and coal generation have the highest median hourly wages; these sectors support wages that are a respective 115 and 80 % above the geographically weighted wages. Natural gas electric power generation jobs also support significantly higher wages, with a 77 % wage premium. Solar, oil, and wind electric power generation employees earn wage premiums that are approximately 20 to 35 % above national wages, but below that for gas.

WHILE ENVIRONMENTAL REGULATION CLOSES COAL PLANTS

The U.S. Environmental Protection Agency on Tuesday proposed denying requests from three Midwest coal-fired power plants to continue dumping coal ash in unlined surface impoundments, a move that could lead to the plants’ early retirements. Under a rule finalized in mid-2020, the EPA allowed utilities to continue dumping coal ash from their power plants into unlined basins until April 11, 2021.

Some 57 requests to extend the deadline have been made. Four of those requests have been deemed to be incomplete or inadequate. Two of those four are owned by municipal utilities. City, Water, Light, and Power’s 200-MW Dallman plant in Springfield, Illinois; and, Lansing Board of Water and Light’s 160-MW Erickson plant in Lansing, Michigan. This process is just the beginning of EPA efforts to address issues like coal ash storage and disposal, nuclear operations, and water quality issues related to all fossil fueled generation facilities.

In Michigan the municipal utility in Grand Haven is confronting the realities of coal and reclamation. The Michigan Department of Environment, Great Lakes and Energy (EGLE) and the Grand Haven Board of Light & Power disagree on how to dispose of coal ash and chemical residues left over after the closure of a coal fired generation plant. The issue is how to handle accumulated ash which now sits in ponds. Depending upon the age of a coal ash pond and the material which lines it, serious environmental issues can result. These require significant expenses to clean up.

It is a repeat of many other situations involving waste ponds especially those associated with generation facilities. The EPA has applied a greatly heightened level of attention to these conditions as it was a point of emphasis in the home state of the current EPA administrator. It is not surprising to see heightened state regulatory attention as a result.

LOUISIANA UPGRADE

The last year saw a bit of everything in the Sportsman’s Paradise in 2021 – hurricanes, floods, tornados, a declining oil and gas business, and continued diminished tourism to New Orleans. With all of these issues potentially raising significant obstacles to economic recovery from the pandemic, one might not have put Louisiana at the top of the potential upgrade list.

Nevertheless, the State of Louisiana’s general obligation ratings (Aa3) from Moody’s were assigned a positive outlook. Moody’s cited “the significant progress the state has made restoring its financial reserves and liquidity in recent years by aligning revenue and spending with its smaller oil and gas sector, rebuilding borrowable funds and generating budgetary surpluses in consecutive years.

Moody’s did acknowledge one commonly held concern. “The state’s recovery, however, depends in part on the economic recovery of New Orleans (A2 stable), the state’s largest city and a popular tourism destination.” The current revival of COVID creates a real timing risk for New Orleans with Mardi Gras less than a month away. This just highlights the vulnerability of tourism-based economies so long as the pandemic remains a significant public health issue.

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.

Joseph Krist

Publisher

THE CHRISTMAS THAT WASN’T

This year the schedule of the holiday’s – Christmas and New Year’s on Saturdays – set up well for those businesses and institutions which had been particularly hard hit by the surge in the latest CO VID variant. And then came reality.

The resurgence of the pandemic is now threatening a real recovery from the economic damage of it. We see limits, postponements, and cancellations of events including cultural as well as sporting events. While tourism had begun to recover, the transit and hospitality industries face great uncertainty again with cruises being shortened and/or altered. The resurgence of the pandemic is already impacting return to work timelines. The resulting economic impacts will increase the already high level of pressure that exist on small businesses fighting for their survival.

The hope is that the current state of the pandemic will be short lived. It is clear that the likelihood of an additional federal stimulus is low. The Biden Administration is taking the position that the states are expected to be the primary source of government action. That will make the governmental response that much more political. That is problematic. The impact on economies will vary as those more dependent upon traditional weekday economic patterns will take an additional blow in the short term.

The Baltimore Museum of Art, closed its galleries through Dec. 29 because of an increase in positive coronavirus tests. The Metropolitan Museum of Art said it would limit attendance to roughly 10,000 visitors per day because of the highly infectious Omicron variant. That would represent a 50% drop from historic daily holiday season averages.  At the start of Christmas week, nearly a third of all Broadway shows were canceled because of positive coronavirus tests among their casts and crews, and several are shut down through Christmas.

The resurgence of COVID as a source of limits on activities is quickly spreading. Initially, hospitality businesses especially restaurants were limited by staffing and supply issues. The sports world saw a host of postponements of games. The NHL dropped out of the upcoming Olympics. It is not clear what additional measures will have to be taken and what the potential economic/financial impact will be.

The real risk is that the virus wave will be prolonged after a major federal stimulus has occurred. It is not likely that another round of robust financial aid from the federal government will be available. That is true of both individuals and businesses. The pandemic has shone a very bright light on the role of the education system as child care provider. It follows that for businesses to open that staff have care for their children. In NYC, the major banks are reversing their insistence on a return to the office during January.

Atlanta opened its schools remotely. Los Angeles delayed vaccination requirements for students which would have taken an estimated 30,000 students out of in person learning. It not always the various districts’ call as Chicago and Philadelphia faced union hostility to return to classroom efforts. New York and Chicago are pinning their hopes on the distribution of home testing kits. The results from Chicago’s effort were discouraging in that some 25,000 tests were improperly used rendering the results useless. That made it hard to meet teacher demands for safety which resulted in a system closure

P3 TROUBLES IN VIRGINIA

The public-private partnership undertaking extension of the 95 Express Lanes in Virginia have announced a delay in project completion. Work on the $565 million project to bring high-occupancy toll lanes to Fredericksburg began in 2019 and was expected to be finished in October 2022. 

Now the project is caught up in a dispute between toll operator Transurban and its contractor Branch Civil and Flatiron Construction (BFJV). BFJV contends that geologic conditions in the construction zone have affected its ability to keep the project on schedule. The issue has gone to arbitration. The initial proceeding before the arbiter called for the Virginia DOT to offer an adjustment of the price and more time to complete the project because of the soil conditions.

In January, the arbiter is expected to decide the amount of the required financial adjustment. That decision will not be subject to appeal. In the interim, construction continues. This section of road is just one part of a multi-facility expansion program being undertaken primarily through P3 approaches. Delays here could have real financial impacts on a several toll-funded projects.

Virginia remains the center of toll financed express lane projects. With some 60 managed tolled lanes already in operation, an additional 35 miles of such roads is under construction. Now, the Commonwealth is proposing another 11-mile expansion of tolled express lanes to connect to the existing and emerging network. Virginia is on track to have 10 percent of the nation’s managed toll lanes as early as next year.

MEDICAID

The Biden administration on Thursday rejected work requirements for Medicaid recipients in Georgia, the last state to have a federal waiver for such restrictions. The waivers were granted to demonstration projects under Section 1115 of the Social Security Act.  The limits on economic activities and the virus itself made compliance with work requirements to not be feasible.

The Department of HHS previously revoked work requirements in the Medicaid programs of Arizona, Arkansas, Indiana, Michigan, New Hampshire and Wisconsin. Kentucky and Nebraska withdrew their applications for work requirements notwithstanding the fact that their requirements had been approved.

Arkansas is the only state currently challenging its revocation in the courts. That litigation remains on hold while the U.S. Supreme Court considers whether or not to hear Arkansas’ appeal. Regardless, Arkansas’s latest application to renew its waiver drops work requirements altogether, substituting in their place incentives aimed at encouraging work and healthier lifestyle choices.

One other outcome of policy change in a new Administration is the end, for now, of Tennessee’s experiment with block funding for Medicaid. Tennessee plan would have called for the State of Tennessee to receive a capped funding amount for its Medicaid program under its Section 1115 waiver. The approval provided that the State would be able to redirect a portion of any resulting cost savings to other health programs.

COLLEGES UNDER VIRUS PRESSURE AGAIN

A growing number of colleges nationally have announced plans to begin classes virtually after the winter break, and a few, including Yale and Syracuse universities, have announced that they plan to delay the start of classes until later in January. Howard University will delay the start of the spring semester until Jan. 18 when it will require everyone returning to campus from winter break to provide a negative PCR test result within four days of arriving. All faculty, staff and students are required to have a booster shot before the end of January if already eligible for one, or within 30 days after becoming eligible.

IS VACCINE POLICY A GOVERNANCE ISSUE?

Arkansas, Florida, Iowa, Kansas and Tennessee have carved out exceptions for those who won’t submit to the multi-shot coronavirus vaccine regimens that many companies now require. Historically, unemployment does not cover those who resign to avoid compliance with a company policy or are terminated for refusing. The action has been received poorly by both employers who will bear many of the costs of mitigation as the result of unvaccinated employees and by other workers.

This represents a reversal from policies followed by some of those same states when they tried to use limits on unemployment benefits to try to force workers back to work before the availability of vaccines. That sort of inconsistency makes a full-scale recovery slower and puts additional businesses at risk.

HIGH SPEED RAIL ON TRIAL

The Texas Supreme Court will hear arguments on January 11 in a case which will determine whether or not the proposed high speed rail link between Houston and Dallas can move forward. Opponents of the project – especially landowners along the proposed route – have been challenging the plans of the Texas Central Railroad Company to acquire land for a right of way. Land rights are a major cultural and political issue in the Lone Star State. The primary issue is that of whether the Company has the legal right to use eminent domain to acquire the needed land.

The State Attorney General has weighed in on the case on the side of landowners. “(Texas Central and an affiliated company) may only make preliminary examinations and surveys of private landowners’ properties for the purpose of constructing and operating a bullet train if they are either railroad companies or interurban electric railway companies. In the state’s view, the respondents are neither. They are not railroad companies because they do not operate a railroad. And they are not interurban electric railway companies because the high-speed train they intend to operate is not the small, localized, interurban railway expressly contemplated by statute.

The case was originally brought in Leon County where a local judge found in favor of the landowner contesting the proposed acquisition of a portion of his land. An appellate court subsequently ruled in favor of Texas Central, saying it is a valid railroad company and could therefore exercise eminent domain.

EDUCATION FUNDING

A bill was introduced in the California Legislature which proposes to tie education funding to annual enrollment rather than average daily attendance records. The move could bring in an additional $3 billion in annual state funding for schools. Supporters say that an enrollment-based policy is less volatile. Opponents see the change as lowering the pressure to address attendance issues.  The thought is that the daily average attendance provisions motivate schools to address truancy.

Twelve percent of California’s 6 million-plus K-12 students were marked “chronically absent” in 2018-19, meaning they missed at least 10% of the school year.  The legislation requires that at least half of any new funds schools receive under the new policy be put toward combating chronic absenteeism and truancy. The bill includes a “hold harmless” provision would maintain current funding levels but allow districts to apply for supplemental funding if enrollment totals are greater than the average daily attendance formula. The bill would go into effect in the 2023-24 school year.

The proposal comes in the wake of data which shows that school enrollments throughout the state declined by some 160,000 students in the 19-20 academic year. Given that the drop occurred during the pandemic, the data may noy be truly indicative of a longer-term trend. It did occur as California saw its population drop for the first time.

In November, the nonpartisan Legislative Analyst’s Office projected that K-12 schools and community colleges will receive more than $102.6 billion in the current fiscal year. The legislation is represented as generating some $3 billion of additional funding statewide.

NYC FISCAL OUTLOOK

We are among those who are concerned that the DeBlasio Administration’s spending – especially in light of the fact that much incremental new spending was paid for with one-time pandemic revenues. The fact that the local economy is still under significant stress at the same time the pandemic once again is spreading does not inspire confidence. It is against that backdrop that we will view the expected budget pronouncements from both the Governor and Mayor.

The NYC Independent Budget Office (IBO) has released its outlook for the City’s financial plan based on its review of the plan update from the DeBlasio administration in November. IBO projects that within the framework of the Mayor’s latest financial plan, the city has nearly enough resources available to balance each year of the plan without the need for tax increases or major cuts to city services. Only 18 months ago IBO and other fiscal analysts estimated that the city’s out-year budget gaps ranged from $4 billion to $6 billion.

At the same time, the IBO does share some concerns. The unprecedented influx of federal dollars enabled the de Blasio Administration to continue, and even exp and, many city services without the need for tax increases, which have been required during previous periods of fiscal upheaval. The receipt of billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces. billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces.

Much of that uncertainty reflects the current realities of the City’s economy. New York City’s economy has generally lagged the nation’s, particularly on employment, with only about 35 percent of the jobs lost in calendar year 2020 recovered by the end of 2021. IBO expects employment growth to diminish each year from 2022 through 2025; the city is projected not to recover all of the jobs lost in 2020 until late in 2025. IBO estimates that the city gained a total of 213,000 jobs in 2021, just over one-third of the 615,000 lost in 2020. IBO projects this growth to slow to 175,000 jobs in 2022 and 100,000 in 2023, and that pre-pandemic levels of employment will not be reached until late in 2025.

IBO estimates next year’s expenditures will actually be $1.6 billion less than in fiscal year 2022. Adjusting each year’s expenditures for the prepayment of expenses with prior-year resources as well as for other non-recurring expenditures, IBO estimates that spending in fiscal year 2022 will grow by 10.0 percent from the actual level of expenditure in 2021. Adjusted spending will decline in 2023 to $99.7 billion and then grow slowly over the final two years of the plan period, at an average annual rate of 1.4 percent.

AFTER THE FIRE THE FIRE STILL BURNS

Eric Adams took over as the Mayor of New York City. He inherits a $102 billion budget and the highest headcount in the City’s history. Contracts are expiring for many city workers with the uniformed services the most prominent. Indeed, municipal union contracts will be another early challenge for Mr. Adams. The Independent Budget Office estimates that a 1 percent increase in salaries could cost the city about $600 million in the next fiscal year.

The new Mayor will not be able to look outside to other levels of government to bail out the City budget is the pandemic cannot finally be controlled. The State of New York, like every other state, is being expected to fund the response to pandemic limitations if they are not soon eliminated.

And, by the way, Mr. de Blasio’s final budget also increased spending for the Police Department by $200 million, including a $166 million increase for overtime, bringing police spending to a total of $5.6 billion. 

ELECTRIFICATION REALITIES

The big push to reduce or eliminate fossil fuel use faces many hurdles. Those hurdles raise the cost of electrification and make the cost benefit analysis less favorable in the eyes of many residential electricity consumers. The recent release of a proposed plan to address climate change by New York State’s Climate Action Council focuses attention on the issues.

The use of heat pumps to replace traditional heating and cooling systems is getting a lot of attention. The Council recommends that the state develop codes prohibiting propane, gas and oil equipment from being installed in new single-family homes and low-rise residential buildings beginning in 2024, and adopting zero-emission standards that prohibit the replacement of this equipment in existing homes beginning in 2030.

That raises the issue of cost. Heat pumps are advertised as a more efficient source of heating and cooling but many are put off by concerns over price. One provider notes that 5 percent of people who request air-source heat pump installation were interested in lowering their carbon footprint. The remainder of demand was driven by rebate programs.  The Council acknowledges that it would take five to eight years for consumers to realize the savings from heat pumps versus fossil fuel systems.

Like electric cars, the initial adoption phase relies on rebates and/or tax credits. The argument over whether or not to subsidize electric vehicles was a significant stumbling block in the debate over the Build Back Better legislation. We see subsidies as a key to the move to electrify. Whether it be solar, heat pumps or electric cars, the initial cost in the current environment is a major limiting factor in electrification.

PUERTO RICO

The effort to resolve Puerto Rico’s Title III proceedings took several hits over the holidays. This year’s Feast of the Three Kings did not see any gifts exchanged between the parties. Puerto Rico’s Financial Oversight and Management Board (FOMB) filed a lawsuit against the governor in the U.S. District Court on the island to stop the government from implementing and enforcing pension laws the fiscal panel claims would add “unaffordable” retirement benefits for public employees. Pensions have long been a major source of contention between the Commonwealth and its lenders. Efforts to maintain pension levels have led to pensioners getting more favorable treatment in bankruptcy than bondholders.

Acts 80, 81, and 82 enacted provisions designed to encourage early retirements but at current levels of pension payments. The Board had opposed the new laws and there was thought to be an agreement to delay implementation until challenges to those laws were litigated. Instead, Joint Resolution 33-2021 was signed by Gov. Pierluisi last week to require the partial implementation of Act 80 within 30 days. 

The FOMB reviewed information provided by the administration its own analysis and the fiscal panel determined that Acts 80, 81, and 82 together could increase the commonwealth’s expenses by as much as $8.3 billion over the next 30 years. The oversight board pointed out that these additional costs would be in violation of the commonwealth’s board-certified fiscal plan and the proposed amended POA, which would reduce creditors’ claim by 80% but pay government pensions in full.   

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.