Joseph Krist

Publisher

Recently we sat down with the Daily Bond Buyer and discussed some current trends I see in municipal credit. It’s available at https://www.bondbuyer.com/podcast/unexpected-turns .

MISSOURI SHOWS US A GAS TAX

Missouri Gov. Mike Parson has signed into law raising the state’s gas tax, The law will gradually raise the state’s 17-cent-a-gallon gas tax to 29.5 cents over five years. The first 2.5 cent increase is slated to take effect in October, which will bring the gas tax to 19.5 cents. Once fully implemented, the gas tax hike could generate more than $500 million annually for state, county and city roads. The Missouri Department of Transportation estimated that the state faces a $745 million annual funding gap for roads and bridges.

Now opponents to the increase are working to get a refund if they keep track of their receipts. to force the issue to a vote by the people. Since voters approved a constitutional amendment in 1996 requiring all tax increases over a certain amount to go to a statewide vote, not a single general tax increase has passed. The expectation is that if the proposed initiative gathered enough signatures, it could be on the ballot in 2022. This despite provisions in the law allowing residents to get a refund if they keep track of their receipts.

That provision makes it likely that the tax will not generate sufficient funds to close the existing gap between what the state needs for transportation and what the net proceeds of the proposed tax would generate after refunds. It shows how hard it is to raise gas taxes.

CRYING WOLF?

There has been nothing but lamentation and fiscal gnashing of teeth in the oil and gas producing states since the Biden Administration announced that it was suspending the acceptance for consideration applications for leases of Federal land for oil and gas exploration and production operations. While the spigot of new leasing applications has been turned off, that doesn’t mean that new leases are not being approved.

Approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president. The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data.  Some 2100 of those approvals came after January 20.

New Mexico and Wyoming have been leading the steady opposition to the lease suspension. Nonetheless, New Mexico and Wyoming had the largest number of approvals. This news comes as gasoline prices have steadily increased since the reopening of the economy. This increases the likelihood of some increased production and that at least some of the approvals will result in new drilling. Drilling on public lands and waters is estimated to account for about a quarter of U.S. oil production.

The continued growth in oil/gas leasing comes as more evidence of the decline of Wyoming coal comes in. The Energy Information Administration (EIA) on Wednesday said U.S. coal production fell in 2020 to its lowest level since 1965. U.S. coal production totaled 535 million short tons (MMst) in 2020, a 24% decrease from the 706 MMst mined in 2019. Coal production in Wyoming, where more coal is produced than in any other state, was 21% lower in 2020 than it was in 2019, while the second-largest producer West Virginia experienced an annual decline of 28%. U.S. coal-fired generation fell 20% year-on-year and exports were 26% lower in 2020 than in 2019.

GARDEN STATE OUTLOOK

The trend of improved ratings on state general obligation credits continues. The latest beneficiary is the State of New Jersey. Moody’s affirmed the A3 rating on New Jersey’s outstanding general obligation debt, and revised the outlook to positive from stable. This ultimately benefits some $40 billion of state agency and local debt with a state backup. The State was able to weather the pandemic storm.

It applied much of the revenue windfall resulting from the stimulus to address longstanding credit weaknesses. Specifically, Moody’s cited the fact that “The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management. These actions include debt reduction and avoidance and acceleration of pension contributions.”

The budget included a $6.9 billion pension payment and a $3.7 billion debt defeasance fund to pay down obligations. These items were keys to the improved outlook. While the budget also included recurring expenses which were not totally offset by recurring revenues, the pension payment was the largest in 25 years and it reverses a trend of consistent underfunding under the Christie administration which contributed to some 11 negative rating actions during that administration.

MAINE PUBLIC UTILITY VETO

Gov. Janet Mills on Tuesday vetoed LD 1708, An Act to Create the Pine Tree Power Company. The bill aimed to create a nonprofit, consumer-owned utility that would take over Central Mainer Power and Versant Power. It was approved by the legislature but not with a veto proof majority. It comes as the utilities are perceived to provide significantly less reliable service since CMP was purchased by a foreign owner. (Full disclosure – the owner Avingrid is also my utility supplier. Maine, we feel your pain.)

And the Governor seems to agree. In her veto message, the governor called the recent performance of Maine’s utilities “abysmal” and said that “it may well be that the time has come for the people of the State of Maine to retake control over the [utilities’] assets.” 

There does seem to be a consensus in favorable of a decarbonized grid in Maine but it has not produced clear results. The effort to import hydroelectric power from Quebec requires a transmission line which has encountered significant opposition. The effort to develop off shore renewables has been strongly opposed by the state’s lobster industry.

It’s another good example of the clash of interests which arises from the effort to significantly alter the energy production, distribution, and consumption chain. It is that environment that means that unless the Legislature is able to override the governor’s veto by two-thirds supermajorities in both the House and the Senate, the question of consumer ownership of Maine’s two investor-owned utilities will not be on the November 2021 ballot. The Legislature will reconvene on July 19 to vote on the veto and on all other vetoes Mills has issued since July 1.

While the veto process plays out, it is of note that a law was enacted which requires the Governor’s Office of Policy Innovation and the Future to define “environmental justice,” “environmental justice populations,” “frontline communities” and other terms. Officials will also have to develop methods to incorporate equity into decision-making at the Public Utilities Commission, the Department of Environmental Protection and other state agencies.  These definitions would guide the development of future legislation.  It could provide a good starting point for the process of actually developing consensus about what the terms mean on a granular level.

Maine joins several other states in such an effort. It’s clear that economic and environmental justice mean different things to different people. Seven states have adopted definitions of “environmental justice” or related terms in state law. Several states have also implemented definitions as part of agency initiatives related to pollution reduction and toxic facility siting.

New Jersey passed an environmental justice law in September 2020. It requires the state’s Department of Environmental Protection to deny permits for new polluting facilities deemed to have a negative environmental or public health impact on overburdened communities. Notably, it requires the department to consider “cumulative impacts” when making its decision: factors outside the facility in question, such as other existing sources of pollution, that could collectively create a higher burden for the community.

VIRGIN ISLANDS

Well before the pandemic, the U.S. Virgin Islands was a very troubled credit. This while relying on tourism, rum, and oil production. Oil production reflected the presence of what in its day was the largest oil refinery in the western hemisphere. For years, it was operated by a consortium consisting of the Venezuelan state oil company and the Hess Oil Company. As the politics of Venezuela became more unstable and incompetent, the refinery fell on hard times. As the source of over 1100 jobs on St. Croix, the loss of those jobs was problematic.

The refinery filed for bankruptcy in 2015. The economic failings of the plant created operating issues for any subsequent buyer and/or operator. ArcLight Capital purchased the refinery out of bankruptcy in 2016 for $190 million​. The current owner, Limetree Bay Refining LLC is controlled by EIG Global Energy Partners, which said it became the “reluctant” owner of the troubled refining operation in April as part of a restructuring. They are even more reluctant now since the most recent effort to restart the refinery earlier this year was halted in May under EPA orders. The operation had resulted in significant pollution – air, water, and directly.

Now Limetree has filed for bankruptcy protection. In the absence of any interim funding, Limetree’s refinery operations are forecast to burn through nearly $7 million over the next three weeks. The refinery only had about $3.5 million in cash on hand when it filed its Chapter 11 petition. The plant employed roughly 400 people as of the date of the bankruptcy filing, most of whom were required to be U.S. Virgin Island residents.

Full operations have not occurred since 2012 but there remained a significant economic interest in having it operate as a source of both employment and revenues. With the U.S.V.I. already dealing with legacy budget and pension issues and a utility on the constant edge of insolvency, this just one more brick on its credit load.

COULD LITHIUM REVIVE THE SALTON SEA?

Much attention has been focused on the need to develop significant sources of lithium to supply the production of batteries. Batteries will be a key towards moving renewables to the center of the energy supply as the nation moves to decarbonization. The attention comes from the need to mine lithium and there are environmental concerns being raised in regard to environmental destruction and possible pollution associated with lithium extraction.

While those issues are hashed out through the political process, the need for lithium batteries continues to substantially increase. This has led to the development of other sources of lithium including the extraction of the mineral from brine. The issue has been one of availability of lithium and the extraction process is one way to address that.

That’s where the Salton Sea comes in. The body of water was an accidental creation. When irrigation canals from the Colorado River jumped their levees near the U.S./Mexico border in 1905 on the desert east of San Diego, millions of gallons of fresh water spilled into the Salton Trough, historically an arm of the Lower Colorado River Delta at the head of the Gulf of California. When the water finally stopped, it filled a trough 45 miles long, 17 miles wide, and 83 feet deep.

Over time, the lake became an inland resort. Then in the late 1970’s, continuing drought and the fact that the “sea” was not fed by any flowing waters (rainfall became the primary source of replenishment caused the Sea to begin to shrink. The lack of new water and increased temperatures badly impacted the native fish species. The reduced attraction of the Sea became a vicious circle leading to the abandonment of seaside communities and businesses.  The waters continued to recede and the exposed lake bed became a source of toxic dust impacting nearby communities.

Most of the lithium used for batteries today comes from either South America or Australia and it is processed in China.  It makes sense that it would be more economical to develop lithium sources in closer proximity to end user customers. That’s why GM has recently invested in one domestic provider of lithium derived from brine.

The Salton Sea region is unique in that some researchers estimate it contains enough lithium in the geothermal brines that it could supply a third of the world’s current lithium demand. The lithium also could be processed in tandem with developing geothermal power plants that could generate significant clean energy and local jobs. That has led to increased investment in the development of geothermal power in the Sea. Now, the demand for lithium has led to new development of facilities to extract lithium from brine in the waters.

The potential exists for such a project to be a source of jobs and tax revenues for Imperial County.  

PENNSYLVANIA ROAD FUNDING DEBATE CONTINUES

The latest party to weigh in on what the funding mechanisms should be for transportation, particularly roads, in Pennsylvania is the 42-member Transportation Revenue Options Commission. The Commission was created in March and charged with developing recommendations and changes environment.  Road funding has been an ongoing problem for the Commonwealth given opposition to higher gas taxes or tolls.

The recommendations are sure to be contentious. The proposal calls for changes in three phases: the first two years, the next two years and five years or longer, with the new or increased charges starting at various times because some of them would require approval by the General Assembly. The largest new revenue source and the most dramatic change would the enactment of a tax of 8.1 cents a mile for each mile a vehicle is driven. That move — which wouldn’t begin until the third phase and would require legislative approval and a pilot period to test a collection method — is projected to generate $8.9 billion a year.

Other fees: A fee of $1 for every package delivered by major companies like Amazon, FedEx and UPS, as well as local groceries and restaurants. No government is charging such a fee at this time. Transportation networks such as Uber and Lyft would be charged fees of $1.11 for each trip. Existing taxes and fees like the vehicle rental fee would increase by $3 to $5; vehicle registration would double to $76 for passenger vehicles initially, then be replaced by a fee based on the value of the vehicle; and aircraft registration and jet fuel taxes would increase.

All of this is designed to replace the existing $8.1 billion of revenue derived from taxing fuel and the existing fee infrastructure.

PR

U.S. District Court Judge Laura Taylor Swain issued a preliminary ruling rejecting creditor objections to the document filed by Puerto Rico’s Financial Oversight and Management Board (FOMB), but delaying a final approval until the fiscal panel and insurers conclude negotiations. The hearings analyzed whether the disclosure statement provides accurate information to creditors, retirees, public employees, contractors and other parties who will be affected by the POA, which would restructure approximately $35 billion in commonwealth debt and $50 billion in pension liabilities, and include an 8.5 percent cut to monthly retirement payments. 

The deal reduces the outstanding general obligation (GO) and Public Buildings Authority (PBA) debt as well as other claims by almost 80%, from $35 billion to $7.4 billion in new GO debt that would be issued by the commonwealth government. The government’s debt service would be $1.15 billion, or 8% of fiscal year 2020 own-source revenues. The rulings and agreements reached with bond insurers allow the process of approval of the Plan of Adjustment offered by the Commonwealth.

Judge Swain established a preliminary calendar for the Plan Of Adjustment discovery and confirmation process. A U.S. District Court Judge will oversee the discovery process lasting from Aug. 3 to Oct. 11, assuming the order for the disclosure statement is issued. The confirmation trial will commence on Nov. 8 and end on Nov. 23. That trial will include cross-examination of witnesses. The judge said that objections to the proposed confirmation order should be filed on Oct. 22, while the FOMB’s reply should be filed on Oct. 29. 

There still remains the possibility of additional delays. As outlined by Judge Swain “in order for there to be a practical possibility of holding confirmation hearings beginning in November, as proposed by the oversight board, discovery will need to begin immediately” and “Fulfilment of the oversight board’s request to begin confirmation hearings in November is dependent on the government entities’ cooperation in discovery… The court expects the oversight board and the Fiscal Agency & Financial Advisory Authority to fully respond to every request,”.

The continuing political opposition to parts of the Plan does cast a pall over the proceedings. The Governor and his party are doing everything they can to avoid having to agree to cuts to pension payments. There is still plenty of room for mischief.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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ILLINOIS UPGRADE

In perhaps the surest sign that state credits are coming out of the pandemic in much better than expected shape, Moody’s upgraded the State of Illinois’s general obligation (GO) rating to Baa2 from Baa3. In connection with this action, ratings on Build Illinois sales tax revenue bonds were upgraded to Baa2 from Baa3, and annual appropriation bonds issued by the Metropolitan Pier and Exposition Authority Ratings were upgraded to Baa3 from Ba1.

Total debt affected amounts to about $33 billion, including $27.7 billion of general obligation bonds, $3 billion of Metropolitan Pier and Exposition Authority bonds, and $1.9 billion of Build Illinois bonds. The outlook remains stable. The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act.

The Metropolitan Pier and Exposition Authority upgrade stems directly from the upgrade of the State.  The credit is supported by the state’s commitment to provide funds for debt service when pledged taxes on Chicago-area meals, hotel stays and other tourist activity is insufficient. That commitment was tested during the pandemic but the State did step up and assist the Authority to keep current on debt service.

Illinois nonetheless is far from being out of the woods. The failure of the income tax amendment in November was telling in terms of where the State’s politics are. The return to fiscal stability and strength remains a long way off.

SUMMER ELECTRIC OUTLOOK

The U.S. Energy Information Agency has made an assessment of regional electric reliability based on estimated demand and projected available generation capacity. The highest risk of electricity emergency is in California, which relies heavily on energy imports during normal peak summer demand and when solar generation declines in the late afternoon. Although California has gained new flexible resources to help meet demand when solar energy is unavailable, it is at high risk of an electricity emergency when above-normal demand is widespread in the west because the amount of resources available for electricity transfer to California may be limited.

The Electric Reliability Council of Texas (ERCOT) typically has one of the smallest anticipated reserve margins in the country, meaning it has relatively little unused electric generating capacity during times of peak electric load. ERCOT’s anticipated reserve margin increased from 12.9% last summer to 15.3% for this summer as a result of adding new wind, solar, and battery resources. Although ERCOT’s anticipated reserve margin is higher this summer, extreme summer heat could result in supply shortages that lead to an electricity emergency.

The Midcontinent Independent System Operator (MISO) and ISO-New England have sufficient resources to meet projected peak demand. However, if above-normal levels of electricity demand (which NERC calculates based on historical demand) occur in these regions, demand is likely to exceed capacity resources. In that case, additional transfers of electricity from surrounding areas will be needed to meet demand.

NEW YORK CITY

It looks like the next Mayor of New York will be Eric Adams. It is a big win for the city’s business community, especially the real estate industry given Mr. Adams long history with that sector. The win also is seen as a blow to those who support things like defunding the police. That issue was prominent in the campaign although the result argues that those arguments did not resonate. One thing that characterized the debate was a general lack of knowledge on the part of voters as to how much the City actually spends on criminal justice.

Now, we have some real data from the City’s Independent Budget Office (OMB) about how much is spent on criminal justice by the City. Spending by the agencies involved in the criminal justice system has grown from $5.1 billion in 2001 to $9.2 billion in 2020, an increase of 83 percent over two decades. When adjusted for inflation, though, the growth in spending is a far more modest 1.3 percent.  Funding from the city typically covers about 90 percent of the cost to support the system—$4.6 billion in city-generated funds in 2001 and $8.2 billion in 2020.  The police and correction departments have consistently absorbed most of the funds for the justice system. But over the past two decades, the two departments’ share of system spending has declined from 84 percent in 2001 to 79 percent in 2020.

Conversely, despite the decline in the number of arrests over that period, there has been no corresponding decline in the share of criminal justice spending on the offices of the District Attorneys or Special Narcotics Prosecutor.  A number of expenses such as pension and fringe benefits for criminal justice agency staff, as well as debt service and the cost of legal settlements are not part of the budgets of the individual agencies involved in the justice system. The city budget carries these expenditures centrally. When the “fully loaded” costs of the system are taken into account, projected spending totals $14.1 billion for 2021 (as of the 2021 Adopted Budget), compared with direct agency costs of $8.3 billion.

The largest agency in the system is the New York Police Department. The NYPD budget pays for all patrol and enforcement activity, as well as traffic enforcement, transit police, and school safety officers. The police budget increased by 43 percent from 2001 through 2013, from $3.4 billion to $4.9 billion, and by another 24 percent to just over $6 billion in 2020. In total, the budget grew by 77 percent from 2001 through 2020. Adjusted for inflation, police department spending over this period was largely flat, with spending about 2 percent less in 2020 than in 2001.

The Department of Correction (DOC) is the second largest agency within the criminal justice system. DOC oversees security and operations for jails on Rikers Island, as well as the city jails and court pens in each borough. In 2001, DOC’s budget was $835 million. It increased 31 percent, to $1.1 billion, in 2013 and another 19 percent, to $1.3 billion, in 2020. Over the entire 2001 through 2020 period, the DOC budget increased by 56 percent.

Spending did not keep pace with inflation, however, decreasing by 13 percent since 2001 in real terms. The budget for alternatives to incarceration and community programming increased 163 percent (46 percent with inflation), from $285 million in 2001 to $752 million in 2020. As a result, spending for this category has grown from 6 percent to 8 percent of the overall criminal justice system budget over the period.

PR

The Puerto Rico Oversight Board approved a $10.1 billion budget which was the product of collaboration by the governor, the legislature, and the Oversight Board. It represents the smoothest process of developing and approving the Commonwealth’s budget since the establishment of the Board. The fiscal 2021-2022 General Fund budget is $10.112 billion. The major expense categories are  $2.12 billion for health, $2.06 billion for pensions, $1.88 billion for education, $1.28 billion for the Department of Public Safety and Corrections, $416 million for economic development, and $371 million for the courts and the legislature.

The start of fiscal 2022 also saw the Board approve the operating and maintenance budget for the Puerto Rico Electric Power Authority of $3.13 billion, up from $3.06 billion in the previous fiscal year. The authority’s revenue is expected to be $3.1 billion, up from $2.9 billion. The approved budget for the Puerto Rico Aqueduct and Sewer Authority anticipates $1.03 billion of revenue in fiscal 2022, $43 million less than the previous fiscal year due to lower population and lower demand.  

The Highways and Transportation Authority budget calls for $681 million in operating and capital expenses in fiscal 2022, down from $862 million in fiscal 2021. Operating and capital revenues are projected to decline to $710 million from $862 million. No general fund transfers into the Authority are planned in the budget. That is a savings of some $250 million relative to the subsidy provided in FY 2021.

OPIOID SETTLEMENTS

Fifteen states have reached an agreement with Purdue Pharma, the maker of the prescription painkiller OxyContin.  The proposed settlement would provide some $4.5 billion from the family which owned Purdue Pharma an increase from the starting bid of $3 billion. The plaintiffs (including the states, some 3000 governmental plaintiffs) are also obtaining a significant amount of documents from the company. The negotiations were under the auspices of a bankruptcy court where Purdue Pharma’s bankruptcy filing occured.

The terms of the proposed settlement call for the Sacklers to pay $4.325 billion. Trustees appointed by a national opioid abatement fund would oversee Sackler charitable arts trusts worth at least $175 million. Those funds would go toward addressing the opioid crisis. The settlement is key to the company’s hopes of emerging from bankruptcy. Creditors have until the 14th of July to approve the deal. If sufficient approvals are achieved than the plan could be confirmed in the second week of August. That would make $500,000,000 immediately available to plaintiffs.

The plan doesn’t produce a windfall like the ones from the tobacco settlements. This means that any hoped for new securitization of payments will not be viable. There is less money and the payment period is only 9 years. There is no evergreen recurring annual payment after that time.

New York and Massachusetts were in the lead in terms of pursuing the documents from the company. The other joining states were Colorado, Hawaii, Idaho, Illinois, Iowa, Maine, Nevada, New Jersey, North Carolina, Pennsylvania, Virginia and Wisconsin. There are still states holding out from the settlement. Other litigation remains unresolved. Distributors are facing a bench trial in a West Virginia federal court and they and other manufacturers are being tried before a jury in a New York state court. 

WAYNE COUNTY UPGRADE

Wayne County, MI has certainly seen its share of fiscal difficulties especially when its major other governmental entity declared bankruptcy. The City of Detroit has been able to start its recovery process and get out from under state control. While that process unfolded, the County dealt with several fiscal issues as well. While the City’s credit faces some concerns resulting from proposed City Charter provisions, the County had slowly but steadily moved forward.

It’s reward? Moody’s has upgraded to A3 from Baa1 the issuer rating of Wayne County, MI. It also maintained a positive rating outlook. ” The upgrade of the issuer rating to A3 reflects the county’s material bolstering of operating fund balance and liquidity aided by restructuring of retiree benefits which greatly reduced the county’s annual fixed cost burden. Also considered is an expanding tax base, which creates some cushion against the state’s strict property tax caps that can result in revenue losses during time of tax base contraction.”

The historic risks which result from dependence on the auto industry continue. The County remains the economic center of Michigan even after the decline of auto manufacturing. Plans to build electric cars in Michigan will help as well.

CLIMATE WATCH

Missouri enacted legislation prohibiting local governments from banning natural gas hookups on newly-built buildings. A law to restrict local limits on natural gas and propane was enacted on Ohio. In Indiana, legislation making local zoning boards the arbiters of solar siting is designed to hinder solar development at the local level.

Preemption bills were introduced in 19 states this year –  Alabama, Arkansas, Colorado, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, Texas, Utah, West Virginia, and Wyoming). Fifteen of these bills have been enacted into law or awaiting final signature from the state’s governor (AL, AR, FL, GA, IN, IA, KS, KY, MS, MO, OH, TX, UT, WV, WY). Four other laws went into effect last year (AZ, LA, OK, TN). 

The Ohio legislation was backed by the Ohio Oil and Gas Association and the Ohio Chemistry Technology Council, would block any city or county from issuing any law or zoning code that “limits, prohibits, or prevents” people and businesses from obtaining natural gas or propane service. The Florida legislation recently passed, preempts local governments from blocking or restricting the construction of “energy infrastructure,” including the production and distribution of electricity. Prior to the rule, the county commission was required to grant a special exception for a major utility on an agriculturally zoned property.

In Florida, the Sand Bluff solar project was to be connected to an existing Gainesville Regional Utilities substation in Alachua County and produce about 50 megawatts of electricity a day. Issues of racial and environmental justice were raised and they were enough to discourage approval. It is the last time a county level approval would be required under the new Florida legislation.

Maine enacted a law which would prohibit state and local governments from licensing or permitting the siting, construction or operation of wind turbines in the state territorial waters that extend three miles from shore. The ban would have no effect on activities in federal waters beyond the three mile limit. It’s another example of the conflict between labor and the environment coloring so many aspects of the effort to decarbonize.  In this case the law placates Maine’s lobstermen.

COSTS OF COAL EVEN AFTER ITS GONE

Appalachian Voices been an advocate for post-coal Appalachia as the region transitions from the mineral extraction industry. Recently, they studied the magnitude of the cost involved with reclaiming old abandoned mining sites. As more coal companies declare bankruptcy, fewer companies remain to take over mines, so the number of companies forfeiting reclamation bonds and deserting their cleanup responsibilities will only increase. In many states, the funds generated by bonding programs may fall short of the actual reclamation costs that are passed to state agencies and taxpayers.

Using state and federal reclamation data, the organization estimated the amount of outstanding reclamation at active SMCRA permits for seven Eastern coal mining states: Alabama, Tennessee, Virginia, Kentucky, West Virginia, Ohio, and Pennsylvania. The total estimated cost of outstanding reclamation is $7.5 to $9.8 billion dollars across all 7 states. Total available bonds across the seven eastern states amount to about $3.8 billion dollars.

Without federal funding, it’s likely that the states would foot the bill. The silver lining of the problem is that addressing the reclamation backlog could put a substantial number of people back to work. If the remaining 633,000 acres in need of reclamation were reclaimed, this would create between 23,000 and 45,000 job-years across the Eastern states. It is likely not a long term fix but it could lessen some of the issues resulting from the demise of coal.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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The Muni Credit News is taking the 4th of July off. The next issue will be the July 12 issue. In the meantime, enjoy the nation’s 245th birthday. __________________________________________________________________

STATES TRY TO LEAD ON INFRASTRUCTURE

It has been somewhat disheartening to see that any changes to transportation funding at the federal level will not involve gas taxes or vehicle mileage taxes. This despite a general consensus that some revenues based on usage of roads makes sense. This despite a growing receptivity to if not acceptance of the concept of mileage based fees across party lines. That reflects the consideration of new road funding measures in many state legislatures.

The Pennsylvania Transportation Revenue Options Commission is charged with providing Gov. Tom Wolf with short-term and long-term recommendations by Aug. 1 to address an ongoing funding crisis resulting from a reduction in gas tax revenue and an increased use of electric vehicles. So far, several potential sources have been identified. They include a gas tax increase but also a vehicle mileage tax.

Illinois will see its gas tax go up by one half cent per gallon. In Oregon, a 4-cent increase in the state’s 30-cent fuel tax rate took effect Jan. 1, 2018. That legislation called for additional, 2-cent increases were to follow every two years through 2024. That would produce a gas tax of  40 cents.

The move by states comes as the federal infrastructure legislation begins the long process of approval. The bipartisan negotiating group in the Senate has produced an eight-year, $1.2 trillion infrastructure investment “framework” on June 24 that includes roughly $579 billion in new funding for roads, broadband internet, electric utilities, and other “traditional” infrastructure projects.

That $579 billion in new funding includes $110 billion for roads, bridges, and other major projects, $48.5 billion for public transit, and $66 billion for passenger and freight rail. It also includes $16.3 billion for ports and waterways, $25 billion for airports, as well as $15 billion for electric vehicle infrastructure along with electrified buses and ferries.

The plan comes with a list of “payfors” to cover the cost of the plan. Here’s where the concern comes in. Early in the process, gas tax increases and the imposition of vehicle mileage taxes were taken off the table. So now the potential sources of funding do not look particularly solid. The list includes: redirecting unused unemployment insurance relief funds; repurposing unused relief funds from 2020 COVID-19 emergency relief legislation; allowing states to sell or purchase unused toll credits for infrastructure: extending expiring customs user fees; reinstating Superfund fees for chemicals; profits from 5G spectrum auctions: oil sales from the nation’s strategic petroleum reserve; public-private partnerships; private activity bonds, direct pay bonds, and asset recycling for infrastructure investment

The lack of real plans to generate new revenues to pay for such a plan is a concern. In many ways, the long list of potential funding are reminiscent of the 1980’s when tax cuts were always going to be funded from monies generated through reducing fraud, waste, and abuse in federal programs. The resulting deficits put paid to that idea.

RURAL POWER AND CLIMATE CHANGE

Tri State Generation is a cooperative of 45 members, including 42 electric distribution cooperatives and public power districts in four states that together provide power to more than a million electricity consumers across nearly 200,000 square miles of the West. It participates in or owns 7 coal units in four states and 6 oil or gas fired units in two states. This puts Tri State at the center of the climate debate.

As participating co-ops plan for the future, they face enormous pressure to reduce fossil fuel reliance and divest fossil fueled generating capacity. Tri-State last January proposed a strategy to move its members toward a cheaper, cleaner power mix by shuttering some of its coal-fired power plants and replacing the power with renewable energy resources, but members were still concerned about high prices. Seven member c0-ops are actively considering leaving Tri State.

As part of that decision making process, member co-ops need accurate pricing information in order to properly analyze the cost of withdrawal. The Federal Energy Regulatory Commission was asked to review Tri State’s pricing when the utility came under FERC regulatory processes. The utilities have complained for years that Tri State did not provide information to utilities seeking to alter their status for electric purchases.

That process yielded a decision that found that  “It is basically impossible for Tri-State’s members to make a reasoned assessment as to whether to terminate their membership in Tri-State.” Tri-State, which came under FERC jurisdiction in 2019, filed a rate schedule with the commission by which member exit fees could be calculated last April. But it has yet to give any of its members an exit price, despite members requesting such a calculation since November.

The issue comes down to whether or not the individual utilities can strike more favorable prices for renewably sourced power outside of the efforts by Tri State. The FERC order finds the G&T’s tariff and bylaws are unjust and unreasonable in that they do not give its members a clear and transparent way to determine the cost of exiting its service.

Because such a calculation relies on proprietary information, and Tri-State hasn’t provided any of its members with a calculation, those cooperatives have no way to determine what the financial impact of their exit will be. The lack of clear and transparent exit provisions has allowed Tri-State to impose substantial barriers for its utility members in evaluating whether to remain in Tri-State.”

Given the near 100% reliance on fossil fuels especially coal, it is understandable that Tri State make every effort to postpone the inevitable in terms of its generation mix. At the same time, Tri State’s apparent ability (and willingness) to withhold financial information from its membership raises some serious governance concerns.

MIAMI GOES ALL IN ON BITCOIN

Someone had to go first and it looks like the City of Miami is the leading candidate. The current mayor is a big bitcoin booster. Now he is putting out a welcome mat for bitcoin miners who are being driven out of China. The demands on the electric grid from bitcoin mining are behind the move. The Mayor is highlighting the more favorable pricing scheme for electricity in the city relative to the rest of the country, primarily as the result of nuclear power.

What miners care about most is finding the cheapest source of power out there to drive up their profit margins. The mayor is also considering a mix of other incentives, like enterprise zones specifically for crypto mining. The mayor has been trying to make bitcoin mainstream by advocating for policies that would enable city employees to be paid and residents to pay their taxes in the cryptocurrency. The city itself is considering holding it as an asset on their balance sheet. 

The plans raise a host of questions. Given the Miami’s vulnerability to climate change and sea level change, how realistic is it to attract consumers of large amounts of power. Power generation is such a major source of carbon pollution and one could argue that pushing high energy consumption businesses which don’t produce anything may not make sense. Especially when the city experiences “dry day” flooding on a regular basis.

Add to that the ongoing debate over a proposed seawall to protect the City from rising ocean levels. The initial plan got a rough reception as it included thirteen-foot-high floodwalls could line part of Miami’s waterfront including some very high priced real estate, under a proposed Army Corps of Engineers plan. The plan also comes with a $4.6 billion estimated cost. It would be designed to protect the City from coastal flooding and storm surge during tropical storms and hurricanes.  It would not address the “dry day” flooding issue.

The Corps of Engineers plan calls for storm surge gates to be installed on three waterways that open onto Biscayne Bay, a series of pumps and floodwalls along Miami’s waterfront, and one section of 36 foot high seawall in Biscayne Bay. The plan also calls for elevating and flood-proofing thousands of homes, businesses and public buildings in vulnerable neighborhoods.

The concentration on cryptocurrencies, the huge capital needs related to climate change facing Miami, and the risk of rising sea levels are all potential drags on the City’s credit. It’s not clear that crypto is the key to the City’s future.

NEW YORK STATE

It is one more step on the road to recovery for post-pandemic New York. Moody’s has affirmed the Aa2 rating on the State of New York’s general obligation (GO), personal income tax revenue and sales tax revenue bonds while revising the outlook on the ratings to positive from stable. For those with concerns about two potential sources of pressure – the MTA and a damaged commercial real estate environment – Moody’s specifically noted that the rating and outlook reflect “risks associated with the Metropolitan Transit Authority, a component unit of the state, and uncertainties regarding recovery of the office-intensive New York City metropolitan area, which is the key driver of the state’s economy.”

COAL AND PROPERTY VALUES

It is estimated that Campbell County WY produces just under 50% of the coal produced nationwide. This has made the County extremely reliant on all sectors of the fossil fuel industry for revenues for government. As production declines nationwide and efforts to curtail or eliminate fossil fuel use continue, localities fear the economic consequences of mine and power plant closures. Recent data from Campbell County, WY illustrates the point.

The County reported a  decrease in assessed valuations in 2021 versus 2020 valuations. The county’s assessed valuation — or its taxable value — for 2021 is about $3.4 billion. That is a decrease of about $850 million, or 20%, from 2020, when it was $4.24 billion. Fossil fuel properties – especially the large open pit mining operations which predominate in the county – are at the heart of the decline.

Coal, oil and gas together made up $2,465,592,453, or 72.7% of the total. Those are taxed at 100% of their value, while residential properties are taxed at 9.5%. In 2020, those three made up $3.29 billion, or 77.6% of the total. The year before, their total was $3.53 billion, or 79%. It has been seventeen years since valuations have been this low.

In southwestern Virginia’s coal belt, Wise County is experiencing significant revenue pressures. Declining production has negatively impacted the County’s receipts from severance taxes. In 2010, Wise County planned for $4.4 million in severance revenue. By 2015, the annual severance tax collection had dropped to $1.25 million. In 2018 and 2019, only $700,000 in tax was collected each year. In 2020, overall severance tax collection had dropped to $588,750.

That leaves the County scrambling to maintain its rods which it needs for the surviving mining operations. The hitch is that these heavy trucks produce a higher than average level of wear and tear on the roads but the numbers show you why that’s a problem. State law sets various priorities for spending coal severance revenue: economic development through the Virginia Coalfield Development Authority, allocations for water projects in the region, gravel funds for localities, special road project requests from counties. After those allocations are set each year, the remainder gets allocated for secondary road maintenance.

It’s illustrative of the problems facing communities dependent upon extractive industries. The big fear for local government is the loss of tax revenue from reduced values and then the economic impact in general. These numbers from Wyoming are a good example of the economic hurdles to be overcome in the road to a carbon free environment.

NUCLEAR STAKES IN ILLINOIS

With the fate of legislative action on a plan to reform the state’s electric generation industry still up in the air, the operator of the nuclear generators in Byron, IL are proceeding with the regulatory process for closing them in the fall. The ongoing standoff over the bill reflects many of the issues we see in the Wyoming story. Here the economic issues stem from the impact on payrolls and employment as much as the direct impact on property values.

The Byron plants employ some 725 people. Utility jobs are the second highest average paying jobs in the County at over $70,000 a year. That is well above the local, state, and national median. So the source of fear for employees is obvious. The plants produce a payroll of some $50-55 million. Using a conservative multiplier factor, that represents a substantial overall economic impact. In its the plants home county, Exelon (plant owner and operator) is the largest property taxpayer by a factor of four over the next largest.  

CLIMATE AND MASSACHUSETTS

The latest decision in one of the many pieces of litigation filed by states and cities against the fossil fuel industry followed an emerging pattern. A plaintiff sues in state court and the defendant company moves to have the case moved to what it perceives as a friendlier venue. recently, the City of Baltimore successfully argued before the U.S. Supreme Court that a state court was the proper venue for its case.

Now, a Massachusetts state judge has rejected Exxon Mobil Corp’s  bid to dismiss a lawsuit by state Attorney General Maura Healey accusing the oil company of misleading consumers and investors about its role in climate change. The court determined that Exxon failed to show that the October 2019 lawsuit was meant to silence its views on climate change, including those Healey and her constituents might dispute.

Exxon’s recent experience has yielded different results depending on the jurisdiction. In December 2019, a New York state judge dismissed a lawsuit by that state’s Attorney General Letitia James accusing Exxon of defrauding investors by hiding the true cost of climate change regulation.

In the meantime, the Bay State’s largest municipal utility agency, the Massachusetts Municipal Wholesale Electric Company, finds itself in the middle of the climate debate. MMWEC has proposed a 55 MW peaking generating facility. The rub is that it is intended to run on oil or gas.

The debate over the climate benefits of natural gas is unfolding throughout the country. MMWEC is trying to fend off opposition by emphasizing the peaking nature of the plant. MMWEC says that the facility will only run about 239 hours per year and produce fewer emissions than 94 percent of similar resources in the region. Opponents want no fossil fueled generation while MMWEC insists their goal is to ultimately convert the plant to hydrogen fueling.

MMWEC does admit that such a conversion would be a long way down the road. Proponents cite the “unreliability” of renewable power and refer to the California and Texas  experiences with grid failures in support of the plant.

HIGH SPEED RAIL SLOWS DOWN

The Brightline West high speed rail line between Las Vegas, Nev., and Victorville, Calif., will wait until 2022 to attempt a private activity bonds. The consortium behind the project blames the impact of the pandemic on the delay. Brightline was awarded $200 million in private activity bonds in Nevada and $600 million in California in 2020 and a sale was attempted in November 2020. It postponed the sale because of market conditions.

This is the second delay in the project’s timetable. Originally, the bonds would have allowed construction to begin in 4Q 2020. The project then announced a 2Q 2021 start date and has now delayed the start until after a successful bond sale.

On the East Coast, high speed rail hit a speed bump when the City of Baltimore advised that it was opposed to a proposed maglev train project to connect the city with Washington, D.C. The city recommended a “No Build Alternative” for the proposed project in a May 14 letter to the Federal Railroad Administration in response to the project’s draft environmental impact statement.  The City cited equity and environmental issues.

The train is designed to shorten the trip between Baltimore and Washington to 15 minutes. Eventually, the hope is to expand to New York, creating an hour-long trip between the nation’s capital and its most populated city.

JEA

The last few years have been tumultuous ones for the Jacksonville Electric Authority. Litigation challenging power purchase agreements for output from the expanded Plant Votgle nuclear facility were seen by some as a weakening of commitment to timely payment of debt. An effort to privatize the Authority was undertaken only to crash and burn over issues of conflicts of interest and the potential enrichment of JEA management. It produced a federal investigation.

Now those issues which weighed heavily on its ratings appear to be behind JEA and we have a full year of operations under the pandemic to evaluate. Moody’s recently did an announced a positive outlook for JEA’s A2 rating. It cited  the approval during 2019 of a settlement agreement by the JEA Board, the City of Jacksonville and the Board of Municipal Electric Authority of Georgia (MEAG Power) . “The settlement agreement is credit positive as it effectively eliminates the significant credit negative overhang which called into question JEA’s willingness to abide by the take-or-pay “hell or high water” terms governing the Project J PPA with MEAG Power.”

The issue of the privatization attempt is seen as driving the positive steps taken to address some of JEA’s governance related challenges. “The positive outlook primarily reflects the elimination of litigation risk following the fully executed settlement and the likelihood that JEA’s fundamentally sound financial profile can prevail to balance JEA’s several remaining credit challenges. Some of these challenges include further progress on governance owing to large scale senior management level transitions and a complete changeover at the board level.”

TEXAS POWER FALLOUT CONTINUES

Another report is out casting doubt on the industry narrative that the late February Texas power crisis was the result of too much reliance on renewables. A study published in Energy Research and Social Science points to a more likely source. Their review shows that “Texas failed to sufficiently winterize its electricity and gas systems after 2011, and the feedback between failures in the two systems made the situation worse. At its depth, gas production declined by nearly 50%, which lowered pressure in the pipelines, making it harder for power plants fueled by natural gas to operate. 

Texas gets most of its electricity from natural gas (46% in 2020), with smaller shares provided by wind and coal (23 and 18% respectively), followed by nuclear (11%), solar (2%), and marginal contributions from hydroelectric and biomass, according to data from the grid manager ERCOT. The impacts of the cold on the natural gas infrastructure make that dependence a concern.

The most prominent municipal credit caught in the middle of the situation is the City of San Antonio electric system. CPS is in the midst of litigation in an effort to reduce the financial impact on its customers and rate base as the result of the massive spike in gas prices. Now, the utility’s legal team has resigned over policy differences with the utility CEO and the outside legal team hired to review legal options.

The dispute appears to be over tactics and strategy issues connected with the litigation. Recently, upper management was restructured at the utility. The changes led to a new management team. When those changes were announced, we had concerns about the potential implications for CPS’ role in dealing with electricity supply in the face of climate change.

We wonder how the utility can develop an effective plan to deal with climate change and grid reliability when its new Chief Power, Sustainability, & Business Development Officer (CPSBDO) is on the board of the American Gas Association. That would seem to create at best a bad look given the controversial nature of the role of natural gas in the climate change debate. Exactly how objective can a board member of an industry’s leading advocacy group?

If you are an ESG investor, the situation has to raise some serious governance issues.

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

________________________________________________________________

ILLINOIS POWER AND THE LOOMING BATTLE OF CLIMATE CHANGE

A framework for addressing the realities of climate change and electric power generation in Illinois had begun to take shape before the Legislature failed to enact laws to support it by the scheduled May 31 adjournment date. It did remain viable and the hope was that passage would occur in special session.

The failure to get a bill passed was blamed on a lack of consensus between proponents of closing nuclear and coal generation without provisions for the economic impact on host locations. Labor vs. environmentalists or as one legislator put it “The caucus made it very clear that we don’t want to vote for something that puts us in the middle of a fight between friends.” 

The battle in Illinois is one which has repeated itself in various forms throughout the 2021 legislative season. Obviously, the utilities have been at the front of the lobbying line (to their detriment in Illinois and Ohio). those activities have led to one Speaker retirement and one Speaker expulsion. But their partner has been unions representing utility workers. The potential economic impact of generation closures has become a powerful factor slowing the move to renewable generation.

While most attention outside has focused on the nuclear subsidies, the sticking point appears to be the fate of two municipal coal generation plants. The failed legislation would have allowed the prairie States plant to operate through the life of bonds issued for its construction but some municipal power purchasers have longer term debt outstanding. As for the nukes, Exelon has threatened to shut down its Byron and Dresden nuclear plants if the state doesn’t offer more help. 

The governor’s most recent proposal would force the average residential ComEd customer an estimated 80 cents per month to subsidize those two plants facing potential closure, along with Exelon’s Braidwood plant. The three plants would receive the subsidies for five years.

PUERTO RICO

The last thing Puerto Rico needed was the explosion and fire at one of PREPA’s generating facilities. The event which occurred over the weekend left some 1 million customers without power. The fire was devastating enough but the concern has been heightened by the news that the utility had been the victim of a cyber attack. Luma Energy LLC said a distributed denial-of-service attack targeted its customer portal, Mi Luma, as well as its mobile app, shutting out customers trying to access their accounts or report outages.

The outage and cyber attack have all occurred within the first  15 days of Luma Energy taking over the operation of the system. Already unpopular with customers and employees, the effective privatization of PREPA could not have started with a worse set of circumstances. The blackout and a poor customer response are combining to support continued efforts by customers and the utility workers union to scotch the deal with Luma.

Digging below the headlines, the problems seem to be rooted in a poor call center and issues with the utility’s website and mobile app. PREPA’s Governing Board President acknowledged, however, that LUMA’S response in addressing outages has been quick in most cases, according to case complexity.

As the island deals with the physical aspects of the power system, bankruptcy proceedings continue. The latest Omnibus Hearing for the Puerto Rico bankruptcy occurred this week. The Puerto Rico Oversight Board tried to have the successor suit to a February 2015 lawsuit electric ratepayers filed against PREPA thrown out. The 2015 suit was stayed after the board put PREPA into bankruptcy in May 2017. That suit charges that fuel vendors  had conspired to provide PREPA low-quality, cheap fuel while charging prices associated with much higher quality fuel. Those costs, as is the case with most utilities were passed through to customers.

PUBLIC POWER MOVES A STEP CLOSER IN MAINE

The increasing pressure on legislators regarding climate change were a major characteristic of the current legislative sessions. Among those efforts, are those which would increase the roles of locally controlled public power agencies in the place of investor owned utilities. For the latest iteration of that process, we look to the Pine Tree State.

The Maine legislature has moved legislation forward which would allow Maine voters to vote on an initiative authorizing the creation of Pine Tree Power. If voters approve the bill, the new Pine Tree Power Company would have until 2024 to negotiate a transition with CMP and Versant Power, whose infrastructure would cost between $5 billion and $13.5 billion to buy out. It would be financed by borrowing against future revenues. The seven elected board members each would represent five of Maine’s 35 state Senate districts.

And it would likely be financed through the municipal bond market. Once again the availability of cheaper financing via tax exempt bonds will be a key determinant of the plan’s viability. It comes as the delivery and development of renewable power sources in Maine have become a contentious issue. The debate is unfolding as long term fishing interests and sea turbine generation plans have collided. A project to deliver hydropower from Quebec via a new transmission line has pitted the interests of consumers, labor, and environmentalists against each other.

While the Legislature acted, it is believed that the Governor will veto the bill. That may just be delaying the inevitable.

MUNIS FINANCE FLINT WATER SETTLEMENT

The State of Michigan is getting ready to issue some $600 million of bonds to pay for its share of a settlement covering the State’s responsibility in the Flint water crisis. The Michigan Strategic Fund will be the  issuer for the taxable limited obligation revenue bonds on behalf of  the Flint Water Advocacy Fund Project. This entity was set up by the State to manage the settlement and its funds distribution process. The Strategic Fund will issue the debt and loan the proceeds to the Project.

The monies will finance recovery awards for children and adults exposed to contaminated drinking water. The bonds will amortize over a 35 year term. repayment will come from monies appropriated annually by the State Legislature. With the market where it is on an absolute basis, it is a good time for such an issue to come to market. Michigan like so many other states has benefitted from the stimulus and that has brought Michigan positive ratings outlooks.

For credits in need of flexibility, the time may be now to access the market. Even if rates adjust upward to reflect inflation concerns,  there still remains a window for restructurings, refundings, and for items like the Michigan bonds. Judgment bonds, which these effectively are, have long been a feature of our market. In this case, some may wish additional yield to reflect the annual appropriation component of the security. In reality, we see no real likelihood that a substantial and frequent issuer like Michigan would not follow through on the appropriation requirement.

SOUTH CAROLINA PUBLIC SERVICE AUTHORITY

The South Carolina legislature has at least for now decided the fate of the state electric utility. Santee Cooper has been under the gun since the cancellation of the Sumner nuclear plant expansion. The creation of what is effectively a stranded asset saddling the rate base eroded what had been a long standing supportive relationship between utility management and the State.

It has been nearly 4 years since the project was abandoned. In the interim, the Legislature has considered maintenance of the status quo in terms of its management and ownership as well as the sale of the utility to an investor owned utility. The goal was to minimize as much as possible the rate impact on consumers from the need to fund the stranded asset.

With the failure of the effort to sell the utility in the current environment, the Legislature turned to reform of the utility’s governance and management. Legislation passed in the current session by veto proof majorities in both houses of the legislature provides for removal of nine of the ten current board members. They were part of the decision process by which Santee Cooper participated in the Sumner expansion.

The legislation provides for more active state regulation. It allows them to review the utility’s future plans to generate power and their forecasts for power, and to require public hearings and a watchdog to question utility executives about rate increases. It also restricts severance packages for any executives who lose their jobs.

There remains a significant level of support for selling Santee Cooper. The Governor supports a sale. His position – “South Carolina no longer has a need to provide, and never had the legal obligation to own, a state-owned utility, and the political process does not include the private-sector expertise nor the means necessary to effectively oversee Santee Cooper’s operations.” 

THE SUPREME COURT AND MUNIS

The U.S. Supreme Court ruled 7-2 Thursday that Republican states led by Texas lack standing to challenge the Affordable Care Act, the latest win for President Barack Obama’s signature health law in the nation’s top court. Standing provides a way for so many pieces of litigation to be handled without dealing with the underlying issue of the litigation.

It has become pretty clear that the ACA is surviving largely because the Chief Justice wants it to. Nonetheless, it is a positive for state and hospital credits that the law is being upheld. 

In climate related litigation, Oakland and San Francisco sued BP, Chevron, ConocoPhillips, Exxon Mobil and Royal Dutch Shell in 2017 alleging fossil fuels qualified as a public nuisance under California law by damaging the coastal cities through the effects of rising global temperatures. The oil companies have been responding to suits like the one in question which are typically filed in state courts.

The oil companies believe that they will receive more favorable treatment if litigation like this is heard in federal rather than state courts. This week the Supreme Court reviewed an appeal of a Ninth Circuit decision which would keep the suits in state court. This week the Court upheld a May 2020 ruling by the Ninth Circuit rejecting the oil companies’ claim that the San Francisco and Oakland case belonged in federal court.

1070.6

That number is the level of Lake Mead this week in feet above sea level. It is the lowest level the lake has been at since it was filled. The white ring around the edges of the lake have grown to 143 feet. It serves as a symbol of the water crisis facing the western U.S. Lake Oroville in California threatened to breach the Oroville Dam in 2017. Now the lake level is becoming too low to support hydroelectric operations. The lower water levels have serious implications for some of the market’s best known credits.

The Metropolitan Water District of Southern California is an agency at the center of the western water debate. The District has obtained and delivered water from the Colorado River since the 1930s when the Hoover Dam was completed. The District maintains the Colorado river aqueduct which transits water some 242 miles to southern California. Over the last nearly 20 years, the District has managed its allotments of water which have declined as upstream demands on water from Arizona and Colorado  have reduced supplies available to the District.

Now the effects of the long term drought impacting the West are coming home to roost. Metropolitan has been experiencing lower deliveries of water since the turn of the century.

NUTMEG AND CANNABIS

The Northeast continues to move towards legal cannabis throughout all but New Hampshire. Connecticut is about to legalize recreational cannabis legislatively. The issue has been held up by equity concerns. Initial drafts of the legislation contained requirements that would have allowed those with prior marijuana convictions to get preference when applying for licenses to grow or sell legal marijuana. The bill now includes a preference for those who come from low-income communities defined by census tracts.

Connecticut residents will be allowed to purchase or possess up to 1.5 ounces of marijuana beginning July 1. The state would set up a regulatory framework and approve licenses to be ready to sell retail marijuana products by May 2022. Like NY, legalization in Connecticut required legislative action. Only six states have legislated legalization.

The politics have followed public opinion. In April, a Pew Research Center survey found 60 percent of U.S. adults say marijuana should be permissible for recreational purposes, and another 31 percent said pot should be allowed for medical purposes only. Just 8 percent said marijuana should not be legal at all.

CHICAGO PUBLIC SCHOOLS

As we go to press, legislation awaits the signature of the Governor of Illinois overhauling the governance structure of the Chicago Public Schools. Currently, the seven-member board that is fully appointed by the Mayor. The union representing the system’s teachers has long sought an elected school board. The union and prior Mayor Rahm Emmanuel had a tense relationship and the union then backed the loser in the most recent mayoral election.

Now, the legislation awaiting signature would transfer mayoral control of the Chicago Public Schools to a fully-elected school board by 2027. The move would be phased with a new 21 member board created. Initially in 2025. At that time, the board would be comprised of 10 elected members and 11 appointed by the mayor. A fully-elected board would result in 2027. 

The bill does not account for the fact that the city of Chicago provides $500 million annually to CPS. This has raised concerns on the part of many who are concerned that the City will be less willing to continue to shift resources away from its own troubled direct credit if it does not have a role of the new board. The legislation calls for the board to conduct an independent financial review of the district and City’s fiscal relationship.

Any review must consider the Chicago board’s ability to operate with the financial resources available as an independent unit of local government. The review will to go the state board of education before the first elections in 2024 and recommendations over potential legislative changes needed will go to lawmakers. 

While some details will be addressed in implementing legislation, the package as it stands now raises a number of concerns. It seems impractical to have a board reliant on the City without any role for the City in the governance of the board. The proposed legislation does not fix the problems with the Chicago schools. It does likely make it easier for the City’s teachers union to wield power. What it does not do is to address the troubled finances of CPS.

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

________________________________________________________________

COAL AND MUNICIPALS NOW IN THE SPOTLIGHT

The Illinois legislature has been considering a package of legislative items to deal with climate change and the need for clean energy. Much of the discussion has revolved around the fate of two privately owned and operated nuclear generating plants. Efforts to gain state subsidies and keep the plants open has been at the center of that debate. Those efforts have revealed corruption and illegality.

Now an effort to address the clean energy needs of Illinois has run into a significant hurdle. The Prairies States Generating Campus began generating power nine years ago this month. It was considered a state of the art plant and was advertised as the industry’s answer to the demand for cleaner electric generation. located adjacent to a coal mine it was supposed to make the case for clean and economical coal generation.

Prairie State has ironically been the single biggest source of carbon dioxide emissions in Illinois. It emitted some 12.7 million metric tons of carbon dioxide equivalent in 2019, according to the most recent federal data. The plant ranks ninth in the country for carbon dioxide releases. So the pressure to limit the plant’s operations is intense.

Pending energy legislation in Springfield would include an expansion of subsidies for nuclear plants, more funding for renewable energy projects and a shorter timeframe for climate targets that would include a phase-out of coal power by 2035. That would force the closure of Prairie States long before its expected useful life and before the retirement of some of the municipal bond debt issued to finance the plant.

The municipal owners  are American Municipal Power (23.26 percent), Illinois Municipal Electric Agency (15.17 percent), Indiana Municipal Power Agency (12.64), Missouri Joint Municipal Electric Utility Commission (12.33 percent). American Municipal Power  is the wholesale power provider to some 135 local municipal distribution systems in OH, PA, MI, KY, VA, WV, MD, and DE. It owns 23.26% of the capacity at Prairie States. If legislation ultimately requires closing the plant, AMP would be owning stranded assets with another 13 years to amortize the bonds. Illinois Municipal Energy Agency acts as wholesale supplier to municipal utilities throughout the state as do its counterparts in Indiana and Missouri. Even the state capitol Springfield faces stranded debt costs.

That’s what has created a hurdle in the legislature. Those costs associated with the stranded assets would be passed through to the customers of the local distribution utility. So while the environmental argument makes clear sense, the local utilities see themselves being held responsible for the debt problem without real input into the decision trail.

POWER MARKET REALITIES

Investors in municipal utility credits continue to deal with the uncertainty and changes resulting from a dynamic market for electricity. PJM, the regional grid operator which supplies power to 65 million people in thirteen states held a new capacity auction. This mechanism allows power generators to offer power to the grid based on cost.  That process unfolded just as the abovementioned energy debate in Illinois unfolds.

While the Legislature is considering subsidies for nuclear plants, Exelon announced that three nukes it owns all failed to sell their power at the PJM auction. Over a three year period, the price at which PJM purchased power dropped 64% from $140/MW-day to $50.  Exelon warned that even two nuclear plants that successfully bid to provide power in the PJM auction remain in danger of “premature retirement.” “unfavorable market rules that favor (carbon) emitting generation.”

MARYLAND P3 TAKES FIRST STEP

The board for the Maryland Department of Transportation approved what is essentially a design contract for its I-270 (see Feb. 1 MCN) expansion project. As we noted earlier, the experience with the Purple Line P3 impacted the process for the new project. The approval begins a 30-day public review period by the state comptroller, treasurer and the legislature’s budget committees before the Board of Public Works is expected to vote in mid-July.

The process has already faced bumps in the road with a failed initial bid process. That process generated one bid which was rejected based on what the State saw as unrealistic numbers. Now the contracts are awarded to Transurban and Macquarie, established players in the P3 space. Transurban operates more than 50 miles of toll lanes in the region already.

The contract would be limited to the two companies doing preliminary design at their own expense which gives them the right of first refusal on a broader contract to build the lanes and keep most of the toll revenue over 50 years.  The predevelopment contract the state would have to reimburse the private team up to $50 million of its predevelopment costs if the project gets canceled.

There had to be flexibility built into the deal. The proposed expansion aspects of the project are drawing opposition and pressure over many of the same issues which plagued the Purple Line. The State will manage the permitting process which is yet to be completed. The project has also been scaled back in response to some of those very concerns. A proposed expansion of the eastern I-270 loop has been shelved. Studies have shown that widening that segment would affect more public parkland, homes and the Walter Reed National Military Medical Center.

MORE BAD NEWS FOR MEAG

This week Georgia Power made an announcement that testing at the first unit of the Votgle nuclear plant expansion was underway in support of an expected November 1 start date. For a project that could use some good news, the announcement was positive. Now however, the state regulatory body (the PSC) in Georgia has announced a somewhat different take on the projects status.

In testimony from independent monitors and state regulators, it was noted that “many of the problems encountered by SNC (Southern Nuclear Company)  should have been resolved long before” the current testing. The first of the new reactors are not likely be in operation until at least the summer of 2022, and the project’s total costs are likely to rise at least another $2 billion.

The second reactor is unlikely to be up and running until at least June 2023. Independent monitors and PSC staff recently testified as to project issues, including work that didn’t meet design plans; construction that wasn’t completed before testing began; known problems that weren’t timely addressed, such as failure to upgrade software; and concrete that contained voids among other issues.

OIL AND STATE BUDGETS

As the economy reopens and demand for fuel increases, we can see the beneficial impact of the recovering economy. While production of oil and gas is increasing, the increase in  drilling activity has been inconsistent. So while states like Texas and North Dakota see production remaining below pre-pandemic levels, there have been positive exceptions to that trend.

When New Mexico was planning for its fiscal 2022 budget, the state’s consensus forecast in February projected $43 a barrel average oil price. In reality, the average price is now trending at $49 per barrel. A $1 increase in the per-barrel price of oil translates into an estimated $23 million impact on the state’s general fund. The state is expected to produce about 390 million barrels in the new fiscal year. That is an increase of 20 million barrels over levels projected in February. Each additional million barrels of oil generates about $3 million for the general fund.

The state government had projected to draw a little over $1 billion from reserves to cover the budget for fiscal year 2022. Now, that requirement is some $350 million lower. In addition, the state also expects to receive nearly $133 million more in its Tax Stabilization Reserve from excess oil and gas taxes. That is driven by both prices and production. The excess has also come as federal leasing activity for oil and gas development has been halted.

ILLINOIS PENSION PROGRESS

It’s one issuer and one pension plan but recent legislation passed by the Illinois legislature is designed to get the Chicago Park District on the road to a fully funded pension plan. The statutory changes laid out in House Bill 0417 call for the use of an actuarially based payment. Currently, a formula to determine payment levels based on a multiplier of employee contributions. The phase in of the higher actuarially required annual contribution will occur over three years. Full funding of the ARC is required in 2024. The goal is to achieve 100% funding by 2055.

The District’s pension fund held $821 million of unfunded liabilities at a 29.9% funded ratio for fiscal 2019 and under its current course would exhaust all assets in 2027 if all future assumptions are met and no additional contributions are made. An initial supplemental payment to the fund of $140 million immediately improves the balance sheet. The change in funding also accompanies the imposition of a new tier of pension beneficiaries.

For employees hired after January 1, 2022, the plan raises their annual contribution to 9% of their salary from 7%. Employees in the new tier three can claim full benefits two years earlier, at 65, and existing tier two employees can opt into the new tier, trading higher contributions for a lower retirement age. The legislation also allows the use of any available funds for pension contributions as the current system required the proceeds of specifically levied taxes. The additional flexibility will ease the pain of higher contribution levels. The bill gives the district $250 million in borrowing authority that will not count against its bonding limits which are based on its tax collections.

The borrowing would be limited to $75 million annually of the authorization to cover payouts in the event of a negative cash situation that could occur based on negative investment results. In the end, the legislation represents a meaningful attempt to deal with those elements currently pressuring the District’s ratings. The  lack of a plan to address a huge and growing unfunded liability has been a major downward pressure on the ratings of the District and all of the major borrowers who share the same City tax base.

INVESTMENT POLICIES MOVE WITH THE TIMES

Legislative Document 99 passed the Maine state legislature this week. It directs the Maine Public Employee Retirement System to divest $1.3 billion from fossil fuel companies by January 1, 2026. It also requires the state treasury to divest by the same date. Both will have to provide annual reports to the legislature’s Appropriations and Financial Affairs Committee until the funds are fully divested.

Activists for a variety of causes have been after major state pension fund investors to divest from a variety of businesses in support of a variety of goals. The process to actually achieve the goals legislatively have historically fallen short.

The law in Maine makes it the first state to actually codify into state law requirements for divestiture by state agencies and funds to actually have to do so for a specific sector.

THE EMERGING CONFLICTS FROM THE CLIMATE CHANGE BATTLE

It is becoming more apparent that the obstacles to achieving a renewable energy future are not technological. They are rooted in social science issues like economics and politics. As those elements gain greater strength, a clear clash of interests is emerging which serves as a much greater obstacle. The budget and legislative cycle has laid bare those conflicts. Deservedly or not, the effort to address climate change will impact many issuers and raise real regulatory and financial issues with the potential to severely impact their economies.

We see it in the debate over the state level subsides for nuclear power. Their greatest advocate may be union labor at those plants. It’s the same issue for closing mines, drill rigs, and generation plants. The biggest objections are nearly always based on jobs and tax revenues. So far the dream of something like the Green New Deal looks increasingly distant. The absolute level of technology needed to provide for a renewably based economy and overall transportation system has in reality barely been developed.

This limits the ability of government providers to identify and fund the needed public infrastructure to support such a world. Filling that void is a host of legislative actions shifting the regulatory landscape including local zoning actions. In some cases, preemption has been used to shift the power to the state by prohibiting local regulation and zoning in an effort to thwart the development of renewable generation in a top down approach. In other cases, local zoning powers have been reinforced in an effort to thwart renewable

Environmentalists have come down on many sides of many fences. Farmers are thwarted from selling or leasing to solar operators due to aesthetic concerns (the view). Transmission expansions or upgrades are slowed over land issues even if they convey sources like hydro. Land use requirements like required setbacks from streets and certain facilities (schools, hospitals) are imposed impacting project economics.

The issue of equity is an additional hurdle. The legacy issues stemming from the location of certain facilities relative to concentrations of poorer communities will serve as a brake on repurposing of some sites which might otherwise be well positioned. It will likely raise costs by limiting locations which can then generate additional capital needs (roads, sewers). And it is not just generating facilities. Projects to expand or relocate highways (I-270 in MD and the I-81 relocation in NYS) are being driven by equity issues.

The point is that advocates for the rapid implementation of a high level of technologically connected hard infrastructure are likely under estimate the length of time it will take until that brave new world is underway. Now my view may be influenced that there’s a crew outside my house replacing standard wood telephone poles with new ones. No technology upgrade there! And the broadband will still be inadequate.

PRIVATE INSURANCE AND HOSPITALS

The pandemic threw a huge wrench into the financial works at many hospitals. Utilization plummeted as the result of COVID 19 as patients were afraid to leave their homes and certainly afraid to do so to go to a hospital. others were concerned that they had lost their medical insurance as the result of cuts and/or layoffs. Many simply delayed contact with the system, resulting in more serious illness and emergency care.

Recently, United Healthcare announced that beginning July 1 it had planned to scrutinize the medical records of its customers’ visits to emergency departments to determine if it should cover those hospital bills.  Anthem, another large insurer that operates for-profit Blue Cross plans, undertook a similar process several years ago that led to a political backlash and a federal lawsuit from emergency room physicians claiming it violated federal protections for patients seeking emergency care. 

Now United Healthcare has decided to delay its program until the declaration of a national health emergency related to COVID 19 is declared over. If United still goes ahead with the change later on, the policy would apply to millions of people in United’s fully insured plans in 35 states, including New York, Ohio, Texas and Washington. People covered through an employer that is self-insured or enrolled in a Medicare Advantage plan or Medicaid would not be affected. The policy would exempt care for children under 2 years old.

For those institutions which have weathered the COVID 19 financial storm, the policy was bad news. For many of the institutions, ratings pressure has decreased but that reflects an assumption that more normal utilization patterns would emerge. The industry saw this effort as one which would discourage utilization especially for things like heart attacks. A recent study in Health Affairs by researchers from the M.I.T. Sloan School of Management, working with Boston Emergency Medical Services, found evidence of an increase in heart attacks that had occurred out of the hospital, particularly in low-income neighborhoods.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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GATEWAY TUNNEL REVIVAL

The need for major capital investment in the rail infrastructure supporting the New York metropolitan area has been clear for a long time. The Gateway Tunnel project is designed to address issues arising from the age of the existing rail tunnel infrastructure (over 100 years). The damage from Superstorm Sandy accelerated the interest in the project. A funding source had been identified – there had been a general agreement that the federal government would cover half the cost of building the tunnels, with New York and New Jersey sharing the other half. 

Then politics intervened with then Gov. Christie refusing to provide New Jersey’s share and that allowed the Trump Administration to get its hands on it. They used the environmental approval process to stall the project. Another hurdle was the disagreement over whether any funds borrowed – not granted – from the federal government by the states and used to fund their state share counted as part of a state’s share of the overall project. In the meantime, the need continued and the cost remained subject to increase over time to its current price of $11.6 billion.

Now, the proposed infrastructure package could easily provide the federal share of funding.  The Biden Administration will allow the states to borrow from the federal government if they choose and it will count as part of their share of the costs. The U.S. Department of Transportation will no longer sit on the environmental approvals needed for the project. So now it can move forward.

INTERNATIONAL STUDENTS

The Muni Credit News has been talking about the impact of tightened immigration rules under the Trump Administration from its beginning. We have documented the role of international students in the financial welfare of the universities they attend as well as the overall economic benefit these students generate through consumer spending and real estate. As full fare paying customers they have become a reliable source of income to these institutions.

Now that universities are planning for full reopenings in the fall, these institutions are looking to the Biden Administration to dismantle the obstacles raised against international students attendance at U.S. institutions of higher education. It comes as Moody’s has opined that the limits on international students is having long term negative impacts of the finances of colleges with substantial international cohorts. We’re glad to see Moody’s come to that view but it has been apparent for some time that this was a credit concern.

College students and academics from China, Iran, Brazil, South Africa, the Schengen Area of the European Union, the United Kingdom and Ireland have been added to the State Department’s list of national interest exceptions to the Covid-19 travel restrictions, which allows them to come to the United States despite travel restrictions . But there are still issues with the need to obtain visas from consulates around the world which under the best of times have limited ability to process requests.

A couple of data points highlight the problem. At University of California at Berkeley, 13 % of students are from overseas. Carnegie Mellon University, finds 18%  students are from overseas. Nearly 1.1 million students from abroad attended college in the U.S. in the 2019-2020 academic year, according to the Institute of International Education.

At the same time pressure is being placed on the Administration to support immigration, another side of the college enrollment issue emerges. California is the latest state to consider limits on non-resident admissions to the UC system. The UC regents in 2017 capped nonresident enrollment at 18% systemwide under legislative pressure, with a higher share grandfathered in for UCLA, Berkeley, San Diego and Irvine. Now the demand from California residents is skyrocketing.

A bill is under consideration which would reduce the proportion of nonresident incoming freshmen to 10% from the current systemwide average of 19% over the next decade beginning in 2022 and compensate UC for the lost income from higher out-of-state tuition. Ironically, this would highlight the importance of international students as that demand has shown to be price inelastic.

The issue of access to state residents who have in large part financed the UC system through taxes is a long standing one. When the state’s finances were damaged by the Great Recession, reduced aid to UC led to tuition increases. The bill’s sponsors claim that it would ultimately allow nearly 4,600 more California students to secure freshmen seats each year, with the biggest gains expected at UCLA, UC Berkeley and UC San Diego. Those schools see non-resident shares as high as 25%.

MUSIC STOPS ON THE CAROUSEL

One clear victim of the pandemic was brick and mortar retail. It has raised concerns about municipal bonds whose source of repayment is payments made by projects like shopping and entertainment malls. The restrictions on public activities which limited or prevented patronage increased the pressure on a couple of the larger projects as they either started out (the American Dream project in New Jersey) or which were already under some financial strain.

The best example of the latter is the Carousel Center in Syracuse, NY. The project had a rocky financial history before the pandemic. The project originally thought that it would attract the same number of  visitors as Las Vegas does in a year. That was dubious prospect at best given the realities of weather and more geographically limited appeal. The limits of the pandemic exacerbated existing shortfalls in demand and revenues. This left much less available to cover PILOT payments (payments in lieu of taxes) on bonds issued to finance a portion of construction.

The project has undertaken a number of efforts to restructure its obligations which have involved deadline extensions among other steps to prevent foreclosures. The troubled finances of the project have led to steady downgrades to its outstanding ratings. Now it has been announced that Carousel Center Company L.P. has hired a restructuring agent and counsel and is actively engaging its lenders, including some PILOT bondholders and the PILOT bond trustee, with an unknown restructuring proposal. 

This led Moody’s to downgrade the rating on the outstanding debt secured by PILOT payments to Caa1. Moody’s points out that because of lower valuations for shopping malls, including the Carousel Center, there is a higher likelihood that the PILOT bonds could be impaired should a debt restructuring, distressed exchange transaction or a bankruptcy filing. It references the fact that “in extreme cases like a bankruptcy, the PILOT bondholders could be impaired if the PILOT agreement is rejected or if some unforeseen action occurred in that proceeding as there is no legal precedent for what will happen to the PILOT bonds in a bankruptcy. For example, the property tax generation potential of the legacy Carousel Center is arguably lower than the PILOT payments given the below 60% occupancy rates now compared to above 80% before the pandemic.”

The rapid decline in occupancy in the legacy Carousel Center portion of the Destiny USA mall has also reduced the publicly reported asset’s value that is materially lower than the PILOT bonds and the subordinate CMBS loans outstanding. One deadline occurred this week. A major concern for the municipal bond holders is that they have little control over events which could trigger actions detrimental to the bondholders.

The project relies on some old models with its reliance on big box and major retailer anchor tenants. Many of these entities have been under financial pressure even before the pandemic and now are facing significant closures. Best Buy, Michaels, Lord & Taylor, and Abercrombie are all recent departees from the project.

While the pandemic may have been foreseeable, the concept behind the mall was always suspect. The projected patronage numbers provided strained credulity even back in 2007 when the PILOT bonds were issued by the Syracuse Industrial Development Agency. It took a high level of optimism to believe in any project drawing nearly 40 million people to Syracuse for the mall. While I may have been prejudiced from having gone to school in Syracuse, the likelihood that those levels of patronage could be achieved struck me as extremely unlikely.

Now, Moody’s takes the view that “there is significant uncertainty as to whether the Carousel Center can reach previous occupancy levels above 80% given the currently low level and difficult market for new retail tenants. With below 60% occupancy levels, the mall’s market position has also weakened and with the loss of several anchors and large box stores, the overall impact is larger than losing the smaller in-line tenants. 

FREE FARES – TWO APPROACHES

Over recent years a significant movement has emerged to support the subsidy, reduction, or elimination of fares on public transit. It is one of many issues encompassed in the “progressive” movement. Now, two of California’s major cities are about to take clearly different paths on that issue.

In San Francisco, the Board of Supervisors  (City Council) had voted to implement an experiment this summer under which fares on Muni would have been free for all riders between July 1 and Sept. 30. The agency would have still collected voluntary fares for people who still wanted to pay. 

The system hoped to use the experiment to generate data on ridership patterns and demand to determine where such a program would generate the most benefit. $12.5 million in city funds that would have supported the three-month pilot. Now the Mayor has indicated she will veto the plan. The argument against the plan reflects the financial damage done by the pandemic. Ridership on Muni trains and buses is at about 30% of pre-pandemic levels, while services are at about 70% of what they were before shelter-in-place.

Los Angeles County’s Metropolitan Transportation Authority’s board approved a 23-month fareless transit pilot program. The program would begin in August and initially be offered to K-12 and community college students. In January 2022, the pilot will expand to include “qualifying low-income residents” (annual income is less than $35,000). Metro officials estimate rider fares account for 13% of the agency’s operating costs, and roughly one-third of those costs go toward expenses related to fare collection, such as fare enforcement, accounting and fare box maintenance. 

The different plans reflect the complexity around issues like transit funding. These systems are increasingly seen as being at the center of the debate over “economic justice”. There will likely be more debates like this going forward as the recovery from the pandemic emerges in a likely inconsistent manner.

BIDEN TAX PROPOSALS DISAPPOINT MUNIS

Handicapping legislation is often difficult. The proposed changes to the tax code in support of infrastructure financing released this week by the Biden Administration are a good case in point. Whether it was the debate over the 2017 tax cuts or the many times when an infrastructure week actually looked possible, two items were considered to be no brainers. One was an expansion of the ability to issue private activity bonds and the revival of advance refunding capability.

So it has puzzled many that neither of those two changes were included in the Green Book published by the U.S. Treasury which details proposed tax code changes. Advance refunding has broad bipartisan support. It’s value was made clear even in its absence as the low interest rate environment was able to provide significant flexibility to issuers. Imagine the savings which could have been realized through tax exempt refundings.

As for private activity bonds (PABs), they too are favored on a bipartisan basis. The arguments in recent times have been more about purposes and volume caps than they have been about the use of tax exempt financing for private businesses. For certain projects, the most efficient subsidy could very well be PABs. In other cases, there are legitimate arguments to be made against project subsidies.

Some less obvious items were proposed. Qualified School Infrastructure Bonds were part of the American Recovery and Reinvestment Act enacted in February 2009. They would be issued as taxable debt and would receive interest subsidies similar to the Build America Bonds (BABs) which were issued under the ARRA and then subject to annually declining subsidy payments. Bonds could be issued over three years from 2022 through 2024 with annual total issuance limits of $16.7 billion.

PUERTO RICO ELECTRIC

Luma Energy, took over the transmission and distribution operations of the Puerto Rico Electric Power Authority under the 15 year contract awarded in the aftermath of the hurricanes of 2017 and the ongoing financial restructuring. Luma is required to manage the process of upgrading the battered system. The primary source of funding will money coming from the U.S. Federal Emergency Management Agency.

The company has pledged to reduce power interruptions by 30%, the length of outages by 40% and cut workplace accidents by 50%.  It is a significant undertaking complicated by a militant workers union and a hostile political environment which has made ratemaking exceptionally difficult. 20 unions representing thousands of Puerto Rican workers ranging from teachers to truck drivers announced on the start date of the contract that they would go on strike if the Luma contract is not rescinded.

The system needs to be upgraded. PREPA’s power generation units average 45 years old. The latest fiscal plan approved by the federal board foresees Luma spending some $3.85 billion through fiscal year 2024 to revamp the grid’s transmission and distribution system.

The transition of the utility may not be politically popular but the reality is that the existing PREPA structure was  not up to the job of maintaining and operating the system. We have advocated a privatization of PREPA since the hurricanes ravaged the island. We believe that a private operator was better positioned to run the utility given the weakness and politization of PREPA management. A private operator is better positioned to implement alternatives in generation and transmission than would be the case under the existing PREPA structure.

Nonetheless, the Puerto Rico Senate has filed litigation challenging the validity of the contract with Luma Energy. Some things don’t change.

STATE LEGISLATORS TRY TO BLOCK OUT THE SUN

Renewable energy has been at the center of debate in a number of state legislatures as the politics of energy, the environment, and economics collide. A number of legislative actions involved with the electric grid send some very mixed messages. In Indiana, a bill to establish state level zoning standards for renewable power projects was defeated. Sounds like a good thing for local control advocates but not good for solar arrays and windmills. Local zoning boards want to retain their control both for and against these projects.

Ohio over the last year has tried and failed to subsidize nuclear generation. The effort led to a huge corruption scandal. Now, The Ohio Senate passed legislation which would require renewable energy developers — before filing a separate application with the state Power Siting Board that currently exists in law — to hold a public hearing with advance notice to local officials. County commissions could then pass resolutions to ban wind or solar projects outright or limit them to certain “energy development districts” in the county.

So this law merely extends requirements like this which exist for current fossil fuel generation right? Apparently not. The law looks much more like an impediment to solar and wind development. Its sponsor admitted as much in the local press. He believes that fossil fuels like natural gas and coal are more necessary for the reliability of the grid than wind and solar.

CYBER RISK APPEARS AGAIN

It was hospitals in the fall. Over the winter it was a municipal water system. Now a series of transit agencies are the targets. This week’s announcement of the hacking of the MTA in New York brought more light to the subject. The positive is that the MTA was apparently able to contain the impact and that operations were not affected. It was also positive to see the agency was able to hold the cost of recovery to a very manageable number and did not pay a ransom.

What we take away from the situation is that disclosure on the topic remains a very thorny issue. Given the nature of the hack and the relatively low cost associated with the recovery from it, in practical terms it might not be seen as a material event for investor purposes. At the same time it shouldn’t take press inquiries to generate an announcement that had the potential to be material.

It’s another reason for the investor community to come up with and demand clear disclosure standards for an ever changing municipal bond environment.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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As the infrastructure funding standoff continues in Washington, it is easy for the gross spending figures to overwhelm some of the sector by sector spending items. This tends to make one think that a fairly sizeable amount of money being spent on a problem should actually fix the problem. Much attention is being paid to how much as opposed to how little of the real size of infrastructure capital needs are actually being met.

A good example is housing. The next attempt at stimulus, the American Jobs Plan would provide $40 billion for rehabilitation of existing public housing stock across the country. The Administration estimates that some 1 million apartments are over 50 years old. Many come close to exceeding the limits of habitability – water and heat are often recurring problems and capital repairs long delayed.

While federal funding for new public housing ended with the budget compromises of the mid 1990’s, spending for capital maintenance continued. As time passed and politics hardened, spending for upkeep like boilers for water and heat and functioning elevators consistently reduced. That left public housing authorities with little to leverage in support of tax exempt bonding for those costs as had historically been the case.

So we see a substantial sum proposed for many of these issues. Here’s the rub. While New York does have by far the largest number of public housing units in the country, most major cities have substantial public housing infrastructure. So if the $40 billion was applied to fill the capital needs of the NYC Housing Authority there would still be a multi-billion dollar shortfall in NY and none for the rest of the country. It is just another example of the challenges faced by municipal bond issuers.

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PANDEMIC PRESSURES LINGER

The economy may be opening up again but that does not mean that some credits are no longer in trouble as the pace of the reopening may not be fast enough for some credits to avoid problems. The latest example comes from San Antonio where the impacts on travel, tourism, and convention activities have not been mitigated sufficiently to generate necessary cash flows to meet debt service.

Moody’s has downgraded to Baa1 from A3 the city of San Antonio Convention Center Hotel Finance Corporation, TX’s bonds and has placed the rating under review for further downgrade. The pandemic so limited business that “the accumulated pledged revenue and reserve in the equity fund for the hotel special tax bonds were depleted and used to meet the July 15, 2020 obligation, reducing the flexibility for future payments. Accumulated pledged revenue was also used to make the January 15, 2021 payment. Following the January payment, the city has continued to receive pledged revenue but collections have remained weak and are projected to be insufficient for the July 15, 2021 payment.” 

It is expected that debt service reserves will be used to fund some $1-1.4 million of debt shortfalls. The downgrade to Baa1 also reflects a much weaker credit profile from a year ago with limited flexibility although the city is exploring various options for the future. None of those alternatives, however, are projected to be available to meet the July 15 debt service payment.

With an end to the harsh limitations of the pandemic clearly in sight, timing of the return to revenue sufficiency for many similar projects will be a key factor in determining whether other similar credits will face similar issues.  

TREASURY REGS FOR STIMULUS SPENDING

The U.S. Treasury Department released much-anticipated guidance for the American Recovery Plan’s (ARP) $350 billion in direct state and local aid, including details on how it will implement the law’s restriction on using ARP funds for state tax cuts. The long awaited guidance allows those governments to properly apply the funds without risks to the state budgets they are right in the middle of enacting.

During the debates over the various stimulus packages since the onset of the pandemic, the specter of a “blue state bailout” was consistently raised. It all stemmed from an ill advised item in the original stimulus bill mentioning funding of Illinois’ pensions  shortfall. At the same time, representatives from “red states” sought to use funding for their pet cause – tax cuts.

Now at least the states have guidance at this important point in their budget processes. The ARP’s legislative language was fairly broad: States “shall not use [ARP] funds … to either directly or indirectly offset a reduction in net tax revenue … or delay the imposition of any tax or tax increase.” The rule applied to any “change in law, regulation, or administrative interpretation.” The law also provided the Treasury to clawback any ARP money used for such tax cuts.

The new guidance addresses some of the issues raised by litigation from a group of red state attorneys general challenging the rules. Several of those states intended to use aid to finance tax cuts regardless of any guidance. Hence, the litigation. Now, Treasury will compare each state’s fiscal year tax revenue during the ARP years (March 2021 to December 2024 or whenever a state exhaust its ARP funds) to its fiscal year 2019 tax revenue—as reported by the Census Bureau and adjusted for inflation.

This formula allows Treasury to work the numbers such that if a state’s tax collections in one of the ARP years are above its real 2019 level, any tax cuts passed that year were paid for with economic growth and not ARP funds. Problem solved! Additional cushion is provided by the fact that each state gets a 1% de minimis exemption to account for “the inherent challenges and uncertainties that recipient governments face.”  It allows for a state to pass a tax cut as part of a revenue neutral budget and then see revenues decline, it will not count as a violation of the rules. 

Conversely, if a state sees revenue cuts directly attributable to tax legislation it would potentially run afoul of the rules. If that state passed significant tax cuts and its next year’s revenue was below its real 2019 baseline, it must document how it financed the tax cuts without ARP funds. It cannot make cuts to a department, agency, or authority that used ARP funds. A state would need to point to offsets – taxes raised, spending cut—but no cuts to a department, agency, or authority that used ARP funds are permissible. 

Pensions even got a bit of help when all was said and done. While pension deposits are prohibited, recipients may use funds for routine payroll contributions for employees whose wages and salaries are an eligible use of funds. Treasury’s Interim Final Rule identifies several other ineligible uses, including funding debt service, legal settlements or judgments, and deposits to rainy day funds or financial reserves.

AUTONOMOUS VEHICLES

It will take some time before all of the ultimate impacts of the pandemic are clear. One of the sectors to have seen much of that impact has been the mass transit sector. Now that systems are reopening – in NY the MTA has resumed 24 hour service – we can begin to see what the true impact will be. One of the fears of the mass transit sector is that people will be unwilling to use those systems and will instead choose to use services from transportation network companies (TNC) instead of public mass transit. The initial signals we’re seeing don’t necessarily spell the beginning of the end for public transit.

It is clear that at present the core transit functions of Uber and Lyft are not moneymakers. The history of the business is that the demand for it has been driven by price considerations. The subsidized prices they charge are what generate the favorable cost/benefit assessment a customer makes. While there will be some acceptance of higher prices, the rate of increase in that cost is likely to exceed the rise in the benefit of the service.

As is well known, the one place that these companies can improve that ratio and drive demand is by lowering the costs. The most obvious cost is that of the driver. It has long been clear that ultimate profitability for the TNC is reliant on autonomous vehicles. That drove much of the TNC investment in autonomous technology and development which did not produce the desired result.

With the reopening expanding over the summer we expect to see lots of noise over transit and vehicle use going forward. There will be a real push and pull between those who wish to maintain services and modalities and those who demand that public infrastructure accommodate large scale autonomous utilization now. I’ve always been skeptical of claims about the speed of new technology. That’s the product of time and experience.

We don’t think that AV adoption will occur nearly as fast as proponents hope. Two recent comments in the press happened to be timely.

“If you look at almost every industry that is trying to solve really, really difficult technical challenges, the folks that tend to be involved are a little bit crazy and little bit optimistic.”  – president of Nuro.

“These cars will be able to operate on a limited set of streets under a limited set of weather conditions at certain speeds. We will very safely be able to deploy these cars, but they won’t be able to go that many places.” – an executive at Lyft.

If that is the state of play for the foreseeable future, it is not realistic to expect public agencies to make capital funding decisions for a truly nascent technology at the expense of current modes of transportation.

CARBON CAPTURE AND MUNIS

Sens. Michael Bennet (D-Colo.) and Rob Portman (R-Ohio) introduced the Carbon Capture Improvement Act to help power plants and industrial facilities to finance carbon capture and storage equipment as well as more unproven direct air capture projects. The bill would permit businesses to use private activity bonds, which local and state governments currently have access to, in order to finance a carbon capture project.

We note that both Senators represent states with significant economic interests tied to the extraction of minerals. So their approach to climate change is not about shifting to renewable fuels and away from the environmental destruction of associated with fossil fuel extraction and production. It is interesting that Senator Portman has discovered the joys of private activity bonds after supporting the 2017 tax legislation.

This is just the latest example of the effort to save the fossil fuel industry through the subsidy of tax exempt financing. At the same time the industry fights the financial claims of municipal issuers in association with pending litigation on the impact of climate change, the industry seeks to use the benefits of issuance by municipal issuers to subsidize their share of the costs of climate change.

ESG

The “social cost of carbon”  is an effort to measure the economic harm of putting one additional ton of carbon dioxide, the prime greenhouse gas, into the air. A 2019 Colorado law regulating utilities includes a minimum of $46 a ton to estimate compliance. The 2019 law directed the Colorado Public Utilities Commission to use a social cost of carbon in evaluating all existing electric generation and in the approval of the plan by Xcel Energy, the state’s largest electricity provider, for closing plants and adding new generation.

Now there are two new bills pending which would extend the use of the concept to cover methane in evaluating energy efficiency and demand management programs for utilities, like Xcel and Atmos Energy, selling natural gas to homes and businesses. The emerging weaknesses of the approach is reflected in the fact that there is no agreement as to how one calculates the social cost of carbon.  And that is a huge problem.

Over the years many efforts have been made to develop consistent replicable calculations to measure a number of factors. These would be used to develop scores and/or rating systems for investors who wished to be able to use them to meet a variety of purposes. The fact is that the process is complicated and not always open, so the results to date have not produced the desired metrics.

Even after you crack open the black box and perfect the math, there is still the issue of what exactly defines green. At one point, issuers were using eight different sets of standards to support their assertion of “green” status. Some of the “standards” were developed internally by the issuers. That is not how one validates the concepts underpinning ESG  investing.

Investors are getting wise. The municipal analyst community through the National Federation of Municipal Analysts is undertaking an effort to reach a consensus on what is green for purposes of the municipal bond market. In the meantime, there are some federal efforts to calculate these costs dating back some 25 years. Nonetheless, no clear consensus has emerged.

That reflects the model based nature of most of the effort to date which can provide widely divergent results and prices. As one researcher put it, ““We think we can describe the range.  “We have to pick a number somewhere in the middle of the range, that is all you can do.” That’s a problem for investors who increasingly rely on a data based analytic approach to portfolio management. An imprecise number lowers its value for trading valuation purposes and can create compliance nightmares for management and marketing purposes.

NUCLEAR SUBSIDIES

Senator Ben Cardin (D-MD) said he would introduce an amendment with fellow Democrats, Senators Sheldon Whitehouse (D-RI)  and Bob Casey (D-PA) which would provide a production tax credit of $15 per megawatt hour for existing nuclear plant owners or operators in states such as New York, Illinois, and Pennsylvania with deregulated power markets. The credit would be reduced by 80% for any market revenues above $25 per megawatt hour. The credit would begin to phase down when greenhouse gas emissions fall by 50% below 2020 levels and ends entirely after 2030. The proposal comes as the Ohio legislature considers the expulsion of its former Speaker and the chief of staff for the former Illinois House Speaker indicted over efforts by power companies to obtain subsidies from state governments.

IOWA CHARTER SCHOOLS

Typically, the supervision and regulation of charter schools has been the province of local school districts. Local control stems from the fact that many charter schools are paid for by the local taxpayers. We have long had concerns about the drainage of funding from local school districts to charter schools especially where it creates funding shortfalls for the public system.

Now in Iowa we see new legislation which takes the authorization for charter schools out of the  hands of the local funding entity. HF 813, which was signed recently allows private charter school operators, known as founding groups, to seek approval to operate directly from the state Board of Education. Charter school founding groups can still be created by a local school board, but the new state-approval option provides an opportunity to pursue approval free of local opposition. The state board will approve and monitor the performance of all charter schools.

In Iowa, funding is based on enrollment using a state cost-per-pupil (SCPP) formula. Under HF 813, the state will fund 100% of the SCPP for the first year of a charter school’s operation because the formula is based on prior-year enrollment. Thereafter, these costs will be funded by the combination of state and local funds. At the same time, the law allows charter schools to avoid some of the costs borne by traditional school districts. Charter schools will be required to operate a brick-and-mortar “attendance center” but they are not required to provide remote options.

Even though it allows charters to be approved by local entities, the law  is another form of preemption. The new state-approval option provides an opportunity to pursue approval free of local opposition. That creates a real problem for districts which are required to fund schools they do not want.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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The quick reversal of trend in terms of municipal credit is impressive. The much more optimistic outlook for the economy through year end is already showing up in rating activity. Negative outlooks are being revised to stable and upgrades are clearly shoring up the municipal market.

If travel picks up as many expect, there will be a clear impact on airport and airport related credits. The economic activity generated by travel and tourism is already relieving pressure on credits supported by revenues derived from hotel taxes and sales taxes. Multiple states have seen upgrades to outlooks. Connecticut was the most prominent example. After several years as one of the more troubled state credits, the Nutmeg State has seen its ratings upgraded by all four rating agencies. Louisiana, a state whose major industries are under pressure, has been assigned a positive outlook.  

At the same time, we are a bit more restrained in our outlook for state credits. One concern has been the application of what are arguably one-time revenues to fund significant rounds of new spending. NYC is doing it. California’s Governor has proposed a budget which allocates $25 billion to one-time or temporary spending, including nearly $15 billion for capital outlay; $7 billion to revenue-related reductions; $3.4 billion to the Special Fund for Economic Uncertainties (SFEU) balance; and nearly $2 billion to ongoing spending increases, although these costs would grow substantially over time.

Other sectors which stood to benefit from the improving outlook for the pandemic include some hospitals, higher education institutions, cultural and entertainment facilities. As these facilities reopen and demand reestablished, we would expect the perception of these credits to improve fairly dramatically. ports are another sector seeing immediate benefits. After a year of reduced activity, ports are now dealing with capacity issues which are expected to last through the summer.

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CALIFORNIA BUDGET REVIEW

The Legislative Analyst Office (LAO) in California has reviewed the Governor’s May Revision to his fiscal 2022 budget proposal. Much has been made of the huge surplus the state has accumulated through a combination of better than expected revenues and a federal stimulus windfall. The LAO starts off with a disagreement over the actual size of the surplus truly available for new spending.

LAO estimates the state has $38 billion in discretionary state funds to allocate in the 2021‑22 budget process, an estimate that is different than the Governor’s figure—$76 billion. The differences in estimates stem from differing definitions. The Governor counts $27 billion in constitutionally required spending on schools and community colleges, nearly $8 billion in required reserve deposits, and $3 billion in required debt payments in his calculation of the surplus. After excluding these amounts, the two surplus estimates are nearly the same.

The Governor’s estimate includes constitutionally required spending on schools and community colleges, reserves, and debt payments which must be allocated to specified purposes. The constitution requires the state to spend minimum annual amounts on schools and community colleges (under Proposition 98) and budget reserves and debt payments (under Proposition 2). Mainly as a result of higher revenues, relative to January, constitutionally required spending is higher by nearly $16 billion across the budget window.

The May Revision includes roughly 400 new proposals costing $23 billion in new spending. That leaves $16 billion of surplus for other purposes. The revision sends some definitely mixed messages..Under the administration’s estimates and proposals, total reserves would reach $19.8 billion in 2021‑22. Yet some of the new spending uses $12 billion in reserve withdrawals and borrowing to increase spending. Overall, the State’s reserves are pegged to be lower by nearly one-half.

Schools and community colleges would receive the largest spending allocations. The major components of the next largest  category are $5.5 billion for broadband, $1.1 billion to replenish the state Unemployment Insurance Trust Fund, and $305 million for the Employment Development Department to more quickly address workload. Those are three major areas where the pandemic directly impacted life across the board.

The State Appropriations Limit (SAL) limits how the state can use revenues that exceed a specified threshold ($16 billion for FY 2022). Each year, the state compares the appropriations limit to appropriations subject to the limit. If appropriations subject to the limit exceed the limit (on net) over any two-year period, there are excess revenues. The Legislature can use excess revenues in three ways: (1) appropriate more money for purposes excluded from the SAL (under the Governor’s proposal, the common new spending for this purpose is capital outlay), (2) split the excess between additional school and community college district spending and taxpayer rebates, or (3) lower tax revenues.

NYC OUTLOOK UPGRADE

New York City was the beneficiary of an improved outlook from Moody’s. The outlook was moved from negative to stable. The fortunes of the City were greatly enhanced by its designation for significant funding from the federal government. The move comes as the City Council begins its deliberations on the FY 2022 budget.

The Mayor’s Executive Budget plan is the current administration’s last opportunity to present an executive budget, and the last time their budgetary priorities and vision will shape an adopted budget. Those priorities are apparent as the City’s Independent Budget Office (IBO) estimates that about a third ($4.2 billion) of the federal stimulus funding added in the Executive Budget is proposed for baselined initiatives that will continue past current plan years, and the expiration of the stimulus funding.

The stimulus funds, including $5.9 billion of ARPA funding provided directly to the city for general purposes and $7.0 billion of ARPA and CRRSA funds allocated to the Department of Education, along with FEMA moving to full reimbursement of city Covid-related expenses, have filled a large portion of the revenue shortfall brought on by the pandemic.

OREGON FIRE FALLOUT

A lawsuit filed on behalf of 70 landowners in Oregon’s McKenzie River Valley seeks $103 million from two public utilities, Lane Electric Cooperative and Eugene Water & Electric Board, for damages arising from the Holiday Farm fire. The Labor Day fire destroyed 430 homes, killed one person and burned 173,393 acres. The lawsuit alleges that fires were started when tree branches contacted power lines.

The plaintiffs contend that the utilities had been warned about fire conditions but chose to maintain power throughout their systems. In addition to homes, fires such as these have significant impacts on businesses related to logging and lumber activities. The municipal utilities now join several investor owned utilities in Oregon as well as California as defendants in similar lawsuits.

WASHINGTON CLIMATE BILL RAINS ON SUPPORTERS

As the nation and the states move to cope with the realities of climate change, a number of conflicts have arisen between various interest groups. Those conflicts have played out in ways which increasingly are surprising. Issues like carbon pricing and vehicle mileage taxes have been considered. While this has not necessarily resulted in positive legislative action, the debate on the issues sheds light on the viability of many proposed actions and solutions. It also creates some dilemmas.

One of the best examples of the resulting inconsistencies is currently playing out in Washington State. The Legislature passed a broadly backed package to address climate change and the Governor has positioned himself as a national environmental champion. The issue was contentious and a variety of compromises were struck which overcame objections to individual provisions of the proposals (a low carbon fuel standard and a “cap-and-trade” policy). In return, legislators agreed to increase the gas tax by 5 cents. 

So when the legislation passed, the Governor’s signature was seen as a formality. Instead, the Governor vetoed the portion of the legislation raising the gas tax. The state Constitution allows for a governor to veto sections of a bill while signing the rest into law, but Inslee vetoed a specific provision. The Legislature has done this previously when the Governor in 2019 after he vetoed certain sentences in particular areas of the transportation budget. A County Superior Court judge invalidated those vetoes. The Legislature, including members of the Governor’s party, plan to sue on similar grounds again.

How is this all going to work? Under the new laws, fuel companies must start reducing their emissions a little each year in order to hit a statewide goal of emissions 20% below 2017 levels by 2038. Fuel companies can clean up their fuels by producing biofuels or mixed fuels. If they can’t, they would be required to purchase “credits” to make up for emissions that go above the allowed amount. The cap-and-trade plan puts a cap on carbon pollution and greenhouse gas emissions beginning in 2023. The largest polluters in the state would need to either clean up their work to meet the cap or purchase allowances from the state. The state would receive the revenue from those allowances.

ILLINOIS DEBT CHALLENGE FAILS

Billed as an issue of a concerned citizen contesting a bond issue rather than as a front for the effort to create a successful short trading strategy by a private equity investor, the latest challenge to the State of Illinois’ debt issuance powers has failed. The Illinois Supreme Court in a unanimous decision cited the issue of laches. This doctrine deals with how long a plaintiff can wait to take an action. In this case the Court directly referred to the fact that the ” petitioner waited to file his taxpayer action until 16 years had elapsed following enactment of the 2003 bond authorization statute and 2 years had elapsed following enactment of the 2017 bond authorization statute.”

The Court neatly found a way to stop the challenge without ruling directly on the issue of the validity of the debt – $10 billion of 2003 pension bonds and $6 billion of bill backlog borrowing in 2017. A decision of the issue of the validity of the debt would have to wait for another legal challenge.  The use of litigation by motivated political players to halt state borrowing efforts are a fairly regular occurrence as is their general failure to succeed in their efforts to stop or invalidate debt.

The opinion reflected the Court’s understanding of the implications of allowing the case to proceed. It specifically referenced the fat that “enjoining the state from meeting its obligation to make payments on general obligation bonds will, at the very least, have a detrimental effect on the State’s credit rating.” The Court effectively found that the long wait time before the original lawsuit was filed was done to make the State’s position more difficult.

We find this decision to be reinforcing of a general lack of willingness by the courts to invalidate debt. That long established pattern made us confident that the suit and others like it which are a fact of life will continue to be losing efforts.

ROCKY MOUNTAIN WAY

Colorado now relies largely on the 22-cent per gallon gas tax and 20.5-cent diesel rate to fund transportation work.  Newly created fees would be collected from electric vehicle registrations, fuel taxes, retail deliveries, passenger ride services, and short-term vehicle rentals. The fees would be phased in from fiscal year 2022-23 through fiscal year 2031-32 and then indexed to highway construction costs.

Raises in the gas tax would start at 2 cents per gallon and ultimately reach 8 cents per gallon. A fee applied solely to diesel sales initially would be 2 cents per gallon and later increase to 8 cents per gallon. Also included in the bill is a requirement for the $50 existing registration fee charged per electric vehicle to be adjusted annually for inflation. The tax increases are accompanied by transfers from the State’s general Fund.

$507 million in one-time funding would come from the state’s general fund for fiscal year 2021-22. The State Highway Fund would receive $355.2 million. Another $24 million would go to local governments. The remaining $127.8 million would be directed for multimodal uses. Currently, state law requires $50 million to be transferred annually from the General to the Highway Fund. That has been repealed in the face of the significant one time transfer.

MORE NUCLEAR DELAYS

MEAG, Oglethorpe Power, and the Jacksonville Electric Authority got more bad news about the operating schedule for the Plant Vogtle expansion. Georgia Power Co. said that delays in completing testing means the first new unit at its Vogtle plant is now unlikely to start generating electricity before January at the earliest. The additional month will add another $48 million to the cost of the two nuclear units.

The reactors, approved in 2012, were initially estimated to cost a total of $14 billion, with the first new reactor originally planned to start generation in 2016.  Now the plant’s costs are expected to come in at or above $26 billion. The second new reactor is supposed to start operating in November 2022. The company says it is still on schedule.

CLIMATE LITIGATION

By a 7-1 decision, the Supreme Court ruled that suit filed by the City of Baltimore in July 2018 against the major oil companies should be sent back to the U.S. Court of Appeals. The suit, and some 20 others like it from other jurisdictions, argues  that the companies’ “production, promotion and marketing of fossil fuel products, simultaneous concealment of the known hazards of those products, and their championing of anti-science campaigns” harmed the city.

The fossil fuel companies requested an expansive review of issues in the decision to send the case to state court; the city requested that the rules of appeal be interpreted narrowly, in a way that would have allowed the case to proceed in state courts. The court majority ruled that the appeals court should not be overly limited in its review of issues.

There some 20 similar lawsuits to the one filed by Baltimore. They by and large seek to have their claims adjudicated in state courts which are seen as friendlier to the arguments advanced by the cities. So the decision to send this case back to the federal courts for review is being seen as a “loss” for the City of Baltimore and the other cities suing.

But it is important to note that the decision was not about the merits of the cities’ cases. The decision reflected in part a unanimous 2011 Supreme Court ruling which said that, under federal law, the Clean Air Act displaced the common law of nuisance, giving jurisdiction to the Environmental Protection Agency. So the decision at least establishes the proper forum for these cases to be adjudicated in.

PRISONS AND RURAL ECONOMIES

Where I live in upstate NY, the role of prisons as drivers of employment and incomes for local residents could not be clearer. While the drive for criminal justice reform is driven mainly by urban constituencies, the economic impacts of reform of bail and imprisonment policies fall primarily on rural host communities.

It is a pattern which repeats itself across the country. In California, the impact of prison closings is generating concern about host localities and their economies. California’s prison system employs some 50,000 people and consumes about $16 billion in annual state spending. So when a prison is closed, the impact is quickly felt. Taft in Kern County, which had its federal prison close last year, lost 18% of its population in 2020, the highest population loss in the state that year.

Susanville and Tracy are two California communities scheduled to see prisons in their jurisdictions closed. The City of Susanville estimates that the closure of the California Correctional Center scheduled for June 2022 means Susanville could lose an estimated 25% of its employment base — jobs that can pay as much as $90,000. The prison helped to offset job losses from the decline of the regional lumber industry in the late 20th century.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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This week, we get to see how policy matters. The immigration policies of the Trump Administration had consequences and we see them in California’s population trends. We see the results of a regulatory “soft touch” approach which let a major infrastructure facility be vulnerable to just about any hacker who wanted to create some disruption. We see approvals move forward on major wind generation now. The impact of environmental regulation and economics on coal will continue.

On other fronts, we see Puerto Rico moving a bit closer to a resolution of its ongoing bankruptcy and debt restructuring efforts. At the same time, we see some issuers taking steps reminiscent of other declining credits such as pension bonds.

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CALIFORNIA

The news this week that California’s population had declined has been taken by a variety of interests as a sign that their views have been vindicated. Among them are that the State’s politics and taxes are driving people away. It is a long running debate that likely will not go away soon.

The decrease was very small – 0.46% — a decline in 2020 of 182,083 Californians. Most of the loss appeared to occur in the second half of 2020, during the worst of the pandemic. For the first time in its 170-year history, California will lose a congressional seat, with the new population numbers from the 2020 census trimming its delegation in the House to 52 members. The State estimates that more than half of that drop — roughly 100,000 people — was the result of federal policies that blocked international immigration and global lockdowns imposed to curb the pandemic, including restrictions on H-1B and other visas during the last year of the Trump administration.

The immigration impact is real. Enrollment of international students in the state, for example, declined last year by 29%. The Public Policy Institute of California analyzed 2020 census data and found that 4.9 million people moved into California from other parts of the country, while 6.1 million Californians left. It is likely driven by the State’s ongoing struggle to expand the development of affordable housing. The lack of immigration definitely influences the numbers as the historic source of replacement residents for those who leave has been essentially shut off.

The PPIC study showed that those who move in are “more likely to be working age, to be employed, and to earn high wages — and are less likely to be in poverty — than those who move away.”  Another issue is the impact of the pandemic. California’s overall death rate by 19% in 2020. Some 51,000 more lives were claimed last year than would have been normally, according to the state’s estimate.

Now, the Governor has released his May update to his proposed budget. Since his initial proposal in January, California received significant aid through the stimulus passed in the first quarter. Like so many other states, its fiscal position and outlook are much better than expected. The governor puts the surplus at $75.7 billion. Under the governor’s proposal households earning up to $75,000 in adjusted gross income will be able to receive $600 direct payments if they did not receive a payment in the first round this year. The governor puts the surplus at $75.7 billion.

The Governor also hopes for $5 billion to double rental assistance to get 100% of back rent paid for those who have fallen behind, along with as much as $2 billion in direct payments to pay down utility bills. The plans come in the midst of the effort to recall Governor Newsom. It is a good time for the governor to have money to spend.

CYBER ATTACK ONLY A MATTER OF TIME FOR MUNI UTILITIES

It involves a private provider but the news that Colonial Pipeline it had shut down its 5,500 miles of pipeline,  as part of its effort to recover from a cyber attack is troubling for any utility operator. The pipeline carries 45%  percent of the East Coast’s refined gasoline and jet fuel supplies. The pipeline transports 2.5 million barrels each day, taking refined gasoline, diesel fuel and jet fuel from the Gulf Coast up to New York Harbor and New York’s major airports. 

The pipeline connects Houston and the Port of New York and New Jersey and also provides jet fuel to most of the major airports, including in Atlanta and Washington, D.C. The U.S. Department of Transportation has declared a state of emergency in the 17 East Coast states it supplies in an attempt to avoid fuel shortages. Now Colonial has admitted that it paid $5 million in ransom as it ramps its facilities back up to capacity.

Increasingly, we see that ransomware is paying off for the criminals. As it becomes clear that ransoms are being paid, we expect to see additional attacks. It is  reminder of how important a credit factor the cybersecurity should be. It is also a reminder that the tough talk about not paying ransoms is just that – talk. It will stay that way until investors demand real answers as to an issuers cybersecurity strategy.

MUNICIPAL UTILITY COAL EXPOSURE

We have frequently commented on the decline of coal and the increasing pace of closures of coal fired generation across the country. Given the heavy environmental orientation of the Biden Administration, the ownership and operation of coal generation is increasingly problematic. Not only is it a credit issue but as ESG investing continues to grow, it has the potential to be a cost issue.

Some of those investors will want to shun utilities with continuing coal generation exposure on their balance sheets. Fortunately, the number of municipal system owned and operated coal plants is not that large. The agencies include Nebraska PPD and Omaha PPD, CPS of San Antonio, Sikeston, MO, and Muscatine, IA. Another credit in that category is Illinois Municipal Power through its exposure to the Prairie States mine mouth generation plant. IMPA is merely an owner but not an operator.

Operators won’t be able to ignore reality for long. For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity.  For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity. Utilities ran their coal plants far less in 2020 than a decade earlier, with utilization rates dropping to just 40 % from 63% in 2011. At the same time, utilities retired a significant number of their coal plants, dropping the nationwide capacity from 317 gigawatts in 2011 to 223 gigawatts in 2020.

Shipments to power providers dropped 22% from 2019 to 2020. The 428 million short tons the industry received last year marked the lowest shipment level since the U.S. Energy Information Administration began publishing such data in 2007.

BLOWIN’ IN THE WIND

The Biden administration approved construction of The Vineyard Wind project off the coast of Massachusetts. The 84 turbine project would be the largest offshore wind project permitted off the US. The turbines will be able to generate 800-megawatts of electricity. The next largest such projects are rated at 30 and 12 megawatts.

This project could also create a bit of a template for other offshore wind projects. A consistent source of opposition to these projects comes from fishing interests which fear the impact of these constructions to their fishing grounds. Vineyard Wind promised compensation funds for lost revenue for fishing interests in Rhode Island and Massachusetts of $25.4 million, which could lessen the impacts.

Commercial fisherman are center stage in a fight against submerged turbine technology off the coast of Maine. Governor Janet Mills seemingly tried to appease fishermen’s concerns by putting forward a bill that would place a 10-year moratorium on wind development in state waters. In response the fisherman are getting behind a bill which would prohibit state officials from permitting or approving offshore wind projects along the coast.  The bill would not stop wind farms in federal waters in the Gulf of Maine.  

PROVIDENCE PENSION BONDS

It will require state legislative approval but the City of Providence is looking for authorization to issue up to $700 million of pension obligation bonds. It is another BBB issuer looking to borrow its way out of problems. The City only reported $52 million of GO debt when it issued bonds in January of this year. That works out to $296.97 per capita. The pension debt alone would be $3931 per capita. So the pension plan and approved debt if issued would put per capita debt at over $4000 or some 14 times the existing per capita debt burden.

We find it interesting that the finance staff of the City are recent appointees to a second term administration and that this idea is being floated now. Is it a plan that needed the right audience? The plan may indeed provide a way out for a city facing significant tax assessment litigation and that is already making its actuarially required contribution. One can see how it makes sense to the City but it is also a big bright distress signal. If you go down the list of prior pension borrowers, it seems to be the beginning for the ride down the credit rabbit hole.

New Jersey, Illinois, Detroit were all pension bond issuers and all of those issues were followed by ratings declines. What recent municipal bankruptcies show is that pension bond investors increasingly find themselves facing bigger haircuts in restructurings. Providence is assuming 25 year money at 4%. The question is will this be enough to entice investors in a clearly weakened asset class?

GAS TAXES

They may not be a part of the Biden Administration infrastructure proposal but increases in gas taxes are not being excluded from state plans to fund infrastructure. The Missouri Legislature approved the first gas tax increase in Missouri in nearly 25 years.  The plan will increase the tax by 2.5 cents per gallon annually over five years, starting October 1.  Currently, Missouri has the third-lowest gas tax, 17-cents, in the country, behind Alaska and Hawaii. By 2025, the gas tax would be 29.5 cents.

One feature helped to get it through. The legislation comes with a 100 percent rebate for Missourians, as long as they keep their receipts for an entire year. Drivers would apply for the rebate once a year. Even with that carve out, proponents estimated that the increase would be able to generate $500 million a year once fully in place. The legislation also includes an increase in annual fees for electric vehicles raising it 20 percent over a five-year period. 

In Washington, the Governor vetoed a bill which would have banned the sale or registration of new gas vehicles of model year 2030 or later in the state of Washington. Vehicles prior to model year 2030 would not have been affected. An amendment to the bill tied this goal to the implementation of a road usage fee in Washington state. It stated that the guidelines would not take effect until 75% of cars in Washington were covered by a road usage fee.

Washington is one of these states that has added an electric vehicle fee – an extra $150 registration fee per year. The Governor wants the ban on new registrations to be separated from the issue of vehicle mileage taxes. It is surprising given the Governor’s well known stances on the environment. Transportation makes up 45% of Washington state’s emissions, the largest sector. Recently, the Governor supported a 2035 date for the end of internal combustion powered cars.   

DETROIT

The City of Detroit operates under the terms of a City Charter which is approved by a vote of the people. The charter was last revised in 2012. It establishes the ground rules for government operations, details the roles of the executive and legislative branch, enables the election process and mandates the departments, programs and services the city must provide. Now, as the City moves forward after its emergence from bankruptcy anew element of uncertainty has been introduced to the outlook for the City’s credit.

The Detroit Charter Revision Commission (DFRC) was impaneled in 2018 by Detroit voters to address quality-of-life issues, such as water access, affordable transit, affordable housing and responsible contracting. That commission has recommended a series of changes to the charter which would increase and redirect spending.

The governor, in an April 30 letter to the commission, concluded provisions of the revised charter could spur another financial crisis and send Detroit back into active oversight of the Financial Review Commission, which was installed as one of the conditions of its bankruptcy.  The charter commission faces a choice. It could make changes to address Governor Whitmer’s objections and then resubmit a modified plan for her approval.  The commission also could opt to submit the proposed charter to city voters for approval notwithstanding Whitmer’s objections.

An analysis from Detroit’s chief financial officer warned that the proposed charter changes would cost the city $850 million annually due to spending requirements on infrastructure investments, contracts, transportation, salaries, transportation, and information technology. 

That would likely throw the issue into the courts. The August primary will be the final election to take place during the Detroit Charter Commission’s term.  The attorney general’s review concluded that the proposed charter includes provisions that are inconsistent with requirements of the Home Rule City Act and other applicable state and federal laws.  If approved, the charter would go into effect in 2022.

PUERTO RICO

The Puerto Rico Oversight Board approved its proposed Puerto Rico General Fund budget for fiscal year 2022. The proposed $10.1 billion budget for government operations increased slightly from the previous year’s budget. It allocates 72% of funding to education, public safety, health, economic development and pension payments. The board said the budget “fully funds the public employees’ pension through the Paygo system that replaced the insolvent pension trust. The budget also includes Medicaid funds for which the U.S. Congress has not yet extended incremental funding to ensure the continuation of much needed healthcare programs.” 

As the budget process unfolds, the Restructuring Support Agreement (RSA) which would restructure the debt of the PR Electric Power Authority (PREPA) continues to be the subject of several motions in US Bankruptcy Court. Filings by the Authority and the Oversight Board were notable for their support for the RSA. It has not been clear that this was the case. As this process unfolds, legislative actions are being introduced which would effectively cripple the ability of PREPA and the Oversight Board to move forward on PREPA’s much needed reform.

It is likely that much of what the legislature could try to do to implode the RSA would not withstand court scrutiny. Nonetheless, the continuing resistance and obstruction to efforts to create an efficient, resilient, and reliable electric utility are troubling.

DETAILS AND THE AMERICAN RECOVERY PLAN

The American Rescue Plan Act of 2021 will provide $350 billion in emergency funding for state, local, territorial, and Tribal governments.  The U.S. Treasury has released detailed guidelines for how governments can spend the money.

Recipients can use funds to: Support public health expenditures, including funding COVID-19 mitigation efforts, medical expenses, behavioral healthcare, mental health and substance misuse treatment and certain public health and safety personnel responding to the crisis; rehire public sector workers, providing aid to households facing food, housing or other financial insecurity, offering small business assistance, and extending support for industries hardest hit by the crisis.  Governments can also fund premium pay for essential workers; and, improving access to clean drinking water, supporting vital wastewater and stormwater infrastructure, and expanding access to broadband internet. 

The State of Illinois has raised one issue. It was a borrower under the Fed’s Municipal Liquidity Facility. It would like to pay the Fed back and use some of the funds to be distributed under the ARPA. As they stand, the Treasury guidance does not include that purpose as a permissible expense.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change  without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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GREEN POLITICS

In our April 19 edition we highlighted the plan’s by Columbus, Ohio’s electric utility to move to a 100% renewable generation base for its customers beginning this June. It was a way to undertake a policy through sale of a service to customers who want it through the utility. This was accomplished in response to a voter initiative.

Now a long time green power advocate has obtained a ruling from the Ohio Supreme Court against the City of Columbus. The ruling covers the City’s refusal to certify an ballot initiative which called for the city to redirect $87 million — almost one-tenth of its general fund budget — to a private organization for “clean energy programming.” The order requires city council “to find the petition sufficient and proceed with the process for an initiated ordinance,” as outlined in city code. The court ordered the city to either adopt the proposed ordinance or place it on the next general election ballot, as the city code requires.

The initiative would require that $57 million of the total be given to a private organization to assist residents in purchasing electricity generated from wind, solar, fuel cell, geothermal or hydropower producers. Distributions of public dollars through private organizations have a long history of issues including transparency and accountability. It would be troubling if this initiative would pass from both a budgetary point of view but also a governance standpoint.

As this process unfolds, the City has contacted residents and customers asking them if they wish to stop the city from automatically enrolling them in the City utility’s new green-energy aggregation program. That plan would lock in for one year an electricity-generation rate of 5.499 cents per kilowatt hour. That rate is almost 10% higher than the 5.03 cents per kWh that Columbus’ AEP Ohio customers currently pay on the “Generation Services (Supply)” line item portion of their electric bills. That default AEP rate is not fixed for one year. In fact, it expires at the end of May. The City’s program starts June 1. The AEP Ohio default price has changed six times between the start of 2020 and April 2021, ranging between low of 4.64 cents per kWh last July to a high of 5.42 cents per kWh in January 2020.

SUTTER HEALTH

This week, Moody’s reaffirmed its negative outlook on the A1 rating for debt issued by Sutter Health. The Northern California system is in the process of finalizing a $575 million settlement of a class action lawsuit. The resolution of that case, while costly, did stand to reduce pressure on the credit. Now however, a second significant class action suit against the system is beginning to move forward with certification of the class. 

The latest class action lawsuit claims Sutter violated antitrust and unfair competition laws, which caused certain individuals and employers in certain parts of Northern California to overpay for health insurance premiums for health insurance purchased from Aetna, Anthem Blue Cross, Blue Shield of California, Health Net or United HealthCare (together, the “Health Plans”) from January 1, 2011 to the present. Sutter denies that it has done anything wrong or that its conduct caused any increase in the price of premiums that individuals and employers paid for health insurance from those Health Plans. 

The case moves as the system reports weak 2020 financial results. In maintaining the negative outlook Moody’s cited an already high cost structure and the fact that Sutter Health’s nursing union contracts are expiring this summer. The potential for costs increasing faster than revenues is a real risk and we believe that this would generate a downgrade.

REOPENING QUICKLY BENEFITS SOME RATINGS

It makes sense that we see ratings respond to the increasing level of economic activity. Places like Disneyland reopened after 419 days, many businesses will be permitted to fully operate in the New York metropolitan area beginning in the middle of the month. Outdoor facilities are well positioned as operators of indoor facilities approach reopening cautiously. Broadway shows will resume until after Labor Day.

As more people get vaccinated, facilities like airports and ancillary credits (parking, rental cars) are moving quickly to financial improvement as passenger volumes grow.  1.63 million passengers went through TSA screening at airports across the nation on Sunday, May 2, the highest number since March 2020, despite it still being about 35 percent lower than pre-pandemic levels.

As hospitality businesses reopen, the flow of taxes generated by these entities will recover and coverage levels for revenue bonds they secure are quickly improving. Those more dependent on outdoor facilities will show that improvement more quickly than those for indoor facilities. Holders of debt payable from tribal gaming operations will benefit as we see capacity restrictions relaxed. The Seminole Tribe saw the negative outlook on its Baa2 rated revenue bonds lifted to stable.  

THEY LOVE NEW YORK

Over the years, there has been a consistent story line that says that New York State’s fiscal and public policies drive residents to leave. That view was revived in this year’s NYS budget process. The issue came up as the Legislature debated whether or not to raise taxes on the high end of the income scale. Opponents as expected claimed that taxes were high enough and would continue to drive residents to states with lower or no income taxes.

Now the results of the 2020 Census are available and surprise, surprise New York State saw its population increase over 2010 levels. This has been lost on many as the emphasis has been on the loss of one seat in the House of Representatives for New York State. While important, Census figures are used to distribute from more than 300 federal programs, including unemployment insurance, job training grants and the Special Supplemental Nutrition Program for Women, Infants and Children. It has been important to get the count right.

The unexpected results have raised questions about how a ten year data trend could be reversed. It comes down to the fact that the trend was based on annual population estimates derived from computer models. The estimates program showing New York losing population started with the 2010 census and updated those figures annually based on births, deaths and the movement of residents in and out of the state. The estimates showed New York gaining less population from immigration and losing more residents to other states as the decade unfolded.

Those estimates are based on a national file of addresses. If an address is not on file then no count of residents at that address occur. It’s been a problem for some time. The Census did start a program in 2000 that would enable localities to update the address data base. It turns out that NYC was one of the more aggressive localities in terms of its efforts to get more addresses in the data base.

In New York City, the process of finding and entering missing addresses began in 2016, and by the time the census was conducted for 2020, there were 122,000 additional housing units on the list of households to be counted.  The State managed to get another 80,000 addresses into the data base. New York’s master address list grew by 693,000 statewide, and after invalid addresses and vacant units were filtered out, the census counted population in 446,000 additional housing units compared with 2010.

NYC AND OPEB

With the pandemic and its current impacts on government fiscal positions, it has been easy to overlook issues which occupied attention in the pre-pandemic era. One of those issues is that of OPEB (Other Than Pension Employment Obligations) and their role as a future credit drag. These benefits are primarily for medical care. One example of the potential impact is the City of New York.

Most New York City employees become eligible for city-paid health benefits for the years from their retirement to when they become eligible for Medicare after 10 years of service. In addition, the city pays their Medicare Part B premium once they move onto Medicare. In fiscal year 2020, the city spent $2.7 billion on health insurance and Part B premiums and other Medicare supplements for retired city employees and their families.

According to the City Comptroller’s annual report, future retiree health benefits currently represent a $109.5 billion unfunded liability to the city. This liability has more than doubled over the fifteen fiscal years since 2005. Retiree health benefits could be d through collective bargaining or state and local law, depending on the particular benefit. The City’s Independent Budget Office (IBO) has suggested one way to deal with the issue is to link the OPEB benefit to residency.

IBO estimates that 34 percent of retired city employees who faced a residency requirement while they worked for the city now reside outside of New York City and the six counties that satisfy residency requirements for active employees as of December 2020,. This figure excludes those who retired from the Department of Education, city university system, public housing authority, and NYC Transit, and a number of other smaller agencies who did not face a residency requirement when working for the city. The linkage of benefit to residency would only cover retirees who had been required to live in the city or in the six suburban New York counties as a condition of employment. They are primarily the uniformed services.

The idea for linking benefits to residency reflects the fact that retirees residing outside the New York City area tend to have been retired for longer than their counterparts residing in the area, and are therefore more likely to have shifted from a city-sponsored health insurance plan to Medicare. As retirees shift to Medicare, the costs of their city-sponsored health insurance plans ends, but the city still offers some less costly benefits such as Medicare wraparound services and reimbursements for Medicare Part B premiums. Retirees would need to continue to meet the residency requirements for active employees to qualify for pre-Medicare health insurance coverage supplemental Medicare benefits once they shift to Medicare if a residency requirement be adopted.

According to the IBO,  non-Medicare retiree health premiums cost the city about $9,000 per individual, and $23,000 per covered family In 2020. The combined costs of Medicare Part B and SeniorCare were approximately $4,000 per individual and $8,000 per family. Assuming that roughly the same number of retirees continue to maintain their primary residence outside of the city and its surrounding counties, eliminating pre-Medicare coverage for nonresident city retirees would save the city $202 million annually; if the Medicare supplemental coverage were also eliminated for nonresidents, total savings would reach $416 million.

WHERE THE CHARGERS ARE

We saw some data this week that shows where electric vehicle charging infrastructure is being installed in the U.S. It should be no surprise that the leader is California with just under 37,000 chargers installed. New York has the next highest number of chargers at nearly 6,500. Texas and Florida are next. As of March 2021, there are 25 states that have at least 1,000 non-residential electric vehicle (EV) charging units (public and private).

Oklahoma had the highest share of DC fast chargers, accounting for 64% of the 1,044 non-residential chargers in the state. The availability of charging infrastructure has long been recognized as a major catalyst in the drive to electrify vehicles. a study published in the journal Nature Energy by the University of California Davis included a survey of electric car buyers in California which indicated that 20% of respondent buyers had gone back to gas vehicles. The reason most cited by far – availability of charging infrastructure.

TEXAS POWER CRISIS WAKE

The weather may have warmed up but the after effects of the February cold snap linger on. CPS Energy, the municipal electric utility serving San Antonio obtained a temporary restraining order against the state grid operator ERCOT. CPS Energy sought the order to keep it from being forced into default and to prevent ERCOT from seizing collateral payments.

The judge specifically cited attempts by ERCOT to charge its losses across viable utilities — those that haven’t sought bankruptcy protection. ERCOT is now seeking to recover $47 billion in electricity charges and $6 million associated with a software error by attempting to seize money it held as collateral to secure participating utilities charges. Already the largest electric co-op in Texas has declared Chapter 11.

The issue is based on the fact that the system’s independent monitor, believes that ERCOT could have lowered prices sooner than it did. In addition to the monitor, the state’s influential lieutenant governor and its attorney general support the view that prices could have been lowered sooner. As it stands, CPS has gone on record as being willing to pay their share but on a more manageable timeline. That puts the customer base at risk and risks hampering economic competitiveness of the revenue base.

CHICAGO

It continues to defy common sense when you come across situations like the one we find in Chicago. In the aftermath of the Detroit and Puerto Rico bankruptcies, many investors focused on Chicago as a potential source of major credit risk. The City has long known that it has credit problems rooted in pension underfunding and a lack of political will. So it is disturbing to see how poorly informed the major decision makers have been regarding the City’s fiscal position on a regular or timely basis.

The Chicago City Council’s Finance Committee this past week endorsed a proposed ordinance, which would require the city’s Department of Finance and the Office of Budget and Management to provide monthly reports on city revenue collections. Both departments would be required under the ordinance to publish monthly reports on their websites detailing “total collections for each revenue category” from the previous month. The reports must include the difference between anticipated corporate fund revenues and actual collections and show how monthly collections in each tax and fee category compare to the same month the year before.

If the information has indeed been lacking as the City deals with its ongoing credit issues, it’s just another weight pulling the City’s credit perception down. It is also a case study of why disclosure continues to be the major issue plaguing our market.

On a positive note, McCormick Place has not hosted an event since March 6, 2019. The 230 cancelled events translate into a loss of $234 million in local and state taxes and $3 billion in economic activity from the 3.4 million attendees. The operator, the Metropolitan Pier and Exposition Authority, reports a $58 million operating loss for fiscal 2021. Tax collections so far are just $35.6 million, down 73% from last year. The Authority will continue to need to restructure its debt to align revenue requirements with expected near term revenue pressures. McCormick Place hosts its first event in mid-July.

THE STATE OF STATE INFORMATION TECHNOLOGY

Now that we are entering the reopening phase of the U.S. economy, it is easy to forget some of the issues which arose at this time last year. As individuals were forced out of work and school due to the pandemic, computers became the primary interface with the world. Quickly it became apparent that the technology capabilities of the public sector had not come close to keeping up with the state of the art.

For those of us with the experience of having to use some of these systems, it really was not surprising that government websites crashed under the strain of thousands if not millions of initial jobless claims, efforts to purchase health insurance through state marketplaces, and the volume of normal transactions which would often have been accomplished through in person contacts.

Now, with governments in far better shape fiscally than many expected one would think that the experience of the pandemic should create support for investment in system upgrades. Whether expectations are realistic or not, the last year has shown the importance of upgrading government IT systems. As the nation moves forward technologically, it will be important for government to be able to instill confidence in its capability to handle technology. Many of the things being proposed to deal with technological change in sectors like transportation will require the existence of and confidence in robust public sector technology capabilities.

It is pretty clear from the last 12 months that government IT systems remain dated and inadequate. In addition to the maddening service delays which result, aging systems run and maintained by government IT staff are also more vulnerable to cyber attack.

FOXCONN AND WISCONSIN

When it was announced four years ago, many thought the deal between the State of Wisconsin and the manufacturer Foxconn was a bad one. Offered as a way to reemploy factory workers from declining industries, the deal was subject to a lot of suspicion. Foxconn had already established a record of an inability to follow through on its promises.

Since then, the problems at the plant site are well documented. The original contract with nearly $4 billion in state and local tax incentives was struck in 2017 by then-Gov. Scott Walker. The planned factory was supposed to employ 13,000.  Foxconn continually scaled back its plans for the site and failed to meet hiring requirements which were part of the deal. The state told Foxconn last year that it would not award it tax credits because the company had made substantial changes in its manufacturing plans and was out of compliance with the tax credit agreement. Foxconn employed 281 people in 2019 in Wisconsin.

Foxconn promised to locate its North American headquarters in Milwaukee and hire 500 employees, something which has not happened. It also promised to open “innovation centers” in Green Bay, Eau Claire, Racine and Madison that would employ up to 200 people each. Buildings were purchased, but the company did not move forward with its plans. In 2018, Foxconn said it planned to invest $100 million in engineering and innovation research at the University of Wisconsin-Madison but, the research center and off-campus location have not been established.

The deal  reduces Foxconn’s maximum tax breaks in the state to $80 million and significantly reduces the amount of jobs and capital investment Foxconn is required to make. Moody’s has concluded Foxconn won’t bring an influx of new workers or residents to Racine County. The separate development agreement between Foxconn, Mount Pleasant and Racine County remains unchanged. Local governments expect special assessments and revenue generated by Foxconn’s projects will cover the costs. Foxconn must make these minimum tax payments regardless of the project’s completion. 

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.