Joseph Krist

Publisher

CHICAGO

The City of Chicago received a rating upgrade from Fitch to BBB. The move rewards several actions which begin to address some of the City’s long-standing credit issues. The first is current performance. Chicago concluded 2021 (Dec. 31 fiscal year-end) with a large general fund surplus of $313.8 million or 6.3% of expenditures. The surplus reflected $221.6 million in revenue above budget, expenditures $107.2 million less than budgeted amounts and $782.2 million of American Rescue Plan Act (ARPA) revenue replacement. 

Pensions remain a significant credit factor for the City. The city increased its pension contributions from $848.5 million in 2016 to nearly $2.28 billion in 2022 as part of a five-year plan to reach the full statutorily-required pension contribution to the four single-employer pension funds covering municipal employees (MEABF), laborers (LABF), police (PABF) and firefighters (FABF). The proposed 2023 budget includes $2.39 billion in pension contributions (excluding a planned $242 million advance or supplemental payment, see below for more information), representing an increase of $92.3 million over the 2022 budget.  The statutory pension contributions are based on an amount that targets a 90% funding ratio by 2058 for all plans.

The upgrade comes in the midst of the City’s budgeting cycle for 2023. The city is projecting a surplus totaling $134 million in 2022 with year-end revenue estimated at $5.0 billion or $84.5 million above budget. The proposed 2023 budget totals $5.4 billion, which is nearly $392 million above the August budget forecast due to $160 million in baseline revenue growth, $56 million in tax increment financing (TIF) surplus and a $40 million initial payment from the city’s casino operator. The city projects a nearly 12% increase in YE 2022 sales tax revenues.

BALLOT TIME

For elections in 2022, 140 statewide ballot measures are certified for the ballot in 38 states.

The move to make it harder to get voter initiatives on the ballot continues. Whether it be Medicaid expansions or cannabis legalization, conservative (usually Republican) politicians have strengthened their efforts to take that power back for legislatures. In Arizona, voters will decide three constitutional amendments: (1) to create a single-subject rule for ballot initiatives; (2) to allow the legislature to repeal a voter-approved ballot initiative following a state or federal supreme court order striking down a portion of the initiative; and (3) to require a 60% vote for voters to pass ballot measures to approve taxes. In Arkansas and South Dakota, constitutional amendments to require three-fifths (60%) votes for certain citizen-initiated and referred measures are on the ballot. 

Marijuana is on the ballot again.

AR – Issue 4 would legalize marijuana use for individuals 21 years of age and older and authorize the commercial sale of marijuana with sales to be taxed at 10%. Of the tax revenue, 15% would be used to fund an annual stipend to all full-time law enforcement officers certified by the Commission on Law Enforcement Standards and Training that are in good standing. Adults could possess up to one ounce of marijuana. 

MD – Question 4 Amends the Maryland Constitution to legalize adult-use recreational marijuana and direct the legislature to pass law for the use, distribution, regulation, and taxation of marijuana.

MO – Amendment 3 Legalizes the purchase, possession, consumption, use, delivery, manufacturing, and sale of marijuana for personal use for adults over the age of twenty-one; allows individuals convicted of non-violent marijuana-related offenses to petition to be released from incarceration and/or have their records expunged; and imposes a 6% tax on the sale of marijuana.

ND – Statutory Measure 2 would legalize the personal use of marijuana for adults 21 years of age and older and allow individuals to possess up to one ounce of marijuana and grow up to three marijuana plants. The measure would require the Department of Health and Human Services, or another department or agency designated by the state legislature, to establish marijuana regulations, including for the production and distribution of marijuana by October 1, 2023.  

SD – Initiated Measure 27 legalizes marijuana use, possession, and distribution for individuals 21 years old and older

Taxes will be voted on in several states.

In Colorado, Proposition 121 would reduce the state income tax rate from 4.55% to 4.40% for tax years commencing on or after January 1, 2022. In Massachusetts, Question 1 creates a 4% tax on incomes that exceed $1 million for education and transportation purposes

SANTEE COOPER

Central Electric Power Cooperative is the largest customer of the South Carolina Public Service Authority. Central receives roughly 70% of its power supply from Santee Cooper. It distributes power to some 20 smaller distribution coops in the state. In the aftermath of the decision to end the Sumner nuclear project expansion, the utilities must plan for additional capacity to meet future demand. Santee Cooper was planning to develop new generating capacity which was fueled by natural gas. Now, those plans could be in doubt.

Central has announced a new power supply plan which includes purchasing power from existing and new power plants within and outside South Carolina, pursuing utility-scale battery storage projects and implementing voluntary customer programs to limit peak power needs. Like other generation and transmission coops across the country, Central faces pressure from its local utility customers to deliver power from a more diversified mix or resources.

The pressure to develop new generation continues, however. Santee Cooper plans to close a coal-fired plant at Winyah, S.C. by 2029. When it closes, the jointly operated Central-Santee Cooper system will lose 1,150 MW of electric generation capacity.

EMINENT DOMAIN

Two of the major midwestern energy projects facing issues over their efforts to acquire right of way face new obstacles. One is the Grain Belt Express transmission line. The Midcontinent Independent System Operator (MISO) which manages its regional power market has informed the Federal Energy Regulatory Commission is not eligible to be included in MISO’s long-term transmission planning process. The project is described as not an ‘advanced stage merchant transmission facility.

To be included, a transmission project must either be represented in a utility integrated resource plan — or in a “preferred plan” for utilities that do not have an IRP — or the project must have an interconnection agreement as of this month.

Summit Carbon Solutions has withdrawn its court request for immediate access to private property in northern Iowa for a land survey. The withdrawal follows an unsuccessful attempt by another pipeline company to obtain a temporary injunction in March of next year. 

AN EAST COAST/WEST COAST THING

The Ports of Los Angeles and Long Beach have long been the busiest ports in the U.S. As trade with Asia increased so did volume. This solidified their positions vs. those of the primary East Coast ports over the last two decades. Like so many other things, the pandemic impacted that long term trendline. That along with trade policy changes limited the growth of volume from the Chinese market. That alteration of trend now shows up in data.

The 10 largest U.S. ports saw a 5.5% drop in inbound container volume in September. The decline was driven by a 17% drop in inbound volume on the West Coast over the past 27 months. The report also noted a 24% reduction in ships waiting for berths compared to August. The Ports of L.A. has been delaying container storage fee increases for several months now as volumes decline.

The Ports of Savannah, New York, and Houston had the highest number of waiting ships in September. While overall volumes are expected to continue to decline, the current trend from West to East remains likely. The U.S.-China trade outlook would be considered uncertain at best with new restrictions on Chinese entities designed to reduce their trade with the U.S. There also remains the chance of a railroad strike which would impact West Coast ports unfavorably. Negotiations continue with West Coast longshoremen unions with a strike also possible.

SAN ANTONIO ELECTRIC – WHO IS IN CHARGE?

CPS is the municipal utility owned by the City of San Antonio. TX. Like many other utilities, it is planning for its future supply of power with an eye towards reducing or eliminating coal generation out of its supply mix. CPS owns one last coal-fired unit (Sprague 1 and 2) and it has committed to close Spruce 1, by 2030 and plans to convert the other unit, Spruce 2, to natural gas by 2028.  Now, the utility has admitted that the ultimate decision as to whether or not the Sprague units are closed is not the utilities decision to make.

The state grid operator ERCOT, is able to dictate whether or not the units can be shut down. When a utility seeks to shut down a generating facility it must submit a Notice of Suspension of Operations (NSO) with ERCOT. “Once the plant in question provides us with a Notice of Suspension of Operations (NSO) ERCOT performs a Reliability Must Run (RMR) assessment to determine if the retirement of the plant will cause a reliability issue. If it does, ERCOT may enter into an RMR agreement with the plant. 

CPS Energy will need to tell ERCOT exactly where the replacement megawatts will come from before getting permission to take any units offline. ERCOT may also require local transmission reliability upgrades to the grid before Spruce’s closure, which typically takes four to five years to install. In the interim, CPS drop roughly 3,000 megawatts of fossil fuel generation out of its portfolio by 2030. 

The plan to replace that power will likely leave clean energy advocates disappointed. CPS expects that some 20% of the fossil fuel generating plants capacity will be replaced by natural gas generation. The CPS plan currently calls for up to 900 megawatts of solar, 50 megawatts of energy storage and 500 megawatts of “firming capacity”.

MUNICIPAL ACCOUNTABILITY

The Portland Clean Energy Fund was created by a voter-approved ballot measure in 2018.  The fund receives revenue from a tax imposed on retail businesses. It is projected to reach $402 million by the end of the next fiscal year. Initially, it was projected to generate between $40 and $60 million annually. The flood of money has been accompanied by some shaky management and disclosure issues.

One of its initial grants had to be withdrawn and recouped when   the recipient group’s leader’s past — including a conviction for fraud and a string of unpaid tax bills. That highlighted weaknesses in the fund’s structure which raised concerns among the establishments forced to collect the tax. Those concerns were reinforced earlier this year when an audit of the fund by the City found  a lack of oversight and accountability systems and clear climate-action goals. 

Now the City is considering changes in the fund’s operations and management to address the concerns raised in the audit. The retailers had been calling for a hiatus in the fund’s operations until these issues were addressed. The proposed changes would allow governmental entities to participate in projects where before only NGOs were.

We expect that schemes such as this will be adopted on a more widespread basis. The growing pains of the Portland program highlighted important issues of disclosure and transparency. The concerns expressed around those issues are transferrable to any similar situation. It is something all investors should insist on.

JACKSON, MS. WATER UPDATE

Earlier this year we covered the difficulties at the water system serving Mississippi’s state capitol (MCN 10.17.22). One of the issues raised by activists was the role of the water system’s credit rating in raising the cost of capital for repairs and upgrades. This week, Moody’s released its latest review of the system’s credit.

Moody’s has affirmed the rating Ba2 rating for the revenue bonds of the City of Jackson Water and Sewer Enterprise of which there are outstanding approximately $240 million. The outlooks on the enterprise ratings are stable. At the same time, the rating action highlights the challenges facing the water system.

Here’s what Moody’s sees. They reference an ineffective billing and collection system, the system’s substantial and ongoing operating challenges as a result of considerable infrastructure weakness, the costs of repair and revenue loss which are still unknown. They note that environmental and managerial challenges which include last winter’s ice storm, a flood on the Pearl River in 2020, a decade long effort to update the billing and metering system, and a $900 million consent decree.

The system shut down cast a harsh light on the role of the State in the system’s demise. In response, immediate resources have been provided by the State of Mississippi Emergency Management Agency and the Emergency Management Assistance Compact and Mutual Aid Programs, which provided various technicians to the site to work on repairs. The federal government has deployed FEMA as well as personnel from the Environmental Protection Agency who are providing operational technical support.

In addition, the US Army Corp of Engineers is on site to provide assistance with an assessment of the water treatment facility including working with the city to develop a winterization and resiliency plan. The state has also committed to pay half of the cost of repairs to the water and sewer system, with the city expected to fund its share through a combination of FEMA monies, ARPA funds, IIJA disbursements or grants.

NEW ORLEANS RESILIENCE AND IDEOLOGY

While Hurricane Katrina was 17 years ago, the impacts of that event on infrastructure continue to be felt. That includes things like the source of electricity to power the drainage and sewer treatment systems. Recent near misses by hurricanes have allowed the problems with operations at the power station to go unaddressed. In the wake of these issues and the availability of additional infrastructure dollars, the Louisiana legislature gave its approval to a $44 million bond issue to replace aging and obsolete equipment for the generating facilities.

But wait! To actually issue the bonds, the Louisiana Bond Commission must give final approval. Here is where the story veers off track. Three of the commissioners, for clearly apparent political posturing purposes, refused to support the bonds for this project. The Sewerage & Water Board of New Orleans is obviously city owned and the City Council resolved not to enforce the state’s new limits on abortion. So, the three have held up the project.

Now, with the state election cycle a year away, the commissioners have relented and the bonds have finally been approved. The bond commission has not historically singled out local projects the Louisiana Legislature has already vetted and approved for state funding. It is in line with the general level of petulance exhibited by a growing cohort of conservative state officials who seek to use public finance to advance a particular ideological agenda.

It is not clear what changed in recent weeks but the bonds finally received preliminary approval last month. When it came up for final approval Thursday, it was one item in a group of more than a dozen other projects on the agenda that received approval without opposition.  

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

MEDICAID ON THE BALLOT AGAIN

If voters approve the referendum, South Dakota will be the seventh Republican-controlled state in the past five years to expand the low-income insurance program at the ballot box. A yes vote would expand its state Medicaid program to more than 40,000 people. 11 other states that have not expanded Medicaid, but only three — Florida, Mississippi and Wyoming — allow voters to collect signatures for a ballot measure. The expansions of Medicare which occurred under the Affordable Care Act added 17 million low-income Americans to the insurance rolls.

Under the American Rescue Plan enacted in 2021, Congress incentivized states to expand Medicaid by having the federal government cover an extra 5 percent of the costs of the program — on top of covering 90 percent of costs for the newly eligible population. In South Dakota, an American Cancer Society Cancer Action Network poll from August found that 62 percent of likely voters support the Medicaid expansion ballot measure.

A Kaiser Family Foundation analysis found that South Dakota would see increased costs of $50 million. The additional incentives however, would send $110 million to South Dakota. Opponents also tried to get a ballot measure to pass, in June to raise the threshold for approval to 60 percent. That effort was soundly defeated, meaning Medicaid expansion only needs 50 percent support to pass. A 60% vote requirement for such an initiative to pass in Florida is viewed as a serious impediment to expansion there.

The other path to expansion is legislative. The history is not favorable. The latest example is North Carolina where there is political consensus supporting expansion. There is one major hitch and that is the state’s Certificate of Need laws. The state’s hospitals would like that process to disappear. This would allow the various systems serving the state to expand and diversify their service areas. The state’s House and Senate passed separate bills on Medicaid expansion this summer but the CON issue prevented the final legislation of the issue.

DESALINIAZATION

California’s South Coast Water District has received approval from the California Coastal Commission for the construction of a water desalinization plant in the Orange County community of Dana Point. It would serve the district’s roughly 35,000 residents in Dana Point, South Laguna Beach and parts of San Clemente and San Juan Capistrano.  Proponents of desalinization have been trying for many years to have such a facility built to serve Southern California. In May, the Coastal Commission rejected Poseidon Water’s proposed $1.4-billion plant in Huntington Beach.

This plant uses different technology than the one in Huntington Beach. The water will be more costly than imported water from the State Water Project and the Colorado River. The Coastal Commission’s staff report estimates the increase at about 20% more at $1,479 per acre foot than for imported water. That translates to increased monthly costs of about $2 to $7 per household.  The district has already secured more than $32 million in federal and state grants. 

Opposition to these plants revolves around the potential damage to marine life. Other plants damage fish by drawing water directly. This plant would be the first commercial-scale desalination project to use slant wells that would collect seawater from beneath the seafloor. Seawater would be routed via a new pipeline to a treatment plant that will be built at a nearby site already owned by SCWD. SCWD plans to route its effluent to an existing, approved brine discharge system at South Orange County Wastewater Authority’s treatment plant. Those flows are discharged two miles offshore, 100 feet below surface water.

Other issues cited by opponents center around the use of electricity by these plants. The plant will include up to 5 acres of solar panels, which would provide 15% of that power. SCWD customers using 20% less water than they used in 2013. The district also sends 70% of its sewage flow to a treatment plant and reused for landscaping at local parks, resorts and other common areas.

CARBON CAPTURE

Opponents of carbon capture pipelines in Iowa have achieved a delay in efforts by one of the sponsors of a carbon capture pipeline to survey land for construction purposes. The sponsor had sought court support for its efforts to conduct such surveys under temporary restraining orders. One of those requests was rejected by a judge in Woodbury County.

The company has sought expedited court help because it says a delay of the surveys will impede its progress to its economic detriment. The company had argued that it needs to evaluate the land this month, otherwise those surveys might need to wait until the spring thaw. That will likely be the case as the judge noted that would have effectively ended the need for further litigation to approve the surveys. A ruling for Navigator would have resulted in its survey being completed, and the landowners’ arguments would have been rendered moot.

It is becoming a political issue. An Iowa newspaper surveyed candidates for the state legislature. The majority of Eastern Iowa political candidates seeking seats in the state Legislature who responded to the survey say they oppose using eminent domain for carbon dioxide pipelines. Two other county courts are weighing temporary restraining order requests which are being contested this week.

The debate also unfolds as residents of other proposed sites for carbon capture takes steps to review projects. A second Louisiana parish has enacted a moratorium on the drilling of wells associated with carbon capture. Louisiana utility Cleco recently revealed in a regulatory filing that the project in Rapides Parish will significantly increase the plants water consumption and reduce the generation output of the plant by 30%.

CALIFORNIA PROPOSITION 30

California voters will get to decide if a “millionaire’s tax” should be imposed to help people buy electric vehicles and to build charging stations, with some also dedicated to resources for fighting wildfires. Proposition 30 would raise the state’s top income-tax rate on Californians making more than $2 million to an eye-watering 15.05%—the highest in the country—from 13.3%. About 80% of the $3.5 billion to $5 billion in revenue annually would fund electric vehicles and charging stations—mostly for lower-income drivers—and the other 20% would go to wildfire mitigation. 

The driving force behind the campaign is Lyft has spent at least $45 million backing it. Facing a requirement that all rideshare vehicles be “zero emission” vehicles, it is not a surprise that a TNC would back such a measure. Without significant financial support, Lyft would not be able to require its drivers to drive an EV. Either its drivers get state help to buy electric cars or Lyft would have to bear the greater costs of EV deployment.

The initiative hits several hot button issues. The employment status of its drivers, the role of TNC vehicles in road congestion, the concentration of the income tax base among a relatively small group of taxpayers, and even school funding. It also comes in the midst of federal efforts to address issues with the employment status of drivers for companies like Uber and Lyft. On 11 October, the US Department of Labor (DOL) proposed a rule to clarify the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA).

CLIMATE LITIGATION

New Jersey has joined the ranks of states suing oil companies over the issue of climate change and their role in it. Like the other suits, it alleges that the oil companies new of the risks of their businesses to the climate and that their failure to disclose them damaged the state. New Jersey does have one powerful motivation as it cited the impact of Superstorm Sandy in New Jersey, killing 38 and leaving more than 300,000 homes damaged.

This suit comes as the oil majors have asked the U.S. Supreme Court to review for a second time whether a lawsuit filed against them by Baltimore over the costs of adapting to climate change belongs in federal court. The companies were denied in their latest attempt to get to the Supreme Court this past April. Since the May 2021 Supreme Court decision, several appeals courts including the 1st, 3rd, 4th, 9th and 10th have all remanded similar  suits to state court. Those cases were filed by state and local governments in California, Delaware, Hawaii, Maryland, New Jersey and Rhode Island.

Another suit has been making its way through the Eighth Circuit seeking to stop the reestablishment of an Interagency Working Group on the Social Cost of Greenhouse Gases (“IWG”) established by President Barack Obama. The State of Missouri is the lead plaintiff along with Alaska, Arizona, Arkansas, Indiana, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee, and Utah. Its roster includes seven cabinet members along with economic and science members of the Administration. It was disbanded by President Trump.

The issue driving the suit is the executive order reestablishing the Group which directed the IWG to publish interim and then final estimates of the social costs of greenhouse gas emissions (hereafter, “interim SC-GHG estimates”), and required federal agencies to use these estimates when monetizing the costs and benefits of future agency actions and regulations. Those estimates have been released only in preliminary form but the states sued nonetheless.

The Court decided that the States are requesting a federal court to grant injunctive relief that directs “the current administration to comply with prior administrations’ policies on regulatory analysis [without] a specific agency action to review,” a request that is “outside the authority of the federal courts” under Article III of the Constitution. The Court did point to a specific path for the issue to be decided. “these policy disagreements are for the people to decide through their elected representatives in the legislative and executive branches of government.”

INSULAR CASES

After the Spanish American War, the U.S. came into possession of several territories. They included Cuba, Guam, American Samoa and Puerto Rico. Under the terms of Treaty of Paris was a statement noting that Congress would determine the political status and civil rights of the natives of the island territories. In the early 1900’s, the Supreme Court was asked to review nine cases in total, eight of which related to tariff laws and seven of which involved Puerto Rico as a part of that process. 

The challenges to the precedent gained the most notice in association with Puerto Rico and its issues surrounding its status. Earlier in arguments about another case touching on the status issue, Justice Gorsuch had expressed a pretty clear view that he thought the Insular Cases were incorrectly decided, this gave hope to many that issues around the status of Puerto Rico and its citizens might lead to a decision to overturn the Insular Cases decision.

The hopes were dashed in the short term when the Court announced that it would not review a new challenge to these Cases. Unfortunately for Puerto Rico, this case revolved around plaintiffs from American Samoa which is treated differently by Congress than is the case with other territories.

MUNIS AND TVA

The operations and energy development plans of the Tennessee Valley Authority (TVA) have been at the center of the energy debate. Its reliance on older large-scale coal plants have led to debates by several long-term customers to consider replacing TVA as their primary supplier. Much of the demand for change is customer driven. This has led municipal electric systems to reconsider their power supply arrangements.

Memphis has been at the center of that debate as its municipal utility is considering whether to maintain TVA as their power supplier. As that debate unfolded, other municipal utilities considered their positions. Now, one utility serving the City of Huntsville, AL has made an effort to move to a greener energy source. The city council last week unanimously approved an agreement for Huntsville Utilities to purchase power from Toyota Tsusho, which is building a solar power facility near a Toyota Motor Manufacturing in north Huntsville. 

In 2020 the city council approved a power supply flexibility agreement with TVA. That agreement allowed Huntsville Utilities to purchase up to 5% of its electricity from a source other than TVA. Huntsville Utilities will build a $2.6 million substation to connect with the solar development, which is expected to be completed in February 2024. That power would be procured by the city at a rate that is lower than what TVA could provide.

Huntsville made a fairy straightforward case for the move. “If TVA were to raise its base rate an average of half a percent a year and increase the fuel cost adjustment by half a percent, the project would provide nearly $500,000 in savings for HU each year.” 

SPITTING IN THE WIND

The core of ideological attorneys general trying to “punish” financial institutions which employ ESG principals by withholding business from them has grown by one more. The Attorney General in Virginia is joining Arizona, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Tennessee and Texas in an “investigation” of six major American banks. The plan is to issue a civil investigative demand, which acts as a subpoena, for the institutions to produce documents related to their involvement with the United Nations Net-Zero Banking Alliance. 

The Virginia AG contends that the banks – Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo – by participating in the Banking Alliance are trying to impose UN rule. It’s a favorite theme of conspiracy theorists on the political right. The Virginia AG has already joined another Missouri-rooted move to “investigate” Morningstar, Inc. and Multianalytes for alleged violations of state consumer protection laws. He claims that the ratings are driven by “credible allegations” that the companies “allow(ed) anti-Israel bias to infect the ESG ratings they provided to investors.” 

If you are an ESG investor, these suits have to raise governance issues. The idea that market participants have to toe the line established by ideological trends should raise issues for all investors. This applies to progressive attorneys general as well.  Interventions like this latest one made in an effort to fight market trends don’t usually succeed in that fight. If you are a believer in markets, these continuing partisan efforts call into question the dedication to the rule of law which has supported the market on the part of “conservative” political figures.

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

HOSPITALS AND THE CLIMATE

The end of October will mark the passage of ten years since Hurricane Sandy devastated the northeastern U.S. While there are many images which can be recalled, one was especially telling. The idea that three major hospital facilities experienced severe damage and that operations at those facilities could be curtailed for an extended period focused much attention on their location and vulnerability to floods. Hurricane Ian focused attention on Florida’s hospitals given the ever-increasing levels of population along the state’s coasts.

Climate researchers at Harvard recently released a study of the risks posed to hospitals from flooding associated with storms. The study examined 682 acute care hospitals in 78 metropolitan areas along the East Coast and Gulf Coast, all situated within 10 miles of the shore. It found that 25 of 78 metropolitan statistical areas (MSAs) on the U.S. Atlantic and Gulf Coasts have half or more of their hospitals at risk of flooding from relatively weak hurricanes. 0.82 m of sea level rise expected within this century from climate change increases the odds of hospital flooding 22%.  In 18 MSAs, at least half of the roads within 1.6 km of hospitals were at risk of flooding from a category 2 cyclone.

The areas of greatest risk are not a surprise. The Miami-Ft. Lauderdale-Palm Beach strip up the east coast of Florida contains the greatest risk from road flooding in addition to the obvious location risk of the institutions.  New York, New Orleans, and Tampa were other areas with substantial vulnerability.  Rising sea levels, put more hospitals at risk from hurricane induced storm surge. Sea level rise of 2.69 feet increases the odds of hospital flooding from any strength.

That level of sea level rise puts hospitals and beds in 6 MSAs (Easton, MD; Hammond, LA; Pensacola-Ferry Pass-Brent, FL; Savannah, GA; Washington, NC; and Washington-Arlington-Alexandria, DC-VA-MD-WV) at risk that would otherwise be unaffected by a category 2 storm without sea level rise and increases beds at risk by over 50% in 7 MSAs (Baton Rouge, LA; Beaumont-Port Arthur, TX; Boston-Cambridge-Newton, MA-NH; Corpus Christi, TX; Deltona-Daytona Beach-Ormond Beach, FL; Philadelphia-Camden-Wilmington, PA-NJ-DE-MD; and Virginia Beach-Norfolk-Newport News, VA-NC) from a category 2 storm.  

WATER UTILITIES

Water utilities have historically been a reliable sector in terms of creditworthiness. The revenues collected are usually protected in a bankruptcy of a general government as water revenues are treated as special revenues. This makes it harder to use revenues from a financially healthy utility to fund non-utility expenses. In combination with the absolute necessity of the supply of water, the sector has been a steady credit performer over an extended period of time.

In recent years, that image has been weakened somewhat by management and operations issues at several utilities. The Birmingham, AL bankruptcy largely was rooted in issues with its water and sewer utilities. Newark, NJ faced issues with lead pipes delivering tainted water. This summer, the Jackson, MS water system was unable to deliver water to its customers. That was reflection of mismanagement, neglect, and a distinct lack of support from the State of Mississippi for its state capitol.

Now another water system serving a state capital is under scrutiny and a candidate for takeover. The City of Trenton, NJ has long experienced operational and management difficulties. The state Department of Environmental Protection has cited the utility on multiple occasions in recent years for failing to ensure the safety of the 29 million gallons of water the utility delivers daily to 200,000 residents of Trenton and four adjacent townships. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

In Mississippi, the situation reflects a real lack of support from the state. That reflects the realities of local and state politics. As suburban growth around Jackson continued, the remaining customer base became more concentrated among the city’s poorer (and let’s face it Blacker) population. The failure by management to address long standing infrastructure needs of the system make it vulnerable to operating and supply issues. The state’s neglect of the City and its water system was not at all benign.

The unwillingness of local utility officials to raise rates and address capital needs in Trenton has renewed calls for a new entity to operate and fund the City of Trenton water system. Now, state legislation is being offered that would establish an oversight commission to take control of the Trenton Water Works and monitor reforms. It would a create Mercer Regional Water Services Commission (Trenton is the county seat of Mercer County) would be created to oversee Trenton Water Works’ rate-setting, service quality, and infrastructure operations, as well as remediation measures to bring the utility into environmental compliance. State officials and leaders of the five municipalities served — Ewing, Hamilton, Hopewell, Lawrence, and Trenton — would comprise the bulk of the 17-member commission.

Water quality concerns drive the effort. There are issues with lead pipes as is the case with so many old utilities. Water quality was top of mind this summer when a study found 50% of homes serviced by Trenton Water Works in Hamilton tested positive for legionella bacteria, which can cause Legionnaires’ disease. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

The City’s ability to help financially is limited. In August, Moody’s downgraded the City of Trenton, NJ’s outstanding general obligation bonds to Baa2 from Baa1. The outlook has been changed to negative from stable. The downgrade affects approximately $252 million in outstanding debt. Politics have overwhelmed the practical needs of the City.

The city council and the mayor have not only been unable to pass a budget for 2022, they were unable to agree to authorize debt service. The mayor publicly appealed to the state for assistance, which came in the form of a directive from the Division of Local Government Services (DLGS), ordering debt service to be made on time and in full. That is simply poor governance.

This brings us to an issue which some have raised in connection with utilities, especially water utilities. Many of the most publicized issues with municipal water systems have occurred in systems surrounded by weak economies. This has in turn led to those systems serving an increasingly poor and BIPOC population. This has led some to try to link ratings downgrades to race and imply that the rating agencies hold minority communities to different standards.

Over a five-decade career, I have had a hard time defending the rating agencies over many issues. This is one where the criticism is badly misplaced. Trenton, Birmingham, Newark, Flint, Detroit are all cities with significant water utility problems and yes, they all serve primarily BIPOC communities. But the other common threads are weak local resources and management (pass a budget on time) and an unwillingness to avail themselves of state assistance.

The lower ratings assigned to these credits usually have not been based solely on economics and demographics but on an inability to arrive at solutions by overcoming local politics. Rating agencies do not make rates, appoint management, or elect officials. These are weak credits as far as ratings are concerned.

PUERTO RICO HIGHWAY AUTHORITY DEBT RESTRUCTURING

Judge Laura Taylor Swain confirmed Wednesday the Puerto Rico Highway and Transportation Authority’s Plan of Adjustment (POA-HTA), a restructuring that -beyond cuts to the public debt- will require the public utility to reorganize its operations; will allow 30 years of consecutive toll increases adjusted to inflation; and will prepare the way to transfer all of Puerto Rico’s highways to private operators.

The plan cuts the agency’s debt by more than 80% and saves Puerto Rico more than $3 billion in debt service payments. HTA must establish a toll management office that is exclusively responsible for toll roads, separate responsibility for construction and maintenance between toll roads and non-toll roads, and transfer the Urban Train (Tren Urbano) to the Puerto Rico Integrated Transit Authority. The HTA Plan also requires HTA, during all times in which new HTA bonds (or refinancings thereof) remain outstanding, to maintain and comply with a debt management policy that imposes certain limitations on further borrowing after the plan becomes effective.

TAMPA TRANSIT STOPPED BY COURTS AGAIN

For the second time, efforts to get a transportation funding initiative off the Hillsborough County, FL ballot have been successful. (MCN 9.19.22). As was the case the first time, local anti-tax advocates seized on detailed ballot requirements to have the proposed removed from the ballot. Opponents have used the fact that the proposed ballot item would, if approved, violate requirements that the ultimate responsibility for identifying projects and allocating money lies with elected commissioners, not a pre-determined formula contained in the citizen-initiated referendum.

The ballot initiative was described as confusing so as to make voters think that approving the initiative meant approval for specific projects. Decide for yourself if the following was too “confusing”: “Should transportation improvements be funded throughout Hillsborough County, including Tampa, Plant City, Temple Terrace, Brandon, Riverview, Carrollwood, and Town ‘n’ Country, including projects that: Build and widen roads; Fix roads and bridges; Expand public transit options; fix potholes; Enhance bus services; Improve intersections;  Make walking and biking safer By levying a 1% sales surtax for 30 years and funds deposited in an audited trust fund with citizen oversight.”

Conservative activists use these challenges to defeat as many tax initiatives as they can. The arguments are never usually about the need for better roads and more public transit. They focus on procedural issues. The frustration in Tampa is that initiative backers relied on prior court actions when designing the second initiative. It is another example of ideology getting in the way of progress.

WHAT’S LEFT IN IAN’S WAKE

It is becoming clear that a lack of flood insurance is going to weigh on the recovery from Hurricane Ian in Florida. CNN did an analysis of data from the Federal Emergency Management Agency that shows how serious a situation it is. That analysis showed that some 25% of single-family homes in Lee County, by the coast, are covered by federal flood insurance. On Sanibel Island, about half of homes are covered. It is the inland counties where the lack of protection is highest – 4% of single-family homes in Seminole County, 3% of homes in Orange County and 2% of homes in Polk County are covered by flood insurance.

People without flood insurance will still be eligible for assistance payments from FEMA and any additional aid which might be approved by Congress. Those payments are not designed to replace flood insurance. In Seminole County more than 5,200 residential buildings have been damaged by the storm. Polk County has 3,000 buildings damaged in the storm, Orange County has 1,200, and Volusia County on the state’s eastern coast has at least 4,000 damaged.

The majority of the damage appears to be flooding related. Federal flood insurance limits payments for single-family home damage at $250,000 and contents of the home at $100,000. There will also be significant automobile losses adding to the cost burden for recovering residents. One bit of positive news. Moody’s says that Citizens Property Insurance Corporation can withstand damage claims. Citizens, an entity created by the Florida legislature that provides coverage for coastal properties, has the resources to withstand damage claims from Hurricane Ian. Florida Hurricane Catastrophe Fund’s reimbursement capped at $17 billion. Primary insurers will share a significant portion of the loss with The Florida State Board of Administration Finance Corporation (Florida Hurricane Catastrophe Fund, FHCF). The fund is well positioned to cover claims from Hurricane Ian because it has financial resources on hand that approximate its statutory reimbursement cap.

COAL TAKES ANOTHER HIT

The efforts of some to hold on with the last of their fingernails to the use of coal to generate electricity failed again. This time, the State of Montana failed to persuade a federal court that two newly-passed Montana laws intended to stop majority owners of Colstrip from closing the power plant were constitutional. The Court ruled that the laws violate the Commerce Clause and Contract Clause of the U.S. Constitution, as well as the Federal Arbitration Act.

The legislation authorized the state executive branch to issue $100,000-a-day fines or dictating maintenance and repairs the government finds necessary.  The federal court ruled that the laws served no legitimate purpose and instead attempted to thwart the business decisions of the power plant’s majority owners.

That interferes with efforts to negotiate financial issues stemming from the closure which is driven by the four out-of-state utilities which own 70% of capacity. The court concluded that SB 265 substantially impaired the rights of the Pacific Northwest owners under the Contract Clause of the U.S. Constitution, which prevents states from making law impairing the obligations of contracts.

MUNI UTILITIES MOVING FORWARD

Four Florida energy companies have signed agreements to join as members of the Southeast Energy Exchange Market (SEEM), effective Jan. 1, 2023. Two of the four are municipal utilities – the Jacksonville Electric Authority and Seminole Electric Cooperative – recently expressed their intent to join the expanded platform and expect active energy trading in mid-2023.

The platform is intended to facilitate sub-hourly, bilateral trading. This is designed to allow participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission. The two utilities join several municipal utilities which are founding members of the SEEM.  They include Associated Electric Cooperative, Dalton Utilities, MEAG, N.C. Municipal Power Agency No. 1, NCEMC, Oglethorpe Power Corp. and Santee Cooper.

NYC AND RESILIENCE

It will be ten years since Hurricane Sandy flooded Manhattan. The storm did some $19 billion worth of damage. The recovery was aided by some $15 billion of aid from the federal government. Now, the NYC Comptroller has released a report which documents how the City has used those resources. They can be viewed either positively or negatively. To us, they reflect the complex process of designing, approving, funding and financing capital projects in NYC. The fact that the money has been available has been no guaranty that the needed projects have been undertaken.

Of the $15 billion of federal grants appropriated for Sandy recovery and resilience, the City has spent $11 billion, or 73%, as of June 2022. The City has spent 66.2% of the nearly $10 billion in FEMA Sandy grants, and 92.4% of the $4.2 billion HUD CDBG-DR grants. The anticipated completion dates for some of the uncompleted Coastal Resiliency Projects are as far out as 2030. A major component ‘is the East Side Coastal Resiliency project (ESCR) which is expected to create a network of seawalls on existing parkland to protect Manhattan.

Four agencies received over a billion dollars each in FEMA grants: the New York City Housing Authority (83.5% spent), Health and Hospitals Corporation (45.3% spent), Department of Environmental Protection (58.8% spent), and Department of Parks and Recreation (61.8% spent). The report highlights one issue of import – the location of so much of the New York City Housing Authority’s housing stock which is vulnerable to flooding. Today, 17% of NYCHA’s buildings are in the 100-year floodplain; this number will grow to 26% by the mid-century.

On the private real estate side, In the past decade as new waterfront developments have steadily increased, market rate values of real estate in the 100-year floodplain have increased to over $176 billion – a 44% increase since Superstorm Sandy.

Rising tides and more frequent storms will put upwards of $242 billion (in current market value) at risk of coastal flooding by the 2050s – a 38% increase in value from today with Brooklyn experiencing the most dramatic increases in property values at risk in the coming decades. The tax lots in the current 100-year floodplain are estimated to generate $2.0 billion in annual property taxes. As the floodplain grows, more tax lots will be put at risk, threatening $3.1 billion in annual projected property tax revenues by the 2050s (using current property values).

HOSPITALS IN THE POST-COVID WORLD

This week’s poster child for the uncertain operating environment for hospitals is University Hospitals in Cleveland, OH. The A2 rated credit by Moody’s like many hospitals, confronts three primary sources of pressure – the aftermath of the pandemic, general inflation, and labor costs and availability. These three factors as well as the supply chain issues everyone is facing are pressuring hospital finances across the country.

University Hospitals operates an integrated network of 21 hospitals (including five joint ventures), more than 50 health centers and outpatient facilities, and over 200 physician offices in 16 counties throughout northern Ohio. The system reports a net operating loss of $184.6 million in the first eight months of 2022. To deal with the revenue shortfalls, the system has announced that it will lay off 100 administrative workers. It will also leave unfilled some 300 additional administrative jobs.

Utilization in the post-pandemic environment has been below what was expected at many institutions. This pressuring profits and more particularly impacting balance sheets. This is reflected in less favorable debt rations and declines in days cash on hand. It should not be a surprise that many hospitals were at least partially shielded from the full financial impacts of the pandemic. Only after massive injections of operating cash to hospitals slowed and ended did many of the impacts of the pandemic become clear.

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

PIGS AND ELECTRICITY

Next week, the U.S. Supreme Court hears oral arguments next week in a case about California’s Proposition 12, a law passed by Golden State voters in 2018 that requires that pork sold in California come from facilities where sows have pens that are at least large enough for the animals to turn around and stand up. In National Pork Producers Council v. California, the industry is challenging the law as being inconsistent with the dormant commerce clause, which bars state laws that hinder interstate commerce.

California is arguing that overturning the law would raise issues of states’ rights. The pork industry argues that the law has the practical impact of regulating out-of-state conduct [and] was impermissible under the dormant commerce clause. The petition effectively seeks to have the dormant commerce clause interpreted in such a way that would broaden its use. That may actually work against the pork producers. At least three of the justices are in record as being effectively against the clause.

The case has emerged as one with potential impacts on the energy sector. Laws which have the effect of regulating power suppliers in other states via state law – “extraterritoriality” – have been challenged before. The industry is concerned on a couple of levels. Clean energy advocates cite state laws and regulations governing utility operations as a major driver of renewable energy adoption. They fear that a win for the pork industry could undermine those efforts.

Some 30 states and the District of Columbia have Renewable portfolio standards (RPS) in place, according to the National Conference of State Legislatures. The Court has not had to rule on dormant commerce clause issues impacting the energy industry but at least one justice has. In 2015, Justice Neil Gorsuch ruled that Colorado’s RPS violated the dormant commerce clause because it required changes by out-of-state energy producers.

The pork producers will have to convince the Court that the law was designed to disadvantage non-California producers. The Biden administration has filed briefs in support of the pork industry. They took the position that California’s law does not directly benefit the state’s residents, as the state attorney general claims, unlike state statutes to prevent or limit environmental harm. The two are thus “not comparable.”

WINDY CITY BUDGET

Mayor Lori Lightfoot has proposed her executive budget for the City of Chicago in 2023. It has gotten attention because it deals with two politically fraught issues: taxes and pensions. The $16.4 billion budget plan does not include a property tax increase. That is a change from the last several years. Along with stable property tax rates, the mayor proposes to fund its pension system with contributions in excess of its annual actuarially required payment.

The extra payment is budgeted at $242 million. The City fully funded required contributions to all four pension funds for the first time ever in 2022. The 2023 budget would pay $2.6 billion, an increase of 15% from a year earlier. City revenues for 2023 are now expected to come in $260 million above an August projection. There is also a payment of $40 million from a casino operator which is being applied to pension funding. The pension funding would come at a time of poor investment results from equity and fixed income market performance.

The overall size of Lightfoot’s proposed 2023 budget is 1.3% smaller than the overall 2022 budget was. The mayor started from a stronger fiscal position with an anticipated estimated budget gap being lower especially relative to those in recent years. The 2022 budget gap was $733 million. The mayor was able to craft a budget with a beginning gap of $128 million.

The more solid position overall also occurs while spending for public safety is increased. Chicago’s main fund for city operations is the corporate fund. The police department’s budget would increase to $1.94 billion from $1.88 billion this year.

FEDERAL CARBON CAPTURE PROGRAM

The passage of the Inflation Reduction Act and its provisions impacting climate change has begun to manifest itself in program announcements. The latest comes from U.S. Department of Energy (DOE). DOE announced its $2.1 billion Carbon Dioxide Transportation Infrastructure Finance and Innovation (CIFIA) program. Enacted under the Infrastructure Law, CIFIA offers funding for large-capacity, shared carbon dioxide (CO2) transportation projects located in the United States.

Appropriated annually through 2026, CIFIA will support shared infrastructure projects, including pipelines, rail transport, ships and barges, and ground shipping, that connect anthropogenic sources of carbon with endpoints for its storage or utilization. The goal of the program is to provide economies of scale and help form an interconnected carbon management ecosystem that will enable commercial deployment of carbon management technologies. 

There is no doubt about the current federal view of carbon capture technology. “Carbon management technologies such as direct air capture, carbon capture from industry and power generation, carbon conversion, and CO2 transportation and storage technologies must be deployed at a large scale in the coming decades to meet the United States’ net-zero greenhouse gas goals by 2050.”

SALT RIVER PROJECT GOVERNANCE

While the debate goes on about what is and is not ESG investing, there continue to be clear examples of situations which should clearly raise issues with investors interested in one or more of the ESG trio. Our view is that the hardest one to find real examples of is in the governance sector. Governance, it seems, can be so broad and so subject to politics in the municipal space in particular that it is hard to find clear examples.

This isn’t about day-to-day management of an entity issuing municipal bonds. It is about the oversight and direction given by those charged with that responsibility. As politics have become more local and more heated, the potential for some activist participants to throw wrenches into the operating and management processes continues to grow. One recent example is the Salt River Project in Arizona.

SRP has been locked in a debate with environmental activists (of whom four are members of the SRP board) over the expansion of the utility’s natural gas fired generators. SRP initially wanted to expand an existing natural gas plant by placing 16 gas generators on a space at a site designed for said expansion. The plant is located in the “historically Black” municipality of Randolph.

Activists in the environmental movement were able to effectively accuse SRP of racism. The environmental justice and equity movement managed to convince state regulators not to approve the expansion at the Randolph site. So, that’s the end of the simple story? Guess again. After the proposed gas plants were rejected, the four “environmental” board members took it upon themselves to send an unsolicited letter demanding that the regulators not approve the plant.

The activists may have been acting as individuals but once an individual takes a position at a public agency, they have different issues that they may have to subsume in order to effectively carry out their responsibilities. A board member is expected to take a bit more nuanced approach especially from the inside. One has to ask how effective the move was now that the SRP Board has announced that the four members have been censured by majority vote of the board of directors.

There might be a cause to be made for opposing the plant and the environmental interests may have “won” by virtue of the fact that the utility has approved a significantly smaller natural gas project at its Copper Crossing solar plant in Florence . SRP had already purchased eight of the 16 gas turbines in anticipation of Coolidge expansion approval. And the resolution of the environmental justice and equity issues? The cities of Florence and Randolph are within a couple of miles of each other so unless the winds stop blowing…

EV HEADLINES

The old General Motors small-car assembly plant in Lordstown, Ohio became a symbol of economic politics in the 2016 election cycle. The plant had been shut down and residents were highly concerned about their economic outlook. Then candidate Trump went to Lordstown and advised residents not to sell their houses because there was a plan to rejuvenate the plant.

Six years and an administration later, the Lordstown site has returned to the production of motor vehicles. Commercial electric vehicle startup Lordstown Motors says it has slowly started production of its first model, the Endurance pickup. The Foxconn backed entity has produced its first three trucks and plans to begin a slow rollout of some 450 trucks in the first half of 2023.

The company will obviously need more capital to fund expansion but it had nearly $200 million of available assets to fund operations.

Rivian reports that it produced 7,363 vehicles at its manufacturing facility in Normal, Illinois and delivered 6,584 vehicles in the quarter ended Sept. 30. At roughly the same time, the local community college announced the construction of a facility designed to train workers for the electric vehicle industry.

LITHIUM SETBACK

There has been much attention focused on the extraction of lithium, a key component of the emerging electrified economy, through mining. The usual concerns regarding mining have been expressed. In addition, the locations of many potential sources of lithium are located on culturally significant lands in the American West including many Native American burial grounds. Those issues have led to lawsuits and delays around a prime source of lithium in Nevada.

The key role of lithium in battery development has driven extraction activities to places like the Salton Sea in California. There Berkshire Hathaway planned its facility to extract lithium from the brine in the Salton Sea. Berkshire already operates multiple power plants near the Sea where it flashes steam off brines brought from deep underground at temperatures around 700°F (371°C) to spin turbines that produce electricity. Technology for an extra processing step could be connected to one of the existing plants to extract lithium before the brine is reinjected underground. 

The State of California and the federal government both have provided grants to Berkshire for their lithium development effort. The federal grants were subject to a final negotiation process. The State grant was supposed to help during the development of the process of separating out the lithium from the brine.

The federal grant was meant to aid the development of one lithium-based product. Thirteen months after the process started, the federal grant was withdrawn in March of this year. Now issues are emerging with the lithium extraction process. The very heat which made the Salton Sea an attractive geothermal power source is apparently not compatible with the production equipment needed for the right lithium product.  

COLORADO RIVER

The Metropolitan Water District of Southern California, Imperial Irrigation District, Coachella Valley Water District and Palo Verde Irrigation District – proposed cutting their annual allotment of river water by 400,000-acre feet, or around 130 billion gallons. It is all part of the effort to reduce usage of Colorado River water by between 2 and 4 million gallons per year. In June, the federal government set a deadline for the states in the “lower basin” to craft an agreement to reduce their water usage. When the deadline for a new plan passed in August, the federal government announced that the river was in a Tier 2 shortage condition for the first time in its history.

The shortage declaration means Arizona, Nevada and Mexico will have to further reduce their water usage beginning in January. Of the impacted states, Arizona will face the largest additional cuts – 592,000 acre-feet – or approximately 21% of the state’s yearly allotment of river water. The number from the water agencies isn’t a final offer, and could change depending on what kind of federal money is available to the agencies under the Inflation reduction Act.

CONGESTION PRICING FACES PRESSURE

New Jersey Governor Murphy has let it be known that he has lobbied at the highest levels – with the President – about his issues with the proposed congestion pricing plan under consideration by New York City. The specific ask – that the federal government complete a full environmental impact study before the new tolls are implemented. Such a study would be welcomed not only by New Jersey commuters but also by residents of the Bronx where much truck traffic would be diverted.

Other concerns from west of the Hudson include the lack of real consultation with a significant potential source of expected revenue. It already costs $16 to cross into NYC via the three Hudson River crossings into Manhattan. Other issues include the inability of the existing mass transit infrastructure to handle extra riders. The environment is also hardened by some childish moves by legislators in both states.

Ridership on New Jersey Transit trains is estimated to have risen to 60% of prepandemic levels but the agency does not expect it to fully recover for several years. The Port Authority’s PATH trains are also carrying about 60% percent of its prepandemic passenger loads.

MORE ESG PERFORMANCE ART

The State Treasurer of Louisiana has announced the withdrawal of state funds from Blackrock. The move is another example of the sort of performance art which has characterized the debate over climate change. The Treasurer is expected to run for Governor next year and ESG investing is shaping up as a campaign issue. The Treasurer’s announcement seems to cover significant assets – Louisiana had already removed $560 million from BlackRock investments from its treasury fund and that $794 million will be divested by the end of 2022. The treasurer’s decision affects day-to-day state deposits and transactions.

Tellingly, the Treasurer’s announcement does not cover the state’s pension assets. While $1.2 billion of funds is not insignificant, the real goal of anti-ESG state financial officers is to take pension funds away from fund managers who do not toe the anti-ESG line. That probably not be enough to satisfy the anti-ESG movement which is being driven by the right-wing group, the American Legislative Exchange Council (ALEC).  ALEC has written “model legislation” it says will help states protect their pension funds from “politically driven investment strategies.”

The moves come in the midst of a significant debate over proposed SEC rules which would require reporting entities to support their claims regarding ESG in regular scheduled financial disclosures. Those plans have received howls of protest from issuers including many in the municipal bond market. Then again, most efforts to improve disclosure over the last four decades have been met by howls of protest.

The announcement came at virtually the same time as another major power generator – Duke Energy – announced a program to expand access to renewable sources of electricity in South Carolina. The program addresses a straightforward business concern. Duke cites the fact that “a majority of South Carolina’s leading employers have explicit decarbonization goals, and the carbon intensity of electricity suppliers is top-of-mind for economic development prospects too.” 

Duke’s plan would enable large-load customers to contract with either of Duke Energy’s South Carolina utilities to provide locally sourced environmental attributes, including renewable energy certificates (REC), generated from both utility-owned generation assets as well as third-party owned generation assets and could include energy-storage options. The fact that the plan is the result of customer input simply highlights the political nature of efforts to fight adaptation to climate change.

In New Jersey, a state Senate committee voted to advance a bill to force the State pension funds to divest from any investments in the fossil fuel sector. The state has an established history of divestiture reflecting politics of the day. It has laws which require requires state pension funds to divest from businesses that boycott Israel. The state has also moved to divest from gun manufacturers, the owner of Ben and Jerry’s over boycotts of Israel, and companies which has invested in South Africa. 

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

MTA

For a credit which has not received much good news in the last 2 ½ years, it will take what it can get. What it gets this week is a maintained rating of A3 from Moody’s with a stable outlook. The rating reflects “the system’s essential service to a vast and economically robust service area and strong political and financial support from New York State, New York City and the Government of the United States of America, which have been instrumental in supporting the credit through the coronavirus pandemic and recovery.

The rationale for why we have had concerns about the credit for some time are reflected in Moody’s comments. “Due to the structural increase in remote work, MTA’s forecast for its “new normal” ridership level has dropped to 80% of pre-COVID levels by FY2026. As a result, MTA’s large structural budget gap will remain 16% of budget, and the authority will exhaust its federal stimulus aid a year earlier than previously forecasted.

In addition, budget gaps could grow if ridership recovery underperforms, future fare increases are deferred or canceled, upcoming collective bargaining agreements exceed plan, and/or high inflation or a weakening economy depress dedicated tax collections. MTA’s high leverage position will remain well-above pre-COVID levels due to reduced revenues and new borrowing, and debt service costs will grow steadily to meet substantial capital and debt plans.”

The rating news comes as MTA reaches a post-pandemic high in ridership. Subway and bus ridership is roughly 60 percent of pre-pandemic levels on the weekdays. The LIRR and Metro-North commuter rail lines report daily ridership at 200,000 and weekend ridership is at 90% of pre-pandemic levels. At the same time, 1 million vehicles traveling on MTA bridges and tunnels on Friday Sept. 16 which puts the use of those facilities above 2019 levels.

Over the next 24 months while MTA draws down its remaining federal aid, some policy decisions will highlight a real dilemma for the Authority. New York is the only major metro system in the world which provides 24-hour service. Whenever the issue is raised it is usually concurrent with budget concerns for MTA. The reality is that a significant segment of lower income employment is held by people who rely on mass transit to get them to and from night shifts.

That is not going to change regardless of daytime office attendance. So, in deciding how to achieve long-term cost reduction, it will walk a fine line as it seeks to reduce service without hurting employment where it matters the most. The politics will reflect the fact that the same working class cohort which rides the subway at night is the same class cohort which was deemed “essential” during the pandemic.

D.C. TRANSIT EXPERIMENT

Over the last several years, the District of Columbia has undertaken a number of efforts to address concerns over traffic as well as issues related to the Metro. On traffic, the City established a program which linked traditional taxis with city employees. It was intended to reduce the size of the fleet of city cars and traffic while providing support to the taxi community impacted by Uber and Lyft. Another program established loading/drop off zones in the evening hours for Ubers and Lyfts around clubs and the like.

The operating issues which have plagued the Metro are well known and the process of reintegrating idled rolling stock is underway. Those issues have made pandemic recovery all the more difficult and limited demand and ridership. To stimulate demand, a bill has been introduced to offer direct payments to Metro passengers. It would provide a monthly $100 subsidy to D.C. residents to be used on Metro, building on the existing Kids Ride Free program, which serves more than 50,000 D.C. school children on an annual basis. 

Qualifying residents would get the initial $100 subsidy, and get monthly installments thereafter to keep them at that level. (So, if a rider only spent $25 on Metro in a given month, they would get $25 as a subsidy the following month to bring them back to $100.) Any expenses above the monthly subsidy would have to be covered by the user. According to the council committee analysis, the $100 a month would cover the transit needs of 92% of adult users in the city.

The city’s chief financial officer has estimated the cost of the subsidies at $373 million for the first four years. The council estimates that 78% of D.C. residents do not currently receive any transit subsidies from their employer.  Federal employees already get transit vouchers so they do not qualify. The concern over the program has to do with the issue of funding. The legislation says the costs will be covered by the additional (and unexpected) revenue that D.C. has been taking on a yearly basis, the committee report also concedes it is “by no means a predictable funding source” as federal pandemic funding runs out.

It’s another example of the impact of federal funding for pandemic-related issues which has allowed a short-term condition to become a long-term assumption. The bill is based in part on an assumption of steadily growing District revenues even in the face of a recession. That and the full draw down on pandemic aid would create real fiscal pressure.

AUTOMATION COMES TO PRISON

When one talks about automation it is usually about the negative impact on employment. The pandemic changed the view of a lot of people about the work they did, where they did it, and for how much pay. That phenomenon is being seen throughout the country as businesses and governments cope with new attitudes towards in-person work. Help wanted signs are everywhere.

The latest sector to experience the phenomenon is the field of corrections. Most of the reporting one sees in this sector revolves around efforts by usually rural localities to keep the local state prison open and providing secure jobs with pensions and benefits. As incarceration rates fall, the need for some facilities no longer exists and corrections officers lose their jobs.

Now changing attitudes towards the nature and value of corrections jobs is causing a rethink among potential employees. The situation is leading to understaffing of the guard function. It is estimated that some states see 25% of their corrections jobs unfilled. It is a combination of the nature of the work and improving pay at other jobs. In some jurisdictions, higher minimum wage requirements have raised wages such that they are becoming competitive with jobs like those in corrections.

So, what are states to do? Florida has “temporarily” closed three prisons. Nevada is taking a unique approach based on technology.  The Nevada Department of Corrections is seeking funding for the use of drones and surveillance bracelets to minimize the need for a physical presence. It is part of a plan called “Overwatch”. Ultimately through the use of technology, the DOC hopes that a centralized surveillance system could be established which would allow limited staff to see activity inside housing units and outdoor areas at facilities throughout the state.

Other states are taking a more traditional approach. Nebraska raised an officer’s typical annual salary from $41,600 to $58,240, under a 2021 law.  Pay matters in places like West Virginia where salaries for corrections officers are among the lowest in the country. Corrections officers in West Virginia currently start at a salary of $33,214, which is lower than the neighboring states of Virginia ($34,380), Ohio ($37,630), Pennsylvania ($40,270), and Maryland ($43,370). West Virginia estimates that it is short 1,000 officers in its system. Gov. Jim Justice declared a state of emergency earlier this year over staffing issues, bringing in 150 National Guard troops to provide support.

While the nature of the job may not be typical, the issue of government wages in a period of inflation is still a problem. It is legitimate to ask what would someone rather due for $15/hour with benefits – load shelves at Home Depot or spend 8 hours + in a state corrections facility? The corrections officer gets $15.97/hour to work in a de facto mental health/corrections system. It’s one example of the realities facing government employers which implies higher costs and revenue demands for taxpayers going forward.

MILEAGE FEE SETBACK

San Diego and its neighboring municipalities announced a wide-ranging plan for transportation in the greater San Diego region. The price tag was $160 billion. It is designed to fund a variety of initiatives through 2050. The plan included the imposition of a “road usage charge.” The fee was planned to be implemented in 2030.

The plan includes building out more than 800 miles of express or “managed” lanes designated for service buses, carpools and toll-paying customers. It also funds the completion of improvements a 70-mile regional bicycle network. Mass transit investment would fund a proposed Purple Line rail project between National City and the San Diego neighborhoods of City Heights, Kearny Mesa and University City. In total, the plan calls for building a 200-mile commuter rail system stretching from the U.S.-Mexico border to downtown San Diego, El Cajon and Oceanside.

Designed to placate as many constituencies with stakes in the rollout of a significant capital construction program, the plan has instead created some unexpected alliances and pitted historical political allies against each other. The plan assumes that voters will approve three half-cent sales tax increases by 2028. The first proposed tax increase under the plan was to be voted on this November.

Interest group politics got in the way. Organized labor and environmental groups supported the plan but they were unable to get enough voters to sign petitions this summer to qualify the first such tax hike for November’s ballot. It seems that “progressive” officials don’t like the idea of removing the usage fee. If that pattern continues, the plan will have a $14 billion hole in the agency’s spending plan. The debate exposed all of the potential political hurdles facing efforts to thwart climate change in the transportation space.

WORKER SHORTAGES IMPACT LOCAL OPERATIONS

The worker shortages plaguing local governments continues to impact operations. A number of transit agencies are having to cut back service as the result of an inability to hire workers. The result has been reduced service in a variety of jurisdictions impacting both local needs as well as long established commuter routes. The latest examples of the problem come from the western US.

The Utah Transit Authority has announced that beginning in December, it will reduce or eliminate service on 20 bus routes in Salt Lake, Davis and Weber counties.  The move reflects the inability of the Authority to attract drivers. The agency is down 85 bus drivers from a roster of 1,200 budgeted positions. That is a vacancy rate of 7%. UTA pays trainees $20 an hour and increases the wage to more than $21 an hour after training. 

In Colorado, the CO Department of Transportation (CDOT) has announced that it will develop housing in an effort to lower the cost of housing for snow plow drivers and other workers. CDOT is current short of some 300 maintenance workers who fill potholes, fix guardrails, and plow snow. The Department is planning to spend $6.5 million on housing projects along the Interstate 70 corridor and in mountain towns. Some of this reflects competition from the wealthy villages for the same workforce at either higher wages or affordable housing.

PORTS

Ports have been at the center of the post-pandemic trade recovery. Volumes have shown steady increases as demand ramped back up for consumer goods. There has been much focus on activities at the West Coast ports especially those at LA and Long Beach. Between labor stoppages, container backups, and issues related to air pollution, the two San Pedro ports have been under pressure. Put all of that together and add US/China trade issues to the mix and changes were bound to occur.

Now, the Port of New York and New Jersey moved 843,191 TEUs (imports + exports) in August, its busiest August ever. The Port of Long Beach and LA were second and third in cargo volume as more trade moved away from the West Coast due to ongoing concerns about labor strikes and lockouts. The Port of Los Angeles ranked third in the nation in August, moving 805,314 total containers. That was 37,877 less than the Port of New York and New Jersey. The Port of Long Beach came in second, moving 806,940 export and import containers.

The Port of Los Angeles diverted 40,000 containers to the Port of Long Beach in August when dockworkers at the Port of LA refused to work at the automated section of APM Terminals, the largest container-handling facility citing safety concerns. An International Longshore and Warehouse Union slowdown is claimed to have resulted in reduced productivity at the Oakland and Seattle-Tacoma ports.

PIPELINE HEADLINES

Officials in 44 Iowa counties have now taken action to express concerns about the three proposed carbon pipelines for the Hawkeye State. The latest counties to do so expressed “concern about training for emergency crews who’d have to respond to pipeline ruptures, as well as potential construction damage to land and drainage.” A second letter from Adair County said that “its board is not opposed to the purpose or construction of the pipeline, but is opposed to eminent domain being used “as a way of achieving it.”

Everyone acknowledges that state law allows the pipeline developers to use eminent domain currently. Those laws were practically intended to support public utilities. Pipeline opponents as well as impacted landowners contend that the carbon pipelines are not “public utilities”.

In Illinois, the Navigator CO2 developer of its planned pipeline to transmit captured carbon dioxide from ethanol plants. Navigator CO2 has refused to make public the list of landowners along a proposed half-mile-wide corridor covering 250 miles in Illinois. The company has informed many landowners that “Navigator CO2 would be seeking right-of-way “on or near” their property, and noted that if it can’t reach voluntary agreements with landowners to allow permanent easements, “we may need to request the right of eminent domain (‘condemnation’)” from state regulators. 

They already are. Navigator Heartland Greenway LLC, a wholly-owned subsidiary of Navigator, in July filed with the Illinois Commerce Commission seeking permission to build the pipeline and request eminent domain powers.  

The Commission will ultimately decide the eminent domain issue. A 2011 Illinois state law – the Carbon Dioxide Transportation and Sequestration Act – requires the Illinois Commerce Commission to consider local landowners’ concerns about public safety, infrastructure, the economy, and property values before approving permits for carbon dioxide pipeline projects to use eminent domain. 

Ironically, the law was enacted primarily to facilitate a prior attempt at successful sequestration which ultimately failed in 2015. There are systems being tested at the municipally-owned Prairie States Energy Campus but results to date are underwhelming.

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

PUERTO RICO

It is tempting to go back five years and take what we wrote about the electric system in Puerto Rico and simply cut and paste it here. The news that a new hurricane had dumped 30 inches of rain on Puerto Rico raised all of the same issues with PREPA which arose in 2017. Housing conditions remain poor, the government’s finances have still not entirely been sorted out, and the politics of the Commonwealth have not gotten much better than was the case when it filed under Title III.

Once again, the Puerto Rico Electric Power Authority (PREPA) is experiencing an island wide power failure. Roads, bridges and other infrastructure have been damaged or washed away as a result of the downpour. More than 775,000 residents also have no access to clean water. After Maria in 2017, the island’s utility regulator, the Puerto Rico Energy Bureau, approved a plan that would require 40 percent of power to come from renewables by 2025.  The island has made little progress in its effort to decentralize the power system. PREPA has been seen as a significant obstruction to progress. The private operator of the system has been resisting those efforts and has been pushing an agenda based on increased natural gas.

The timing of the storm and power failure come amidst legal efforts to resolve PREPA’s ongoing debt default. Puerto Rico Electric Power Authority bondholders asked the bankruptcy court Monday to dismiss the proceedings as a step to appointing a receiver for the authority. The move comes after a six month mediation effort conducted under the auspices of the oversight Board.

The board asked bankruptcy Judge Laura Taylor Swain to set aside several months to litigate issues in the bankruptcy. The Ad Hoc Group of PREPA Bondholders, Assured Guaranty (AGO), Syncora Guarantee, and National Public Finance Guarantee (together the “bondholders’ group”) rejected this instead asking for dismissal of the bankruptcy or a lift on the stay on litigation and the subsequent appointment of a receiver.

If the judge disagrees with that approach, the bondholders asked that the judge require the board to propose a plan of adjustment by Nov. 1 and a timetable with a plan confirmation hearing scheduled no later than May 1, 2023. Litigation is not the preferred approach but it increasingly looks like the parties cannot resolve their differences without an imposed solution. The differences are real. Bondholders believe they are entitled to PREPA’s gross revenue while the Authority sees the revenue pledge as one of net rather than gross revenues.

The storm and its destruction only serve to highlight the management and policy issues holding the island back. It is pretty clear that an electric grid composed of some centralized base load power and a large dose of renewables is what will allow Puerto Rico to move forward. The exposure to storms will not go away so the need to decentralize the grid and localize access to renewable power becomes even greater.

CARBON CAPTURE PIPELINE RISK

Opponents of carbon capture pipelines proposed for Iowa are focusing on issues associated with these facilities in other areas. They are especially interested in the issue of potential leaks or pipeline ruptures. They have seized upon the results of an investigation into an actual rupture of a carbon pipeline in Mississippi.

In 2020, a carbon pipeline near a small Mississippi village ruptured. The incident was blamed on “natural occurrences” which led to a section of pipeline breaking. That incident, in which there were delays in emergency notifications, led to the start of that investigation by the US Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) to establish new measures to strengthen its safety oversight of carbon dioxide (CO₂) pipelines around the country and protect communities from dangerous pipeline failures.

The incident highlighted the many concerns that landowners have over carbon capture pipelines potentially impacting their properties. The 2020 incident was characterized by the lack of timely notification to the National Response Center to ensure the nearby communities were informed of the threat; the absence of written procedures for conducting normal operations, as well as those that would allow the operator to appropriately respond to emergencies, such as guidelines for communicating with emergency responders; and a failure to conduct routine inspections of its rights-of-way, which would have fostered a better understanding of the environmental conditions surrounding its facilities that could pose a threat to the safe operation of the pipeline.

CLIMATE CHANGE DATA REALITIES

The pressure to reduce the carbon footprint of the power generation industry has been relentless. The debate over fossil fuels has gotten so intense it is easy for some neutral, non-political points to get lost in the debate. We see one example of this phenomenon in recent data from the US Energy Information Administration (EIA) regarding natural gas.

One of the issues which confronts climate change activists is the trade-off between rapid electrification needs if we decarbonize. The shift of home and/or commercial usage of natural gas to electric will create significant increased demand for power. That power has to be generated at least at a base-load level to support a majority renewable electric grid. Right now, there is a significant mismatch between the timing of electrification and the development of a mature reliable generation and transmission infrastructure that is not fossil fuel based.

Activists who oppose fossil fuels tend to also oppose nuclear power on “environmental” grounds. They also object to hydroelectric power from dams. When the efforts to reduce coal and nuclear coincide, it should not be a surprise as to the fuel of choice for replacing those sources. Natural gas, despite seasonal pricing issues still comes out to be the financially most beneficial choice for utilities.

That has resulted in increases in natural gas usage and declines in hydroelectric generation. It is reflected in natural gas production statistics from EIA. U.S. natural gas producers are operating more drilling rigs now than at the beginning of the COVID-19 pandemic in early 2020. Before the pandemic, the number of operating rigs in the United States had generally been declining. On January 31, 2020—when the U.S. Department of Health and Human Services first declared a public health emergency related to COVID-19—it was reported that 112 natural gas rigs were operating in the United States.

The number of natural gas-directed rigs continued to fall in the first half of 2020, reaching a low of 68 rigs on July 24, 2020, the fewest in the historical data, dating back to 1987. Since then, the natural gas rig count has generally been increasing, returning to pre-pandemic levels in January 2022. On September 9, the industry reported that 166 natural gas rigs were operating in the United States, 54 more than at the outset of the pandemic in the United States.

NUCLEAR SITE STUDY

The US Department of Energy has released research that finds that about 80% of operating and recently retired coal-fired power plant sites could host an advanced nuclear power reactor, with nearly 265 GW in total potential nuclear capacity. Use of existing transmission and connection infrastructure would reduce capital cost. The research found 190 operating coal plant sites that could host nearly 200 GW of nuclear capacity and 125 recently retired plant sites that could handle about 65 GW of nuclear capacity. 

The repurposing of former coal generation sites helps to address the economic impact side of the climate change debate. Whether it be property tax revenues, sales or income tax revenues and the fees associated with residential and economic development, those revenues could continue to exist through a nuclear repurposing.

COAL REALITIES IN NEW MEXICO

Public Service Company of New Mexico, Tucson Electric Power Company, the County of Los Alamos, New Mexico and Utah Associated Municipal Power Systems are defendants in a lawsuit filed by the City of Farmington, MN. The San Juan Generating Station in the city is a huge, dirty coal generating facility which is scheduled to close on September 30. The plant and the coal mine which supplied the plant through its operating life are both scheduled for closure.

Now, the City is hoping to get the courts to issue an injunction forcing Public Service Company of New Mexico to continue to operate the plant. Ultimately the City hopes to transfer ownership of the plant and continue to operate it with carbon capture technology. It’s all about economics. The plant and the mine were substantial long-term employers. PNM has about 100 employees remaining at the plant. Approximately half of these employees will be laid off September 29^th.

The mine owner announced earlier this month that that its “underground crews have mined the last ton of coal destined for the San Juan Generating Station.” PNM said that 48 employees will stay at the plant through mid-October “for safe shutdown of the last unit and then around 10 employees will remain onsite for activities such as continued running of the switchyard, managing inventory reduction, closing down computer systems, and decommissioning.” A San Juan County ordinance requires PMN to file a demolition plan within 3 months of permanent plant closure.

The situation puts one joint action municipal power agency right in the middle of another debate over the future of electric generation. Utah Associated Municipal Power Systems finds itself being stymied in its effort to decarbonize at the same time it is pursuing a possible replacement for fossil fueled power in the form of modular nuclear reactors.

WHILE PHILADELPHIA GAS WORKS IS UNDER PRESSURE

The Philadelphia Gas Works has always been a somewhat problematic credit in that it provides an essential service to some of the City of Brotherly Love’s most economically challenged areas. This has always created a challenging environment for PGW’s ratemaking and revenue collecting process. In recent years, environmental activists have called for the utility to be shut down given the role of natural gas in climate change.

Those are more long-term issues. In the immediate future, PGW faces scrutiny and calls to refund some charges due to overly high bills related to natural gas for usage in the month of May of this year. PGW this summer refunded about $12.4 million to customers after some residential customers in June got bills in excess of $200 for May usage, including weather charges that were more than five times their monthly delivery charges.

The Pennsylvania Public Utility Commission (PUC) voted in favor of a broad ranging investigation and analysis of the changes requested by PGW to the weather normalization adjustment. That charge on the bill automatically adjusts customer bills (up or down) when the actual weather varies from “normal” temperatures. Beyond the issue of the normalization process, the PUC also is asking for a broader review of PGW’s existing rates, rules, and regulations, extending the inquiry beyond weather normalization.

It continues a process which followed an August request asking the PUC to approve a revised tariff that would cap its monthly weather adjustment to prevent the excessive charges in the future. PGW proposed limiting the weather adjustment to no more than 25% of a customer’s monthly delivery charges. None of this is credit positive. It highlights the potential for longer term pressure to shut the utility down.

RHODE ISLAND TOLLS IN COURT

A U.S. District Court Judge ordered Rhode Island officials to stop collecting truck tolls within 48 hours. The judge wrote a 91-page decision finding that the collection of tolls is unconstitutional under the dormant Commerce Clause of the United States Constitution. The judge found that the tolls discriminated against out of state truckers.  Tolls are not collected from automobiles.

Therein lies the rub. The trucking industry has used that provision as a basis for a discrimination complaint. The authorizing legislation included an explicit prohibition against tolls on automobiles. This ruling did not address the issue of revenue repayment. The state has collected $101 million in truck tolls since the first one launched in 2018. 

Changes the General Assembly made to the original 2015 tolling bill exempted all vehicles except tractor trailers – including dump trucks and box trucks. Tolls were limited to $40 per day and charged a vehicle only once in each direction at each gantry. All of those changes were found to have benefited local businesses over out-of-state operators. Rhode Island is the only state in the country with a truck-toll system like the one struck down. 

SPECIALTY COLLEGE AT RISK

New Jersey City University (NJCU) occupies a unique role in the state’s public university system. It is the only state university in Hudson County. It is also designated – like several other public institutions around the country – a Hispanic Serving Institution (HSI) for the state of New Jersey. The University’s recent history has been characterized by executive leadership turnover, as well as changes in other key administrative positions. The current management team has not yet had time to establish a track record of fully addressing the university’s significant financial challenges or implementing improved risk management practices. 

The pandemic hit the University’s prime demand base quite hard as was true for minority/immigrant communities throughout the country. This has driven demand and enrollments down. The university enrolls around 5,900 students, over 80% of whom are undergraduates, with operating revenue of approximately $162 million in fiscal 2021. The resulting pressure on an institution with historical financial difficulties has drained cash balances to a dangerously low level of some 30 days. The hope is that the University’s role in the overall university system will generate support for state assistance while the new management is able to install its own financial plan.

The University issues unsecured general obligation debt. Total outstanding debt for fiscal 2021 was $148 million. This week, Moody’s downgraded the University’s debt to Ba2 and maintained a negative outlook. The declines in enrollments and cash have driven the credit close to covenant default. If cash goes below 30 days, the University must hire a consultant to review operations.

Preliminary unaudited information for fiscal 2022 shows a significant operating deficit driving a reduction in liquidity to under 30 days cash on hand. Management has declared a financial emergency and is taking steps under its fiscal 2023 budget to adjust expenses. Returning to financial stability in the near term will prove difficult given the magnitude of the projected deficit, forecasted continued enrollment declines, an inflationary environment, and labor constraints. 

Disclaimer:  The opinions and statements expressed in[JK1]  this column is 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 CITY

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

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

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

NUCLEAR

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

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

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

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

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

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

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

NUCLEAR FUNDING RACE

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

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

GIG WORKER SETTLEMENT

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

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

THE WHEEL STOPS ON ATLANTIC CITY

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

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

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

SECOND CHANCE FOR TAMPA TRANSIT

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

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

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

THE COST OF RESILIENCE

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

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

RURAL HOSPITAL PRESSURES CONTINUE

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

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

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

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

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

CALIFORNIA TRANSIT ON THE BALLOT

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

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

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

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

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

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

RUM TAX UNCERTAINTY

The federal tax revenue collected from rum produced in Puerto Rico, the U.S. Virgin Islands, or internationally is transferred to the governments of Puerto Rico and the U.S Virgin Islands. This transfer of revenue from the United States back to the location of production is called a “cover-over.” After hurricanes Irma and Maria, Congress placed a five-year increase of the cover over from $10.50 to $13.25 in the Bipartisan Budget Act of 2018, which is the public law that gave the Virgin Islands and Puerto Rico increased funding to rebuild the territories after the storms of late 2017. That temporary increase in cover over expired in December of 2021. 

That was supposed to be addressed through the build Back Better Act. When that legislation failed, the tax increase was one of many casualties resulting from that failure. this has a direct impact on the already shaky credit of the US Virgin Islands. The USVI borrows against receipts from a $13.50 per gallon tax on rum exports collected by the federal government and transferred to the territory. The risk is that the government of the Virgin Islands has budgeted as though the tax will be renewed at $13.50 and that the amounts subject to transfer from the federal government will be calculated retroactively.

Now, many tax credits and other tax provisions that have or will expire by the end of this year that need to be extended – such as low-income housing credits, pharmaceutical company credits and others. Legislation to do that will be taken up but unless it is included in that legislation, the extra $3 per gallon will not be renewed. In the interim, the U.S. Department of the Interior’s Office of Insular Affairs has announced the approval of the payment of $226,165,037 to the U.S. Virgin Islands representing 2023 estimated rum tax-cover over payments for the USVI.  

THREE HEADLINES ILLUSTRATE THE DILEMNA

Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging, California to ban sales of new gas cars in 2035. Diablo Canyon legislation

Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging – Timing is everything. Just as the state was legislating the end of sales of internal combustion vehicles, the state’s electric grid operator was asking Californians to avoid charging their cars between 4 and 9 p.m. This at a time when diminished hydro resources increase dependence on carbon emitting power sources. It is against this backdrop that we view the need for green energy proponents to move to the execution phase of their plans. They need to show a practical path to carbon reductions.

Diablo Canyon legislation – Legislators voted to extend the life of Diablo Canyon and continue to generate 9% of the state’s power requirements from its two units. The two reactors were originally scheduled to close in 2024 and 2025, but the new plan extends those deadlines to 2029 and 2030. It also authorizes an agreed upon $1.4 billion loan to Pacific Gas & Electric, the utility that operates the plant. PG&E is also expected to apply for money from a new $6 billion federal program designed to keep open existing nuclear plants.

California to ban sales of new gas cars in 2035 – California been required to slash its greenhouse gas emissions 40 percent below 1990 levels by 2030. Under new legislation passed Wednesday, the state will now have to cut emissions at least 85 percent by 2045 while offsetting any remaining emissions. Under those conditions, electric cars and nuclear power are likely necessities.

JACKSON WATER

The City of Jackson, MS – the capital of the Magnolia State – has long had issues with its water and wastewater systems. The aged systems may be serving the state capital but overall, the service area reflects below average demographics. The water and sewer system serves an area of approximately 150 square miles, including the City of Jackson (Baa3 stable) and portions of Hinds, Rankin, and Madison counties. The lack of steady and at least decent service to communities like those which the systems serve, provides a prime example of the issues which drive the issues of environmental justice and equity.

The systems have been long plagued by inadequate investment in plant both for maintenance as well as improvement/expansion. It is true that the below average economics of the wide service area keep pressure on rates and that there is not a very strong capacity to support significant debt. That is reflected in the Ba2 rating assigned to the debt backed by utility revenues.

In late December Moody’s said that “The confirmation of the Ba2 rating and assignment of the stable outlook reflects our review of the unaudited financial results for fiscal 2020, which includes the benefit of the receipt of approximately $60 million in settlement monies that have allowed the water and sewer system to repay the city general fund, restore its contingency fund, and boost days cash and debt service coverage to 192 and 2 times respectively. The confirmation also incorporates the system’s ongoing challenges, which include implementation of an effective billing and collection system, management of a very large consent decree, and substantial capital needs that will continue to create narrow operating margins.

Very early indications for fiscal 2021 suggest that these obligations have reduced cash to approximately 99 days and sum sufficient coverage. However, these figures are very preliminary and subject to additional refinement as the city closes the fiscal year. Operating revenues will be boosted by an approved 20% rate increase anticipated to take effect in March 2022 and are not factored into the otherwise balanced budget.”

IS PREEMPTION ALWAYS BAD?

We’ve talked about preemption a lot over the last couple of years. It has come up mainly around the issue of the local regulation of the use of fossil fuels and equipment which runs on them. A particular recurring target has been restrictions on the ability of localities to ban the use of natural gas in newly constructed buildings. It has been easy for some to rail on about how these laws reduce local control and impose unwanted policies on people. But what happens when the “other side” wants to impose its will?

In California, Assembly Bill 205 (“AB 205”) makes available to qualifying renewable energy, energy storage and alternative fuel power projects (and their transmission lines) a “one-stop” permitting and environmental review process at the state level. Under the new law, renewables, energy storage and alternative fuel power plant developers have the option to go directly to the CEC to obtain local, regional and state permits and approvals, rather than going to each agency individually and separately.

The California Energy Commission (“CEC”) is empowered to prepare the project’s Environmental Impact Report (“EIR”) pursuant to the California Environmental Quality Act (“CEQA”) and must complete the environmental review process and “certify” (i.e., approve) projects within 270 days of receiving a complete application. A certified project automatically qualifies as an “environmental leadership” project if the CEC finds that certain criteria are met. This designation provides significant benefits by expediting CEQA litigation—including the general standard that all legal proceedings, including appeals, be resolved within 270 days.

ETHANOL AND THE ENVIRONMENT

Ethanol is at the center of the ongoing debates over where and how to locate pipelines for the transmission of captured carbon underway in the Midwest. One of the arguments being used by carbon capture advocates is that it would enable ethanol plants to reduce their substantial carbon footprints. The positive impact on corn growers is cited as a reason to use the technology in that region.

Now in the middle of that debate, Reuters has released an analysis of the relative carbon footprints created by oil refineries and ethanol production facilities. The 2007 law, the Renewable Fuel Standard (RFS) requires individual ethanol processors to demonstrate that their fuels result in lower carbon emissions than gasoline. The Environmental Protection Agency (EPA) however, has exempted facilities built before the law was enacted.

These grandfathered plants produce more than 80% of the nation’s ethanol, according to the EPA. The agency found that the average ethanol plant generated  1,187 metric tons of carbon emissions per million gallons of fuel capacity in 2020, the latest year data is available. The average oil refinery produced 533 metric tons of carbon. A study published by the National Academy of Sciences in February, for example, estimated that ethanol produces 24% more carbon. The agency acknowledged the higher production emissions of ethanol, compared to gasoline.

Some 240 of 251 U.S. ethanol production facilities are exempted from emissions-reduction requirements. The RFS requires that the ethanol industry demonstrate that the fuel delivers a 20% reduction in carbon. exempted ethanol plant produced 1,203 tons of carbon. One of the factors driving the issue is that EPA uses statistical models developed by academics funded by the ethanol industry. Shockingly, using those data points lead to a conclusion that gasoline blended with ethanol had a low carbon footprint.

CARBON CAPTURE PIPELINES MOVE TO THE COURTS

Navigator CO2 Ventures, one of three companies that have proposed liquid carbon pipelines in Iowa, recently sued four sets of landowners to gain access to their properties to survey the land. Iowa law does say that “a pipeline company may enter upon private land for the purpose of surveying and examining the land to determine direction or depth of a pipeline by giving ten days’ written notice. The entry for land surveys … shall not be deemed a trespass and may be aided by injunction.”

In the meantime, Summit Carbon Solutions is finding that there is much opposition to its plans in South Dakota. Here is what Summit offers a landowner. Summit provides an annual payment for construction, based on 100% of crop loss in the first year, followed by 80% for the second year and 60% for the third year — all paid up-front. This is figured on income, based on each crop. And the one-time payment is 115% of the property value — not for the whole property, but just for that 50-foot-wide strip.

FLORIDA TOLL POLITICS

The continuing populist efforts on the part of Florida’s Governor to shore up support for a run for higher office are putting the state’s toll roads in the spotlight. Governor DeSantis has proposed a plan to provide toll rebates to frequent users of several of the state’s toll roads. They include Florida’s Turnpike, toll express lanes on Interstate 95, Interstate 75, and Interstate 595, along with the Sawgrass Expressway.

They do not include roads operated by the Miami-Dade Expressway Authority and Central Florida Expressway Authority. Those roads have been under political pressure from the Governor over his entire term. The governor is asking state lawmakers to approve an expansion of the SunPass Savings Program, which would allow any roads operated by expressway authorities — like the Dolphin Expressway and Rickenbacker Causeway in Miami-Dade County — to also be included in the package.  SunPass and E-ZPass commuters who pay a certain number of tolls each month will get a 50% discount on their tolls for the entire year.

MASS TRANSIT

The New York Metropolitan Transportation Authority has been seeing gradually better utilization as more residents are being returned to their offices. Now, the State of New York has announced that the requirement that patrons wear masks on public transit is no more. It is a sign of a return to at least a portion of normality as the summer vacation season ends and the city’s public schools reopen. Now, the focus turns towards the proposed congestion fee which is garnering significant opposition.

The closure of the MBTA’s Orange Line for a month for significant repairs to be undertaken generated mixed reviews. “Transit advocates” cited the fact that bicycle usage was up significantly. Nonetheless, the Mayor of Boston (a major proponent of free fares on the “T”) has acknowledged that the closure has not received well by many. The real test will come with the onset of colder weather and the return of the line to service.

San Francisco has announced that it hopes to have a newly constructed extension to open before year-end. The new stations extend the City’s Metro subway service. The announcement comes as the city continues to be impacted by a lower than hoped return to the office.

In late July, a significant storm impacted the greater St. Louis area resulting in much damage from the resulting floods. St. Louis Metro Transit reported nearly five miles of damaged light-rail trackbed; the total loss of one MetroLink train; and significant damage to the signal system. It will be several months before the system can fully restore MetroLink service on the Red and Blue Lines in the city of St. Louis City and in St. Louis County.” 

COAL RESUMES ITS DECLINE POST-PANDEMIC

New data from the Energy Information Administration shows that the perceived revival of coal was short-lived. The numbers for the second quarter of 2022 show that renewable energy rose to make up 24.8% of the electricity generated in the United States in the second quarter this year.  Coal-fired power plants generated 190,547 gigawatt-hours in the second quarter, down 7.1 percent from the second quarter of 2021. 

It is interesting that coal continues to decline even in the face of efforts to emphasize the base-load nature of that generation vs. renewables. Coal-fired power plants, operated at an average capacity factor of 52%. That is down from June of 2021, when there were 210 gigawatts of coal-fired power plants and their average capacity factor was 59%. Utility-scale renewable electricity sources generated 254,754 gigawatt-hours in the second quarter.

Hydropower plants generated 71,123 gigawatt-hours in the second quarter, up 7.6% from the second quarter in 2021. Those numbers do not tell the story of regional concentration of hydro resources as nearly all of the increase was in the Bonneville Power system. That growth offset declines in hydro power attributable to the drought plaguing the Colorado River hydro assets.

Natural gas remains the leading fuel for electricity, with 37.9% of the country’s total in the second quarter; ahead of renewables, which include wind, hydropower, solar, biomass and geothermal, at 24.8%; coal, 18.5%; and nuclear, 17.9%. Gas became a “go to” source of generation in the face of coal and nuclear plants being shut down.

That is why utilities continue to expand their investigation of small modular nuclear reactors. The Grant County Public Utility District in Washington will undertake a study of the potential for modular nuclear to support growing demand in its service area. It also comes as the debate over hydroelectric plants at dams generates pressure to remove some capacity. The studies so far have eliminated one proposal from Next Era energy for a reactor. A current proposal would locate a reactor at the Hanford Reservation where nuclear generation already exists.

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 Muni Credit News will take its summer break and the next issue will be the September 12 issue.

HE’S MAKING A LIST, HE’S CHECKING IT TWICE

The Texas Comptroller Glenn Hegar has released his list of financial firms which are now prohibited from doing business with the State of Texas or its underlying municipalities. It is based on his determination that “The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.” 

Black Rock, BNP Paribas SA, a French international banking group; Swiss-based Credit Suisse Group AG and UBS Group AG; Danske Bank A/S, a Danish multinational banking and financial services corporation; London-based Jupiter Fund Management PLC, a fund management group; Nordea Bank ABP, a European financial services group based in Finland; Schroders PLC, a British multinational asset management company; and Swedish banks Svenska Handelsbanken AB and Swedbank AB.

The move is consistent with Governor Greg Abbott’s continuing effort to achieve his own political goals via a series of political stunts. Whether it’s shipping migrants from the Mexican border to Washington, D.C. and New York City and dumping them on the street or efforts like this against ESG investment, it is not a serious debate.  In the end, it’s what the taxpayers think that matters. We refer you to our recent discussion of the observed cost of this move (MCN 8.15.22).

__________________________________________________________________

SLOW COMEBACK FROM PANDEMIC

One of the casualties of the pandemic was the live entertainment industry. In the larger cities, these activities are always major contributors to those economies. With cities like NY and SF struggling to recover prepandemic working and entertainment patterns, the revival of the arts and entertainment industries are seen as key to longer term economic strength. It was hoped that “pent-up” demand might drive a quick return to prepandemic levels.  That does not appear to be the case.

Recent press reports have cited data showing that movie theaters have yet to recover their prepandemic audiences. Domestic box office revenues so far this year are down 31.2 % compared to the same period in 2019.  There are fewer releases but the pandemic did drive substantial demand for streaming services. Major League Baseball has been drawing fewer fans than it did before the pandemic.

TRG Arts is an analytics firm which serves the arts industry. It authored a recent study of 143 performing arts organizations in North America. It found that the number of tickets sold was down by 40 % in the 2021-22 season, compared with before the pandemic, and ticket revenues were down by 31 %. 

One of the sectors that New York is counting on is the theater, especially the Broadway theaters. Fewer than half as many people saw a Broadway show during the season that recently ended than did so during the last full season before the coronavirus pandemic. The 2021-22 season was still not a full one. The recovery in demand for Broadway started slow and concerns about virus variants limited attendance as the industry gradually reopened. There were 6,860 performances seen by 6.7 million people, grossing $845 million.

Those factors impacted other pillars of the New York cultural environment. During the 2018-19 season, the last full season before the pandemic, there were 13,590 performances seen by 14.8 million people, grossing $1.8 billion. The Met Opera saw its paid attendance fall to 61 % of capacity, down from 75 % before the pandemic. 

DETROIT AREA CREDIT UPSWING

This week, Moody’s revised its ratings and outlooks on three prominent Detroit area credits: the Great Lakes Water Authority Water and Sewer Revenue bonds and Wayne County. Moody’s affirmed the A1 senior and A2 second lien ratings on the water and sewer system’s existing bonds. Moody’s also revised the authority’s outlook to positive from stable. After the current sale, the water system will have about $1.6 billion of senior lien and $700 million of second lien revenue bonds outstanding. the sewer system will have about $1.8 billion of senior lien and $800 million of second lien revenue bonds outstanding.

The outlook is positive because the authority has strong management and stable operations and its underlying service area continues improve, particularly in the City of Detroit, as well as across Wayne (A3 positive), Oakland (Aaa stable) and Macomb (Aa1 stable) counties. The good ratings news comes amid the Authority’s efforts to replace a broken water main which generated some bad publicity.

Moody’s Investors Service has upgraded to A1 from A3 the issuer rating of Wayne County, MI leading to the upgrade of the county’s general obligation limited tax (GOLT) bonds and lease rental bonds. The upgrade of the county’s issuer rating to A1 reflects the continued strengthening of operating reserves and liquidity, aided by the restructuring of retiree benefits and proactive management. Once again, the benefit of dealing with retiree costs is clear as Moody’s noted that a retiree benefit restructuring has provided a level of budgetary predictability. 

MUNI UTILITIES AND COAL

Emissions data from EPA and power plant information from the U.S. Energy Information Administration has been released which shows the ten dirtiest coal fired generating plants based on emissions of greenhouse gases. That data was used to generate a top ten list which no power producer wants to be on – the ten worst emitters in the country.

Two of those plants are owned by municipal utilities. The Prairie State coal plant in Illinois is owned by nine different municipal utility owners. It may be one of the newest coal plants in the country but it ranks as the eighth dirtiest. The plant was at the center of the debate in Illinois over how to deal with carbon emissions as the state established emissions reduction limits in an effort to phase out coal plants. Illinois passed a law last year requiring all privately owned coal plants in the state to close by 2030. The law contains a carve-out for Prairie State, which must reduce its emissions 45 percent by 2035 and achieve net-zero emissions by 2045. 

The second plant on the list is the Fayette plant in Texas. It is owned by the Lower Colorado River Authority and the City of Austin electric system. Austin has attempted to reach an agreement with LCRA to divest itself of its interests in the plant but was unable to.

Some may have thought that the U.S. Supreme Court decision in June which questioned the ability of the EPA to regulate greenhouse gases at power plants may have granted some of them a reprieve from regulatory pressure. The Inflation Reduction Act amended the Clean Air Act and defined the carbon dioxide produced by the burning of fossil fuels as an “air pollutant.” In 2007, the Supreme Court, in Massachusetts vs. E.P.A., No. 05-1120, ordered the agency to determine whether carbon dioxide fit that description. In 2009, the E.P.A. concluded that it did. By classifying carbon dioxide as a pollutant, under the terms of the IRA the EPA can limit power plant emissions. 

IRA, AMT BACK TO THE FUTURE

The corporate AMT was eliminated under the Tax Cut and Jobs Act (TCJA) in late 2017.  Now, the Inflation Reduction Act of 2022 includes a 15% minimum tax on the adjusted financial statement income for corporations with three-year average incomes of more than $1 billion. It takes effect in 2023. While a change to the status quo, the revival of a corporate AMT is actually a trip back to the future. So far, the reaction has chiefly been on the legal side.

Newer official statements are including advice that “interest on the bonds will be taken into account in computing the alternative minimum tax imposed on certain corporations under the code to the extent that such interest is included in the ‘adjusted financial statement income’ of such corporations.”

Our biggest takeaway is the continuing lack of relief in the form of issuing flexibility for municipal bond issuers. It was not unreasonable to think that the largest infrastructure legislation might have taken full use of the municipal bond markets experience and position in the finance and development of infrastructure. Whether it be the AMT, the SALT deduction, or limitations on private activity bonds, the loss of those abilities limits flexibility and increases costs.

PA. TURNPIKE RECOVERS

In late 2013, Pennsylvania enacted Act 89 as a comprehensive funding plan for the Commonwealth’s road system, especially the local roads. That plan looked to the Pennsylvania Turnpike System to use its tolling powers to provide “excess” revenues for transfers under Act 89. The result was lower ratings for the Turnpike’s existing revenue bond debt and the need to create a subordinate lien of debt to finance the increased funding demands being made on the Turnpike. It took a strong credit with a long track record and a history of relatively stable tolls and diminished it unnecessarily.

The pandemic pressured tolls and forced the System to eliminate physical toll collections as a source of cost savings. Its bigger concern was the chance that once again the Turnpike could be caught up in the ongoing debate over how to fund roads and particularly bridges. It was a major uncertainty holding the credit back and there were concerns that Act 89’s clear statement that the Turnpike’s obligations to fund state roads at the end of the most recent fiscal year would not be respected.

In connection with its upcoming bond issue, Moody’s has reached some positive conclusions about the Turnpike’s post FY 22 exposure to revenue transfer demands. It announced that it had revised its revenue bond outlook to positive from stable on its A1 rating. “The revision of the Commission’s toll revenue bond rating outlook to positive from stable reflects our view that there is increased certainty that the Commonwealth will honor Act 89 given other available sources of funds for other state transportation needs. The change in outlook to positive reflects increased certainty about the forecast deleveraging expected over the next several years as the Commission increases the amount of its capital spending funded from future excess cashflow rather than debt.

ANOTHER VIEW OF CONGESTION PRICING

As the congestion pricing debate in NYC unfolds, we are seeing different jurisdictions taking different approaches to the issue. The latest example comes from Massachusetts. Many think that congestion pricing would be useful in Boston where there are mass transit alternatives. When the legislature passed an $11 billion transportation funding package in the recent session, it included a plan to create a state commission to study “mobility pricing,” which could include both tolls and congestion pricing.

So, congestion pricing is coming soon, right? Well, the governor doesn’t think so. As is permitted under Massachusetts law, Governor Baker returned that section of the bill unsigned, citing his long-standing concerns about “equity” issues associated with congestion pricing. He raises a fair point in the debate over congestion pricing. “Workers who have the financial means to pay a congestion price are best able to adjust their commutes to avoid it, and those who don’t have the financial means to pay a congestion price are those with the least flexibility in their schedules.” 

The move comes as Massachusetts voters will be asked to approve a constitutional amendment to fund transit. The proposed constitutional amendment, if approved by voters, would set a 4% surtax on the portion of an individual’s annual income above $1 million.  That money is intended to fund education and transportation but there are no restrictions formally established to insure where those funds go.

TOLLS ARE A DIFFERENT STORY

One coast is seeing the process of establishing congestion fees unfold. At the same time, another coast is seeing tolls move in the opposite direction. The Tacoma Narrows Bridge in Washington State collects tolls for the repayment of debt issued to finance its construction. While there is still debt remaining (until 2032) the debt service requirements are lower. That drove legislation enacted in March to encourage a toll reduction.

It is being portrayed as the first toll reduction in Washington State history. The reduction goes into effect October 1, 2022. Currently drivers with Good to Go passes pay $5.25 to cross the eastbound bridge. Those who choose to pay with cash are charged $6.25, and drivers who pay by mail pay $7.25. Truck drivers in vehicles with more than two axles will see reductions of more than $1.

The irony is that the toll decrease is occurring in a state which seeks to take a leading role in addressing climate change. For us the lesson is that the road to dealing with climate change is ever longer and rockier. The pressure on tolls is leading to moves like this while at the same time limiting funding via other options (mileage fees, e.g.).

CLIMATE LITIGATION

Another effort to move lawsuits against fossil fuel entities from state to federal court has failed. A federal Third Circuit panel rejected efforts to move lawsuits filed against the fossil fuel firms from state to federal court. This is the fifth time that the companies have failed to convince federal judges that their position is valid. The State of Delaware and the city of Hoboken, NJ lawsuits were at issue in the case.

The argument that the federal government leases the companies offshore drilling rights, and that they have contributed oil to the Strategic Petroleum Reserve and have provided specialty fuels to the military has not created a federal issue for the courts. This decision is fairly clear on that. “Most federal-question cases allege violations of the Constitution, federal statutes, or federal common law. But Delaware and Hoboken allege only the torts of nuisance, trespass, negligence (including negligent failure to warn), and misrepresentation, plus consumer-fraud violations, all under state law.”

LEGAL WEED ON THE MARYLAND BALLOT…

A marijuana legalization referendum will appear on the November ballot in Maryland this November. The referendum will finish a process which began in April of this year with legislation to put the question of legalization to voters as a constitutional amendment on the ballot and a complementary measure that will lay out the implementation framework.

“Do you favor the legalization of the use of cannabis by an individual who is at least 21 years of age on or after July 1, 2023, in the State of Maryland?” The existing legislation only authorizes the vote. If voters approve, implementation would be “subject to a requirement that the General Assembly pass legislation providing for the use, distribution, possession, regulation, and taxation of cannabis within the State.”

The implementation framework would allow for the purchase and possession of up to 1.5 ounces of cannabis by adults. The legislation also would remove criminal penalties for possession of up to 2.5 ounces. Adults 21 and older would be allowed to grow up to two plants for personal use and gift cannabis without remuneration. True “legalization” would be achieved gradually. Possession of small amounts of cannabis would become a civil offense on January 1, 2023, punishable by a $100 fine for up to 1.5 ounces, or $250 for more than 1.5 ounces and up to 2.5 ounces. Legalization for up to 1.5 ounces would not take effect until July 1.

BUT MEDICAL MARIJUANA MISSES THE NEBRASKA BALLOT

Ballot initiatives are always tricky. In some states where citizens have the right of initiative or referendum, rules for getting those items on the ballot often make the process less straightforward. The latest example comes from Nebraska where medical marijuana advocates saw efforts at a ballot item to approve it fail to make it over all of the hurdles.

To get on the Nebraska ballot, an initiative petition needed nearly 87,000 signatures — or a total of 7% of registered voters — as well as 5% of registered voters in at least 38 of Nebraska’s 93 counties to put the proposals to a vote of the people. The first of these intended to protect patients and caregivers from legal jeopardy – the Patient Protections initiative – collected 77,843 valid signatures, and the 5% threshold was met in only 26 counties. The second would have legalized the possession, manufacture, distribution, delivery, and dispensing of marijuana for medical reasons and would have established a commission to regulate a state medical cannabis program.

NET METERING WARS CONTINUE

Net metering – the method by which excess residential solar power can be sold back into the grid – has been the subject of much debate as utilities seek to minimize the financial impact of residential solar on their operations. Utilities which have attempted to limit net metering include municipal utilities like Salt River Project in AZ and San Antonio, TX. On the investor-owned side, Florida utilities have been especially aggressive in their effort to reduce if not eliminate net metering.

The latest chapter in this fight is taking place in Kentucky. Kentucky legislation allows power providers to restrict their programs once they reach 1% of a company’s “single-hour peak load” — the maximum power demand a company receives. Kenergy is a rural electric cooperative serving some 57,000 customers across 14 Kentucky counties. In Kenergy’s program, the co-op offers its qualified members credits on their power bills. Kenergy has been limiting its net metering program under the law. The PSC opened an investigation into Kenergy in October 2020 on the grounds that the power provider was restricting its net metering despite being under the 1% threshold.

This month, the PSC ruled that those limits were being imposed on customers in violation of the law’s requirements. “Kenergy’s cumulative generating capacity of net metering systems has not reached 1% of its single hour peak load during a calendar year, and Kenergy must continue to offer net metering under its Net Metering tariff until the cumulative generating capacity of net metering systems reaches 1% of Kenergy’s single-hour peak load for all sales within its certified territory during a calendar year.” 

AMERICAN DREAM DEFAULT

The American Dream mall in East Rutherford, NJ is showing the impact of the long delays in its development and the pandemic’s impact on travel and retailing. The developers were late in making a PILOT payment due to the Trustee for the bonds issued by the Public Finance Authority (WI) to support the project. The payment was due on August 1. It was ultimately made on August 11. That is within the stated cure period established at issuance. The amount received equaled the required payment but interest on the payment accrued beginning August 1. Until that amount is paid or waived, the bonds are in technical default.

It repeats a pattern of late monthly payments which began in May of this year. The interest on that late payment was eventually paid. Given all the impacts on travel, in-person shopping, and the cost of transportation it should not be a surprise that the mall would be underperforming. Given the highly leveraged nature of ownership, the current environment of rising rates and continuing patronage issues at the mall, it is not a surprise that the credit remains under 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

DIABLO CANYON

Diablo Canyon provides nearly a tenth of California’s electrical power. It was scheduled to close by 2025. In a significant development, California Governor and re-election candidate Newsome proposed legislation which would direct the California Public Utilities Commission to set a new closure date of Oct. 31, 2029 for one unit, and Oct. 31, 2030, for the second on the coastal site along the Pacific. By 2026, regulators would be allowed to grant an extension, but not beyond Oct. 31, 2035.

The state would provide a $1.4 billion forgivable loan to cover the costs of relicensing by PG&E. Pacific Gas & Electric applied to the U.S. Department of Energy’s $6 billion program to preserve the operations of nuclear power plants. No visibility has been provided regarding the issues of how much will be granted, or when. The process includes significant approval requirements from federal, state and local regulatory entities. One significant “exemption” is the provision of an exemption from state regulations to allow operators to maintain operations at the plant without conducting extensive technical analysis of the environmental effects.

California was always likely to face this sort of dilemma ahead of some others. Its hydro resources are depleted by drought both in state and from the Colorado River. It has eliminated coal in state. These were all sources of consistent base load power. The last five years have shown the variability of hydro (think Oroville Dam). There is an increasing fear that the anomaly along the Colorado was the wet period and that the near quarter century drought is the base line.

The closure of significant nuclear assets has generated initial negative results in New York State in terms of the environment and the use of fossil fuel for replacement energy. The same issues have driven the debates in OH and IL (once you took the cash out of them) over whether to subsidize existing nuclear plants. Germany had been on the path to closure of its three remaining operating nukes by the end of this year. Natural gas would have been a likely replacement.

Now with the war in Ukraine limiting gas supplies, the nuclear capacity needs to be replaced. So, does it come as a shock that Germany has proposed that shuttered coal plants be reopened? the Omaha Public Power District (OPPD) in Nebraska has now moved to slow its plans to close one of the nation’s dirtier coal-fired plants from 2023 to 2026. They are best positioned at present to meet the need. Once again, the environmental movement confronts the need to compromise. Perhaps one of the outcomes of the successful compromise in the Inflation Reduction Act can cause state legislatures to try it?

COLORADO RIVER

Federal officials had previously given the seven states which “share” the waters of the Colorado River until Aug. 16 to come up with a plan to reduce demand on the river to conserve as much as a third of the river’s flows. The amount reflects the Bureau of Reclamation they believe is necessary to keep Lake Powell above the levels sufficient to generate needed power and provide water.

The Interior Department holds ultimate authority over Colorado River deliveries in the Lower Basin and, through its Bureau of Reclamation, controls key infrastructure up and down the river. This gives the federal government enormous leverage. The deadline date is not arbitrary. It roughly coincides with the review and release of data in support of allocations of water for 2023.

Whatever is decided it will have to occur within the framework of existing legal agreements. Under Western water law, users with the oldest water rights are entitled to their full allotment of water before newer, junior users get a drop. Since farmers led the settlement of the West, a significant volume of senior water rights are held by agriculture, which uses roughly three-quarters of the Colorado River’ water. Cities typically hold junior, lower-priority rights.

Technically, water deliveries for cities and tribes in Arizona are first on the list to be cut back. Here is where geography becomes a real factor. Arizona, California, and Nevada are downstream from Lake Powell. If less water gets through than those states are at risk. The other Upper Basin states of Wyoming, Colorado, Utah and New Mexico sit upstream of Lake Powell. That gives those states direct control over these water resources.

At the same time, under the terms of a 1963Supreme Court decision, the Interior Department has the right to define what is — and isn’t — a “beneficial use” of water.  Western Democrats secured inclusion of $4 billion for the Colorado River in the Inflation Reduction Act. It would allow the Bureau of Reclamation to pay users to voluntarily forgo water use or to restore ecosystems affected by drought.

The deadline did not result in a new plan from the states, so now the lower basin states and Mexico are going to be cut back. Arizona will have to reduce its Colorado consumption by nearly 600,000 acre feet, or 21 percent of its annual allocation. Nevada’s total reductions are now 25,000 acre feet, or about 8 percent of its allocation. Mexico’s cuts total 104,000 acre feet, 7 percent of its allotted supply.

The cuts come with the release of the Bureau of Reclamation’s August 2022 24 Month Study. The 24-Month Study projects Lake Powell’s Jan. 1, 2023, water surface elevation to be 3,521.84 feet – 178 feet below full pool (3,700 feet) and 32 feet above minimum power pool (3,490 feet). The three states and Mexico will be impacted by actions at Lake Mead which will operate in its first-ever Level 2a Shortage Condition in calendar year 2023.

Depending on future snowpack and runoff, a range of actions will be needed to stabilize elevations at Lake Powell and Lake Mead over the next four years (2023-2026). The analysis shows, depending on Lake Powell’s inflow, that the additional water or conservation needed ranges from 600,000 acre-feet to 4.2 maf annually.

TRANSIT ON THE BALLOT

Voters in four counties in Georgia will be asked to approve new taxes to be dedicated to transportation. The state created the tax option (Transportation Local Option Sales Tax) six years ago for purposes that include roads, bridges, public transit, and seaports. It adds 1% to existing sales tax rates, excludes gas and motor fuels, and must be renewed every five years. According to the Georgia Department of Revenue, 102 of the state’s 159 counties have enacted the transportation sales tax.

Chatham County consists of eight municipalities including the city of Savannah. The tax is estimated to raise $143 million for the city of Savannah. Countywide, the 1% tax is estimated to raise $420 million over five years. The metro Atlanta Forsyth County would see the money be distributed among the county and the city of Cumming under a predetermined formula to address approved project lists. Most of the new tax revenue – 69% – would stay with the county which now collects a 7% sales tax.

Habersham County now collects a 7% sales tax. A prior effort to secure voter approval for this same tax in 2018 was defeated by a 54-46% margin.  The tax is estimated to generate $44 million over five years. The bulk of the revenue – $33.4 million – would go to the northeast Georgia county. The remainder would go to the county’s five cities. Oconee County voters failed to approve a ballot item to increase its existing 7% sales tax for transit. Nevertheless, proponents in the county that borders the city of Athens are trying again this year.

IDEOLOGY IN PENNSYLVANIA

Republican lawmakers in Pennsylvania are attempting to block the passage of proposed emissions regulations, which must be written into state law by Dec. 16 to meet a federal deadline that, if not met, threatens $500 million in highway funding. This amidst a continuing debate over how to generate and apply state revenues to Pennsylvania’s road system. The Legislature has 30 calendar days or 10 session days — whichever is longer — to vote on the regulations.

The regulation would require unconventional oil and gas sites, like fracking wells and natural gas processing plants, to adopt technologies that would limit emissions of volatile organic compounds (VOCs). This because when combined with nitrous oxides (also emitted by oil and gas sites) in the presence of sunlight, form ground-level ozone, a respiratory irritant is increased.

Sources affected by this final-form rulemaking include natural gas-driven continuous bleed pneumatic controllers, natural gas-driven diaphragm pumps, reciprocating compressors, centrifugal compressors, fugitive emissions components and storage vessels installed at unconventional well sites, gathering and boosting stations and natural gas processing plants, as well as storage vessels in the natural gas transmission and storage segment.

Pennsylvania currently has no state regulations on VOC and methane emissions from oil and gas sources. The PA Department of Environmental Protection (DEP) estimates that the unconventional oil and gas industry is currently responsible for some 5,648 tons of VOC emissions and more than 100,000 tons of methane emissions per year. The effort to delay or prevent legislation against the fracking industry has been an ongoing theme in the Legislature.

NORTH DAKOTA CANNABIS

For years, hemp was a viable cash crop. In World War II, hemp growers were encouraged to produce more to support the naval war effort. North Dakota was a major producer. That did not do anything to drive support for cannabis production or possession. Now, with the tide finally flowing in favor of cannabis decriminalization, the state’s voters will be asked to consider its legalization.

The Secretary of State of North Dakota has certified a ballot measure to legalize recreational marijuana. If enacted, the measure will permit adults 21 and older to possess up to one ounce of cannabis. It will also establish a regulatory system for registered cannabis businesses, run by the Department of Health and Human Services or another agency designated by the Legislature.

Regulators would have until October 1, 2023 to develop rules related to security, advertising, labeling, packaging and testing standards. The industry would be limited to 18 state-approved dispensaries and seven manufacturing facilities. 

BRIGHTLINE

It has not been a credit issue to date but the Brightline, a privately owned high-speed passenger line, has the worst fatality rate among the nation’s more than 800 railroads. Federal Railroad Administration data is reported to show 68 people und something that is the product of past practices along the right of way which includes significant stretches with unimpeded access, long established walking shortcuts, and hundreds of unsignalled grade crossings.

Who has the responsibility for addressing the capital need for fencing and signals? Are they the railroad’s job?  The state or local road agency’s job? That has delayed efforts to attempt to lessen the risks. A $25-million dollar grant from the U.S. Department of Transportation will allow the Florida Department of Transportation to fund 33 miles of pedestrian protection features. They will be constructed at 328 roadway-railroad grade crossings along the Florida East Coast Corridor from Miami-Dade, through Broward, Palm Beach, Martin, St. Lucie, and Brevard Counties.

AUTONOMOUS VEHICLES

The climate bill enacted this week puts much emphasis on electrification of both individual and mass transit vehicles. This has reduced the focus on autonomous vehicles which were seen as a driver of capital investment in anticipation of their full adoption. Tesla’s “autonomous” vehicle software has come under criticism. The most useful testing of AV technology has been on smaller scale Mass transit uses. That is what makes the findings of an analysis by an AV proponent – US Ignite – so interesting.

US Ignite is a nonprofit whose mission is advancing the use and development of urban technology. The U.S. Army Engineer Research and Development Center (ERDC) provided funding for a two-year pilot of an AV shuttle at Fort Carson in Colorado. The Fort Carson project operated from September 2020 until March 2021. The service operated on a 3.1-mile fixed route. Clearly it was a small scale effort. A total of 204 people rode the autonomous shuttle.

The findings indicate some problems in the short-term. “For safety reasons, the current generation of automated passenger shuttles operate at average speeds of 12-15mph, with some vehicles reaching a maximum of 25 mph. These slow speeds make driving on standard roadways challenging for AVs and other road users as it can create road congestion and cause frustration among other drivers on the road.

Speed limitations make it clear that AV shuttle offerings should be a “last-mile” solution – where the destination is beyond a comfortable walk but too close to justify taking a personal car. Speed limitations make it clear that AV shuttle comfortable walk but too close to justify taking a personal car.”

It is a sign to advocates that adoption will be a much longer term process. We are already seeing issues of reliability and availability in terms of electric vehicle charging infrastructure. That well before full rollout of charging infrastructure.

CONGESTION PRICING MOMENTUM SLOWS IN SF

The San Francisco County Transportation Authority has been researching potential congestion pricing plans for downtown SF. That continued even after the city was at the center of the pandemic. SF along with NY have been the two cities which have had the slowest return of workers to offices in the aftermath. Many commentators have paired the cities in terms of the return to office. Now, with New York trying to move ahead with its congestion pricing plan we see a divergence between planners in the two cities.

Downtown SF remains less crowded as the tech industries have been slower to return to office settings. Before the pandemic, San Francisco was studying a plan to charge drivers entering a downtown zone $6.50 — with discounts based on income. Those plans all assumed a return to pre-pandemic levels of traffic but they have not materialized. Now, The Authority has announced a “pause” in its efforts to establish these charges.

The latest plan called for implementing congestion pricing in two downtown zones — one including the Financial District, Chinatown, the Tenderloin and South of Market. The other zone would be larger, including North Beach, Russian Hill, Fisherman’s Wharf and Marina Bay.

The plan proposed electronically charging drivers entering the zone   between 6 a.m. and 9 a.m. and 3:30 p.m. and 6:30 p.m. a toll of $6.50 with a discounted cost of $4.33 for moderate-income people, $2.17 for low-income people and no charge for those with very low incomes. Drivers with disabilities would pay $3.25. Drivers for ride-hailing service like Uber and Lyft would pay the full charge for each ride. Residents of the zones would not be exempt.

The reality is that it would take five years before the plan would be implemented as it would require extensive planning, state legislation, installation of electronic toll collection equipment and alterations to some city streets. As for now, the companies are still in the process of establishing new hybrid work attendance requirements. Congestion remains a memory.

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.