Joseph Krist

Publisher

PREPA GETS A CHANCE TO SETTLE

The Financial Oversight and Management Board for Puerto Rico filed an amended proposed Plan of Adjustment to restructure the debt of the Puerto Rico Electric Power Authority (PREPA), including a schedule to repay the reduced debt. The Plan proposes to cut PREPA’s more than $10 billion of debt and other claims by almost half, to approximately $5.68 billion.

The debt would be paid by a hybrid charge consisting of a flat connection fee and a volumetric charge based on the amount of PREPA customers’ electricity usage that would be added to the electricity bills. The estimated PREPA legacy charge for customers not currently benefiting from subsidized electricity rates would be, on average, about $19 a month. The PREPA legacy charge would exclude qualifying low-income residential customers from the connection fee and kWh charge for up to 500 kWh per month.

For non-subsidized residential customers, the proposed PREPA legacy charge would be: a flat $13 per month connection fee, 0.75 cents per kilowatt-hour (kWh) for up to 500 kWh per month of electricity provided by PREPA, and 3 cents per kWh for electricity above 500 kWh per month. For commercial, industrial, and government customers, the PREPA legacy proposed charge would be: a connection fee of between $16.25 for small business customers, $20 per month for smaller industrial companies, and $1,800 per month for large businesses proportional to their current rate. Between 0.97 cents and 3 cents per kWh per month for electricity provided by PREPA.

The resolution of the bankruptcy is a minimum piece of the foundation of any plan for the utility going forward. The early signs of life going forward in the near-term are not encouraging. Even under the best of efforts, the grid remains environmentally challenged. The record over the period of the bankruptcy, especially in light of the lack of debt service payments shows how difficult the future will be.

NYC BUDGET

The City’s Independent Budget Office has reviewed Mayor Eric Adams’ proposed fiscal 2024 budget. IBO projects that the city will end fiscal year 2023 with a $4.9 billion surplus, $2.8 billion more than the surplus projected by the Office of Management and Budget (OMB) in the Preliminary Budget. This higher surplus is the result of IBO’s forecast of $1.8 billion more in anticipated tax revenues in 2023 than OMB, coupled with IBO’s estimate that city-funded spending will total about $1.0 billion less than budgeted in the Preliminary Budget.

Led by strong growth in revenue from property, sales, and hotel taxes, IBO forecasts $70.6 billion in total tax revenue this fiscal year, $1.2 billion (1.7 percent) greater than 2022 collections. However, slower economic growth, higher interest rates, and the end of Wall Street’s bull market in calendar year 2022 have generated declines in the forecasts of business income, personal income, and property transfer taxes. Further decreases in business and personal income taxes are expected next fiscal year, and with the projection of only modest property tax growth, IBO’s forecast of total tax revenue in 2024 is $69.7 billion, 1.3 percent less than 2023 revenue.

IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. The number of full-time municipal employees has fallen since the pandemic began from 301,000 in January 2020 to just under 281,000 in November 2022. Those reductions come with another cost. IBO notes that while the city has seen reduced costs due to the decline of active headcount, there is concern that these reductions have left some agencies unable to meet key performance targets.

The analysis points out two major sources of pressure and uncertainty arising from the Governor’s proposed state budget – transportation and Medicaid costs. One is a proposal to increase the city’s contribution to the MTA by approximately $500 million more annually. The second is the proposal ending Affordable Care Act (ACA) savings that the city has been receiving. These ACA Enhanced Federal Medicaid Assistance Percentage (eFMAP) payments have been flowing to localities, including New York City since 2015, which the city has passed on to H+H, the city’s public hospital corporation. This change would eliminate city savings of $124 million in 2023 and $343 million in 2024 onward.

COAL REGULATION

The US EPA announced that it would deny permits to continue dumping toxic ash into unlined or inadequately lined pits at six coal fired generating stations. The action reflects rules adopted in 2015. Enforcement of those rules was lax at best during the Trump administration. Now, the EPA is more actively enforcing the rules. Six individual coal generating plants were the subject of the ruling. One of those plants is operated and owned by a municipal power agency.

Salt River Project’s Coronado Generating Station is one of the plant’s whose owners argued that they should not have to meet the deadline since naturally occurring clay, archaic liners or other conditions made their pits essentially as safe as impoundments with modern liners. The EPA cited evidence of potential pollution releases from the pits, and “insufficient information to support claims that the contamination is from sources other than the impoundments.”

AMERICAN DREAM

Given all of the forces which have aligned against it, the recent news regarding the underperformance at New Jersey’s American Dream Mall is no surprise. We have been a skeptic from the days of the first efforts to create a retail mecca in the Meadowlands. Once the pandemic hit the region, it was only a matter of time.

On December 1, 2022, the Trustee delivered $26,743,375 to the trustee, to pay regularly scheduled semi-annual interest due and payable on the PFA Bonds for distribution to holders of record on the November 15, 2022 Record Date. In order to fund this payment, the Trustee transferred $2,595,130 from the Reserve Account to the Interest Account.

The PILOTs previously deposited to the Interest Account were insufficient to fund the interest payment in full due to a reduction in the assessed value of the Project, and a reduction in the Tax Rate, which resulted in lower PILOT obligations. After the transfer, the balance of the Reserve Account will be $51,504,870.

THE ESCALATING FIGHT OVER CARBON PIPELINES

The efforts by sponsors of several carbon capture pipeline projects to obtain permits and rights of way for their proposed pipelines are well documented. Most of the sponsors are working through the existing approval and acquisition process. Much has been made of efforts by those sponsors to be able to use eminent domain to obtain the necessary land for these facilities. The potential for the use of eminent domain has led to significant opposition at both the local and legislative levels in most of the states where carbon pipelines are proposed. In some cases, localities have voted for moratoriums of permitting and/or construction processes.

One example of the escalation of the debate is what is currently underway in Illinois. Last fall, McDonough County intervened in eminent domain proceedings before the Illinois Commerce Commission, noting that pipeline construction could affect emergency responders and farmland. A week later the county passed its pipeline moratorium covering a period of two years. Now, the sponsor of the project (Navigator) is trying a different approach.

Navigator has not been able to obtain enough leases for the pipeline’s route across Illinois or for a carbon sequestration site in the state, and on January 20 it withdrew its application for eminent domain powers, after state regulators said the application was incomplete. In the meantime, a draft agreement with McDonough County offers the county $20,000 per mile of pipeline per year for up to 30 years, with a $630,000 annual cap. The draft says the payment would be contingent on the county acting “in good faith” to “provide positive assistance” to the company, including obtaining road access and rights of way on county land.

It follows a prior effort in another Illinois county. The Illinois Times reported in October that Navigator had made a similar pitch to officials in Montgomery County, offering to pay up to $1.5 million a year for up to 30 years. No agreement has been reached there but the issue has been on monthly board meeting agendas for the past few months.

A 2011 Illinois state law regarding carbon dioxide pipelines mandates that regulators must make a decision on applications like Navigator’s request for eminent domain within 11 months of filing, which would mean June 2023.  In a January 6 filing, commerce commission staff urged the commission to deny the proposal or Navigator to withdraw it. The staff noted that the pipeline’s impact cannot be adequately evaluated since the exact route has not been determined, especially since the endpoint is not yet known.

Navigator would also need 14 separate federal, state and local permits for the project, and as of September the company had none of them, and likely could not obtain them before the June 2023 deadline for the commerce commission to rule on the eminent domain proposal. The current standards under state law meant to facilitate carbon dioxide pipelines expressly states that such pipelines are in the public benefit since they help grow Illinois’s “clean coal” industry.

It is not clear that ethanol plants are not viewed similarly with coal plants. The $3.2 billion, 1,300-mile proposed pipeline would connect to ethanol and fertilizer plants in South Dakota, Nebraska, Minnesota and Iowa before reaching Illinois.

ANOTHER SHOT TO HOSPITALS

On January 30, a federal appeals court allowed limits on hospitals’ use of pharmacies to distribute outpatient drugs, a credit negative for safety-net hospitals and other healthcare providers participating in the federal 340B program, which is designed to help hospitals that treat a disproportionate number of low-income patients. Under the program, not-for-profit hospitals can purchase drugs at a discount and receive reimbursement for the full price. Many safety-net hospitals and other providers rely on the program for a substantial share of operating cash flow.

Hospitals participating in 340B often reach agreements with contract pharmacies such as CVS and Walgreens to distribute the drugs on their behalf. In its ruling, the 3rd US Circuit Court of Appeals agreed with drug companies that hospitals can be limited in the number of contract pharmacies they can use. Using fewer contract pharmacies has the potential to curb hospital cash flow. While the financial benefit of the 340B program varies among participating hospitals, it can account for as much as 25% of operating cash flow. However, hospitals limited public disclosure on the program’s fiscal results makes it difficult to determine the precise effect contract pharmacies have on hospitals’ finances.

REEDY CREEK LEGISLATION

Governor Ron DeSantis unveiled his proposal to change the laws establishing the Reedy Creek Improvement District. The effort stems from the dispute which arose between the Governor and the Walt Disney Co. over the state’s “don’t say gay” law last year. The District was created to administer municipal services within the area largely comprised of Disneyworld. The proposed law would provide for the appointment of District managers by the Governor. Currently, the District’s taxpayers (Disney) appoint the board. The existing structure worked quite well for nearly a half century providing a stable credit.

The proposed move is troublesome given the motivation behind it. Everyone gets that Ron DeSantis is running for President and that he sees culture war issues as a foundational block of his campaign. Putting bond holders and bond insurers in the middle of a local, partisan, non-financial dispute over ideology is a real negative from our perspective. One of strongest magnets drawing people to invest in the US market is the existence of the rule of law and respect for it. While what DeSantis is doing is legal, it reeks of the sort of governance we find in far less developed countries.

MILEAGE TAXES

Vermont is the latest state to consider legislation to levy a usage-based fee on electric cars. Mileage data is already collected when vehicles undergo an annual inspection and officials say data from odometers could be used to charge EV owners 1.3 cents per mile. The proposal would also have people with plug-in hybrids pay an extra $57 per year when they renew their registration. Altogether, this would replace about $1 million in revenue. EVs now represent about 8% of vehicles on the road. EVs now represent about 8% of vehicles on the road in Vermont.

The issue has brought out a strange argument from “environmentalists.” They claim that a mileage fee on vehicles which do not pay any fuel tax at the pump are seeing a fee increase. The state is using the 1.3 cent rate in an effort to match what a typical gas vehicle uses. So, the argument loses force.

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

NEW YORK STATE BUDGET

The process of enacting a budget for fiscal year 2024 beginning April 1 is underway with the release of the Governor’s budget proposal. All funds spending is $227 billion, which represents an increase of 2.4 percent. Deposits to reserves that had been planned for FY 2024 and FY 2025 will be completed by the end of the current year — two years ahead of schedule – for a total of $24 billion in budget reserves.

An eight-year phase-in of personal income tax cuts for middle class taxpayers commenced in Tax Year 2018. It was scheduled to be completed with the 2025 Tax Year. This budget will allow for the full implementation of the tax relief to take effect this year.

New York State will suspend the state sales tax on motor fuels, the separate motor fuel tax, and the metropolitan commuter transportation district sales tax imposed on motor fuels from June through December, providing an estimated $585 million in relief. Transfers from the General Fund to the dedicated funds to offset the estimated revenue lost from suspension of these taxes is designed to ensure no negative financial impact for the MTA.

The State Budget also creates a new property tax relief credit, the Homeowner Tax Rebate Credit for eligible low- and middle-income households, as well as eligible senior households. Under this program, basic School Tax Relief (STAR) exemption and credit beneficiaries with incomes below $250,000 and Enhanced STAR recipients are eligible for the property tax rebate, where the benefit is a percentage of the homeowners’ existing STAR benefit.

The MTA is a prominent concern. The Governor’s proposal includes some $400 million of “efficiencies”. More usefully, the budget includes increasing the top rate of the Payroll Mobility Tax (PMT), generating an additional $800 million annually. Increasing New York City’s share of funding for paratransit services, providing students with reduced fare MetroCards, and offsetting foregone PMT revenues for entities exempted from paying the tax, is estimated to generate nearly $500 million annually. In addition, $300 million in one-time State aid to address the extraordinary impact on MTA operating revenues is included. The governor also proposed diverting revenues from three planned casinos in the New York City region to help the authority, and called on the city to pitch in nearly $500 million, all of which could add up to $1.3 billion in additional yearly funding for the subway system.

And then there is the environment which is already moving to the center of debate. The Executive Budget also includes building decarbonization proposals that will prohibit fossil fuel equipment and building systems in new construction, phase out the sale and installation of fossil fuel space and water heating equipment in existing buildings, and establish building benchmarking and energy grades. The new construction proposal includes certain exemptions such as commercial kitchens. The existing equipment phase out proposal does not impact stoves. 

The asylum issue is front and center as the City of New York deals with the influx of 40,000 undocumented immigrants. Under the Governor’s proposal, the State would commit more than $1 billion in the coming year on initiatives to support asylum seekers, including: $767 million to pay 29 percent of city shelter/HERRC costs for asylum seekers, consistent with existing State shares for Safety Net Assistance, which already supports City shelters. In addition, the budget plan would fund $162 million for logistical and operational support provided by the National Guard, which has deployed more than 900 service members for this mission.

Other sources of aid would include $137 million for health care to support the City of New York,  $25 million in resettlement funding for asylum seekers through the Office of Temporary and Disability Assistance; $10 million in legal services funding through the Office of New Americans; $6 million to support the shelter site at the Brooklyn Cruise Terminal and $5 million for enhanced migrant resettlement assistance.

STATE BUDGET PROPOSALS

Tax cuts are being advanced as many states are finding that pandemic aid and a recovering economy have generated large surpluses. In Nevada, the Governor has proposed a one year suspension of gas taxes and reductions in some business taxes. The proposals include a 12% raise for state employees. This at a time when the state reports a 24% vacancy rate. West Virginia’s Governor has proposed a 50% reduction in the personal income tax rate. The cuts would phase in over three years with a 30% cut in year 1 followed by two more 10% reductions. ARPA dollars are still on hand in the amount of $677 million. The Governor would put $500 million into an economic enhancement fund and put the remainder towards water and sewer infrastructure funding.

Gov. Josh Green of Hawaii has proposed a new climate impact fee of about $50 per tourist to raise $500 million to $600 million per year. Proposed legislation would also include raises fees on visitors to state parks, including charging for parking.

POWER AND TERROR

More information has been made public which highlights the growth of attacks on the physical infrastructure in the electric power industry. We have previously discussed the phenomenon but new information has come to light which increase concerns. These attacks have up to now been primarily on transformers and distribution substations located in rural areas. They have impacted both investor-owned and municipal utilities.

Now we see evidence that the current risk is concentrated geographically and that this will increase the exposure of municipal utilities as a result. Two news outlets in Oregon have obtained information from the FBI which confirm what many thought. The attacks are politically motivated (right wing extremism). “The individuals of concern believe that an attack on electrical infrastructure will contribute to their ideological goal of causing societal collapse and a subsequent race war in the United States.”

In the Northwest – there have been 15 since June, more than in the previous six years combined. Much of the electric infrastructure outside of the cities is susceptible given their remote natures. The attacks appear to follow manuals disseminated online by neo-Nazis and other far-right extremists such as “accelerationist” groups that advocate, however implausibly, that taking down the grid will hasten the demise of the federal government and start a race war.

In Oregon, the rural electrical grid is largely operated and maintained by public utility districts. So, the geographic concentration of the attacks creates a higher municipal utility exposure to the phenomenon. The efforts to make the fossil fuel industry face financial penalties and requirements to compensate governments for the costs they incur from climate change. There are several actions pending in federal courts across the country which will likely go to the US Supreme Court for final adjudication. In the meantime, state legislators in New York are pursuing a legislative approach.

A bill – The Climate Change Superfund Act – has been offered which is modeled on the concept of superfunds as they have been developed to address more specific instances of pollution. The model is based on the polluter-pays model which has been used to effect funding for the clean up of waste generated by industrial activities. In those cases, the pollution is more obvious – oil spills and chemical spills are examples.

CLIMATE LEGISLATION

The Climate Change Superfund Act is designed to raise money for infrastructure projects across the state to protect against extreme weather events caused by climate change. Damage costs would vary from fossil fuel company to company and wouldn’t apply to companies operating outside of New York. The New York State Department of Environmental Conservation would use a formula for each fossil fuel company to calculate their emissions and the percentage they would have to pay.

One major difference between federal Superfund laws and the state proposal is a requirement that negligence on the part of a polluter must be found for the polluter to pay. The NY law has no such requirement.

There is no language in federal law which would preclude state action in connection with pollution remediation. The trickiest argument for New York state to have to make would be proving a company’s jurisdiction. So, to find that a fossil fuel company emitted greenhouse gases in the region, the state would have to prove that the company operated in the state. The complex nature of the distribution chain in the industry will make this difficult.

PREPA

The Puerto Rico Electric Power Authority (PREPA) has announced an agreement with Genera PR is a subsidiary of New Fortress Energy (NFE) to operate the island’s electric generation system. The company is a liquefied natural gas company which builds LNG import facilities. The contract term is 10 years. The news came as the Authority’s bankruptcy’s mediation process has been extended to April 28 by the district judge for the U.S. District Court of the Southern District of New York hearing the bankruptcy case.

The decisions being made by the Commonwealth covering the management and operation of the electric system are disappointing. The reliance on what are best described as legacy providers as opposed to entities with expertise in renewables and microgrids is creating more and more of a missed opportunity to provide Puerto Rico with an affordable and reliable electric system.

WESTERN WATER

Starting on December 26, 2022, a series of 9 atmospheric rivers (ARs) brought significant amounts of rain, snow, and wind to California and other parts of the western United States over a 3-week period. 80% of a full seasonal snowpack was deposited in California during these storms. Statewide, precipitation over these 3 weeks was 11.2 inches, which is 46% of a full water year. Recent storms improved drought conditions by increasing soil moisture throughout much of the West, especially in California. The amount of water stored in many reservoirs increased, but some are still well below historical averages for this time of year.

The first estimates of water conditions in the American West in 2023 became available at month end. This does provide for at least some of the impact of the recent intense weather events in the West to be reflected in current conditions. The review covers the 54 storage reservoirs operated by the US Bureau of Reclamation. The average percentages are based on three decades of data. The resulting comparisons show why the recent atmospheric river events must be viewed with caution.

Two examples in California – New Melones Lake – New Melones Dam storage on 1/29/2023 was 978,413 acre-feet. This represents 72% of typical storage level for this date, based on the last 30 years of data. Trinity Lake – Trinity Dam storage on 1/29/2023 was 761,242 acre-feet. This represents 55% of typical storage level for this date, based on the last 30 years of data. These are two of the four reservoirs in the most distress. The actual levels at these two are 40% and 31% of capacity.

Other facilities are central to the Colorado River debate. On the Utah-Wyoming border, Flaming Gorge Dam And Reservoir storage on 1/30/2023 was 2,498,769 acre-feet. This represents 81% of typical storage level for this date, based on the last 30 years of data. This storage is the lowest value observed on January 30 in the last 30 years. Gibson Dam And Reservoir storage on 1/30/2023 was 9,386 acre-feet. This represents 34% of typical storage level for this date, based on the last 30 years of data. This storage is the lowest value observed on January 30 in the last 30 years. 

To begin to alleviate long-term hydrologic drought and contribute to spring and summer runoff, snow needs to continue to accumulate during the winter. Above-average precipitation over the next 3 to 5 years, combined with water conservation-focused resource management, would be needed to completely alleviate long-term hydrologic drought. Groundwater levels across the western U.S. remain low. Storage in many reservoirs also remain low, especially Lakes Powell and Mead in the Upper and Lower Colorado River Basins, which are important for water supplies in southern Nevada, Arizona, and southern California.

Reservoirs in eastern Oregon, southern Idaho, and eastern Idaho are much lower than typical for this time of year. In particular, the upper Snake River basin (which contains more than 60% of the agricultural land in Idaho) is short of water, and it seems more likely than not that drought will continue for a third year in that basin.  the NOAA Seasonal Drought Outlook is showing drought removal in some parts of central and northern California, drought remaining but with improvement in other parts of northern California and central Oregon, and drought remaining but improving in Idaho. Drought persistence is expected for the remainder of southern California, Nevada, Utah, Colorado, and western and eastern Wyoming. 

TEXAS RENTAL PROJECT

A new project in Texas lies at the nexus of several trends in the economy. One of those is the conversion of former military facility near San Antonio, TX to civilian uses. Another is the role of private equity in the municipal finance space. Another trend is the development of portfolios of traditional single-family housing by private equity interests. All of these interests have converged on the site of the former Brooks Air Force Base.

Preston Hollow Community Capital provided the $185 million in tax-exempt bond financing to Brooks Development Authority for the construction of a build-to-rent residential community called Los Cielos. The project is like many small residential developments built for ownership. It will include 492 for-rent, single-family homes that will be built with attached two-car garages and backyards. The community will feature an amenity center, working center, pool, dog park, gathering areas and pickleball courts.

The site’s former life as the Brooks Air Force Base came to an official end in September 2011. The project is part of an overall mixed-use development at the base. Private equity has been steadily increasing its home purchasing activities for the purpose of converting the properties to ownership status. The construction of single-family housing for the purpose of operating it as a rental is an extension of the trend.

INSURANCE STORM

When Hurricane Ian roared into Southwest Florida last September, it caused the second-biggest insured loss in history with damage estimated at between $50 billion to $65 billion; only Hurricane Katrina in 2005 caused more destruction. More than a half dozen private insurers have already been declared insolvent in the past year and several more are on the edge. In Louisiana, more than 20 companies have gone under or withdrawn from the state over the last two years.

If the trends are not reversed, pressure will grow on the established state insurers of last resort to fill the void.  Citizens Property Insurance Corp. already insures some 1 million homes (but not for floods) in Florida. At the same time, Florida is attempting to tighten provisions regarding litigation against insurers. Florida accounts for just 9% of overall insurance claims in the U.S. but 79% of all home insurance lawsuits. 

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

NYC BUDGET

New York City Mayor Eric Adams today released New York City’s balanced $102.7 billion Preliminary Budget for Fiscal Year 2024 (FY24). The city’s revenue forecast was updated to reflect an additional $1.7 billion in FY23 and $738 million in FY24. The windfall increase in FY23 is driven by continued momentum from the record Wall Street activity in 2021, though the city expects that continued slowing growth in the economy will lead to slowing growth in tax revenue over the financial plan.

The 2024 budget is balanced using a prepayment of $2.2 billion from fiscal year 2023. Revenues and expenditures are balanced for 2023 and 2024 and gaps of $3.2 billion, $5.0 billion, and $6.5 billion are projected for fiscal years 2025, 2026, and 2027, respectively. As of November, the City has recouped 88 percent of the jobs lost at the height of the pandemic. While total employment is projected to grow 4.6 percent (fourth quarter to fourth quarter) in 2022, it is forecasted to rise just 0.7 percent in 2023 as tight monetary policy slows the economy. Sectors sensitive to interest rates, such as finance, real estate, and construction, are projected to lose jobs in 2023. In 2024, total employment is expected to return to its long-run growth path and recover all pandemic job losses by the end of the year.

The Preliminary Budget maintains a record level $8.3 billion in reserves. This includes $1.6 billion in the General Reserve, $250 million in the Capital Stabilization Reserve, $4.5 billion in the Retiree Health Benefits Trust fund, and $1.9 billion in the Rainy-Day Fund. Agency new needs in Fiscal Year 2023 (FY23) and FY24 are funded with savings or existing agency resources.

The immediate threats to the budget are obvious – pending labor contract negotiations and the asylum crisis. They are exacerbated by economic uncertainty. Tax revenues are forecast to dip 0.9 percent to $69.0 billion in 2023. The weaker economic outlook for calendar year 2023 leads to a further tax revenue decline of 0.2 percent in 2024. Overall employment gains are expected to slow in calendar year 2023, however non-finance wage growth remains strong, offsetting continued weakness in the finance sector.

Residential real estate is expected to stabilize as the overall demand for housing remains strong. Commercial real estate, which is already facing headwinds from high vacancy rates caused by work-from-home arrangements, will have to reinvent itself to meet those challenges in the coming years.

Property taxes are expected to grow 6.3 percent in 2023, reversing the pandemic driven decline seen in market values in Class 2 multifamily and Class 4 commercial properties. Non-property taxes are forecast to decline 5.9 percent, as most of the non-property taxes, except for sales and hotel tax, fall from historic peaks. Personal income taxes (including PTET) drop 8.5 percent in 2023 from the record levels posted in 2022 as bonus payments and non-wage income drop.

Corporate taxes are expected to decline 9.0 percent in 2023 after growing 13.2 percent in 2022, as finance sector firms adjust their tax payments to reflect lower liability in tax year 2023, which were offset by better-than-expected performance from nonfinance firms. The unincorporated business tax is expected to decline 8.9 percent.

Property taxes are expected to grow 6.3 percent in 2023, reversing the pandemic driven decline seen in market values in Class 2 multifamily and Class 4 commercial properties. Non-property taxes are forecast to decline 5.9 percent, as most of the non-property taxes, except for sales and hotel tax, fall from historic peaks. Personal income taxes (including PTET) drop 8.5 percent in 2023 from the record levels posted in 2022 as bonus payments and non-wage income drop.

Corporate taxes are expected to 7 decline 9.0 percent in 2023 after growing 13.2 percent in 2022, as finance sector firms adjust their tax payments to reflect lower liability in tax year 2023, which were offset by better-than-expected performance from nonfinance firms. The unincorporated business tax is expected to decline 8.9 percent.

As of November 2022, the City’s economy recovered 88 percent of the 957,000 jobs lost in March and April of 2020. In the first 11 months of 2022, the City added 189,000 positions, more than twice the average for the same period in the 10 years prior to the pandemic (88,000 jobs) but less than in the first 11 months of 2021 (263,000 jobs). The private sector expanded by 16,000 jobs a month on average in 2022 and three of the nine major private sectors are above pre-pandemic levels.

Total City employment is expected to advance by 4.6 percent in 2022 (on a fourth quarter to-fourth quarter basis), slow to 0.7 percent growth in 2023 and then grow at a rate around two percent for the rest of the forecast horizon. Employment is expected to return to its pre-pandemic peak of 4.7 million in the third quarter of 2024.

NYC AND OPEB

One of the issues facing New York City is the cost of retiree healthcare. In fiscal year 2022, New York City paid $3.4 billion to provide health care to its over 250,000 retirees. The City hopes to address at least a portion of this growing obligations for the healthcare provided. It has proposed local legislation which would amend the administrative code of the city of New York, to enable the city to place municipal retirees into a private insurance plan or require them to pay premiums to remain in standard Medicare.

This legislation would affect the portion of costs that the city pays for the premiums for supplemental Senior Care Medigap coverage, which annually costs the city approximately $600 million. The change authorized by the legislation would allow the city to implement its proposed Medicare Advantage program that would effectively shift those costs to the federal government and to retirees. It will not be a direct boost to the City’s General Fund. All the savings resulting from ending the city’s financial support for Medigap insurance will be contributed annually to the Joint Health Insurance Premium Stabilization Fund (the Stabilization Fund).

The fund was created in 1984 to equalize costs between the city’s two health insurance options at the time, GHI and HIP—each of which are offered to city workers at no cost. In addition, the Stabilization Fund ensured that the rates paid by the city were predictable for budgeting purposes. The city’s administrative code stipulates that the city must pay the HIP HMO rate for all employee health benefits.

The fund’s revenues are derived from equalization payments paid by GHI for years in which GHI’s premiums are lower than HIP’s. The fund also receives direct contributions from the city negotiated in labor agreements and earns interest on reserves. With this dedicated funding stream, by 2016 the fund had a balance of $1.8 billion.

CALIFORNIA BUDGET

Governor Newsome has proposed a budget for California for fiscal 2024. Prior to accounting for solutions, the Governor’s Budget forecasts General Fund revenues will be $29.5 billion lower than at the 2022 Budget Act projections, and California now faces an estimated budget gap of $22.5 billion in the 2023-24 fiscal year. The Budget reflects $35.6 billion in total budgetary reserves. These reserves include $22.4 billion in the Budget Stabilization Account (The Rainy Day Fund), which fulfills the constitutional maximum mandatory deposit limit of 10 percent of General Fund tax proceeds.  In order to make a withdrawal from this account, the Governor must first declare a fiscal emergency, and no more than 50 percent of the balance can be withdrawn in any single fiscal year.

The Governor’s Budget economic forecast does not project a recession nor does it propose to draw from the state’s reserve accounts to close the budget gap. To balance the budget, a number of maneuvers will be used. Funding Delays will save $7.4 billion. The Budget delays funding for multiple items across the 2021-22 through 2023-24 fiscal years, and spreads it across the multi-year without reducing the total amount of funding through the multi-year. 

Reductions/Pullbacks will total $5.7 billion. The Budget reduces spending for various items across the 2021-22 through 2023-24 fiscal years, and pulls back certain items that were included in the 2022 Budget Act to provide additional budget resilience. Significant items in this category include the $3 billion included in the 2022 Budget as an inflationary adjustment, and a $750 million Unemployment Trust Fund payment in the 2023-24 fiscal year.

The Budget shifts certain expenditures in the 2022-23 and 2023-24 fiscal years from the General Fund to other funds. Other moves include reducing expenditures for debt retirement for both General Obligation and Lease Revenue debt. Some $8 billion of transfers to budget reserves have been withdrawn. All told, the governor proposed spending $223.6 billion.

WATER LIMITS GET REAL

Two stories from this past week highlight the potential for water to limit development. Earlier this month, the city of Scottsdale, AZ stopped supplying water to Rio Verde Foothills. The housing development is located outside of the city’s incorporated area. Scottsdale said it had to focus on conserving water for its own residents, and could no longer sell water to roughly 500 to 700 homes — or around 1,000 people. The city sells water to private suppliers who then truck it to individual users.

It is just the tip of the iceberg. To prevent unsustainable development in a desert state, Arizona passed a law in 1980 requiring subdivisions with six or more lots to show proof that they have a 100-year water supply. S0, builders split their parcels into five lots or less to get around the water supply requirement.

The Arizona Department of Water Resources reported the Lower Hassayampa sub-basin that encompasses the far West Valley of Phoenix is projected to have a total unmet demand of 4.4 million acre-feet over a 100-year period. The bottom line: the Arizona Department of Water Resources cannot approve the development of subdivisions reliant on groundwater. Additional cuts to Colorado River water went into effect at the start of the year. Arizona must slash 21 percent of its water use from the river that provides water to seven states. That’s 592,000-acre-feet a year, or the water usage of more than 2 million Arizona households a year.

The report had been completed several years ago but the outgoing governor had a strong pro-development bias and kept the report from being released. Now, housing planned to bring some 800,000 residents to the west phoenix suburbs is under threat because of the lack of water. Until the use of water for agriculture is limited and used more efficiently, development will be threatened.

LOUISIANA AND EXTRACTIVE INDUSTRY

The efforts by Louisiana to transition its economy from dependence on petroleum continue. The changes however simply shift the natural resource to be extracted and exploited from fossil fuel to timber. The state already is home to wood pellet manufacturing to supply European demand for “green” heating fuel. Now, the state is looking to support the exploitation of its timber resources to an even greater degree.

The Louisiana State Bond Commission has unanimously passed a resolution granting its final approval of the issuance of up to $1.5 billion of tax-exempt bonds for the financing for the construction of a facility to manufacture non-carbon based plastics. The proposed plant would produce sustainable carbon-negative materials used to make products such as polyethylene terephthalate (“PET”) plastic, which, in turn, is used in packaging, textiles, apparel, automotive, and other applications, as well as hydrothermal carbon, which can be used in fuel pellets, as activated carbon, and as a replacement for carbon black. 

The 150-acre facility would create an estimated 500 construction jobs, 200 local full-time positions, and between 500 and 1,000 indirect local jobs. The plant would convert an estimated 1 million dry metric tons of wood residues each year into products for a wide range of end markets.

ANOTHER SMALL COLLEGE DOWNGRADE

Moody’s Investors Service has downgraded Saint Mary’s College of California’s (CA) issuer and revenue bond ratings to Baa3 from Baa2. The downgrade is largely driven by a familiar litany of factors – heightened student demand challenges contributing to weak operating results, lower debt service coverage, and increasingly thinning liquidity. 

Net student revenue typically accounts for over 80% of total operating revenue. Saint Mary’s College of California is a moderately sized private, not-for-profit college located in Moraga, CA, just east of San Francisco. In fiscal 2022, Saint Mary’s generated operating revenue of $119 million and enrolled 2,229 full-time equivalent (FTE) students as of fall 2022.

The negative outlook on the rating is maintained. Saint Mary’s College reflects Moody’s expectations of continued student market difficulties, operating deficits, and weak liquidity into at least fiscal 2023. 

LONG ISLAND POWER RATE EXPERIMENT

The Long Island Power Authority will consider the imposition of time-of-day pricing when it votes on a rate schedule for 2024. The proposal would see customers pay more between 3 and 7 p.m., but less during all other hours of the day and on weekends and holidays. Rates are further discounted during “super off-peak” hours from 10 p.m. to 6 a.m. The hope is that the rate change would encourage the use of electricity for things like cars and pool equipment to hours when demand overall is lower.

LIPA hopes to enroll 85% of its customers in the plan. It estimates that the plan could reduce overall demand by the equivalent of a large generating unit. Customers will still have the option to stay on a flat rate. LIPA is trying to stay ahead of the curve in terms of state energy policy. Internal combustion engine vehicle sales are limited after 2035 and state energy policies may require the use of electricity in new construction and move many to the use of heat pumps.

The goal of the rate structure is to alter behavior and smooth out electric demand as the industry seeks to move away from fossil-fueled resources.

PREPA PRIVATIZATION

The Puerto Rico Public-Private Partnerships Authority unanimously approved a contract for the operation and maintenance of power generation units currently owned by the Puerto Rico Electric Power Authority. The contract still needs approval from the Commonwealth. In the interim, PREPA is not disclosing the identity of the potential operator. All of this raises more questions than it answers.

The lack of transparency serves only to reinforce fears about whether the Commonwealth has learned anything from the bankruptcy experience. The need for transparency is rooted in the experiences of what happened when the transmission and distribution grid was privatized. The hope was that privatization would lead to a more resilient and reliable transmission grid. The opposite has been the case.

One hope was that operators would take advantage of the island’s abundant wind and solar resources. Less than 4% of Puerto Rico’s power generation currently comes from renewable energy. The Puerto Rico Energy Public Policy Act enacted in 2017 includes a goal for Puerto Rico to generate some 25% of its electricity from renewable sources by 2025.

ESG AND STATE POLICIES

The effort on the part of certain states to take actions including the withdrawal of funds (state cash pools and pensions, e.g.) from financial institutions who have taken public stances against investment in fossil fuel related industries

and companies continues.

A study authored by Wharton Business School professor Daniel Garrett and Federal Reserve economist Ivan Ivanov, estimated the increased cost to Texas entities following anti-ESG legislation that limited competition in the bond market by blacklisting certain firms that consider sustainability risks and opportunities. Garrett and Ivanov found that the Texas law raised costs to the public by as much as $532 million in its first eight months. This led to an additional study which focuses on the municipal bond market impacts of ESG boycotts actions, applied to six states: Florida, Kentucky, Louisiana, Missouri, Oklahoma, and West Virginia.

The study was based on a simple question:  If State X implemented similar legislation that generated the same bond market restrictions (i.e., the same investment banks were banned), the costs of borrowing to State X taxpayers would have been $X more than their completed bond deals actually did cost? The result is an estimated range of $264-708 million in additional costs for all six states combined, with Florida alone standing to bear $97-361 million.

In 2021, the Texas legislature enacted Texas Senate Bills 13 and 19 which bar banks or other institutions with particular ESG policies focused on fossil fuels and fire arms from acting as underwriters for bonds issued by “state governmental entities” including municipalities, school districts, and other entities. For each standard deviation increase in an issuers’ reliance on targeted banks (relative to the mean level of reliance among all Texas issuers), bond yield increases by 9.7 basis points. Applying these results to the 12 months of bonds issued since the anti-ESG law implementation through April 2022, the additional cost to Texas bond issues ranges between $303 million and $532 million in additional interest cost over the maturity of those bonds.

We are not judging the numbers or the conclusions. They are presented to provide an example of what information is out there.

There are efforts underway in a number of states to impose “punishments” on certain financial institutions. In 2022, the Commonwealth of Kentucky took steps on two pieces of restrictive ESG legislation. In April of 2022, Kentucky enacted, but has not fully implemented, S.B. 205, which would restrict firms determined to be what legislators say are energy boycotters from doing business with the Commonwealth. Kentucky also introduced H.B. 123 which would restrict firms that the legislators say boycott firearms.

The State of Louisiana has not yet enacted any ESG legislation that would impact the state’s public bond issuance; however, the legislature has taken steps towards passing H.B 978 that would restrict financial companies that the legislation says boycotts firearms from doing business with the state and local entities. The State of Oklahoma has taken action on two pieces of ESG banning or blacklisting legislation. The state has enacted but not yet implemented H.B 2034 which would restrict financial companies determined to be energy boycotters from doing business with the state. The state legislature has also introduced, but not enacted, H.B. 123 which would prohibit firms that boycott the firearms industry.

In March 2022, the State of West Virginia enacted S.B 262, which restricts financial institutions that the legislation says are determined to be energy boycotters from entering into a State “banking contract,” as the term is defined in West Virginia Code 12 1C 1(a)(1), based on its restricted financial institutions status.

TVA DECISION

The role of fossil fueled power plants as the core of the Tennessee Valley Authority’s generating fleet has become a primary issue for the Authority. It’s largest distribution customer – the City of Memphis – is still in the middle of a huge debate over future electricity sourcing. Many had hoped that pressure from large customers and a more supportive federal administration would drive moves to replace aging fossil-fueled plants with more climate friendly technologies. This week, TVA announced that it will replace its largest generator of electricity, powering 1.1 million homes with natural gas fueled generation.

The Cumberland City plant consists of two coal-fired units: the first unit will be retired and replaced with a 1,450-megawatt combined cycle natural gas plant by 2026. The second unit will be retired by 2028. TVA has not yet determined how it will replace the second unit. The choice comes in the face of the need for rolling blackouts to be employed among TVA customers in the face of extreme cold weather.

The transition from coal to natural gas will cut carbon emissions from the facility by up to 60%, TVA said. TVA is trying to have it both ways. It emphasizes the need for reliable base-load power like that provided at the Cumberland plant as the rationale for fossil fuels versus renewables. A record of operations at TVA’s eight other combined cycle gas plants suggests that they are run as base load facilities.

The EPA found that TVA failed to properly evaluate alternatives like solar at the site, noting that “the alternatives analysis continues to rely on inaccurate underlying economic information.” Specifically, TVA failed to account for expected declines in the cost of clean energy and increases in the cost of natural gas. The TVA rationale cites the fact the natural gas plant at the Cumberland site will be able to run on hydrogen fuel, or a mix of hydrogen and natural gas, if that technology becomes viable. The plants will be built so that carbon capture technology can integrated into the system if that technology matures and becomes cost-effective.

CARBON PIPELINES

The opening of the legislative season has seen a variety of bills proposed to address issues related to carbon pipeline development. Recently, 8 bills were offered to address specific issues raised by landowners in North Dakota. The primary concern is that of the potential for the use of eminent domain by pipeline sponsors. As is the case in Iowa and other states, the sponsor is Summit Carbon Solutions.

The eight bills would require 85% of landowners to provide a voluntary easement to obtain right of eminent domain. Counties could set a higher standard; remove carbon capture pipelines from being granted the right of eminent domain even if granted common carrier status; requires 100% consent for underground carbon dioxide storage from the owners of the pore space, eliminating eminent domain; survey crews must obtain written permission from property owners (There are currently multiple lawsuits involving Summit and surveyor access.).

If an individual prevails against the state in a court hearing, (as in a surveyor access case) they are entitled to be reimbursed for court costs; require that if property is taken by eminent domain, a court must increase the award by 33%; require a public hearing in each county where the pipeline company is seeking common carrier status; require 85% of landowners to consent to underground storage space. Counties could set a higher standard.

TRI STATE EXODUS CONTINUES

Mountain Parks Electric is a distribution cooperative serving 22,000 members in Colorado’s Grand and Jackson counties. It has given notice that it intends to leave Tri-State Generation and Transmission by Jan. 16, 2025. It joins six of Tri-State’s 42 members who have given withdrawal notices. They include the largest member which accounts for some 20% of demand from Tri-State. The utility has reached agreements with two other utilities for full withdrawal.

Others have reached agreements allowing for the procurement of power from entities other than Tri-State. Several other Tri-State members are also pursuing partial-requirements contracts, including Colorado’s Poudre Valley REA, Wyoming’s High Plains Power, and New Mexico’s Jemez Mountain Electric.

The amount assessed the departing member must be “just, reasonable and non-discriminatory.” This has led to a series of proceedings in front of administrative law judges to establish exactly what “just, reasonable and non-discriminatory” is. Both sides of the negotiations have submitted detailed filings backing their wildly divergent estimates of that amount. In the United case, a ruling is expected in July of this year.

WEALTH TAXES

According to the Washington Post, legislators in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington state will release bills “with the same goal of raising taxes on the rich.” They are the product of the movement to tax “wealth” championed by Senator Elizabeth Warren. Maryland lawmakers will propose an extra 1% tax on top of the state income tax rate on certain capital gains; Bills in Hawaii, Maryland and New York will propose lowering the estate tax exemption.  In California, activists want to impose a 1.5% tax on assets of $1 billion or more.

Proponents hope to see annual taxes paid based on the value of assets. The difficulties in calculating the tax base as well as practical issues over what types of assets would be subject to such a tax effectively doomed proposals from Senator Warren at the federal level. One example is farm assets which typically are owned by individuals who have lower current incomes.

Now, activists hope to achieve the same policy goals through changes to tax policy in 50 states. State tax commissions would face the unenviable burden of having to audit each family suspected of exceeding the threshold annually or rely on self-valuation. Previous efforts to generate taxes from point in time asset valuations proved incredibly difficult to administer and generated trading anomalies related to holdings of in state vs. out of state municipal bonds. Florida’s intangibles tax is a good example.

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 federal fiscal response to the pandemic allowed credit to recede as a concern Fears about cash flow and borrowing requirements were replaced by issues around how to spend the gusher of money that the response produced. Now, issuers will return to the more familiar level of prepandemic federal funding while new spending undertaken during the pandemic remains in place. At the same time, expense baselines are being impacted by inflation which is already affecting capital projects.

All of this produces a more interesting credit environment going forward relative to the recent past. A more challenging environment will create opportunities to trade on.

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SAN FRANCISCO

There has been so much focus on New York and its recovery from the pandemic that it can overshadow similar situations in other major cities impacted by the pandemic. The other municipality to be as heavily impacted is San Francisco. There the return to the office has been slower than it has been in most other major cities. The concentration of the workforce in the technology sector has exacerbated this impact. The result has been a significantly reduced number of people in the city on any given day.

San Francisco is projecting a $728 million budget gap over the next two fiscal years as reduced economic activity attributable to remote work becomes entrenched. The City is now expecting business taxes over the next two years to decline by $179.3 million from previous estimates. Property taxes are now projected over the same period to drop by $261 million from the earlier forecast. 

The city expects costs to rise from employee wages and pensions. Another source of fiscal stress is a ballot initiative approved by voters in November to set aside grants for school students. Funding for that comes at the expense of the City’s general fund. The process will unfold as the economic pressure on the tech industry continues. The latest example is the company which built the City’s tallest building in recent years.

Salesforce is the largest private employer in San Francisco. It had already announced plans to sublease space in its new building. Now, Salesforce said this week that it planned to lay off 10 percent of its work force, or about 8,000 employees, and scale back-office space because of concerns about the economy. Salesforce employed just under 80,000 people at the end of October, up from about 48,000 three years earlier. They join the more than 150,000 tech workers laid off last year.

SMALL COLLEGE BLUES

Cazenovia College, a small liberal arts college in Cazenovia, New York announced that it would close at the end of the upcoming spring semester, after 200 years of operation. Cazenovia’s defaulted on a $25 million bond payment in October. Contributing to the problem was a five-year enrollment drop of about 40% from a peak of more than 1,000 students. The College issued debt as recently as 2019 and defaulted in2022. The college reported operating losses of $3.3 million in the fiscal year ending June 30, 2020. It sustained another $2 million operational loss in the 12 months that ended June 30, 2021.

Holy Names University in Oakland, California also announced that it would close next year, after 154 years of operation. Like Cazenovia, it too issued debt as recently as 2019. The decision was caused by rising operational costs, declining enrollment, and an increased need for institutional aid. 520 undergrads and 423 graduate students were enrolled at Holy Names University. However, only 449 in total were enrolled for spring 2023, according to the school. 

Birmingham-Southern College in Alabama is a liberal arts college, founded in 1856 and affiliated with the United Methodist Church. It has asked for $37.5 million in public funds to remain open. The requested funds would come in the form of $12.5 million from the American Rescue Plan Act, $17.5 million from the state’s Education Trust Fund, $5 million from the City of Birmingham and $2.5 million from Jefferson County.

OCEAN’S TWO?

For a long time, many have been concerned about the targeting of the electric grid by terrorists. The focus has been on things like transmission line towers or the potential for cyber attacks on operating systems. Recently, a smaller scale but rather insidious risk – that of physical attack from vandals or terrorists has arisen. The latest incident is the second in weeks. It targeted four rural substations. These small facilities are a familiar sight in rural areas, usually protected by limited fencing.

In Ocean’s 11 (the modern remake), the gang induces a power outage impacting their targets. The blackout created access and cover for the impending robbery. In Washington state, two men damaged four different substation facilities cutting off power to thousands on Christmas night. They used the resulting blackout to execute a small-scale robbery. Ultimately, they were caught and face federal charges and the prospect of real prison time.

Two of the substations that were targeted are operated by Tacoma Power, the municipal utility serving the city. The damage at those stations is estimated to cost at least $3 million and will take up to 36 months to repair. requiring the power company to use mobile transformers while repairs/replacements are undertaken.

According to a POLITICO analysis of US Department of Energy data, the number of physical or cyber attacks or threats against utility infrastructure reported through August of this year is nearly 70 percent higher than the 60 reported in the same period last year. Last year saw a total of 97 reported attacks, including seven cyberattacks, according to the DOE data. Those followed a total of 96 attacks in 2020 and 81 in 2019.

GAS TAXES

Taxes on gasoline at the pump were back in the news. New York State’s six month moratorium on its 16 cent per gallon tax ended on December 31. There appears to be no appetite to extend it. In Colorado, the governor’s budget proposal includes the reinstatement of a 2 cent per gallon increase in the state gas tax. That increase was scheduled for July of this past year but was suspended in the face of high gas prices. That suspension ends on July 1 unless the Legislature renews the suspension.

In Connecticut, truckers face a new tax. The tax applies to large commercial trucks, which carry a classification between Class 8 and Class 13, with fees ranging from 2.5 cents per mile for vehicles weighing 26,000 to 28,000 pounds to 17.5 cents per mile for trucks weighing more than 80,000 pounds. The first payment is due by Feb. 28. The General Assembly passed the highway use tax in June 2021following a failed effort to institute general highway tolls. The new tax is expected to generate about $90 million per year for transportation improvements in Connecticut.

MASS TRANSIT’S PROBLEM COMES INTO FOCUS

Much of the attention being paid to pandemic impacts on public transit utilization has been focused on New York’s Metropolitan Transportation Authority (MTA). In reality, the MTA is far from the only mass transit system facing real operating issues in the face of reduced demand. The reductions in ridership are being evidenced across the country.

The latest example is Seattle. The City was an early pandemic hotspot and the tech orientation of major employers like Amazon and Microsoft led to wide spread adoption of remote work. Now, a combination of resistance to returning to the office and significant layoffs are serving to hold own a return to prepandemic

Metro and Link light rail have seen utilization rebound but the return has been limited. Commuter rail has been most heavily impacted. Sound Transit’s commuter line is recovering more slowly than other modes, hovering at roughly a third of pre-pandemic ridership.

The phenomenon is evident across the country. Fall ridership is running at about half of 2019 numbers on Chicago’s “L,” which logged 87 million passengers through October. Washington’s Metro carried roughly 225,000 daily passengers through October, two-fifths of its 2019 ridership. The mayor in D.C. recently asked for the federal government to end remote work to address the Metro’s demand problems.

P3 PROGRESS

The private consortium engaged to execute the replacement of six bridges in the Commonwealth of Pennsylvania has reached a significant milestone. The project consists of the design, build, financing, and maintenance of six bridges in critical need of replacement across the Commonwealth – I-81 Susquehanna, I-80 Nescopeck Creek, I-78 Lenhartsville, I-80 Lehigh River, I-80 Canoe Creek and I-80 North Fork – plus related roadway and supporting infrastructure.

It recently announced that the project has reached “financial close”. The project sponsors will contribute $202 million in equity and raised $1.8 billion in private activity bonds (“PABs”).  This puts the financing in place and allows the project to move forward. Design and construction can now commence.  

The latest P3 proposal comes from the US Virgin Islands. The USVI announced an RFP for the redevelopment and operation of its primary airports in St. Thomas and St. Croix. The selected operator will perform Part 139 inspections on behalf of VIPA and ensure compliance with FAA requirements. It will negotiate future airline lease and use agreements as well as concession agreements with new tenants.

VIPA will establish a shortlist of no more than four qualified respondents. VIPA intends to select one of the qualified respondents to enter into two related agreements covering both Airports: a long-term lease and development agreement for the terminal facilities and a long-term operation and maintenance agreement for airfield and landside operations.  

CARBON CAPTURE

The process of approval for a proposed pipeline through several states continues. The likelihood of a quick approval grows less likely every day. The route permit Summit Carbon Solutions applied for is for a 28 mile stretch from an ethanol plant in Fergus Falls, Minnesota, through Otter Tail and Wilkin Counties, up to the southeastern state border.   The Summit Carbon Solutions pipeline would connect six ethanol plants in Minnesota to a carbon storage site in North Dakota.

The Minnesota Public Utilities Commission will require Summit Carbon Solutions to prepare a full environmental impact statement. The statement will cover only a portion of the pipeline as the result of a compromise between the company and regulators. In Minnesota Summit does not have the eminent domain power it has in other states. Summit had 11 open eminent domain cases in North Dakota in mid-September. Summit has yet to acquire pipeline route permits in any of the five states on the proposed pipeline route – Iowa, Minnesota, Nebraska, North Dakota and South Dakota.

The South Dakota PUC voted unanimously this week to set hearing dates for Sept. 11-22 of this year. There are about 478 miles of the pipeline planned for South Dakota. Summit said in November it has obtained voluntary easements for more than half the route. The process has resulted in measurable delays in construction and potential operation of a year.

FEDERAL BRIDGE SUPPORT

The Brent Spence Bridge carries Interstates 71 and 75 traffic from northern Kentucky to Cincinnati. When it was constructed in the 1960s, it had a fifty-year expected life. It carries about 160,000 vehicles daily, twice the amount of traffic it was designed for when constructed. Like a similar bridge in New York (the old Tappan Zee Bridge), the structure was handling such a high and growing level of traffic that replacement became a necessity. That has not been an issue. What has is the cost of a replacement and the funding for it.

That issue was the subject of an announcement this week. The Brent Spence Bridge Corridor Project is receiving $1.6 billion in federal infrastructure grants.  The funding comes from the bipartisan Infrastructure Investment and Jobs Act enacted by Congress last year. That grant represents some 45% of the projected cost. Added to money from the states of Ohio and Kentucky, this completes project funding. Groundbreaking is planned for later this year with an estimated six-year construction period to follow.

The grant reflects issues around the use of tolls to finance a project like this. A previous recent project to replace a bridge between Kentucky and Evansville, IN relies on tolls. Political blowback has been significant from that project. It influenced the effort to fund this project which will not require tolling. The grant effectively replaces the capital costs which would have required tolls. That is why Mitch McConnell and Joe Biden were smiling at the grant announcement.

HOSPITALS AND LABOR

The hospital sector has known that post-COVID, its costs were likely to go up. Shortfalls in supplies and drugs were exacerbated by inflation. As inflation impacted the overall economy it was inevitable that labor was going to be a much higher cost center as contracts ran out. It is one of the key factors which has driven rating agency outlooks on the sector to turn negative.

As we go to press, the latest manifestation of this phenomenon is playing out in New York. All of the large hospital systems in the NY metropolitan market have been negotiating with their union employees with the focus of these talks shining on nurses. The threat of a strike by nurses is already influencing elective surgeries and decisions to export patients to facilities with settled contracts.

The outlook for hospitals is colored by the current state of the labor market, higher supply costs, and a potential economic downturn. Tread carefully in the sector. We expect that COVID related issues will still be a source of pressure. As contracts come up for renewal, we expect that labor issues will be a continuing source of operating pressure.

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

This is our year end 2022 review and outlook. We return with the issue dated January 9, 2023.

TRANSPARENCY

The Financial Disclosure Transparency Act passed the House. It would mandate that financial information from municipal bond issuers be presented in a machine readable form among other provisions. What it does not do is contribute to an increase in timeliness and data quality. Just because a format is selected does not mean that all of the data will be magically improved. The requirements would likely be a nightmare for smaller issuers resulting in increased costs with little discernable benefit to those issuers. It seems to be a benefit for data managers and distributors especially for those who will be developing and peddling software.

No one wants to go back to the days of contacting issuers and financial officers when information was closely held. When information was inconsistent or did not meet what might have been simple common sense inquiries. Now we are moving to an even more quantitative market where the data may be in a uniform format but is not additive to the analytic process. It will do nothing to aid the effort to assess and interpret data by analysts. As for the non-financial information which often drives credit and valuation decisions, this proposal does nothing to improve or enhance that process. This will be especially true for many enterprise backed revenue credits.

This is not like previous efforts to improve disclosure like rule 15c2-12 which did increase the volume of information. It does not offer a clear improvement to individual investors in terms of credit analysis. It continues to drive the market towards greater commoditization of the municipal market. In the end, it diminishes the role of credit in the investment process. A uniform data language does not improve the quality of project information whether it be the monitoring of construction progress or review of interim financial data. It does not address issues of law and policy which can be just as important to credit evaluation as numbers.

We generally support efforts aimed at increasing the quality, volume, and timeliness of financial disclosure in the municipal bond market. This is not one of them.

Many thought that the 2022 mid-term elections would generate results which might establish a clear background for next year’s events. The results were anything but. The euphoria over a Senate majority has given way to the reality of a very tenuous majority in the Senate let alone a House majority for the other party. Already, we are seeing the types of activities which have historically been used by more extreme members to weaken Republican speakers. The result is likely to be effective legislative gridlock which severely limits the potential for any serious legislation.

That should effectively end the vast flow of federal cash to the states and localities. It will be important to remember that the fiscal year beginning in June is the last year that states and localities can rely on outside money to fund programs that have been increased or established during the pandemic period. This will be a phenomenon which will be repeated across the country but there will be some prominent credits to watch as they begin to deal with the beginning of the end of federal largesse.

California benefitted greatly from federal pandemic assistance but its finances are already showing signs of a different outlook going forward in the near-term. In late November, the Legislative Analyst’s Office laid out a case for the entire $25 billion surplus the state has accumulated being offset by an emerging revenue shortfall. Already legislative proposals are being advanced which assume that a large surplus will be available to fund spending – income support, transit projects, homelessness – all have their advocates but no source of funding.

New York State saw increases in spending which were to be expected given the state’s pivotal role in the pandemic and its lingering effects and the realities of its political landscape. Now the State finds itself being the first state to deal with an FY 2024 budget. It does so in the face of an uncertain outlook for its finance and real estate industries. It is clear that the state’s recovery – especially that of NYC – has been slower than expected. It has been a bit of time since the current legislative leadership has had to deal with something other than divvying up other people’s money. The legislature is no longer veto-proof which will make the annual three people in a room setting characteristic of NYS budget making much more difficult.

New York City will try to continue to expand housing, maintain pre-K for all, repair the capital stock of the Housing Authority, address the crisis of mentally ill homeless in the face of an uncertain local economy and declining outside aid. The indicators are so mixed so far that one would be foolish to make assumptions about the future. Office occupancies still lag. Excess space remains on the market – both commercial office and retail. Attendance at the city’s schools continues to be below pre-pandemic levels and it is estimated that some 250,000 have permanently moved out. Tourism remains uncertain. Several Broadway shows have closed shortly after reopenings after the pandemic.

The Metropolitan Transportation Authority (MTA) has already begun the process of imposing a fare increase. The basic problem is simple. Passengers do not wish to see an increase in fares. The current image of the subways is that of slow service, unsafe facilities, turnstile jumping, and an overall breakdown of the environment. The heavy reliance on congestion fees in future plans relies on the success of that program. As much as any agency, the MTA relies on both the state and city government for funding which gives suburban legislators inordinate power.

It becomes clearer each day that new funding is needed and that is in addition to what congestion pricing yields. Unfortunately, MTA funding has been one of the preeminent battlegrounds in the state legislature. The City will face its own revenue needs and will not be a ready source of additional operating cash. Meanwhile, the dance in the press which accompanies any process of raising fares has begun. It also comes at a time when experiments with free service have begun in several major cities. The results to date have been mixed. Riders and transit advocates have pointed to service deficiencies playing as much a role in demand as fares. This has led to an underwhelming reaction in some places to these programs.

HEALTHCARE

It may be only two years ago that federal aid was bailing out hospital credits, mitigating some of the concerns about the damage done to hospital balance sheets. Since then, the virus may have ebbed but inflation has not. Hospitals seem to be one of the hardest hit sectors by inflation. Whether it be supply shortages or prices or labor costs, hospitals bore the brunt of the pandemic’s effects. In the aftermath of the pandemic, hospitals saw declines in non-emergency healthcare which help to extend the damage to finances.

One sector which was under siege before the pandemic was the rural hospital sector. Once the pandemic hit, rural hospitals were at the front line of COVID care as the only providers of emergency services. Now, many of those facilities are still at risk in the wake of the pandemic and hoping for outside help primarily from the federal government. Over 180 rural hospitals have closed in the United States since 2005. Ten percent of those closed in 2020.

A program is being offered by the federal government which would designate facilities as “rural emergency facilities.” Rural emergency facilities could receive monthly payments of $272,866, with increases based on inflation each year. They will also receive higher Medicare reimbursements than larger hospitals. There is one catch. They must promise to release patients to larger facilities within 24 hours. It would mean an end to inpatient treatment at those facilities. Not even for labor and delivery patients.

On the other side of the coin, the hospitals which are supposed to pick up the rural slack have their own problems. Consolidation had slowed during the pandemic but its aftermath is reviving mergers in the face of pressured finances. Volumes continue to be impacted as patients remain fearful of hospitals and hospital type environments especially at large facilities. This has impacted elective care and procedures which are often substantial profit contributors for hospitals.

The large metropolitan hospitals still face pandemic issues. Significant issues with COVID and RSV are both taxing to the facilities’ bottom lines but they revive the aforementioned fears holding down utilization. The situation is highlighted by revived masking requirements in Los Angeles and New York. Hospitals in those places are combating higher costs and supply shortages without additional governmental support.

PRIVATE COLLEGES

Private colleges have been on a downward trajectory in recent years as increasing tuition caused sticker shock and the pandemic limited access. The National Association of College and University Business Officers (NACUBO) conducts annual surveys of tuition rates across the country. The 2021 study showed that net tuition revenue per undergraduate increased year-over-year but is still down two percent from five years ago, after adjusting for inflation. Enrollment was relatively flat overall, as an increase in first-year students was diluted by a decrease in enrollment among other undergraduates. This occurs before the full effects of a pending unfavorable turn in demographics which is expected to reduce applications and matriculations through the decade.

To combat the trend, the smaller private institutions have embarked on a campaign to publicize the “true” cost of attendance. Most undergraduate students at these institutions received grant aid this year, and the awards were, on average, the largest they’ve ever been. In AY 2021-22, 82.5 percent of all undergraduates at institutions surveyed received aid, which covered an average of 60.7 percent of published tuition and fees. Ironically, the higher sticker prices may actually drive down demand for a given school.

POWER

The electric power sector remains the most interesting as it is at the center of nearly every contentious issue associated with climate change. Municipal utilities across the country are on the front line of the response whether it be generation development and siting; hydroelectricity vs. fish; equity – economic and environmental; refurbishment and expansion of the transmission and distribution grid. Municipal utilities are in a position to make pivotal decisions.

Coal vs. natural gas – the potential for Memphis to truly change the game will grow throughout the year as it decides whether or not to renew a long-term contract with the TVA. If a customer which accounts for 10% of TVA’s load demand turns away over environmental concerns, it could lead the TVA to reconsider its plans to replace coal with natural gas.

Nuclear – Utah Associated Municipal Power Systems (UAMPS) is a participant in a proposed small scale nuclear project. Small scale nuclear has hit some speed bumps lately as inflation has raised cost estimates. Nonetheless, utilities in the southeast have announced plans to deploy small modular nuclear in Virginia. A plant has also been proposed for the Hanford site in Washington. These plants will be in the news all year as the regulatory processes unfold.

One risk has already emerged and impacted development. The private developer of an advanced nuclear reactor proposed for southwestern Wyoming recently announced a two-year delay in the project. The issue is not with planning, record keeping, or poor construction management as has been the case with so many legacy nuclear reactors. Here the issue is a lack of the more highly enriched fuel the plant requires.

The primary (and often only) source of the fuel is Russia. This will require the development of a domestic source of fuel. Until that is resolved construction makes no sense.  The planned project site is currently the home of two operating coal units at electric utility PacifiCorp’s Naughton Power Plant. This project could repurpose the site as both units are slated to retire in 2025.

Transmission – This is the issue which is as much of a near-term obstacle to full electrification as anything else. Projects like the Grain Belt Express and the Central Maine transmission line remained mired in legal challenges and environmental concerns. Transmission – its capacity as well as its ability to accept new power – is simply inadequate to satisfy the goals of advocates. The imbalance between capacity and supplies is a real issue. It has slowed connections for solar and both residential as well as industrial scale. 

Electrification – The move to electrify the nation physically and economically is exposing so many conflicts on the road to this goal. Lithium is the key component in the process of manufacturing batteries to power electric cars. The effort to fully develop a domestic lithium industry is now running headlong into a gauntlet of environmental and cultural concerns. Numerous proposed mining sites are being challenged on environmental and religious grounds. That process will play out throughout the year. The trend of restricting natural gas use in new construction will continue. This will continue to conflict with natural gas proponents who are a large number even at the public agencies.

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

JACKSON, MS WATER

In October we documented the issues contributing to the unacceptable situation confronting the City of Jackson, MS and its efforts to run a municipal water system. Now, the US Department of Justice (DOJ) has announced an agreement with the city in litigation it had launched against the city over the management and operations of the water system. DOJ proposed appointing an outside expert to oversee operations until the system is reorganized and major repairs can be made. This is something which was done in Birmingham, AL when its water and sewer system dealt with bankruptcy.

Earlier this year, $5 million was provided by the U.S. Army Corps of Engineers through the Infrastructure Investment Jobs Act (IIJA). The state’s congressional delegation successfully included $20 million in supplemental appropriations in Congress’ Continuing Resolution on September 30. These funds will come directly to the city of Jackson for water infrastructure projects along with $4M in State and Tribal Assistance Grants through the Environmental Protection Agency (EPA).  The city also has applied for funding under the American Rescue Plan Act (ARPA) and match funding through the Mississippi Municipality & County Water Infrastructure Grant Program (MCWI) totaling over $71 million.

The outside manager has been appointed. Under the agreement, the interim manager would operate the city’s public drinking water system to bring it into compliance with federal and state laws, oversee the city agency responsible for billing and carry out improvements to the system.

MOBILE TRANSIT PROJECT

The Alabama Department of Transportation (ALDOT) will move forward with the Mobile River Bridge and Bayway Project, a project which has been mired in controversy over the funding of the project and costs to drivers. Now, ALDOT is moving forward with this project, utilizing funds from the $125 million federal INFRA grant as well as a commitment of at least $250 million in State funding. ALDOT will continue to pursue funding opportunities with the U.S. Department of Transportation but will not delay moving forward pending future grant awards.

The project will employ the design/build strategy. Those seeking the contract will have to provide a new Mobile River Bridge and a new Bayway. The project will have to provide for four non-toll alternatives.

This project will rise and fall over toll revenues from this facility. The plan will be based on electronic toll options of $2.50 or less for passenger vehicles, and $18.00 or less for trucks. An unlimited use option for $40 per month, which is under $1 per trip for daily commuters between Mobile and Baldwin Counties will tamp down opposition to the project. Tolls would significantly higher for customers paying in cash.

While the project will be constructed by a private entity, it will be owned and operated by the State of Alabama, with no private concessionaire. The project, as proposed, includes the construction of a new 215-foot-tall Mobile River bridge, and a new 7.5-mile Bayway between downtown Mobile and Daphne, along with the demolition of the existing Bayway. The entire project, without receiving additional grants, relies heavily on financing that includes $1.2 billion through bonding and another $1.1 billion through federal loans under the TIFIA program repaid through revenues generated by tolling.

The movement on the plan represents a turnaround in the state consensus which existed in 2019 when a proposed P3 for this project was proposed. Opposition weakened support at the statehouse but the access to federal funding and limitation of tolling to this facility has led the Governor to reverse and announce support for the project.

For bidding purposes, the project is in two parts – the bridge and the highway. Bids are due on December 21.

INFRASTRUCTURE TERROR

For half a century, the electric power grid has presented a real source of concern to those concerned with terrorism. The very essentiality of those physical assets combined with their locations in remote areas raise the level of concern. Fortunately, there have not been many incidents and the impacts have been limited. Recent events however, have heightened concerns about the vulnerability of the nation’s electric grid. As the country moves towards greater and greater dependence upon electricity, that vulnerability becomes more and more of a serious issue.

Two power substations in Moore County, NC were damaged by gunfire on last weekend in what they believe was an “intentional” attack on the power grid. The damage to the transmission equipment cut power for some 45,000 customers. The attack comes some 30 years after the issuance of reports from the federal government detailing the concerns about grid vulnerability. The equipment in question is the type of facility which one finds all over rural America.

The incident in North Carolina will raise a variety of questions about the location of these facilities and their true level of vulnerability. This incident follows on the heels of news that the federal government has acknowledged that “Power companies in Oregon and Washington have reported physical attacks on substations using hand tools, arson, firearms and metal chains possibly in response to an online call for attacks on critical infrastructure.  The attacks are attributed to “violent anti-government criminal activity.”

These events are the latest iteration of a long-term conflict based on the issue of federal land management.  That discontent has manifested in other violent confrontations with law enforcement but the new tactics of shooting out necessary electric infrastructure are problematic.

NYC FINANCIAL PLAN

The New York City Independent Budget Office testified this week about its analysis of the Mayor’s November Financial Plan update. IBO’s Fiscal Outlook finds the city will have a budget surplus for 2023 of $2.2 billion, a negligible deficit in 2024, followed by deficits of $3.5 billion in 2025 and $4.5 billion in 2026. (Years refer to city fiscal years unless otherwise noted.)

This incorporates IBO expectations of weak tax revenue growth, albeit higher than the mayor estimates, offset somewhat by expenses that it expects the city will incur, which are not included in OMB’s spending plan. The outyear gaps, although smaller than those estimated by OMB, are substantial and will require action by the mayor and the City Council unless revenues recover faster than expected.

The economic assumptions behind the projections are as follows. For calendar year 2022, IBO projects the New York City economy to add about 205,200 jobs as our recovery from the unprecedented job losses in the 2020 recession continues, although IBO projects that the city will still be 105,540 jobs (or 2.3 percent) below its pre-pandemic level at the end of this year. For calendar year 2023, gains slow to 44,600 jobs before bouncing back somewhat to 90,500 in 2024, 85,900 in 2025, and 82,400 in 2026. The employment recovery remains uneven among the sectors. Industries such as construction, retail trade, and leisure and hospitality are all estimated to be at less than 90 percent of their 2019 level at the end of this year. Others such as information, professional services, and health care have fully recovered to their 2019 levels.

After accounting for new needs, other adjustments, and PEG reversals, the administration, however, only achieved reductions of $705 million and $554 million in fiscal years 2023 and 2024, respectively. Out of roughly 55 mayoral agencies, only 18 achieved their PEG target in each year of the November plan.

Other findings raise concerns. Our concerns from the start of the Adams administration were about his management style and how engaged the Mayor would be with those management details. This report does not assuage these concerns. This past September, the administration issued savings targets to all mayoral agencies of 3.0 percent in fiscal year 2023, and 4.75 percent in fiscal years 2024 through 2026. The targets, known as the Program to Eliminate the Gap or PEG, were set to yield savings of $1.4 billion in 2023 and $2.2 billion in fiscal years 2024 and later. However, the administration did not meet these goals.

After accounting for new needs, other adjustments, and PEG reversals, the administration, however, only achieved reductions of $705 million and $554 million in fiscal years 2023 and 2024, respectively. Out of roughly 55 mayoral agencies, only 18 achieved their PEG target in each year of the November plan. Some of that reflects the Mayor’s approaches towards management of the workforce. The pandemic exposed how antiquated the City’s information system was (and still is) and the effort to force workers back to the office earlier than was the case for many in the private sector seems to have backfired.

The use of attrition to manage headcount is something we’ve criticized the administration for in the recent past and the impact of that method is emerging. Many of the positions which are not being filled were vacated by experienced workers. The crucial core of workers between thirty and fifty (young enough to be still engaged or too close to retirement and a pension to make a major shift) is steadily being hollowed out.

This comes as the potential budget threats from the reliance on COVID money to fund programs becomes clearer. IBO cites two examples. The Department of Education is expected to need $764 million in 2025 and $966 million in 2026 above what the mayor has currently budgeted for programmatic costs. This includes $678 million in 2025 and $881 million in 2026 if it wants to maintain services launched with federal Covid relief funds that will run out during fiscal years 2024 and 2025, such as expanded 3K. In total, these repricings result in IBO estimating higher city-funded expenditures in each year of the financial plan: $228 million in 2023, $1.1 billion in 2024, $829 million in 2025, and $928 million in 2026.

The other issue is less complex. The financial plan includes a reserve for future collective bargaining settlements as contracts with most of the city’s unions having either already expired or scheduled to do so by the end of calendar year 2023. The amount in the reserve is sufficient to provide for a settlement with a raise of 2.5 percent annually. However, given the steep rise in inflation over the past year, it is likely the unions will hold out for higher settlements, which would add to the budget gaps.

PORT AUTHORITY OF NY/NJ

Moody’s maintained a Aa3 rating with a stable outlook for the Port’s Consolidated Revenue Bonds. The rating reflects Moody’s expectation that “the Port Authority’s operating revenue will remain on a positive trend in 2023 despite a weakening economic environment supported by an expected increase in aviation revenue and a potential CPI-based toll rate increase in January 2023.”

We note that operating trends are positive as reflected by the fact that preliminary 2022 operating revenue exceeds pre-pandemic 2019 levels. The port segment has surpassed 2019 levels in 2022, traffic volumes at its bridges and tunnels have come back to 2019 levels and aviation was approaching of 2019 levels as of September 2022. The port segment has already surpassed 2019 levels in 2022, traffic volumes at its bridges and tunnels have recovered to 2019 levels and aviation is approaching 2019 levels as of September 2022. 

PATH remains the money pit it has always been although the move to hybrid and/or remote work has impacted ridership which was still only at around 58% of 2019 levels as of September 2022. Moody’s estimates that the PATH system will likely continue to generate negative EBITDA of over $300 million per year (-$382 million in 2021).

SALT RIVER PROJECT

The Salt River Project (SRP) is the largest electricity provider in the greater Phoenix metropolitan area, serving approximately 1.1 million customers. It has found itself over the last year at the center of a number of controversies including net metering, the location and expansion of gas fired facilities, and the general issue of equity. Now the utility plans to move forward in the renewable generation space.

The SRP Board of Directors announced that it approved the second phase of continued development at the Copper Crossing Energy and Research Center in Florence, AZ, which includes a utility-scale advanced solar generation facility capable of generating up to 55 megawatts (MW) of solar energy.

Historically, SRP has contracted generation from renewable resources through power purchase agreements with developers, as these entities have access to tax credits. Now with the passage of the Inflation Reduction Act, not-for-profit public power utilities like SRP are allowed to directly receive federal incentive payments for renewable projects.  As a result, this will be the first utility-scale solar asset in SRP’s portfolio that SRP self-develops, owns and operates.

Development will not occur overnight. Detailed engineering, material procurement and construction activities for the solar facility are expected to take approximately 24 months. Next year, SRP hopes to be able to move forward with a battery storage project complimenting the existing and proposed solar generation on site.

GAS TAXES

California Republican state lawmakers are offering legislation to try to temporarily suspend the state’s gas tax for a year. At 54 cents it is the highest state gasoline tax levy in the country. Bills were filed in both houses of the legislature for consideration during either a Special session or in regular session. The sponsor in the House has proposed backfilling those funds with money from the state’s general fund. That proposal comes soon after the Legislative Analyst for the state warned of a likely $25 billion budget shortfall which would effectively absorb all of the general fund’s reserves. That raises the question of whether this is a serious proposal or just grandstanding.

Hawaii’s Department of Transportation recommends “moving forward with a minimally disruptive transition to road usage charging.” Its proposal comes with a low price in comparison to some other proposals under consideration elsewhere. HDOT suggests the rate of .8 cent per mile be charged since that amount is equal to what the average gas vehicle in Hawaii pays through the gas tax. Currently, EV owners pay a $50 flat fee for registration. The mileage charge would be odometer based with calculation of the fee incorporated into the state’s annual vehicle inspection process. After California, Hawaii has the second-highest EV adoption rate in the nation. Hawaii collects 16 cents for every gallon of fuel sold, which amounted to $83 million in 2019. HDOT estimates that by 2045, the .8 cent-per-mile rate could generate over $65 million on all EVs or $100 million if levied on all vehicles.

MEMPHIS AND THE TVA

The Board of the Memphis, Light Gas and Water Board of Commissioners voted against a proposed 20 year, rolling contract with the Tennessee Valley Authority for the purchase of electricity. The contract provided for TVA base rates to decline by 3.1% and allowed MLGW to produce up to 5% of electricity independent of TVA.  The utility will continue to purchase power from TVA under an existing agreement. The proposed 20-year term appears to be as much of a stumbling block as anything else. The vote allows for new management to be in place to influence an ultimate long-term decision. New management starts in January.

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

NUCLEAR SUBSIDIES

The Department of Energy awarded the funding for the Diablo Canyon Power plant to Pacific Gas & Electric, which owns the nuclear facility, to help cover the cost of continued power production. The federal money follows a $1.4 billion loan from the state last month. provides about 9 percent of the state’s electricity. PG&E said the funding it had received from the state and federal governments would cover the cost of extending the license and operations of the plant. The utility said the federal money would help repay the state. There are still details to be negotiated but it is expected that the money would be distributed over four years beginning in 2023.

In Michigan, the owners of the shuttered Palisades nuclear plant announced late last week that it was denied funding from the U.S. Department of Energy’s Civil Nuclear Credit Program. No U.S. nuclear power plant has been reopened after an owner filed a formal notice — known as a letter of permanent secession of operation — to the Nuclear Regulatory Commission that it was being decommissioned, which occurred in the case of Palisades earlier this year. The decision

MTA 

The latest review of the mass transit situation in NYC comes from the NYC Independent Budget Office (IBO). As of this fall, ridership on public transit (subway, buses, and commuter rails) hovers around two-thirds of its pre-pandemic rate, while tolled crossings on bridges and tunnels have recovered to pre-pandemic levels. Ridership is now expected to reach just 81 percent of pre-pandemic levels by the end of 2026.

As a result of the revisions made in July, farebox revenues are expected to only make up about 25 percent of the authority’s $19 billion in annual revenues over the next several years—up from 17 percent during 2020 and 2021—but considerably lower than the near 40 percent of pre-pandemic revenues in 2019. Revenue from tolls is expected to stay around its pre-pandemic share.

Ridership on commuter-dominated services like the Long Island Rail Road (LIRR), Metro-North Railroad, and the subway reached extreme lows in the spring of 2020, averaging just 3 percent, 5 percent, and 8 percent of pre-pandemic ridership in April, respectively. Since the start of September 2022, commuter rail recovery has begun to outpace that of the city’s subway and buses.

Crossings on the MTA’s bridges and tunnels saw the least impact from the onset of the pandemic, reaching a low of 32 percent of pre-pandemic levels in the first week of April 2020, and quickly rebounding to over 80 percent by the summer of 2020. Currently, this is the only mode of transit under the MTA’s purview to have returned to 100 percent of pre-pandemic weekly ridership.

The various MTA services do not contribute equally to the authority’s revenue; commuter rail generates the greatest revenue per ride, at approximately $9, while buses have tended to yield the lowest revenue per ride, at around $2. However, most MTA user revenue is generated from tolls and high-volume services like the subway. At the start of 2020, subway ridership yielded the greatest proportion of monthly fare and toll revenue, at 44 percent.

This changed during the initial wave of the pandemic: from April through August 2020, toll revenue from paid bridge and tunnel crossings grew to more than half of all MTA user revenues and has since remained the largest source of these revenues. In August 2022, bridge and tunnel crossings made up 37 percent of user revenues, while subway fares contributed 35 percent.  IBO estimates that the MTA will meet its $6.2 billion fare and toll revenue targets for this year. This is, however, approximately $700 million less than the Authority’s original 2022 target set before Omicron.

The State Comptroller has also weighed in on the future revenue needs of the MTA. The Authority has also put forward an alternative plan to narrow its recurring budget gaps through 2028 by using early debt repayment. the MTA would also eliminate a projected $180 million in recurring debt service costs through 2053, which are associated with debt for operations that the Authority borrowed during the height of the pandemic. The paydown of the outstanding notes and bonds would reduce the size of the budget gaps by an average of $915.4 million through 2028.

The challenges remain substantial going forward. Fare revenue is expected to be the largest source of growth among all revenue sources between 2022 and 2026, rising by 29 percent. The MTA expects fare revenue (including none of the MTA’s major tax subsidy sources, including the Metropolitan Mass Transportation Operating Assistance (MMTOA), payroll mobility tax and real estate transaction taxes, are expected to rise by more than 7 percent over the same period, with toll revenue remaining flat over the period. Revenue in 2026, but that remains 10 percentage points lower than its share in 2019.

TRANSIT WORKER SHORTAGE

Public transit providers across North America face a shortage of operators and mechanics, a crisis that has strained budgets and forced agencies to reduce service. Ninety-six percent of agencies surveyed reported experiencing a workforce shortage, 84 percent of which said the shortage is affecting their ability to provide service. Although the shortage is most acute at agencies serving large urbanized areas and agencies with greater ridership, most agencies across the country report the shortage has forced service reductions regardless of the size of an agency’s ridership, service area population, or fleet.

Agencies reported that 45 percent of departing employees left to take jobs outside the transit industry, more than those who retire or left the workforce combined. The survey of agencies indicates that concerns about schedule and compensation were responsible for more departures than assault and harassment or concern about contracting COVID-19.

The problem is not limited to mass transit providers. States across the country are dealing with a shortage of snowplow drivers.  The Missouri Department of Transportation reports that it is nearly 30 percent below the staffing it needs in order to cover more than one shift. The Kansas DOT is about 24 percent short of snowplow operators needed to fully staff offices across the state. 

WESTERN DAMS

The Federal Energy Regulatory Commission (FERC) voted unanimously to approve the removal of four dams on the lower Klamath River to facilitate the return of salmon to the river. The move culminates a two- decade effort to restore the salmon runs on the river. The irony is that hydroelectric generation is being removed at the same time that carbon-free energy production is being favored.

As a result of the vote, FERC is ordering the surrender of the Lower Klamath Project License, which is currently held by energy company PacifiCorp. That license will be transferred to the entities in charge of dam removal: the states of Oregon and California, and the Klamath River Renewal Corporation, a nonprofit created to oversee dam removal that is made up of tribal, state and conservation group representatives.

PacifiCorp, their owner, had concluded that these outdated, inefficient hydroelectric dams would be more difficult to update than to remove.  In early 2024, the reservoirs are scheduled to be drawn down between salmon runs. In mid-2024, demolition will begin and by October 2024, the river should be open for the salmon’s return.

CRYPTO AND POWER

The recent downfall of FTX, the cryptocurrency exchange, does not help the image of the industry in ways obvious and not so obvious. Of the many factors cited by opponents of crypto, the enormous electric power needs of the industry and their increasing use of fossil fueled generation plants is gaining ever increasing attention. In that environment, legislation was passed in New York State limiting the expansion of crypto mining at abandoned fossil fueled facilities.

The legislation will impose a two-year moratorium on crypto-mining companies that are seeking new permits to retrofit fossil fuel plants in the state into digital mining operations. Many of these are some of the oldest and dirtiest generation in the state. The legislation will not impact existing mining facilities or stop all crypto-mining activities in the state. The restrictions will only apply to those seeking permits to re-power fossil fuel plants. Those that connect directly into the power grid or use renewable energy sources will remain unaffected.

It also requires New York to study the industry’s impact on the state’s efforts to reduce its greenhouse gas emissions. The industry resists these sorts of limits and study periods which may tell you something. It is feared that the New York law’s enactment could stimulate similar actions in other states.

MEMPHIS POWER SAGA

Memphis Gas, Water, and Light the municipally owned electric utility serving the city find themselves at the center of another to the ability of the TVA and the city to enter into a long-term power supply contract. This week, three nonprofits — Memphis-based Protect Our Aquifer, Energy Alabama and Appalachian Voices are challenging the long-term contract model with which TVA agrees to provide power to retail distributors.

The plaintiffs have argued the contracts violate the Tennessee Valley Authority Act of 1933, the law that governs TVA, and the National Environmental Policy Act, which requires environmental review of federal agency policy decisions. The case comes as MGWL decides whether to enter into a 20-year supply contract with TVA or to acquire supplies from other providers. The environment around the decision is also poised to change.

After a two-year period of bid solicitation and review, the outgoing CEO and a consultant hired on his watch recommended renewal of the relationship with TVA on a long-term deal. A new CEO began this week. The MLGW board delayed a vote on the 20-year deal this month because one company that bid on its electricity protested the decision to award TVA the contract. The ultimate decision rests with the Memphis City Council.

RENEWABLES AND PROPERTY TAXES

The Oklahoma Supreme Court unanimously affirmed a trial court’s ruling that federal production tax credits used to finance the construction of wind and solar farms can no longer be included in county assessors’ property valuations that determine the local taxes paid by energy companies. The Court said federal production tax credits (PTCs) are intangible property not subject to ad valorem taxation, according to the Oklahoma Constitution. PTCs are instead a tax incentive.

The ruling noted that while there is no doubt that tax credits may enhance the value of real property or have value for IRS taxation purposes, the Oklahoma Constitution states that intangible personal property is not taxable and that PTCs are intangible personal property. The ruling also stated that if the Oklahoma Legislature wanted to statutorily define PTCs as tangible property, it could do so but has not.

The current system leads to wide variations of similar properties especially those which cross county lines. Local assessments of energy properties can be “farmed out” to third-party assessors hired by elected county assessors to value more complicated assets, such as wind farms, pipelines and petroleum production assets. Multiple bills aimed at addressing property valuation disputes between county assessors and energy companies were introduced during the 2022 legislative session, with two of the measures being enacted.

One law requires energy companies protesting their tax valuations to file the correct paperwork in a timely manner and requires that county assessors inform school districts and tax jurisdictions of the property tax protests taking place within the county. In a concession to the industry, the law also prohibits the use of a third-party assessor during informal valuation negotiations between county assessors and energy companies. The second law moves valuation appeals of $3 million or more from the district courts to the existing Court of Tax Review.

The last provision reflects the fact that this tax dispute has gone on for six years and that the ruling potentially has implications for school districts across the state. The valuation changes will impact the amounts receivable by school districts from the state. The concern is that the law will raise uncertainties about school district bond financings. In 2021, about $80 million in property tax payments sat in escrow owing to valuation protests.

VIRGIN ISLANDS

We waited to see what rabbit the USVI Water and Power Authority would pull out of its hat before December 1 to keep its power generation system running in the face of a fuel cutoff by its propane supplier. The utility’s long standing financial problems have led to regular threats to its fuel supply.  Now, the Authority will use short term authority to acquire diesel fuel to run old power plants while a longer-term plan can be crafted. Electrical production by diesel costs twice as much as it does it by propane. WAPA had been paying $380,000 to $400,000 a day for propane. The Authority’s board authorized WAPA to spend up to $500,000 per day for propane because of the possible higher prices. The board authorized the amount through January 6.

A long-standing dispute between the USVI government and the estate of Jeffery Epstein has been settled. The estate of Jeffrey Epstein has agreed to pay what could amount to more than $105 million to the U.S. Virgin Islands to settle claims The estate of Jeffrey Epstein has agreed to pay what could amount to more than $105 million to the U.S. Virgin Islands to settle claims that he fraudulently obtained tax breaks for operating a financial advisory firm. Mr. Epstein’s estate agreed to repay in cash more than $80 million in tax benefits that one of his companies had received. It will also split the proceeds of the sale of a private island held by the estate.  The estate will have up to a year to come up with the necessary cash to fulfill its settlement terms.

INTERMOUNTAIN POWER

The Intermountain Power Agency has revealed that two private companies, apparently with understandings with state legislators offered to buy the Agency. Last month a proposal was offered that included the companies buying out all of IPA and its assets—its land and water rights, outstanding bonds and power contracts, as well as its transmission systems and generating station.  The plan was to use carbon capture and sequestration to extend the life of IPA’s two coal fired generating units. The power would be used for a data center.

One of the companies even sought to become a member entity of IPA, which is comprised of 23 Utah municipalities, as part of the proposal. That would raise all sorts of issues. All of it would seem to be moot as by agreement with the Environmental Protection Agency, IPA is allowed to operate the coal units until 2025, otherwise IPA would have to spend hundreds of millions of dollars building new coal ash disposal facilities in order to comply with federal regulations. 

If EPA believed IPA was set to diverge from the approved closure timeline tied to the ash disposal agreement, a 135-day deadline could kick in whereby IPA would need to open new ash disposal facilities or face imminent shut down. IPA received an approval order from the Utah Division of Air Quality in 2021 that allowed work to commence on IPP’s gas plant. Provisions of the order contain language about the closure of the plant’s coal-burning units.

Reopening that order to delay the closure of the coal units would likely trigger an 18-month delay in construction of the gas plant and could add costs of up to $50 million to the effort, according to IPA. 

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

This is effectively a double issue of the MCN. Our next issue will be the December 5, 2022 issue.

This week finds two of the major issuance and credit entities providing updated credit information. NYC saw Mayor Adams issue the November 2022 Update to the City’s five-year Financial Plan. The California Legislative Office issued a new update to its outlook for the State’s finances. Bankruptcy is in the news as the City of Chester, PA declared Chapter 9 and FTX the crypto exchange and arena sponsor chose the Chapter 11 route. The cost of the immigration stunts pulled by southern governors is becoming clearer in NYC.

As usual, we see lots going on in the power generation sector. Austin, TX is in the midst of a serious debate over rates. We see the role of solar in grid resilience and two public agency-owned nuclear power plants will participate in a pilot project to produce hydrogen. Several municipal utilities find themselves in the middle of the swirl of issues stemming from the western U.S. drought.

The Port of Los Angeles gets an upgrade 25 years in the making. Two midwestern cities are piloting various forms of income support programs. Enjoy the most universal American holiday on Thanksgiving.

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NYC FINANCIAL PLAN UPDATE

The latest financial update to the City’s financial plan was not exactly filled with good news. The impacts of the pandemic remain, the city economy has been slow to return to its pre-pandemic state, and the performance of the financial markets largely negative. So, it is no surprise that City officials disclosed that they were now projecting a combined budget gap of $13.4 billion for the next three fiscal years, compared with the $12 billion the city projected in June. The City attributes the growing gap to the travails of the financial markets. The impact from the markets is direct in terms of trading activity and pay but also has implications for future funding of pensions costs by the city.

The update comes as the state comptroller released a report highlighting the difficulties the city faces in recovering from the pandemic. The city’s full-time workforce declined by 19,113 employees over the last two years, the largest decline in staffing since the Great Recession of 2008. Despite the city hiring over 40,000 new employees in the last fiscal year, city job vacancies stand at more than 21,000.

The 6.4% decrease in the city’s workforce during the pandemic was found to be uneven across its 37 largest agencies, with 11 experiencing a decline in staffing of more than 13%. The Department of Correction had the greatest loss of employees with a 23.6% decline, followed by the Department of Investigation at 22.2% and the Taxi & Limousine Commission at 20.5%.

The ongoing issues facing the city in regard to public safety and homelessness only highlight the unplanned nature of some of the reductions in headcount. The Police Department (6.7%), Department of Social Services (13.7%), and Administration for Children’s Services (15.6%) accounted for more than half of the citywide workforce decline from June 2020 to August 2022.  Divisions within Social Services, Education, Parks and Recreation, Homeless Services, and Mental Health and Hygiene had the highest vacancy rates of more than 20%. 

The city’s current financial plan looks to fill 24,969 positions by fiscal year 2023. In October, more than half of the city’s major agencies had external job postings for at least 20% of their openings, while other major agencies did not show significant efforts to hire as of October 2022.

IS REAL LIFE RETURNING TO STATE BUDGETS?

The massive infusion of federal aid to lower levels of government to deal with the costs of response to the pandemic was the clear factor supporting state credits. It allowed all but one state to avoid borrowing from the Federal Reserve. It also provided a pool of cash to legislators whose existence is based on the ability to deliver government funded services. Across many jurisdictions, the cash funded either new or expanded service initiatives which required long-term sources of revenue. That has been a huge caution light when looking at the states.

Now, we see the first signs of the potential impact of removing the fiscal punchbowl. The State of California’s Legislative Analyst’s Office has released a report warning of potential shortfalls in revenues and a growing budget gap. Reflecting the threat of a recession, the LAO revenue estimates represent the weakest performance the state has experienced since the Great Recession. The result is the Legislature could face a budget problem of $25 billion in 2023‑24. The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021‑22 through 2023‑24 by $41 billion. 

The $25 billion budget gap in 2023‑24 is roughly equivalent to the amount of general‑purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below the LAO revenue outlook in the budget window. LAO anticipates anticipate revenues will decline between 2021‑22 and 2022‑23 by more than the budget act anticipated, but then remain largely flat between 2022‑23 and 2024‑25, before growing again in the last two years of the outlook.

CHESTER CHAPTER 9

The latest distressed municipality to try the bankruptcy option is the City of Chester, PA. This industrial suburb of Philadelphia is a poster child for the example of historically disadvantaged cities. The City was admitted to the Commonwealth of Pennsylvania’s Distressed Municipalities program under the well-known Act 47 in 1995. A quarter century later a fiscal emergency was declared by the Governor. Now, the city, under the guidance of a state overseer has filed for Chapter 9 bankruptcy.

Chester has long had much working against it. The major industrial development of the late 20^th century in Chester was a refuse to energy plant which served the city and the surrounding area. The concurrent economic decline only damaged the city’s direct revenue generating abilities. At the same time, the City was run poorly even under the best of circumstances. Expenses were delayed or not paid including nearly $40 million of required payments to fund pensions. Even the state overseer has noted the lack of information or concealment of information by city financial officers. His office has expressed frustration at city officials for what is described as a lack of cooperation while trying to get finances in order. 

The city paints a dire picture of layoffs, pension reductions, service reductions. Employees blame “Wall Street” or the state or anything else that doesn’t reflect on their city managers. And yes, the issue of race will overhang the discussions. Chester is an example of the results of years of issues now generally grouped under the heading of equity. If the recent pattern of bankruptcy resolutions holds up the pensioners will take a smaller haircut than will any holders of the city’s debt. In the meantime, it remains to be seen if the Commonwealth will challenge the bankruptcy filing as it did in the case of the City of Harrisburg.

FTX AND MIAMI

Cryptocurrency was having its moment a couple of years ago and some municipal officials embraced it with a real level of gusto. As the pandemic unfolded, a variety of events and factors served to draw a number of participants in the cryptocurrency industry to the City of Miami. The Mayor of Miami has been the leading advocate not only seeking to attract traders and exchanges to the city but also advocating for paying workers in crypto and even investing city funds in cryptocurrency. Through earlier ups and downs in the value of crypto, the Mayor remained a steadfast advocate.

That led one player in the industry to locate in Miami and as was the practice of that player, take a number of steps to insinuate themselves into the community in very prominent ways. That is why the naming rights to the arena which serves as the home of the Miami Heat of the NBA were sold earlier last year to FTX. Yes, that FTX – the one which spectacularly flamed out last week. The immediate impact is on the Miami Arena which had barely gotten the name up over the entrance when it had to be taken down. Those naming rights will now be reauctioned.

It could just be that Miami is the place for trendy products or industries to die at least when it comes to naming rights. It’s easy to forget the Blockbuster Bowl games in the 90’s in then Joe Robbie Stadium. The arena had been called the FTX Arena since June 2021. The naming agreement had a 19-year term and was projected to produce $90 million over the term of the lease for Dade County. It just repeats a pattern seen over the years.

BEHIND THE IMMIGRATION STUNTS

Nothing stimulates debate like the issue of immigration. It is a subject that increasingly becomes more emotional and apocalyptic by the day. The issue has gotten much attention in NYC where the asylum seeker phenomenon has been in full view. Whether it is tent cities in the Bronx or in the middle of the East River, the issue is not going away under the current national immigration scheme. Lost in all the political hyperbole are facts about what this is actually costing NYC.

Once again, the City’s Independent Budget Office (IBO) has stepped in to fill the breach. A new report notes that as of early November, the Adams administration reported that 23,800 asylum seekers have arrived in New York City, in most cases looking to escape economic and civil unrest in their home countries—Venezuela in particular.  Based on the number of asylum seekers who had arrived as of early November, IBO estimates that the city will spend at least $596 million over the course of a year. 

That figure covers costs related to shelter stays, public schools, basic health services, and some legal assistance. The number just covers those who have arrived to date. Additional costs can be estimated but vary widely based on who is getting the help (individuals versus families). For example, individual cost estimates could range from about $1,900 for an individual who does not enter the city’s shelter system and receives some health and basic legal services to nearly $93,000 for a family of four who enters a shelter for a year and has two children enrolled in the city’s public schools, along with receiving some health and basic legal services.

IBO’s best estimate is that another 10,000 asylum seekers locating to NYC could generate additional expenses of some $246 million.

SOLAR AND BLACKOUTS

A newly released study by the US Energy Information Administration showed that while 2021 recorded the third highest rate of total annual electric power outages since 2013, state markets with a high rate of rooftop solar adoption have shown to have the shortest timeframe for recovery from outages and higher grid resiliency. The EIA study found that increasing solar states such as Florida, Delaware, the District of Columbia and Nevada, experienced outages ranging from 52 minutes to 102 minutes in the most recent year.  That contrasts to states with prohibitive solar and net metering incentives, such as West Virginia, Louisiana and Mississippi, which saw power outages stretch from 19 hours to more than 3 days.

The US experienced a record number or 21 named storms in 2021, the third-most active Atlantic weather season on record. In addition to four major hurricanes in 2021, a winter storm affected the Midwest and Southeast as far south as Texas. Customers in Louisiana, Oregon, Texas, Mississippi, and West Virginia experienced the most time with interrupted power in 2021, ranging from almost 19 hours in West Virginia to over 80 hours in Louisiana. Louisiana also had the highest number of power interruptions, followed by Texas.

AUSTIN ELECTRIC

Austin, TX and its electric system were heavily impacted by the electric distribution disaster that was Texas in February 2021. The city’s municipal electric system is now trying to restore the utility’s financial position which was impacted by the higher purchased power costs resulting from February 2021. The city council is now considering rate increase proposals to address the utility’s diminished financial position.

The rapid spike in costs led Austin Energy to consistently over the past two years drawdown $90 million from its reserves. This led to two downgrades of its debt rating, from AA to AA minus. Now it is asking to recover an additional $35.7 million in base rates largely through residential consumers. That has led to serious opposition. An alternative proposal from some stakeholder groups would raise the fixed residential fee to no more than $12 per month rather than Austin Energy’s proposed $25. That would result in a new lower revenue requirement from $35.7 million to just $12 million.

The base rate request follows the approval just one month ago of an increase in a pass-through charge, This is intended to cover an estimated $104 million in operating costs incurred by the utility over the last year. The approved increase for average customers starting Nov. 1 was $15 a month. The regulatory process has seen Austin’s rate proposals successfully challenged before. In the settlement of Austin Energy’s own 2016 base rate review, the Council approved a revenue requirement that was $25 million lower than Austin Energy originally requested.

The cost of power in Texas in the wake of the 2021 freeze has become a real issue. The Census Bureau reports that 45% of residents said they had to forgo spending on basic necessities, such as food and medicine, in order to pay their energy bills. Texas ranked worst among all states and its reported rate was 11 percentage points higher than the national average of 34%.

NUCLEAR GOES HYDROGEN

The U.S. Department of Energy (DOE) is partnering with utilities on four hydrogen demonstration projects at U.S. nuclear power plants. Hydrogen would be produced at the nuclear plants through high- or low-temperature electrolysis, a process of splitting water into pure hydrogen and oxygen. High-temperature electrolyzers use both heat and electricity to split water and are more efficient.

The selected plants are among the most well-known and longest operating nuclear generation plants in the country. Two of them have been the subject of subsidy payments to enhance the economics of continuing to generate nuclear power and two were owned at one time by municipal power agencies. DOE is supporting the construction and installation of a low-temperature electrolysis system at the Nine Mile Point station in Oswego, New York. Nine Mile Point would be the first nuclear-powered clean hydrogen production facility in the U.S. and would also use the hydrogen to help cool the plant. The former NY Power Authority owned plant is the oldest operating plant in the country.

The second plant which formerly had municipal utility ownership to participate in the hydrogen is the Palo Verde plant in AZ. DOE is negotiating an award with Arizona Public Service (APS) and PNW Hydrogen to demonstrate another low-temperature electrolysis system at the Palo Verde Generating Station. The hydrogen will be used to produce electricity during times of high demand or to make chemicals and other fuels.

DOE is continuing to support the development and maturation of clean hydrogen production, including funding for six to ten regional clean hydrogen hubs across the United States through the Bipartisan Infrastructure Law. At least one of the hubs will be focused on clean hydrogen production using nuclear energy.  Additional funding, through the Inflation Reduction Act, will be available to support clean hydrogen production via tax credits that will award up to $3/kg for low carbon hydrogen.

MORE ELECTION UPDATES

South Carolina will see its rainy-day fund showered with enough funding to increase the required level under the state’s constitution. Voters approved two constitutional amendments requiring the state to increase its budgetary reserves to 10% of prior-year revenue from the current 7%. They apply collectively to the state’s rainy-day funds — the General Reserve Fund (GRF) and Capital Reserve Fund (CRF). The higher required reserve level is an obvious positive rating factor.

The amendments boost the budget reserve funds’ required amounts as a share of state revenue, which are determined using the most recently completed fiscal year. The GRF’s requirement will rise over four years to 7% from 5% of revenue, and the Capital Reserve Fund’s will immediately grow to 3% from 2%. Balances required by the amendments as of 30 June 2022, would amount to approximately $918 million — an increase of $274 million above prior requirements.

San Francisco voters did not do the City’s GO credit any favors through approval of two ballot items. Proposition G requires the city to appropriate money to SFUSD based on estimates of the city’s excess Educational Revenue Augmentation Fund (ERAF) revenues, money remitted back to the city after it meets certain unique school district funding requirements. The city controller estimates appropriations will grow from $11 million in fiscal 2023-24 to $35 million in 2024-25 and $45 million in 2025-26.

Voters approved a second ballot measure to increase pension cost-of-living adjustments (COLAs) awarded to a subset of retirees by removing a conditional requirement tied to the funded status of the San Francisco Employees’ Retirement System (SFERS). Beginning 1 July 2023, San Francisco’s annual pension contribution requirements will rise by roughly $8 million annually for 10 years as a result of Proposition A’s approval.

COAL AND WATER

Arizona State University researchers recently addressed the issue of power generation and water supplies. Their report summarizes findings from extensive research to identify and describe the amount, source, and ownership of water rights used by coal-fired power plants and coal mines throughout the Colorado River Basin. There are currently about 37 coal-fired power plants and coal mines in the Colorado River Basin. These plants and mines are located in five states—Arizona, Colorado, New Mexico, Utah and Wyoming—and together they withdraw an estimated 131,130 acre-feet of water each year. Coal plants use the vast majority of this water, about 130,000 acre-feet per year, while coal mines collectively use a modest 1,130 acre-feet.

There are plants owned by public power agencies and cooperatives that are analyzed in the report. Salt River Project (“SRP”), an Arizona-based utility, owns coal water rights that entitle it to around 100,000 acre-feet of surface water each year in Arizona and Colorado. Coronado Generating Station is owned by SRP and located near St. Johns. Coronado used about 5,200 acre-feet of water in 2020, all of which came from about 30 groundwater wells with a combined pumping capacity of 44,000 acre-feet annually. All of the wells are owned by SRP.

Craig Generating Station in Colorado is owned by Tri-State G&T, PacifiCorp, Platte River Power Authority (“PRP”), SRP and the Public Service Company of Colorado (“PSCC”) and is located near Craig, Colorado. It used about 13,300 acre-feet of water for cooling purposes in 2020. According to the EIA, all this water was surface water from the Yampa River. In New Mexico, Four Corners Power Plant is owned by APS, Pinnacle West, SRP, TEP and the Public Service Company of New Mexico (PNM) and is located near Fruitland, on land leased from the Navajo Nation. According to EIA data, the power plant used about 17,000 acre-feet of water for power generation and cooling in 2020, all from the San Juan River.

In Utah, Hunter Power Plant is owned by Utah Associations Power Systems, Deseret Power Electric Co-op, Provo City and PacifiCorp and located near Castle Dale. The plant used about 16,400 acre-feet of water in 2021. It gets its water from Cottonwood Creek in Utah. Bonanza Plant is owned by Utah Municipal Power Agency and Deseret Generation & Transmission Co. (“Deseret G&T”) and is located near Vernal.

The plant used 5,442 acre-feet of water in 2021. As the EIA correctly reports, Bonanza Plant gets all this water from the Green River, under a water right jointly owned by Deseret G&T and the Utah Municipal Power Agency with a capacity of 10,859.5 acre-feet per year. Deseret G&T also owns another water right in the area entitling it to an additional 10,859.5 acre-feet of water per year, but it is not clear whether this right is used at Bonanza Plant.

Intermountain Power Plant is owned by Intermountain Power Agency and is located near Delta. It used about 7,233 acre-feet of water in 2020. The mine gets its water rights from over a dozen water rights, all owned in whole or in part by Intermountain Power Agency, with a total capacity of 15,300 acre-feet per year. Intermountain Power Plant is not within the Colorado River Basin, but it is near the Basin’s boundary, such that its water use could impact Basin water resources.

Just two of the largest water users on the list account for enough water each year to fill the requirements of some 100,000 homes. In a part of the country where every drop matters that puts users like these at the center of the Colorado River water debate. SRP increasingly finds itself at the center of the conflicting forces driving the climate debate. The utility maintains ownership shares of three of these plants and their associated water rights. It has also gone through a bruising process over siting a gas generation expansion. It also has lobbied against net metering rules in AZ which might raise or maintain current price requirements for excess power taken from solar users.

PORT OF LOS ANGELES

Over the past few years, the Port of Los Angeles has been at the center of many of the issues confronting port operators and providers – trade volumes, pressure to reduce pollution, pressures to implement automated operations and the historic relationship between ports and the unions representing various labor interests at the port. It created a challenging operating environment in the best of times. The pandemic raised a host of concerns – pressures on trade activities; delayed offloading as pandemic restrictions led to container backups and the potential for substantial labor disruptions through 2022 – which could have a negative credit impact.

Cargo volume at the Port of Los Angeles dropped in October as the Port handled 678,429 Twenty-Foot Equivalent Units (TEUs), a 25% decrease from October 2021. The Port of Los Angeles has processed 8,542,944 TEUs during the first 10 months of 2022, about 6% down from last year’s record pace. Our concerns over labor issues are acknowledged by the Port. “Cargo has shifted away from the West Coast as some shippers await the conclusion of labor contract negotiations. “With cargo owners bringing goods in early this year, our peak season was in June and July instead of September and October.”

This week, the efforts of Port management to handle these coincident pressures paid off in an upgrade. The Port of Los Angeles has been upgraded to an AA+ bond rating with stable outlook on its outstanding bonds by Standards & Poor’s (S&P), the highest rating given to a seaport without taxing authority. “Trade tensions with China have not resulted in weaker financial performance, and supply chain disruptions and congestion have somewhat subsided, thereby mitigating operational challenges.”

S&P also cited the Port’s continued strong business position, stable portfolio of assets and excellent historical financial performance as factors contributing to the rating. Prior to its AA+ upgrade, the Port of Los Angeles maintained an AA rating with S&P since 1996. 

INCOME EXPERIMENT

The Toledo, OH City Council approved a plan which would allow the City to apply a portion of COVID related federal funding to reduce at least one category of student debt. COVID-19 Stimulus Package, which gave $800,000 to Toledo for emergency funding and relief. Lucas County had agreed it would then contribute an additional $800,000, bringing the total to $1.6 million. Those proceeds would be used by city government to buy medical debt through the nonprofit RIP Medical Debt, an organization that specializes in purchasing “bundled medical debt portfolios on the secondary debt market.

It comes after the City of Chicago approved its own plan in July of this year along similar lines with Cook County participating as well. The Illinois plan hopes to erase $1 billion in debt with RIP Medical Debt, using the $12 million in federal funding provided to them. To qualify, the debtor has to earn less than four times the federal poverty level, and the amount of the debts are 5% or more of their annual income. 

PROPOSED HOSPITAL MERGER

Sanford Health and Fairview Health signed a non-binding letter of intent to combine the two regional health systems based in South Dakota and Minneapolis. The goal is to conclude a merger by the end of 2023. It is not the first time that such a merger was proposed. In 2013, the two systems proposed a merger only to have it shot down by Minnesota regulators over competition issues.

The resulting parent company, with more than 78,000 employees and dozens of hospitals, would be Sanford Health and be operated out of South Dakota. The idea is to bring a generally rural patient base and link it to a significant metropolitan base. The rural hospital sector continues to get pummeled, especially in the wake of the pandemic. Fairview’s hospitals are generally based in the Twin Cities, including the University of Minnesota Medical Center.

Sanford is rated A+ by Standard and Poor’s. Fairview’s A3 Moody’s rating had a negative outlook. The institutions generated similar levels of pre-pandemic revenues and they share characteristics such as the operation of senior care facilities and they have significant presence in their home states. There are a number of stumbling blocks to be overcome as there has been historically opposition to a merger which might give control of the U of M medical center to a non-Minnesota entity.

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 VOTE

It will be hard to know the true implications for federal infrastructure policy of the election until control of the Senate is established. On the House side, it shapes up as a lot of investigating and media stunts so nothing gets done. That leaves the local results to give us clues. Our 10.31.22 edition outlined many of the issues on the ballot.

The NY legislature supermajority was lost. That will temper some of the zeal on the left which has implications for a variety of programs. Congestion pricing and cannabis regulation are two which come to mind.

Speaking of cannabis, Missouri and Maryland passed legalization initiatives. The other three states where weed was on the ballot saw it go down to defeat. Arkansas and North Dakota were not a surprise but South Dakota hasd already legalized in 2020 only to see the courts overturn legalization. Opposition was much better organized this time around and it was not an off-year election so the environment was less favorable.

Millionaire’s taxes resulted in a split decision. California rejected its plan while Massachusetts voters approved their proposal. Efforts to make it harder for ballot initiatives were defeated in Arkansas.  

Medicaid expansion continued its broad support. South Dakota voters approved a constitutional amendment that would extend Medicaid eligibility under the Affordable Care Act. Anybody making less than 133 percent of the federal poverty level (about $18,000 for an individual or $36,900 for a family of four) would qualify for Medicaid coverage. An estimated 45,000 South Dakotans would be covered by the expansion including some 14,000 Native Americans.

Taxes to support efforts by municipalities to decarbonize were supported in Denver and Boulder, CO. Taxes to fund transit projects had mixed results. In California, transit taxes were supported in San Francisco and Sacramento but they failed in three other counties. Arizona saw Pinal County’s tax proposal defeated. In Florida, three counties saw tax increase proposals go down to defeat. One was the Hillsborough County referendum which has been the subject of numerous legal efforts to keep the item off of the ballot. (MCN 10.31.22) Transit related initiatives were supported in Texas and the Carolinas. In Michigan, metro Detroit voters supported three transit tax increases. Ann Arbor voters supported a tax increase to fund climate change adaptation.

NATIVE AMERICAN WATER RIGHTS

The Supreme Court agreed to hear a dispute between the Navajo Nation, the Biden administration and the states of Arizona, Nevada and Colorado. The Navajo tribe is asking the federal government to determine that it has the right to waters from the Colorado River. In 1964, the Court issued a decree partially apportioning the waters of the Colorado River among several states and five Indian tribes, not including the Navajo Nation, represented by the United States as trustee. The Navajo Reservation stretches into Arizona, New Mexico, and Utah, and is located almost entirely within the Colorado River Basin. The Colorado River forms a large part of the Reservation’s western border.

The United States both failed to assert a claim to the Colorado’s mainstream on behalf of the Nation and successfully opposed the Nation’s attempt to assert such a claim on its own behalf. The Court thus did not adjudicate the Nation’s rights to the Colorado. Now, the Navajo are seeking to have its claim to water rights from the Colorado. The litigation brings together the already pressured position of the three states which comprise the lower basin and those of the Navajo Nation. It will be heard amid the ongoing efforts by the Federal government to reach agreements with lower basin water consumers in the face of the two-decade old drought drying out the Colorado.

The questions presented are: Whether the lower courts had jurisdiction over the Navajo Nation’s breach-of-trust claim seeking an order requiring the United States to assess and develop a plan to meet the Nation’s water needs, but not a judicial quantification of the Nation’s rights to Colorado River water, or whether this Court has exclusive jurisdiction under the Consolidated Decree. And whether, given the United States’ promise to provide the Navajo Nation sufficient water by entering into the treaties establishing the Navajo Reservation, coupled with the government’s nearly exclusive statutory and regulatory control over the Colorado River, the United States owes the Navajo Nation a fiduciary duty to assess the Nation’s water needs and develop a plan to meet them.

Given the ongoing “negotiations”, the opposition to the suit by the Lower Basin states is not surprising. They are already under pressure and an “additional” straw in the river would only cause losses for other users. The Colorado has begun a less than zero sum game. It is more an issue of limiting lost resources.

NATIVE AMERICANS AND CLIMATE CHANGE

The Bureau of Indian Affairs has announced that it will give money to five Native American tribes to help them relocate away from rivers and coastlines. The funding will go to three tribes in Alaska and two in Washington State. It is distinguished from other relocation programs in that it is not tied to a disaster event. Rather, it is a limited test of the concept of managed retreat.

One tribe will get $2.1 million to help replace its aging health clinic with a new building on higher land, farther from the Pacific. Other payments to other tribes will provide funding to move between 15 and 20 homes in their villages. It was a popular plan with some 11 tribes applying for relocation funding under the new $130 million program.

While small in scope, the program provides a test of the managed retreat theory. If it is seen as successful, managed retreat will likely become part of overall disaster response and management. As flooding becomes more frequent and serious, the ability of property owners to rebuild on site will be limited. Relocation will become more cost efficient than paying claims on federal flood insurance claims. It is all part of a comprehensive approach to disaster management comprising prevention, remediation, and relocation.

MUNI UTILITIES, RATES AND GOVERNANCE

Municipal utilities across the country have long been seen as sources of revenue for municipal governments. That tactic causes utilities to set rates which generate surplus utility revenues to keep residential property tax rates lower than they would be. That is how the practice is justified when it requires what should be a cost-based utility to levy rates in excess of needs. That trade off has made the practice acceptable to many ratepayers. When municipal utilities generate excess revenues for purpose other than to support general government, it raises issues.

The latest example comes from Clearwater, FL. Municipally owned Clearwater Gas is the only option for residents and businesses in north Pinellas and west Pasco counties for gas water heaters, cooking ranges, dryers and other appliances. It operates as a monopoly under state law. With wild fluctuations in natural gas prices, utilities like Clearwater Gas get more attention than they generally experience. That attention has been focused recently on Clearwater Gas’ use of customer revenues to “promote” the utility.

The Florida Public Service Commission the commission prohibits using funds from rates for promotions related to “image enhancing,” according to state statute. A Tampa Bay Times analysis found that Clearwater Gas spends substantially more on activities which could be considered by some to be “promotional” than any of the other 26 municipally-owned utilities in Florida. It includes “charitable” contributions tied to promotions of the utility as well as the use of facilities like suites at spring training games. Clearwater Gas has paid the Philadelphia Phillies $359,000 since 2015 in exchange for the stadium suite, food and drinks, and the Clearwater Gas logo displayed on the scoreboard and pamphlets.

The problem is that Clearwater Gas has taken the promotional effort to levels well beyond those of the other six municipal utilities in the state which fund “sponsorship” programs. How far beyond? Try eight and a half times the total spending on promotion by the next most profligate utility. It’s $2.2 million. Now, Clearwater Gas returns a dividend each year to the city’s general fund which is required by policy to be at least 50 percent of net income. Clearwater Gas has returned to the city an average of $3.3 million every year since 2015.

The ongoing issues around natural gas prices and their increasing role in higher utility rates has focused attention on utility rates, spending, sources of supply. At the same time, climate pressures in Florida are driving demands for non-fossil fuel generation. The promotional efforts by Clearwater Gas to drive more natural gas use and less electrification fly in the face of climate mitigation efforts. It competes with those who wish to use residential solar but face pressure from utilities who are trying to lower net metering payments.

Now, the mayor of Clearwater has sought to exert more oversight over the utility’s promotional activities. Clearwater Gas cannot provide information on who benefits from things like the suite, tickets to cultural events and golf tournaments. That is a governance issue which should concern all stakeholders.

NYC AND COVID FUNDING

Just over $13.5 billion in federal Covid-19 stimulus funds have been made available to New York City. This is comprised of $5.9 billion in unrestricted State and Local Fiscal Relief Funds from the American Rescue Plan Act of 2021 (ARPA-SLFRF) and $7.2 billion in restricted education aid. Of the dedicated education funding, $4.8 billion is authorized through ARPA (ARPA Education) and $2.4 billion is through the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSAA).

The education stimulus is mostly earmarked for spending by the city’s Department of Education (DOE), with some funds restricted for the City University of New York (CUNY). The city has also received some smaller awards, totaling around $380 million for transportation, remote learning technology, and Section 8 housing vouchers.

As of the close of fiscal year 2022, the city has claimed more than $6.9 billion in these stimulus funds to cover costs, per the city’s Financial Management System. This includes $1.2 billion in FY 2021, and $5.7 billion in FY 2022. Of the nearly $6.2 billion remaining, $4.1 billion are earmarked for educational purposes (from ARPA Education and CRRSAA) and $2.0 billion are unrestricted ARPA-SLFRF funds.

As of the release of the 2023 Adopted Budget, the city had budgeted $4.7 billion—across these stimulus funding sources—from 2023 through 2025. This means that $1.5 billion of the city’s federal stimulus award has neither been claimed nor is currently budgeted for spending in this or future fiscal years, and therefore, is available to be allocated to agencies’ budgets in the city’s upcoming financial plans.

NYC HEALTH AND HOSPITALS

Health + Hospitals (H+H), New York City’s public hospital system, is the largest and one of the oldest public hospital systems in the country. H+H is the largest provider of emergency room care, care for mental health diagnoses, and uninsured care in the city. It was arguably at the center of efforts to address the COVID-19 in NYC. This was an obvious result given the demographic and economic profile of the majority of potential demand for these hospitals. It expanded bed and staffing capacity at the start of the Covid-19 surge and launched new temporary initiatives such as the Test & Trace Corps and staffing vaccination sites across the city, as well as built three new Covid-19 community health centers, and expanded its telemedicine offering.  

The New York City Independent Budget Office (IBO) estimates that the city will provide a total of $2.3 billion in operating support to H+H in 2023 (all years refer to city fiscal years). This is in addition to the $564 million the city has budgeted to provide to H+H for delivering services on its behalf. City operating support planned for H+H is similar to what the city provided in 2022. However, city support has been growing in recent years; its subsidies to H+H averaged $1.5 billion per year from 2018 to 2021.

The primary source of city operating support for H+H is through supplemental Medicaid payments. H+H serves a disproportionate share of Medicaid and uninsured patients and it is receiving additional Medicaid (DISH) funding. By providing these supplemental payments, the city triggers an equal amount of funding from the federal government. The city plans to provide $1.5 billion for its share of the supplemental Medicaid payments in 2023.

There are cash flow risks which could result from the reliance on these funding sources as policies change and COVID aid goes away. DSH cuts were originally required by the Affordable Care Act to begin in federal fiscal year 2014, but have been continuously postponed, most recently due to Covid-19 and then by the 2021 Consolidated Appropriations Act.

Cuts are now forecast to resume in federal fiscal year 2024 (beginning October 1, 2023). DSH cuts were originally required by the Affordable Care Act to begin in federal fiscal year 2014, but have been continuously postponed, most recently due to Covid-19 and then by the 2021 Consolidated Appropriations Act. Cuts are now forecast to resume in federal fiscal year 2024 (beginning October 1, 2023).

If all the H+H reserves are depleted as a result of the cuts, then the system would be in a very precarious situation and would either need to drastically cut expenses and services (likely through layoffs or closures), or require a city bail-out. This situation could be averted by spreading out expense cuts over time. The system may continue to incur unreimbursed Covid-19 related costs after federal funding and the public health emergency period end.

If that is the case, H+H or the city would have to absorb the cost. Indeed, this has already begun to happen. Covid-19 federal relief for the uninsured and programs for Covid-19 testing and treatment ended in March 2022; in April 2022 for funding for vaccine administration was shutdown. The city’s latest adopted budget included $200 million of city funds for Test and Trace in 2023. Test and Trace was a temporary program.

COVID SPENDING FOR TRANSIT

Due to the COVID-19 public health emergency, ridership decreased 24.7 percent from 2020 and Federal assistance for transit (2021 constant dollars) increased 18.2 percent. Report Year 2021 fare revenues decreased by 30.4 percent due to the COVID-19 public health emergency. Federal funding increased 4.2 billion dollars to fill the funding deficit.

Beginning in RY 2020, transit agencies received funding from Federal programs such as the Coronavirus Aid, Relief and Economic Security Act (CARES), Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA), and the American Rescue Plan (ARP). In RY 2021, 852 transit agencies spent over 13.1 billion dollars from these programs, mostly on operating expenses. This represents a 95% increase in the amount of Federal funding expended from the three programs collectively compared to NTD Report Year 2020.

In 2021, for each dollar spent on operating costs per trip across all modes and all transit systems, 12.8 cents are recovered through fares. This is a 30 percent decrease from the 2020 fare recovery ratio of 18.4 cents per dollar spent on operating expenses, resulting from the COVID-19 public health emergency. That is a trend which is difficult to reverse. Ridership trends have been negative for some time. Total urban transit ridership has decreased significantly from 2012 to 2021, going from about 10.36 billion passengers to 4.40 billion passengers.

On average, directly generated revenues, including passenger fares, fund 17.4 percent of public transit operating expenses for urban agencies in the U.S. Local and State sources together fund less than 50 percent of operating expenses, at 25.6 percent and 20.8 percent respectively. Federal Government sources fund the remaining 36.2 percent of total operating expenses.

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

TEXAS CENTRAL

A lawyer for nearly 100 property owners will seek legal action against Texas Central, the consortium which hopes to build a bullet train between Dallas and Houston. The hope is that such a suit could result in an opportunity to depose Texas Central. This could force Texas Central to provide information desired by property owners who do not wish to accommodate the railroad’s planned right of way.

Texas Central secured eminent domain authority to seize private property from the Texas Supreme Court in July. Texas Central plans to obtain any and all federal Surface Transportation Board certifications required to construct and operate the project. The individuals actually running the enterprise all left after the decision was handed down, however. Now, the enterprise is being “managed” by a consultant but there has been no guidance as to whether the railroad intends to proceed as they claim.

How realistic is the plan? The mayor of Houston who is a big backer uttered a phrase on a promotional trip to Japan that may not be the most encouraging. “If you build it, people will take full advantage of it.” We’ve seen too many projects which have been built on that hope which do not succeed.

SMALL COLLEGE BLUES

Founded in 1815, Allegheny College in western Pennsylvania is one of the oldest small, private liberal arts colleges in the United States. The college served 1,545 full-time equivalent students in fall 2021 and generated $63 million in fiscal 2021. Now, like so many other small liberal arts institutions, the College’s finds that its finances are under pressure.

The reasons are common: elevated competition, shifting demand for the college’s core academic offerings, and weak demographics will continue to strain revenue and contribute to deep operating deficits in fiscal 2022 and likely fiscal 2023. Until it can rebalance its finances, it will continue to rely on endowment drawdowns. Allegheny College’s Baa2 issuer rating is largely supported by its solid wealth and liquidity. If trends continue that source of support will be diminished and then the new negative outlook will be borne out.

“The negative outlook reflects Moody’s expectations that significant student market and budgetary challenges will contribute to sizeable operating deficits through fiscal 2023 and likely drive at least some erosion to financial reserve levels. The outlook also incorporates the headwinds the college will have in implementing expense reductions due to human capital and shared governance constraints.”

Another institution in that class is upstate New York’s St. Lawrence University. Moody’s revised St. Lawrence University’s outlook to negative from stable while maintaining its A2 rating. The reasons will sound familiar. “The outlook revision to negative from stable is largely driven by a deeper than forecasted operating deficit in fiscal 2023 due to lower than projected fall 2022 enrollment.

While expense reductions and federal support alleviated structural deficits over the past several years, the need to adjust expenses to offset declining revenue will be challenging due to inflationary pressures, the university’s small scope of operations, and a high 67% reliance on student charges. Weak regional demographics, are a key driver of this outlook action. In a shrinking market, the university confronts elevated competition, which will continue to depress pricing flexibility and student-related revenue growth.”

In fall 2022, St. Lawrence enrolled 2,155 full-time equivalent students, and it generated approximately $130 million in operating revenue in fiscal 2022.

PUERTO RICO

The latest debt restructuring agreement dealing with defaulted Puerto Rico debt was announced. The Puerto Rico Oversight Board reached an agreement with bondholders owning some $1.09 billion in principal of debt issued for the Puerto Rico Public Finance Corporation. The debt was not secured by a revenue pledge, only by a covenant to appropriate funds from the legislature. It was clearly unsecured debt. Nevertheless, holders were able to obtain some limited recompense depending on when their bonds were issued. Overall, the settlement provides a recovery in the range of 6.4%.

In that sense, it is a win for bondholders given the haircuts taken by holders of debt with stronger security positions. We told the Daily Bond Buyer “in the case of annual appropriation debt, especially debt from a non-specific source of revenues, you pay your money and you take your chances. In the case of this appropriation debt, investing in that debt at the point in time it was issued clearly carried lots of risk. That risk continues to be highlighted by the clear language that the DRA debt is very appropriation reliant. I would argue that the buyers of this debt had to be willing to write it off or take a very long-term view in terms of recovery.”

The debt has been in default since August, 2015.

SANTEE COOPER

Last week we detailed issues facing the South Carolina Public Service Authority over its future sources of generation. (See MCN 10.31.22). Now in the wake of the decision by Central, the Santee Cooper Board of Directors announced that it had “discussed” plans for a new natural gas unit to partially replace retiring coal units. Specifically, Santee Cooper is proposing a 1×1 natural gas combined cycle unit with a summer capacity exceeding 338 megawatts (MW) to be located Hampton County, S.C. The plant design is expected to potentially convert to emissions-free hydrogen fuel when hydrogen is more commercially available. 

 The South Carolina Public service Commission will have the final say on Santee Cooper’s plans. Ultimately, resources proposed to Santee Cooper’s combined system will be analyzed as part of Santee Cooper’s 2023 Integrated Resource Plan to be presented to the South Carolina Public Service Commission, next May. The utility offers the standard response when the choice of natural gas is criticized. “Santee Cooper needs additional natural gas generation to provide the flexibility to add more solar power.” The citation of all of the potential limits on solar are repeated – “the sun rises, falls, or hides behind an afternoon thunderstorm” – that we hear across the country from natural gas proponents.

MILEAGE FEES

Efforts to locate electric car assembly and battery manufacturing facilities in Georgia are fast making it one of the centers of the US electric car industry. It makes sense then that the state legislature is considering the substitution of mileage fees revenues for those derived from gas taxes. A bipartisan committee of state lawmakers has been established to discuss the future of its gas tax and a possible transition to a tax based on miles-driven.  The committee hopes to submit formal recommendations in December.

As part of the process, the Georgia DOT will begin a pilot program in 2023.

STUDENT HOUSING P3

The last two years were not kind to the privatized student housing sector. The pandemic was about the worst thing which could have happened to credits supported by revenues tied to occupancy. There was concern that the vulnerabilities exposed during the pandemic period could produce more obstacles to the continued expansion of these projects. We may see one answer in a bond issue being sold to finance privately constructed and operated student housing in a more traditional campus setting.

Eastern Michigan University was established as the state teachers’ college in 1849. EMU Campus Living, LLC’s proposed $200 million Project Revenue Bonds will finance a project which will encompass all of the university’s on-campus housing. It entails the construction of two new on-campus apartment buildings (700 beds), renovations to 8 existing residential halls/apartments (2,029 beds), and the demolition of 7 residential facilities (1,966 beds). In total, EMU housing stock will shrink from 4,307 beds to an end-state of 3,041 beds.

As opposed to most privatized student housing models, this is more of a P3 project. The university will continue managing the residence life functions of the housing system, the facilities are on-campus and do not secure the deal. The physical operations are to be managed by the LLC. The University’s financial support for the project is the major new facet of this private student housing deal security.

The project bonds are secured by a net revenue pledge of the project and includes the trustee’s first-lien security interest in various agreements between EMU Campus Living LLC/CFP3 and, respectively, the from Moody’ Board of Regents of Eastern Michigan University, the issuer, the property manager and the developer. An occupancy agreement from the university to make 1.0x debt service coverage from subordinated general revenue in case of a debt service shortfall from project revenue means the University is not fully protected from the project.

That security structure earned a Baa2 project revenue bond rating from Moody’s. That reflects the perceived strength of the University’s overall credit. The rating acknowledges the recent financial improvement bolstered by federal COVID relief funding. The university used it to strengthen its balance sheet and liquidity. The overall project reduces bed count by some 29% but this reflects demographic and other demand factors pressuring many schools.

PENN STATION DEVELOPMENT ON HOLD

The realities of the impact of the pandemic on demand for office space in NYC are still being measured and felt. One can look at occupancy rates for offices, rental demand, the performance of the economy dependent on commercial real estate. That is what made the continuing push for significant midtown office development a bit puzzling. Now, we may be seeing a real sign of how the recovery is progressing.

The renovation and expansion of Pennsylvania Station has long been a regular feature of New York politics. Before he resigned in the summer of 2021, Andrew Cuomo championed the Penn Station renovation project. His successor, Governor Hochul moved forward with a funding plan dependent upon commercial development. Vornado (Steven Ross’ development company) was named as the lead developer for 18.3 million square feet of office space and 1,256 apartments. 

Now, the timeline for development is in jeopardy. This week, Vornado let investors know that “the headwinds in the current environment are not at all conducive to ground-up development.”  This puts the station renovations under pressure as the price for the transit amenities alone is estimated in excess of $7.5 billion under the general project plan. The Empire Development Corporation estimates that $4.1 billion in payments in lieu of taxes are expected from Vornado in exchange for development rights to fund New York’s share of Penn Station renovation. 

The real question is whether the demand for office space and mass transit will return fully in the long term. The short-term indicators are weak – at least to Vornado. They cite tenants taking less office space, regardless of demand in Class A developments near transit infrastructure. At the same time, the East Side Access station underneath Grand Central is scheduled to commence service in December. It will take time for all to assess the impact on transit and the use of these stations.

The Penn Station redevelopment could be a real indicator of where the greater NYC economy is heading. The last two decades have seen a consistent stream of developments in all five boroughs. The city got used to that financially. In the wake of the pandemic, the potential for a recession will pressure the city’s most economically productive sectors. That could dampen the momentum for growth in the city’s revenue base. This makes the decision to delay development a significant indicator for our outlook on the city’s credit.

LABOR, UNIONS, AND ILLINOIS

Illinois has a long history of contentious labor relations. The Haymarket bombing and the Pullman strike were just two examples. With the state and especially Chicago involved with organized labor, those contentious relations continued over into the public sector. That led to the enactment of laws and constitutional changes to solidify the rights of workers.

In 2018, the then Governor supported litigation which was ultimately decided in the US Supreme Court that sought to overturn a prior decision in 1977, in which the Court said nonunion employees could be required to pay a portion of union dues, known as agency fees, to cover the cost of collective bargaining and prevent “free riders” — workers who get the benefits of a union contract without paying for it. That case – the Janus case- was decided in favor of the plaintiff, Janus.

Since then, the Governorship has changed and some of the temperature has gone down. That may change as Illinois voters are being asked to vote on Amendment 1, the Illinois Right to Collective Bargaining Measure. It would amend the Constitution to state that employees have a “fundamental right to organize and bargain collectively through representatives of their own choosing for the purpose of negotiating wages, hours, and working conditions, and to protect their economic welfare and safety at work” and prohibit any law that “interferes with, negates, or diminishes the right of employees to organize and bargain collectively.”

The economy of the state continues to change with job sources like power plants and coal mines on the way out and new sources like electric auto and battery manufacturing. Unions are not as established at the companies developing those jobs, some of which are not nearly as hospitable to organized labor as was the case with traditional automakers and suppliers or in the electrical or coal industries.

There are three states where a constitutional right to organize exists – Hawaii, Missouri, and New York. This amendment is different in that it not only grants the right to collectively bargain but also seeks to prohibit the enactment of among other things, right to work laws. Language preempting right-to-work or other laws was not included in the state constitutions of Hawaii, Missouri, or New York. 

If approved, one can expect an immediate court challenge and that litigation will ultimately be decided by the U.S. Supreme Court.

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.