Joseph Krist

Publisher

This year is providing one of the most uncertain budget seasons that we can remember. Many of the states are going through fairly contentious budget negotiations and votes. One thing common to them all is the uncertainty around the pending federal budget being negotiated in Congress right now. No one can say with any certainty what that budget will look like or what the impact of changes resulting from that budget will be. We do know that many of the potential cuts would lead to higher expenses for state governments. Policy changes in the areas of transportation, energy and public health will put immediate increased pressure on both state budgets and economies. State fiscal years will be underway when a final deal is reached in Congress. We can expect to see the fallout from that budget fairly quickly.

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ILLINOIS BUDGET

Illinois passed a $55 billion budget just before the midnight deadline over the weekend. The budget includes new or increased taxes on sports betting and tobacco products. Lawmakers did not pass plans to address a fiscal cliff facing the state’s public transit system or funding for a new Bears stadium. The taxes increased include a 25-cent tax per wager for sports betting licensees’ first 20,000 wagers and 50 cents per wager after that; an increase in tobacco products from 36% to 45%; subjecting businesses that move profits to other countries to the state’s corporate income tax.

The fallout from the failure to address Chicago’s public transportation funding needs has become quickly apparent. The games have begun in terms of efforts to generate public support. CTA, Metra and Pace officials said they would soon begin planning cuts in their 2026 budgets. Four of eight CTA rail lines would see service suspended on all or portions of the lines. And more than 50 stations would close or see service significantly scaled back.

Lawmakers could return to Springfield for a special session over the summer to consider a pending bill, which already passed the state Senate, or to negotiate a new proposal. They also have the option of taking it up during the fall veto session.

The failure to act during the just ended budget session has created a higher hurdle for lawmakers’ approval. With the spring session over, bills now require 60% approval instead of a simple majority.

CARBON MITIGATION FUNDING CUT

The Department of Energy is canceling over $3.7 billion in funding for projects that would cut carbon emissions and toxic air pollution from power plants and industrial sites. The impact is geographically diverse. Red state/Blue state status does not appear to be a factor. The impact is not just on smaller entities. Some of the largest participants are among the nation’s leading companies.

Kraft Heinz will lose its $170 million award to install clean heat technologies at 10 of its food production facilities. Beverage giant Diageo North America will no longer receive the $75 million it was promised to help install thermal energy storage systems from startup Rondo Energy at production facilities in Kentucky and Illinois. A $75 million grant to back American Cast Iron Pipe Co.’s ​“Next Gen Melt Project,” which would have lowered emissions from iron and steelmaking at its site in Birmingham, Alabama is being taken back. It also includes $75 million for United States Pipe and Foundry Co. to replace a coal-fired furnace with electric arc furnaces.

The Trump administration is getting rid of funding for several efforts to decarbonize the production of cement, one of the most carbon-intensive industries in the world. The cancelled funding includes $189 million for Brimstone and $87 million for Sublime Systems, two startups pioneering new low-carbon cement production methods. Global cement giant Heidelberg Materials will lose its $500 million award to capture carbon emissions at a massive existing cement plant in Indiana. And the National Cement Company of California won’t receive its $500 million grant to take a multi-technology approach to cutting emissions from its plant in Lebec, California.

Funding for carbon capture and storage projects at power plants will be scrapped, too. Calpine will not receive a pair of $270 million awards to retrofit power plants in Texas and California.  

WHERE’S THE OIL BOOM?

U.S. energy firms this week cut the number of oil and natural gas rigs operating for a fifth week in a row to the lowest since November 2021. It was the first time since September 2023 that the number of rigs declined for five straight weeks. The oil and gas rig count declined by about 5% in 2024 and 20% in 2023. After five years of steadily increasing capital investment, independent exploration and production (E&P) companies said they planned to cut capital expenditures by around 3% in 2025 from levels seen in 2024.

PUERTO RICO GRID FINANCE

The US Department of Energy announced that it was redirecting $336 million of federal money originally granted by the Biden administration for the development of renewable generation and microgrids. The funding will instead be directed to be used to reinforce Puerto Rico’s legacy grid and traditional centralized generation infrastructure. The same infrastructure crushed by Hurricane Maria in 2017, the same infrastructure that continues to fail. The same infrastructure that has produced three island wide blackouts in ten months.

That is what makes support from the Puerto Rico government for reinforcement of a failed system at the expense of projects that work so disappointing. It is clear that they are afraid of offending the federal government but that requires supporting decisions which reflect politics and ideology rather than actual events on the ground. At the end of March, LUMA reported over 1.14 gigawatts of grid-connected distributed solar capacity, with an additional 2.34 gigawatt-hours of distributed batteries connected to the grid. Solar power produces over 2 terawatt-hours of electricity each year, which accounts for more than 12.5 percent of Puerto Rico’s total residential electricity consumption annually. 

Can it work? Adjuntas is a small municipality with a population of about 18,000. The town operates five microgrids which provide 228 kilowatts of photovoltaic capacity and an additional 1.2 megawatt-hours of storage, which serve residences and fifteen commercial businesses. The town participates in a research study with the US Department of Energy to see if microgrids can be interconnected to create a functioning system over a wide area.

The town was in the midst of testing when the April 16 blackout occurred. The process of connecting multiple microgrids known as grid orchestration created a system which was able to “keep the lights on” in the entire town without being connected to the legacy grid during that event. One might think that the experience showed the merit of the idea. Instead, DOE and its ideological leader went the opposite way and removed funding for such projects.

Throughout the entire Puerto Rico financial disaster, the gap between what people want and what the government advocates for grows ever wider. The current entity running the power system LUMA has little public support as it seems to view its reason for being to be that of “restoring” a system that did not work very well in its best era. The new government seems less inclined to go against anything the Trump administration wants. In the meantime, local non-profits are generating proposals and projects that reflect local needs and conditions. But DOE pulls the funding.

All this occurs while the PREPA bankruptcy continues to drag on.

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

Joseph Krist

Publisher

NYC BUDGET

The Independent Budget Office (IBO) presented its analysis of the Adams administration’s Fiscal Year 2026 Executive Budget and 2025-2029 Financial Plan, as required by the New York City Charter. It notes that usually during economic downturns, the federal government works to smooth the economic cycle and help state and local governments navigate financially. Now, the federal government is the underlying cause of much of the turmoil.

Federal dollars play a direct role in both the State and City’s ability to pay for planned expenses. New York State’s fiscal year 2025 budget of $240 billion included $89.2 billion (37% of total State budget) in federal funding. The Adams administration’s fiscal year 2025 budget of $119.8 billion includes $10.5 billion in federal funds in 2025 (9% of the total City budget) and $7.4 billion in 2026 (6%).

In the Executive Budget, the Adams administration assumes a surplus of $2.9 billion that it allocates towards prepaying next year’s debt. IBO estimates that there will be an additional $1.7 billion available, mostly due to agency underspending, for a resulting 2025 surplus of $4.6 billion. A growing concern is the Adams administration’s prepayment of $2.9 billion follows a pattern of shrinking pre-payments year-over-year since 2022.

Over that time, the pre-payment has shrunk from 9% of year-end tax revenues in 2021 to 4% this year. This means that the Adams administration’s practice of spending more than the revenue it brings in is unsustainable. IBO’s estimated gaps increase to $7.2, $7.9, and $7.1 billion in 2027, 2028, and 2029, respectively. These gaps are on average 7% of City tax revenues. This is minimally larger than the gaps the City has closed in recent years, which were around 4% to 6% of City tax revenues.

D.C. BUDGET

On March 8, the U.S. House of Representatives introduced a resolution to temporarily fund the federal government while mandating a federal spending freeze. Historically, continuing resolutions have exempted the city from spending freezes, since the money it spends on services comes from locally raised taxes, not federal funds. That provision was not in the House’s resolution. This created a $1.1 billion shortfall with the fiscal year already half over. The U.S. Senate unanimously passed a bill allowing D.C. to keep operating according to its current budget but the chaotic House failed to adjust its CR to include funding for D.C.

In mid-April, the mayor announced that the city was going to address most of the shortfall by invoking a 2009 federal law that gives the city the authority to increase its appropriated funding by up to 6 percent. That only eliminated some of the shortfall. Now, with the House still unwilling to act, the City outlined how it would close the remaining gap. Some payments would be pushed into the next fiscal year, which begins in October; some debt would be refinanced; open positions would temporarily go unfilled; and certain individual programs would face cuts.

It is apparently not enough for ideologues that the DOGE-related mass layoffs of federal workers have reduced the city’s revenue estimates by more than $1 billion over the next three years and has led Moody’s to downgrade the city’s credit rating.

CHICAGO ON NEGATIVE

Fitch affirmed Chicago’s A- rating on its GO debt. It did change its outlook to negative. “The revised Outlook on Chicago’s IDR and GO bond rating to Negative is driven by a lack of substantial progress procuring permanent and high impact solutions to its structure budget gap. This is estimated at more than $1.1 billion for 2026 (roughly 20% of the corporate fund budget). Fitch estimates reserves could weaken to less than 15% of spending by the end of 2025 compared to 29% in 2023. The city has budgeted reserve draws in 2024 ($414 million) and 2025 ($368 million), to help close its fiscal gap and fund advance contributions to its pension funds.” 

The City also faces uncertainty regarding potential reductions in state aid. The State’s budget process is unfolding in the face of potential cuts in federal funding both to the State and City. What could drive a downgrade? Management ineffectiveness, including late budget adoption, failure to adhere to fund balance policies or irresolute or excessively contentious fiscal decision-making; material reliance on non-structural fiscal measures (including fund balance use), aggressive budget assumptions or failure to fund the full statutory pension contribution, at a minimum; an actual or expected weakening of available reserves to less than 10% of general fund spending.

HURRICANE SEASON

The National Oceanic and Atmospheric Administration issued its forecast for this year’s Atlantic hurricane season. It expects to see between 13 to 19 named storms this year. That would make for anabove-average season, and most likely not as active as 2024 ended up being. An average Atlantic hurricane season has 14 named storms, including seven hurricanes and three major hurricanes.

The agency’s forecasters believe that six to 10 of the named storms could become hurricanes, meaning they would include winds of at least 74 miles per hour. Those could include three to five major hurricanes — Category 3 or higher — with winds of at least 111 m.p.h. According to NOAA, there is a 30 percent chance of a near-normal season and a 60percent chance of an above-normal season, with a 10 percent chance of a below-normal season.

CONGESTION PRICING

U.S. Judge Lewis J. Liman granted the Metropolitan Transportation Authority’s request for a temporary restraining order against the Trump administration efforts to end congestion pricing in Manhattan. Judge Liman noted that the M.T.A. “showed a likelihood of success” in its case to maintain congestion pricing. New York State “would suffer irreparable harm” without a restraining order. The decision leaves congestion pricing in place through at least June 9.

Secretary of Transportation Sean Duffy said in February that the department would begin withholding federal approvals and funding for a range of transportation projects beginning on May 28, starting with a payment freeze on a number of highway and transit accessibility projects. That was tied to a May 21 deadline which came and went as did the previous deadlines.

NUCLEAR

President Trump signed four executive orders to support accelerating the construction of nuclear power plants in the United States.  The orders include support for small modular reactors that offer the promise of faster deployment.

One order directs the Nuclear Regulatory Commission to streamline its rules and to take no more than 18 months to approve applications for new reactors.

Another directs the Energy and Defense departments to explore siting reactors on federal lands and military bases, possibly alongside new data centers. That could allow the departments to bypass the N.R.C. and develop their own, faster processes for approving reactors. Advanced nuclear facilities would only have to start construction by the end of 2028 to access 45Y and 48E tax credits.

The Tennessee Valley Authority applied for a license to construct the first small nuclear reactor at its Clinch River Nuclear Site in Oak Ridge, Tennessee. TVA is the first utility to submit a construction permit application to the U.S. Nuclear Regulatory Commission for a small modular reactor. The first small modular reactor at the Clinch River Nuclear Site could cost around $5.4 billion, according to a draft of TVA’s long-term energy plan.

The project will use its own variant of GE turbine technology already employed at TVA. The other two SMR projects proposed for Wyoming and Texas use reactors are cooled by salt and gas rather than water. The Nuclear Regulatory Commission will likely take 2 1/2 years to review and grant the construction permit. TVA can begin on non-nuclear construction as early as 2026 if it secures a Department of Energy $800 million grant for the project.

California startup Valar Atomics and the state of Utah announced a partnership to have a new nuclear test reactor operating in the state in one year. The reactor will be developed at the San Rafael Energy Research Center in Emery County, which was purchased by the state last year. It is all part of a plan to develop a fleet of SMRs throughout the State of Utah.

COAL

The Trump administration declared that ​“an emergency exists in portions of the Midwest region of the United States due to a shortage of electric energy.” It cites that “shortage” to invoke the DOE’s emergency authority under the 1935 Federal Power Act to unilaterally order any power plant in the country to keep running. Now, the U.S. Department of Energy issued an order demanding that the J.H. Campbell plant, a 1,560-megawatt coal-burning power plant owned by Michigan utility Consumers Energy, must abandon its plans to shut down on May 31 and instead continue operating through at least late August.

The closure has been long anticipated and planned for since 2021. The planned shutdown is part of a broader agreement between Consumers Energy and state regulators to end coal use by 2025 and put the utility on a path to meeting the state’s mandate of 100% carbon-free power by 2040. Consumers Energy has estimated that the switch from costlier coal to cheap gas, solar, and energy storage will save customers $600 million through 2040.

The DOE justified its emergency order by citing a December 2024 report from North American Electric Reliability Corporation which said that the Midwest was at the most risk of “grid reliability challenges”. The power from the coal plant is offset by new gas generation and renewable energy purchases. The Trump administration has offered regulatory relief to some 70 coal fired generation plants nationwide.

MUNI SOLAR

In the midst of the array of trade barriers being erected by the Trump administration, the City of San Antonio’s electric utility (CPS Energy) has entered into an international agreement to develop solar and battery resources for its system. OCI Holdings of Korea announced that its U.S. subsidiary, OCI Energy, has signed a three-party memorandum of understanding with CPS Energy, and Vertech, the U.S. subsidiary of LG Energy Solution, to collaborate on energy storage system (ESS) projects in North America.

OCI Energy will obtain ESS batteries from Vertech, store solar energy generated during the daytime and sell the stored electricity to CPS Energy. The first project is the Alamo City ESS project a solar power facility under development on a 35-acre site in southeastern Bexar County in Texas. It will combine a 120-megawatt solar photovoltaic system with a 480-megawatt-hour energy storage system. OCI signed a 20-year storage capacity agreement with CPS Energy to supply power to the San Antonio area.

OCI will be a potential electric customer. It recently revealed plans to spend $265 million to build a solar cell manufacturing plant in San Antonio. It is expected to reach a production capacity of 2 gigawatts — 1 gigawatt in the first half of next year and another in the second half. 

HOSPITAL FIRST AID

In 2023, S&P lowered its rating to ‘A-‘ from ‘A’ on PeaceHealth, Wash.’s existing taxable bonds and tax-exempt revenue bonds. They kept a negative outlook. PeaceHealth, based in Vancouver, Wash., is a nonprofit Catholic health system providing care to communities in Washington, Oregon and Alaska. PeaceHealth has approximately 16,000 employees, a multi-specialty medical group practice with more than 1,100 providers, and 10 medical centers serving both urban and rural communities.

It is clear that the hospitals’ operating trends have not improved. It’s not a surprise given its smaller community orientation and the unfavorable demographics in those areas. PeaceHealth gets between 55 and 58% of its revenue from Medicare and Medicaid. Medicare alone is 40%. Operating losses have continued albeit with some improvement in FY 2024. Only strongly increased investment earnings got the system to breakeven.

Now the system is making cuts to better balance operations. It announced a 1% staffing reduction this week with immediate effect.  A hiring freeze is also being implemented through 2025, with the exception of clinical and essential operational roles. One important metric did follow recent trends unfortunately. Days in cash on hand declined again.

TARIFFS AND PORT CAPITAL COSTS

Much of the focus on proposed tariffs is rightfully on the most obvious impact – reduced shipping and port activity. That does have an impact on port revenues. The industry however is directing its attention to one serious impact to ports from a specific proposal regarding tariffs and Chinese ship building and the manufacture of port equipment led by The American Association of Port Authorities (AAPA).

Ship-to-shore (STS) cranes are a basic component of modern ports. They are the structures which actually load and unload containers onto ships. Currently, no U.S. companies manufacture STS cranes, and Chinese firms dominate the market. A joint survey by AAPA and the Maritime Administration revealed that 55 cranes are currently on order for U.S. ports, 44 of which are being sourced from China. Over the next decade, U.S. ports are expected to acquire 151 cranes, with about 80% projected to come from Chinese suppliers.

The Trump administration has proposed and then suspended the imposition of a 100% tariff on STS cranes imported from China. Before tariffs, a crane cost roughly $15 million. With the proposed tariff layered atop existing duties, AAPA estimates that U.S. ports could face $6.7 billion in additional costs over the next 10 years. One example is the Port of Houston, which has eight Chinese cranes scheduled for delivery in 2026. That result in $302.4 million in extra fees if the tariff is applied.

The AAPA has urged the US Trade representative to consider exemptions for cranes ordered before April 17, 2025, delay implementation by one to two years, and clarify whether the proposed Section 301 tariffs will be cumulative with existing duties.

CARBON CAPTURE AND WATER

The Mahomet Aquifer supplies water to hundreds of thousands of people in central Illinois.  Estimates for the number of Illinois residents served daily by the aquifer range from 500,000 to 1 million people. In 2015, portions of the aquifer in 14 Illinois counties were designated as a sole source aquifer by the EPA, since contamination of the aquifer could cause significant public health risk. That EPA designation also indicates that there are no “reasonably available alternative drinking water sources” that could be used if the water in the aquifer were contaminated.

Archer Daniels Midland (ADM) has been operating a carbon injection site in Illinois since 2011. The project received the first federal permit for “geologic sequestration of carbon dioxide” in 2017. Since then, the project has stored more than 4.5 million tons of carbon dioxide more than a mile underground. Last year, it was found that a leak occurred during carbon injections carried out by ADM.  8,000 metric tons of liquid carbon dioxide and other ground fluid escaped the area it was permitted to be in.

ADM temporarily paused carbon injections in October after another issue with a well was identified. Now, legislation awaits the Governor’s signature which would restrict injections in the area of the aquifer. SB1723 passed out of the Senate in April 55-0 and passed out of the House on Tuesday with a vote of 91-19.

This week, the Environmental Protection Agency announced it was turning over regulatory oversight of carbon injection facilities in Arizona to the state.

There are no carbon injection facilities in Arizona and no permits have yet been requested to build any in the state. The Arizona Department of Environmental Quality is the state agency that will be responsible for implementing state oversight. Debate over carbon wells revolves around groundwater issues.

The state is losing significant groundwater supplies as industrial agriculture has engaged in significant pumping of groundwater to irrigate its crops. An Arizona State University study found that the Colorado River basin has lost 27.8m acre-feet of groundwater in the past 20 years, an amount of water nearly equivalent to the full capacity of Lake Mead. Most of the groundwater losses since 2003 occurred in the lower Colorado River basin which includes Arizona. Depletion of water storage in the Colorado River basin has sped up in the past decade. Since 2015, the basin has been losing freshwater at a rate three times faster than in the decade before, driven mostly by groundwater depletion in Arizona.

INTERNATIONAL STUDENTS

We have already commented on the role of international students as a source of funding for U.S. universities. While Harvard has been in the spotlight through its ongoing fights with the White House, a number of well-known institutions – public and private – have substantial cohorts of international students. These are the universities with the largest number of students and the share of international students as a % of total full time enrollment. Data is from the National Center for Education Statistics.

NYU – 49,847 (37%); Michigan – 48,167 (17%); Illinois – 47,118 (23%); Washington – 43,118 (18%); USC – 41,648 (28%); UC Berkeley – 41,572 (17%); UC San Diego (40,716 (18%); UC Davis – 38,184 (15%); UC Irvine – 35,511 (16%); Northeastern – 29,738 (40%). For the schools currently in the crosshairs Harvard has 20,807 (28%) and Columbia has 28,756 (40%).

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

Joseph Krist

Publisher

TEXAS POWER

There has been a flurry of Texas legislation seeking to erect or maintain barriers to renewable projects. S.B. 388 requires every new megawatt of renewables to be matched by a megawatt of new gas power. It would require at least 50 percent of power generation installed after January 1, 2026, to come from “dispatchable” energy sources, which include natural gas and coal.

S.B. 819 would use “the police power of the state” to restrict landowners from leasing their properties to wind and solar companies. The bill would make it harder to permit renewable energy projects. The bill invokes the “police power of [the] state” to “increase electric generation” and “mitigate unreasonable impacts of renewable energy generation facilities on wildlife, water, and land” in Texas. The legislation would require new renewable energy projects that generate over 10 megawatts—enough to power about 10,000 homes—to obtain permits from state regulators before connecting to the power grid. 

The Texas Senate passed S.B. 715 which would require all renewable projects — even existing ones — to buy backup power, largely from coal or gas plants. It would require solar plants in particular to buy backup power to “match their output at night. The usual reliability arguments are being made by coal/gas advocates. This isn’t about daytime reliability (that’s not an issue). The bill would also force renewable projects to pay an annual “environmental impact fee” to fund site cleanups of these projects. Greenhouse gas-emitting energy projects in the state, including oil and natural gas, are not subject to similar dues. 

A study by the Texas Association of Business (TAB) concluded the laws would cost the state $5.2 billion more per year — and cost individual consumers $225 more each year. The irony is that Texas is a leader in installed wind and solar capacity. It has been established that shortages under a variety of weather situations have not been the result of renewable generation. Nevertheless,

the state’s oil and gas lobby continues to push against renewables.

NEW YORK STATE BUDGET

The State of New York finally has a budget some five weeks after the beginning of fiscal year 2026. The budget faced some thorny issues such as funding for the MTA in the face of threats to federal funding. Fiscal issues weren’t the source of the delay, however. Rather it was non-fiscal policy issues that held up enactment. Primary among them were changes made to recently enacted legislation which was seen in the criminal justice system seen as more favorable to defendants. Others were changes to the state’s involuntary commitment standards and a bell-to-bell cellphone ban in schools.

The fiscal side did include items such as an inflation rebate check program ($2 billion to provide direct cash assistance to more than 8 million New Yorkers with checks of up to $400 per family), a child tax credit (a $1,000 credit for kids younger than 4 years old and a $500 credit for kids ages 4-16) and middle class tax cut ($1 billion). 

Gov. Kathy Hochul signed new legislation as part of the FY26 Enacted Budget to fully fund the MTA $68.4 billion 2025-29 Capital Plan. The funding plan that also includes cuts to the regional Payroll Mobility Tax (PMT) for roughly 10,000 small businesses and an elimination of the PMT for self-employed individuals earning $150,000 or less. The plan will also eliminate the PMT for all local governments outside New York City. 

In addition to providing $8 billion in total operating aid for the MTA, the FY 2026 Budget will give a $3 billion State capital appropriation to support the MTA capital plan. The FY 2026 Budget also requires the City of New York to provide $3 billion toward the MTA capital plan and requires the MTA to find $3 billion in efficiencies. 

In the end, this budget might not matter that much. All of the major players in the process agree that proposed changes to federal budgets could substantially reduce funding and create gaps which would need to be addressed.

CALIFORNIA MAY BUDGET REVISION

Governor Newsom proposed a $322 billion state budget for fiscal 2026. According to the Governor, Washington’s imposition of tariffs has driven a downgrade in both the economic and revenue forecasts. Combined with increased expenditure growth above the Governor’s Budget—most notably in Medi-Cal—the state must now close an estimated shortfall of $12 billion to balance the budget.

Market volatility since tariffs were imposed has resulted in a substantial downgrade to the S&P 500 forecast in the second quarter of 2025. The impact of tariffs on financial markets was seen in significantly reduced stock prices of the largest California-based technology companies. The May Revision forecast assumes stock-based compensation to their employees is projected to decrease in 2025.

This is contributing to a downgrade in projected personal income tax revenues in 2025-26 that will reverse the positive trends in personal income tax withholding cash results through April 2025. In addition, personal income tax revenues from capital gains were significantly downgraded in 2025-26 due to the stock market decline.

Expenditures in the Medi-Cal program—the state’s health care program for low-income individuals—have increased significantly and continue to outpace revenues. In Spring of 2025, a cash flow loan of $3.4 billion was executed and an additional $2.8 billion General Fund was appropriated to support Medi-Cal expenditures of $37.6 billion General Fund in 2024-25. The major drivers of these increases are higher overall enrollment, pharmacy costs, and higher managed care costs.

It is the source of proposed cuts to deal with the budget gap which is getting much attention. Most prominent is an enrollment freeze for Full-Scope Medi-Cal Expansion for Undocumented Adults, Adults 19 and Older. Others include imposing Medi-Cal Premiums on Adults 19 and Older and Asset Test Limits.

The May Revision maintains the planned withdrawal of approximately $7.1 billion from the Budget Stabilization Account (BSA). That would leave total reserve balances of approximately $15.7 billion at the end of 2025-26. This consists of $11.2 billion in the BSA and $4.5 billion in the Special Fund for Economic Uncertainties.

IOWA EMINENT DOMAIN

Iowa senators voted 27-22 to pass a bill to limit the ability of carbon sequestration pipelines to use eminent domain. House File 639 comprised a number of bills passed by the House aimed at eminent domain. As written, the bill changed definitions of a common carrier, increased insurance requirements to cover any damages to property and reimburse landowners for increases in premiums due to the pipeline. It set requirements for the Iowa Utilities Commission (IUC) and expanded who can intervene in IUC proceedings.

This is the first time that the Senate took a vote on a bill associated with eminent domain after three other attempts. As is often the case with potentially difficult policy decisions, the budget process offered the best vehicle for progress on the issue. By refusing to vote on a budget for the State, supporters of the legislation were able to force consideration of the bill. This year, debate was contentious and efforts to amend the bill in favor of the Summit Carbon Solutions failed.

The effort to amend the bills focused on provisions designed to protect the Summit project. It was led by a former managing director (now a sitting State Senator) of a related entity Summit Agricultural Systems. Opposition to the Summit pipeline regularly hovers around 75%. It actually was in issue in the 2024 Iowa caucuses.

One interesting issue arises from the legislation. Does enactment language in the bill open the door to lawsuits from Iowans who have already signed an easement contract with the state when Summit is no longer able to uphold that contract without eminent domain to complete the project? It’s not clear how many land owners took the money out of fear of eminent domain but clearly many did. Will they be able to get out of their agreements and, if so, at what price?

Summit faces other challenges. The North Dakota Supreme Court heard arguments in a case where landowners are suing the state of North Dakota and the state Industrial Commission over a state law that can force landowners to take part in an underground CO2 storage project. Under that law, landowners can be forced to allow carbon dioxide storage beneath their property if 60% of the landowners agree to a storage project. The argument is that the law is unconstitutional because it doesn’t allow landowners to use the court system to argue for just compensation. 

The Northwest Landowners Association is the lead plaintiff in this case. It successfully challenged a 2019 North Dakota pore space law at the state Supreme Court, with justices finding it unconstitutional.

IS THIS LIFE AFTER FEMA?

Recently, North Carolina received a $1.4 billion grant from the U.S. Department of Housing and Urban Development for disaster recovery—including the repair or reconstruction of single-family homes, rental housing and infrastructure—as well as economic revitalization and mitigation. The grant administration is a state responsibility. The N.C. Department of Commerce on May 9 awarded a project management contract to Horne LLP, worth $81.5 million over the next three years to run North Carolina’s disaster recovery program in western counties flattened by Hurricane Helene.

The contract was awarded despite the fact that Horne was the prime contractor for the N.C. Office of Recovery and Resiliency, also known as ReBuild NC, providing case management and other services from 2019 to 2022, when the firm’s contract was not renewed after many disaster victims complained about poor case management. Here is how privatization gets a bad name. The western North Carolina disaster recovery advisor to Gov. Josh Stein, worked for Horne until April 2024. He was one of six people who authored the RFP.

The state noted in the RFP that this ranking method “may result in an award other than the lowest price or highest technically qualified offer.” In Louisiana, the state auditor investigated Horne in November 2022 after several company employees allegedly received COVID-related relief funds they were administering. Earlier that year the state of Alabama had to return more than $42 million in pandemic aid to the U.S. Department of Treasury after Horne failed to distribute emergency rental funds on time. In April, in West Virginia, Horne agreed to pay $1.2 million as part of a settlement agreement with the federal government over alleged improper billing for services related to disaster recovery in the state.

CALIFORNIA FIRE INSURANCE

The California FAIR Plan Assn., the state’s insurer of last resort, assessed its member carriers $1 billion on Feb. 11. The plan, operated and backstopped by the state’s licensed home insurers, said it has made $2.75 billion in claims payments as of last week and expects its costs for the fires will total $4 billion, which it could not cover with its limited surplus and reinsurance funds.

Under a plan approved by the state’s insurance regulator, insurers are filing applications with the state Department of Insurance seeking to surcharge their policyholders statewide for half the costs of that assessment. Ten home insurers and their affiliates have filed applications for surcharges, with the fees ranging from about $6 or less for some rental policyholders, $20 or $30 for condo owners and typically $40 to $60 for a standard homeowners policy. A bill working its way through the Legislature would authorize the California Infrastructure and Economic Development Bank to issue bonds on behalf of the FAIR Plan to help pay its claims and increase its liquidity.

State Farm is estimated to cover some 1,000,000 homes which means that one in five homes in the state are State Farm customers. Given that dominant position, it’s not a real surprise that the company has been the target of criticism from customers trying to navigate the insurance process. In spite of a 20% rate increase granted in 2024, the January fires have driven even higher insured losses. The State Insurance Commissioner has now approved State Farm for a “temporary” 17% increase in premium rates. The interim rates go into effect on June 1. 

S&P Global Ratings downgraded State Farm’s California subsidiary from an “AA” to an “A+” rating. The action reflected “a significant deterioration” in the company’s capital position over the last five years. The Commissioner’s order does require State Farm’s parent company to provide an infusion of $400 million in cash to the California subsidiary.

CLIMATE LITIGATION

In 2021, the most destructive fire in Colorado history, the Marshall Fire, burned more than 1,000 homes in Boulder County and caused more than $2 billion in damages. That was some three years after Boulder County and the City of Boulder began litigation against fossil fuel producers. Like so many other cities and states, the Boulder lawsuit claims taxpayers shouldn’t bear the full cost of disasters like floods and wildfires. It argues the two defendant companies should share the financial burden after knowingly contributing to climate change and misleading consumers about the risks of burning fossil fuels.

As is the case everywhere else, the companies argue that the cases belong in federal court where they believe they will have a more sympathetic audience. Like everywhere else, the Colorado Supreme Court ruled the lawsuit could proceed within Colorado. The decision returned the case to a lower district court, which had already ruled the lawsuit wasn’t preempted by federal law and belonged in the state legal system. 

BRIGHTLINE RATINGS DIM

Fitch downgraded $2.219 billion of Brightline Florida LLC’s senior secured private activity bonds to BB-plus from BBB-minus and cut Brightline East LLC’s (BLE) $1.1 billion senior secured taxable notes to CCC-plus from B. Both securities have been placed on rating watch negative. It follows news that S&P lowered its outlook on its BBB-minus underlying rating on Brightline Trains Florida LLC’s (OpCo) bonds to negative from stable. Of the $2.2 billion in tax-exempt bonds, $1.13 billion is insured by Assured Guaranty (AGO) and rated AA.

Fitch said “The downgrades to OpCo and BLE debt reflect the weaker than expected ridership ramp up, lower fares, elevated operating costs, and significant spend down of the project’s liquidity accounts. The rating further reflects a number of unanticipated expenses that were not previously reported to Fitch that resulted in material draws on cash balances. Ramp-up is expected to be comparatively longer for Brightline than for other new transportation development projects.

Ridership data to Orlando is limited, complicating the validation of consultants’ long-term forecasts, and initial fares are high relative to competing alternatives particularly to Orlando. Due to slower ridership ramp up, lower fares, and higher operating expense, Brightline ended the year with an operating loss of $63 million.”

S&P notes that “ticket revenue is ramping slower than we anticipated, causing year-to-date revenues as of third-quarter 2024 to lag our base-case forecast by 20%. Notably, for the same period average long-distance fares were 19% lower than our forecast, long distance ridership revenue accounts for about 70% of total ticket revenues in 2024 under our base case. OpCo expenses reported through the third quarter of 2024 are higher than our base case by 7%. We understand additional costs have been incurred in fourth quarter 2024, impairing the balance of the reserves. 

Both agencies see the potential for a serious liquidity crunch in the next 18-24 months.

NEW YORK CITY – RIKERS ISLAND

Federal Justice Laura Taylor Swain (yes, the same judge handling Puerto Rico’s bankruptcy) ordered the City of New York to appoint an outside official to make major decisions regarding the operation of the City’s prison complex on Rikers Island. The official, called a remediation manager, would work with the New York City correction commissioner, but be “empowered to take all actions necessary”. The official would report directly to the judge and would not be a city employee.

The decision comes some ten years after the City settled litigation over conditions at the jails. That settlement resulted in the appointment of a federal monitor who reported on operations. That position was not empowered to make decision, whereas the “manager” is. It is an extraordinary step. Since 1974, federal courts have put only nine jail systems in receivership, not counting Rikers order. In November, the judge found the City found the city to be in contempt for failing to stem violence and excessive force at the facility.

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

FEDERAL EXTORTION

The Trump administration and Maine reached an agreement that restored funding for schoolchildren. The U.S. Agriculture Department held up around $3 million, which would pay for food preparation in schools and child care centers, and also assist in feeding disabled adults in congregate settings. The Agriculture Secretary called the funding “wasteful, redundant, or otherwise against the priorities of the Trump Administration.” The state’s attorney general said his office had withdrawn a lawsuit it filed in objection to the funding freeze.

A bill to restore more than $1 billion in funding for Washington, D.C., that Congress blocked earlier this year has stalled in the House. Congress, when it passed a continuing resolution in March, omitted standard language routinely included in appropriations bills to approve the city’s budget. Now it is being held up on ideological grounds as votes are being held back by a bloc of conservatives who want to include new restrictions on voting, abortion and other issues.

The Senate approved a separate bill that would allow D.C. to continue operating under its current budget without interruption. Until the House acts and passes a budget for D.C., Washington was forced to revert to last year’s funding levels, amounting to a roughly $1.1 billion cut halfway through the fiscal year. The holdup has already led to one downgrade of the City’s G.O. rating.

NEW YORK TAKES THE HIT FOR BORDER POLICIES

New York City’s tourism agency, New York City Tourism and Conventions, had had projected a full recovery this year with a record number of visitors after the coronavirus pandemic disrupted travel five years ago. Then the realities of Trump administration border policies began to take hold. The agency has now twice revised downward its initial forecast of 67.6 million visitors — international and domestic — since President Trump began threatening Canada, detaining tourists, and advancing a trade war.

The latest forecast now estimates that 64.1 million tourists will visit the city. That includes 400,000 more domestic travelers than last year, but 800,000 fewer foreign travelers. The new forecast sees 12.1 million international travelers, a 17 percent drop from earlier 2025 projections. That is a direct reflection of the reaction in Canada to threats from the President.

Last year, tourists spent $51 billion in New York City. Spending this year is now forecast to decline by $4 billion. Through April, about 117,000 fewer foreign passengers have arrived at Kennedy International Airport and Newark Liberty International Airport compared with the same period in 2024. The Empire State Building Observatory’s operator said it saw a 4.6 percent decline in people in the first three months of the year compared with last year, adjusting for the shift in the Easter holiday this year. About 50 percent of its visitors are from overseas. 

WHY NOT PUERTO RICO?

One element of the Trump administration’s trade and economic plans is returning manufacturing jobs to the U.S. It is clear that on an overall basis, the administration will always take the low or no tax option. You would think that these plans could be used to help industries which already are here to modernize or expand. That you might concentrate your efforts on places where there is both a need and a framework in place to encourage growth and employment.

That is why it makes less and less sense that the point is not being made as a part of the budget process that Puerto Rico is a great candidate for such help. Much has been made of the country’s reliance on foreign often Chinese sources for up to 97% of some drugs used in the U.S. With all of its problems, Puerto Rico does have a significant drug manufacturing industry. It just does not operate to its full potential because of foreign competition supported by low or no tax policies. When Section 936 ended, there’s a reason the industry moved to Ireland.

Fortunately, not all of it left. P.R. still has 11 of the world’s largest drug manufacturers. Before that tax break ended, it has been estimated that it allowed drug companies to keep the 2022 equivalent of about $235 million per year — or 70 cents for every American annually. Given the totality of the circumstances which impacted the drug industry since 2017, it’s not unreasonable to think that tax and industrial policies could be of some help.

Another issue is the reliability issue of the power system. The existing manufacturing base often has its own provisions for power. The trials of PREPA truly impact the residential customers who would be expected to work at these plants. It reinforces the idea that the PREPA bankruptcy needs to be resolved.

WESTERN WATER

Snowpack is variable across the region, but most of the higher elevations currently have about 80%-100% median snow water equivalent (SWE). Pockets of snow drought are present throughout the region, but are mostly confined to lower elevations. Snow has completely melted 1–3 weeks early at some lower elevations. Persistent snow drought in southern portions of Utah and Colorado and a rapid transition to late-season snow drought in much of northern Utah and Colorado have led to low streamflow forecasts. As a result, Governor Cox of Utah issued a drought emergency order, declaring a state of emergency in 17 counties.

Snow conditions remain dire in southern portions of the upper and lower Colorado River Basin. SWE is currently below median in southern portions of the basin, including in the Upper San Juan (31% of median), Gunnison (36%), Upper Colorado-Dirty Devil (22%), and Lower Colorado-Lake Mead (28%) Basins.

The Upper Colorado Basin as a whole (130 SNOTEL stations) is now at 62% of median SWE. As of April 28, the April-July for runoff into Lake Powell is 3.5 million acre-feet (MAF), or 56% of the 30-year average.

Most recent median water supply forecasts have declined in the Colorado River Basin compared to the April 1 forecasts. This is likely due to dry conditions, rapid snowmelt, and early melt out. Most forecast points in the Upper Colorado Basin indicate 50%-75% of median seasonal runoff, with some locations less than 50%. This will put additional pressure on the Upper Basin states to conserve water above that which they are being asked to make in current negotiations.

OAKLAND

Just days before an interim mayor was expected to release a budget proposal for the biennium beginning July 1, the City of Oakland’s Finance Director announced their resignation. This as the City faces an $89 million shortfall in the current fiscal year, and a $265 million projected structural deficit over the next two-year cycle. The City Administrator who is running the City until the new Mayor takes office this month was expected to release his budget proposal for the next two fiscal years on May 1. 

The Finance Director has been at the center of several highly politicized disputes. In late November we reported that the Finance Director was proclaiming that the City was on the edge of insolvency. This followed disputes over public safety funding and overtime issues. The City clearly faces significant financial issues. It has already taken some steps to address expenditures – 42 employee layoffs and 34 demotions while also temporarily closing two fire stations, cancelling all police-training academies and cutting some $2.6 million in funding for NGOs and a host of other grants and citywide programs.

Lagging revenues from taxes on real-estate transfers and business licenses, along with rising overtime costs for the city’s police and fire departments are cited as the most obvious problems. The outlook on the City’s general obligation rating from Moody’s remains on negative outlook. When the City was downgraded in December, Moody’s said “Governance is a key driver for the rating action given that management has not made sufficient and timely budget adjustments to fully absorb the one-time pandemic relief monies that were used to fund operations, and declining revenue, in particular real estate transfer taxes. As such, the city has reduced its flexibility to address ongoing spending pressures.”

INITIATIVES UNDER ATTACK

Gov. Ron DeSantis signed a law creating new hurdles for citizen-driven initiatives. Under Florida’s measure, voters could be charged with a felony if they collect more than 25 signed ballot petitions, other than their own or those of immediate family members, and don’t register with the state as a petition circulator. Under the law, more people will be banned from collecting petitions, including Floridians with felony convictions who haven’t had their voting rights restored.

Noncitizens and people who don’t reside in Florida will also be prohibited from gathering signatures, in a state with a significant population of part-time workers and foreign-born residents. Floridians will have to provide their driver’s license number, voter ID card number, or the last four digits of their Social Security number in order to fill out a petition. The form will ultimately become a public record.

The legislation as the State is still dealing with a scandal involving a charity run by the Governor’s wife that was found to be spending some $10 million on opposition to two ballot initiatives on the 2024 ballot.  Florida voters supported ballot initiatives to protect abortion rights and legalize recreational marijuana, though not by the required 60% super majority needed to pass.

The efforts to limit or eliminate initiatives takes on some almost comical aspects. New laws in Arkansas will bar initiative ballot titles written above an eighth-grade reading level. And canvassers will have to verify that petition signers have either read the ballot title or had it read aloud to them. In South Dakota, sponsors will need to make sure their petition titles appear in 14-point type on the front page and 16-point font on the back, where people typically sign.

According to a review by The Associated Press, roughly 40 bills restricting or revamping the citizen initiative process have passed at least one legislative chamber this year.

FLORIDA BUDGET FIGHT

A deal was announced between the leaders of the Florida House and Senate to cut taxes by $2.8 billion, including a sizable permanent reduction in the state’s sales tax rate as part of a top-line deal on the budget. Perez said the deal means the budget will be smaller than the one initially proposed by Gov. Ron DeSantis. The House and Senate had been unable to reach an agreement on top-level spending levels and tax cuts before the end of the legislative session. House leadership had proposed a $5 billion permanent cut in sales taxes, while the Senate was seen as urging a more cautious approach and advocated a smaller blend of permanent and one-time cuts.

Bills dealing with property insurance, education, increased minimum wages and loosening child labor laws all failed to be enacted. Mixed in with the fiscal issues were a couple of other controversial topics which the Legislature hoped would escape notice amidst the budget fight. The Legislature has agreed to ease the financial burdens of condominium owners and impose strict new restrictions on ballot initiatives.  

Budget sessions are often highly political – look at New York State. It became clear that the impending gubernatorial election in 2026 was the major obstacle. Overhanging the budget negotiations were questions about a charity – Hope Florida which is run by the wife of Governor DeSantis. He would like her to succeed him. That led to investigations of the charity and its activities fighting ballot initiatives in Florida – not its stated purpose.

HOSPITAL MERGER

In June 2024, Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. This week, the parties terminated their agreement. It comes before state regulators were able to make a decision on approval of the plan. The Oregon Health Authority (OHA) had heard from a variety of interests including a community advisory board which unanimously asked the OHA to reject the proposal.

Concerns over a rise in insurance costs to patients and a reduction in competition, jeopardizing care quality were big issues. Those factors are raising concerns all over as concentration continues to increase. Unfortunately, most patients feel no positive impact from hospital consolidations. Unsurprisingly, hospital labor opposed the merger as consolidations all over generate staff reductions. One of the issues driving the plan was the cost of paying hospital staff in a post-COVID inflationary environment.

OHSU was the financially stronger and higher rated entity. Legacy is under more financial pressure and is dealing with overcapacity. Those factors made a merger more attractive. Of immediate concern is the potential impact on Legacy’s ratings of the decision not to merge. In December 2024 Moody’s said Legacy’s “A1 rating reflects good business fundamentals, the persistence of favorable liquidity, and the strong possibility that a merger with Oregon Health & Science University (OHSU, Aa3 stable) will be completed by the middle of next year. Now the key factors are “ongoing operational headwinds which may result in operating cashflow margins remaining below 3%-4% through at least fiscal 2026, and debt to cashflow remaining unfavorably high at over 4x.”

HAWAII CLIMATE TAX

Starting Jan. 1, 2026, Hawaii will increase the state’s Transient Accommodation Tax from 10.25% to 11%, Each county may also impose an extra 3% tax. Gov. Josh Green said they all will do so, bringing Hawaii’s total TAT to 14%. The increase was passed in the wake of the Maui wildfires of 2023. It is expected that the incremental tax – “the climate impact fee”, or “green fee,” will generate $100 million annually.

Beginning 7/1/2025, the legislation requires the Governor to request in the executive budget or supplemental budget that an amount of general funds that approximates the additional Transient Accommodations Tax revenue generated by this Act be expended to advance certain climate change mitigation and tourism projects.

HOSPITAL DOWNGRADE

University Hospitals Health System, Inc.’s (OH) (UH) is the second largest health system in northeast Ohio the second largest health system in northeast Ohio. This week, Moody’s downgraded UH to A3 from A2. The system includes an academic medical center, 12 community medical center locations, ambulatory healthcare centers, a large network of physicians, and other healthcare services. Like many others, its recovery from the impacts of COVID and inflation have hampered operating results.

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

Joseph Krist

Publisher

NEW YORK STATE BUDGET

It took a month after the start of the fiscal year but a roughly $254 billion state budget agreement was announced this week. The budget was delayed while the Legislature debated several non-financial issues. Primary among them was changes to New York State’s very strict limits on involuntary psychiatric commitment. Another was an all-day ban on students having cellphones in schools. The agreement also eases so-called discovery requirements on how prosecutors hand over evidence to criminal defendants in the pretrial phase.

The budget proposal called for New York to spend $17 billion more than last year, made possible in part after state officials disclosed that tax revenues and the state’s general fund closed the fiscal year with billions more dollars than expected. The framework agreement with the Legislature included the governor’s proposed child tax credit of up to $1,000 for families with a child under 4, but the refund was scaled back. Now about $2 billion will be devoted to the program, with New Yorkers receiving between $200 and $400, depending on their income. The budget agreement maintains the tax cut but includes an increased payroll levy on companies with more than $10 million in revenue.

The Metropolitan Transportation Authority will get $68.4 billion over the next five years as part of a state budget agreement. Full details on how the state intends to pay for the plan — largely with an increased rate on an unpopular business tax — are not yet clear. Some $30 billion of the capital plan will be paid for with an increase to the payroll mobility tax, an unpopular levy on businesses in New York City and surrounding counties that use mass transit. Companies with a payroll of over $10 million will shoulder a higher rate while the tax on smaller businesses will stay the same or decrease.

The M.T.A. expects to spend $10.9 billion to buy roughly 2,000 new rail cars, an order that will include 1,500 subway cars and more than 500 for the Metro-North and Long Island Rail Road.  $3.3 billion will buy and support 2,261 new buses.

It will spend $1.1 billion to install modern fare gates at 150 stations to prevent fare evasion. The M.T.A. said it lost close to $800 million in fare and toll evasion last year.

About $1.2 billion that would have been used for the reconstruction of Pennsylvania Station will instead be applied to other transit projects, now that the Trump administration has declared it will take the responsibility to manage and finance the Pennsylvania Station project.

STATE OF THE STATES

The effort to enact a budget for Federal Fiscal Year 2026 is likely to hinge on one or two items which Congress will attempt to offload onto the states. Primary among them is Medicaid. There will be efforts to lower the federal share of Medicaid expansion under the ACA. If the cut is large enough, some 10 states would see participation in the expansion cut back as automatic triggers related to the size of the federal share would kick in.

The moves to cut Medicaid will not just seek to reduce fiscal pressures on states. In several cases, states where Medicaid expansion occurred did it pursuant to voter initiatives. It is a clear effort to override the popular will. If it succeeds, states will benefit in the narrow sense that fewer people will be covered requiring less expenditure. What it also brings is a return to a model that everyone acknowledges was broken in terms of healthcare for the uninsured. This will increase demand for more assistance to institutions for care of the indigent from the state to the healthcare system.

The federal drama will unfold just as most of the states begin a new fiscal year. The potential for difficulty is clear. NY Gov. Hochul acknowledged the uncertainty associated with ever changing federal policy in announcing the budget agreement. That is a factor that many states will have to anticipate. The key to state budgets in fiscal 2026 will be flexibility. If the federal cutbacks go through and the economy continues to underperform, midyear adjustments will be required.

NEW YORK CITY BUDGET

It takes a while to get past the campaign literature portion of Mayor Eric Adams’ proposed FY 2026 budget. The “biggest, best budget ever” is $115.1 billion, with gaps of $4.6 billion in FY27, $5.8 billion in FY28, and $5.7 billion in FY29. Tax revenue is expected to have increased by nearly 8 percent in FY 2025, driven by growth in income and business taxes. As the economy slows, growth is forecast to decline to around 1 percent in FY 2026. This results in an upward revision over the FY 2026 Preliminary Budget of $1.7 billion in FY 2025 and $1 billion in FY 2026.

The FY 2026 Executive Budget maintains $8.5 billion in reserves, including $1.2 billion in the General Reserve, $5 billion in the Retiree Health Benefits Trust Fund, $250 million in the Capital Stabilization Reserve, and a record level of $2 billion in the Rainy-Day Fund. This represents no increase in reserves to offset the potential impacts of federal funding reductions.

Given the erratic nature of federal policymaking observed over the first 100 days, the assumption that that process has reached a conclusion is a bit dangerous. “In addition to rising recession risk, the city has not changed its assumptions for the receipt of federal funding to reflect the potential impact of recent federal actions, as many of these actions are litigated, leaving it vulnerable to choices made in Washington,” said Thomas P. DiNapoli, the state comptroller. 

PRIVATE EQUITY AND HOSPITALS

The role of private equity in the not for profit healthcare sector is receiving increasing negative attention as the impacts of its management of facilities, especially hospitals is resulting in financial turmoil. Last week, we discussed the end of operations of two hospitals in PA which were “turnaround situations”. They resulted in neither improvement nor asset sales.

Steward Health Care is another PE entity that thought it could build a better mousetrap and turnaround regional hospitals that did not offer all acute care services. They did it while also loading debt on to the balance sheets. Steward operates 31 hospitals across eight states — Arizona, Arkansas, Florida, Louisiana, Massachusetts, Ohio, Pennsylvania and Texas. One of its Pennsylvania hospitals – Sharon Regional Medical Center closed in January and was only recently reopened by its new owners Tenor Health Partners.

Tenor is owned by R2 Power Investments, a private equity firm headquartered in Pasadena, California. Tenor bills itself as a turnaround firm for financially struggling hospitals. Steward continued to work with Tenor to finalize a deal after the hospital shut its doors. The health system received court approval to purchase shuttered Sharon Regional Medical Center for $1.9 million on Jan. 10.

Steward had gained notoriety for the financial distress at Massachusetts hospitals purchased from the Catholic Church in Boston. Steward Health Care closed some facilities after what can only be described as a failed buyout strategy in acquiring hospitals. Other facilities are being sold. St. Elizabeth Medical Center in Brighton has been rebranded as Boston Medical Center — Brighton, while Good Samaritan Medical Center in Brockton is now Boston Medical Center — South. BMC Health System assumed operations of the two hospitals on October 1, 2024, after Steward Health Care sold the facilities.

CLIMATE LITIGATION

The Maryland Supreme Court will decide whether three climate change lawsuits are preempted by federal law. The Court will review Baltimore City, Annapolis and Anne Arundel County’s lawsuits against more than two dozen fossil fuel companies, agreeing to hear a host of issues in the consolidated appeal that previously had been rejected by federal courts. Primary among them is that some of the companies’ production occurred on federally regulated areas offshore which would preclude state regulation.

The Court is set to decide four issues from appellants’ petition. They are whether the U.S. Constitution and federal law preempt and preclude state law claims seeking redress for injuries allegedly caused by the effects of out-of-state and international greenhouse gas emissions on the global climate; whether Maryland law precludes nuisance claims based on injuries allegedly caused by the worldwide production, promotion and sale of a lawful consumer product.

It will also decide whether Maryland law precludes failure-to-warn claims premised on a duty to warn every person in the world whose use of a product may have contributed to a global phenomenon with effects that allegedly harmed the plaintiff; and whether Maryland law precludes trespass claims based on harms allegedly caused by global climate changes arising from the use of a product by billions of third parties around the world outside of a producer’s control.

In January, an Anne Arundel County Circuit judge dismissed a pair of lawsuits by Annapolis and Anne Arundel County, citing the reasoning presented in a July 2024 Baltimore City Circuit Court ruling that determined similar claims by Baltimore City are preempted by federal common law and therefore cannot survive. That decision is an outlier.

But federal courts have so far ruled there was no valid basis to remove the cases to federal court. In February 2024, a panel of 4th Circuit judges in the Annapolis and Anne Arundel County cases found federal removal was not proper; in April 2022, a 4th Circuit panel found the same in the Baltimore City case. In April 2023, the U.S. Supreme Court denied the city’s petition for certiorari.

The U.S. Department of Justice in a pair of lawsuits argued that recent laws New York and Vermont adopted requiring oil companies to contribute billions of dollars into funds to pay for damage caused by climate change were unconstitutional. The Justice Department filed those cases one day after it launched two preemptive cases seeking to stop Hawaii and Michigan from filing planned lawsuits against major oil companies over climate change, cases the administration said would imperil domestic energy production. DOJ cited an executive order that the President signed on his first day back in office on January 20, declaring a national energy emergency to speed permitting of energy projects

GRANT CUTS

The scale of the continuing effort by the Trump administration to dictate university conduct through the withholding of grant monies for research is becoming clearer. A recent analysis at the Kaiser Family Foundation (KFF) shows how significant and comprehensive the effort has been.

KFF Health News found that the NIH terminated about 780 grants or parts of grants between Feb. 28 and March 28 KFF Health News found that the NIH terminated about 780 grants or parts of grants between Feb. 28 and March 28 of this year. Some grants were canceled in full, while in other cases, only supplements — extra funding related to the main grant, usually for a shorter-term, related project — were terminated.

Among U.S. recipients, 96 of the institutions that lost grants in the first month are in politically conservative states including Florida, Ohio, and Indiana, where Republicans control the state government or voters reliably support the GOP in presidential campaigns, or in purple states such as North Carolina, Michigan, and Pennsylvania that were presidential battleground states. An additional 124 institutions are in blue states. Columbia University had more grants terminated than all organizations in politically red states combined.

Montana is one of 23 states, along with Puerto Rico, that are eligible for the NIH’s Institutional Development Award program, meant to bolster NIH funding in states that historically have received less investment. Congress established the program in 1993. The NIH’s grant terminations hit institutions in 15 of those states, more than half that qualify, plus Puerto Rico.

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

COLLEGES

The fight between Harvard and the President is gaining the most attention but the efforts of ICE to round up international students and withdraw visas is a concern to many other schools, especially state universities. Increasingly, reports grow regarding the revocation of visas and subsequent detentions of some international students. If that results in reduced enrollments by foreign students, it is raising financial concerns. This represents an escalation of efforts to restrict foreign students dating to the first Trump administration.

The fear is that even if restrictions on student immigrants are relaxed, that there will be less demand from this cohort. It is of great interest to the universities reflecting the fact that these students are typically “full fare” paying customers. It also is a way to put pressure on public universities where strictly financial measures would have less impact. Those schools are also under enough pressure as the federal funding for research is under siege.

PUERTO RICO BLACKOUT REDUX

On April 16, the electric system serving Puerto Rico once again managed to blackout the entire island. Luma Energy, the private operator of the system asked for three days to identify the likely cause. Among the possibilities are something wrong with a protective system intended to keep a breakdown on a single line from shutting down the entire power grid, and that a transmission line in western Puerto Rico might have been affected by overgrowth.

Luma warned in March that the system’s power supply would probably not be sufficient to meet peak demand over the summer. The government has solicited bids for an additional operator or operators to provide more power on the island. Until contracts are awarded and progress made on generation infrastructure, Puerto Rico will have to rely on some luck to avoid additional negative impacts primarily related to hurricanes.

POLITICS AND EDUCATION

The Texas legislature is on its way to enacting one of the largest taxpayer-funded school voucher programs in the country. The program would provide about $10,000 to students for private school tuition, or up to $30,000 for disabled students. It would also offer up to $2,000 for home-schooling costs. If demand exceeds funding, priority for the money will go to children with disabilities and those from low-income and middle-class households who were previously enrolled in public schools.

The money could eventually become available to any child, including those already enrolled in private education. The Texas program is expected to reach up to 90,000 students in its first year. An amendment to put the measure to a popular referendum was voted down. The program would be capped at $1 billion in its first year, but could grow quickly, potentially reaching an estimated $4.5 billion annually by 2030. The funds can be used for private school tuition and for costs associated with home-schooling, including curriculum materials and virtual learning programs.

Texas public schools have not seen their budgets increase along with inflation. As part of the negotiations to win over the Texas House, lawmakers also approved nearly $8 billion in additional funding for public schools.

MAYORS, BUDGETS AND ELECTIONS

One is running for reelection after being bailed out of criminal charges by questionable decisions by the Trump administration, one just won election, and one faces reelection pressures in 18 months. They have in common potential budget problems which will require hard choices as well as candidates available to challenge incumbents.

Since our last issue, the City of New York has seen the race for mayor attain some level of clarity. The issue is not whether there will be a new mayor but rather who. Mayor Adams is haunted by a trail of questionable ethical and managerial issues. He has weak campaign funding. And the real estate industry, the oil that moves the gears of New York’s political engine, has clearly coalesced around Andrew Cuomo. This follows strong union support for Mr. Cuomo.

For the current budget process, neither side of City Hall is dealing with a strong hand as the combination of term limits and a looming November election. So many of the players in the budget process are running for other offices that there are many distractions. The recent financial market volatility will make budget assumptions that much harder to develop. The impact of declining international tourism could be significant.

In Oakland, the new mayor is the City’s long time Congresswoman Barbara Lee. She inherits ongoing budget difficulties and the aftermath of the recall of the prior mayor and subsequent indictment. Lee has inherited a budget deficit of $87 million, rooted in revenue shortfalls, continued growth in spending, and the rising costs of pensions and insurance. The budget is approved on a two year cycle so this is the only chance the Mayor will be able to address the budget. Her term will end six months before the end of the budget biennium.

Los Angeles sees both the City and County facing significant budget issues. They are not just the result of the fires. The County is looking at a $2 billion shortfall. This week, the Mayor of Los Angeles released her proposed budget. The starting point was a $1 billion projected budget gap. The budget proposes 1,600 layoffs which would represent nearly 5 percent of the 32,405 positions currently in the city’s workforce. The Mayor also proposed the elimination of around 1,000 vacant positions.

NEW YORK BUDGETS AND FEDERAL MONEY

The ongoing battles between New York and the federal government will only complicate the City’s effort to enact a balanced budget. The various threats to reduce federal funding and the continuing possibility of arbitrary “take backs” of previously transferred funds introduces a level of risk heretofore not associated with federal funding.

Some City agencies rely heavily on direct federal funding. For instance, according to the Mayor’s Office of Management and Budget (OMB), federal funding totals over half of the budget of the Department of Housing Preservation & Development and more than 40% for the Administration for Children’s Services. Separate from the City’s budget, federal funding is also critical to the New York City Housing Authority, Health + Hospitals, and the Metropolitan Transportation Authority.

Governor Hochul recently indicated the federal Department of Homeland Security has revoked hundreds of millions of dollars in infrastructure resiliency programs, including millions of dollars that flow to the City. The news comes as the state budget has yet to be adopted despite a March 31 deadline. The good news is that the holdup has nothing to do with fiscal matters but rather a contentious debate over proposed changes to criminal justice policies. The Legislature continues to fund state operations and there is no likelihood of any impact on the State’s bonded debt.

NUCLEAR

In Arizona, a proposed bill would have let large industrial energy users build a “small modular nuclear reactor” in their facility without having to get a certificate of environmental compatibility. And in rural Arizona, they would also be exempt from local zoning restrictions. In Indiana, HB 1007 incentivizes the creation of SMRs in Indiana by adding a state tax credit for any developmental expenses. lawmakers removed a provision that gave utilities a tax credit for investing in SMRs. The legislative analysis estimates that the 20% tax credit, at a minimum, will cost $280 million.

The Palisades nuclear plant restart project in Michigan received some more financial support from the trump administration. The project has received about 10% of $1.52 billion in U.S. financing that was to be made available under the IRA. It was the second disbursement by the administration to Palisades with more than $151 million of the original loan guarantee having been disbursed.

CARBON CAPTURE

South Dakota regulators determined Summit Carbon Solutions’ pipeline route as proposed in its permit application is “not viable, Summit Carbon Solutions’ pipeline route as proposed in its permit application is “not viable.”  Summit submitted new documentation with the commission this month stating that it would rather work with its current application.

Restarting the approval process could force Summit to effectively start the whole process over. At a previous meeting, the commission denied Summit’s request for a pause in permit proceedings. Since then, a law was enacted to halt Summit’s ability to use eminent domain. The company recently told the commission this month that it would rather work with its current application and route than seek court orders or refer the ban to the voters.

In Iowa, the Senate is debating the first measure on pipelines to become eligible for floor debate in the Senate in several years. The Iowa House has been consistent in the last few years in passing legislation to address farmer concerns about eminent domain. In the Senate, an attached amendment makes significant changes to the bill. It is not a partisan issue in that the House efforts over the last few years have been bipartisan. The Senate has a Republican super majority so partisanship is not the hurdle which needs to be overcome.

PORTS

There has been a significant drop in container vessel traffic headed to Los Angeles and Long Beach due to tariffs on Chinese goods. Estimates of scheduled arrivals for the week ending May 3, show the number of freight vessels leaving China and headed to the Southern California ports, the main U.S. ports receiving Chinese freight and other Asian trade, The number is down 29% week-over-week. That is not a surprise given the rush to ship before effective tariff dates.

Year-over-year, the data shows a 44% drop in vessels scheduled to arrive the week of May 4-May 10. The Gemini alliance between Maersk and Hapag Lloyd has a cancellation rate of 24.39%; followed by the Ocean Alliance, comprising CMA CGM, Cosco Shipping, Evergreen, and OOCL, at 18%; and the Premier Alliance, comprising Ocean Network Express, Hyundai Merchant Marine, and Yang Ming Marine Transport, at 15%.MSC and ZIM currently have a 10% rate of canceled sailings.

HOSPITALS

The signs of continuing pressure on operating results are driving cutbacks and closures at hospitals. The latest examples come from Pennsylvania as Crozer Health properties have begun a process to shut down on Wednesday after a bankruptcy judge approved closures of the Crozer-Chester Medical Center in Chester and Taylor Hospital in Ridley Park. The closure will result in the loss of 2650 jobs.

Along with diverting emergency patients to other hospitals, the order requires Crozer-Chester and Taylor Hospital to cease all elective inpatient admissions, post notices of the impending closures and cease all trauma, surgical, obstetrics and gynecology, burn, behavioral health, oncology and outpatient services. Prospect first filed to close the Pennsylvania hospitals on March 6, citing ongoing losses and lack of a buyer to take over in bankruptcy.

The University of New Mexico Hospital has cut 53 positions as the state’s largest public health system faces deepening financial pressures and federal funding cuts. Some, but not all, of the positions were vacant and emphasized that the eliminated positions were executive positions, not roles like floor nurses and others who provide patient care. According to testimony given to legislators by the New Mexico Hospital Association in 2024, two-thirds of New Mexico’s hospitals had higher expenses than revenue during that same year.

Providence Health, a major multi-state system in the west is also facing financial pressures. It also is pursuing lawsuits against insurers it says are delaying and shorting payments and will explore selling or contracting out for some of its programs. During the California wildfires, Providence was forced to temporarily close some outpatient clinics and halt non-emergency surgeries at some hospitals. One of its clinics in Pacific Palisades also burned down.

The health system has cut costs by restricting hiring and cutting back on expenses like sports sponsorships. Sports sponsorships have long been a staple of stadium and arena advertising. The designation as the official medical provider or hospital of a team is a longstanding practice. Nevertheless, new ground was broken this year. When the A’s moved out of Oakland and took up residence in Sacramento, they moved into Sutter Health stadium. This makes the stadium the first to serve as a home for an MLB team and have its naming rights assigned to a non-profit hospital.

LIFE AFTER FEMA

Disaster survivors in Arkansas left homeless by recent tornadoes have been blocked from receiving federal recovery aid after President Trump rejected the state’s request to declare a major disaster in March. The request followed a series of tornados across three states which killed 40 people. The denial follows executive orders signed by Trump seeking to shift the burden of disaster response and recovery from the federal government onto states.

The Trump administration had “determined that the damage from this event was not of such severity and magnitude as to be beyond the capabilities of the state, affected local governments, and voluntary agencies. Accordingly, we have determined that supplemental federal assistance is not necessary.” The State is appealing the decision. The governor, Sarah Huckabee Sanders was undoubtedly shocked that her state was the first target of the new policy.

If this is going to be the way things are done going forward, natural disaster risk should become an even greater factor when analyzing state credits.

WORKING ON THE RAILROAD

A renovation or replacement of New York’s Penn Station has gone through many iterations, governors and mayors over the 60 years since the original terminal was razed. Now the Trump administration is trying to move the most recent renovation project along. Amtrak, the legal owner of the station is replacing the Metropolitan Transportation Authority as the lead for the current renovation project. According to the US Department of Transportation, the switch will cause a savings of $120 million on a budget of $7 billion.

It is not clear what the expanded federal role will do to overcome concerns with land use that have held up the project. It also is not clear how this change will alter the debate over the potential relocation of Madison Square Garden. In the short run, the move potentially takes the Governor and the MTA off the hook in terms of managing and funding the project. It comes at the same time the federal government’s latest deadline to end congestion pricing has come and gone.

In Texas, the news for the proposed high speed rail line from Houston to Dallas was not good. The Secretary of Transportation called Amtrak’s high-speed rail project between Houston and Dallas “risky.” He also made the point that “the Texas Central Railway project was proposed as a private venture. If the private sector believes this project is feasible, they should carry the pre-construction work forward, rather than relying on Amtrak and the American taxpayer to bail them out. 

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

Late budgets and New York State are not an unusual couple but this year is different since the failure to enact a budget has nothing to do with budgets. It’s not clear how long either side of the issues causing contention – criminal discovery rules and restrictions on the wearing of masks – are willing to hold out to achieve their goals.

As the state process plays out, attention turns to the NYC budget. That process will occur as the mayoral primary process plays out. The Mayor is no longer under indictment or the threat of one. The Council Speaker is challenging the Mayor in the June primary. The federal government keeps up efforts to take money from the City in regard to immigration issues. Recent announcements of actual and anticipated takebacks of federal funding from the City over its sanctuary city policies have grown to nearly $750 billion.

It will be an unsettled period for the City but we do not expect that significant credit issues will arise over that time.

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CONGESTION FEES GET A REPRIEVE

The federal government and New York transit officials have agreed to allow congestion pricing, to continue until at least midsummer, and very likely into the fall. A schedule of hearings has been established that would extend the existing legal proceedings between the MTA and the federal government well into the fall. In its first two months, the program billed about $100 million in tolls. In March, about 2.5 million fewer vehicles entered the congestion pricing zone, compared with the historical average — a 13 percent decline in traffic, according to M.T.A. data. 

The court also spoke to the issue of what it sees as coercion by the Secretary of Transportation to force a halt to congestion pricing. It noted that Secretary Duffy also “appeared to suggest that the Administration may consider improperly withholding federal funds from the State of New York, as the Trump Administration has done in many other recent cases, in order to coerce compliance with its demands.”

The MTA and TBTA specifically asked whether the Secretary is contemplating taking any unilateral action on or after April 20 that might require them to seek expedited injunctive relief. The federal side did not have information to provide, but did state that, at present, they do not intend to seek preliminary injunctive relief themselves.

NEVADA ROAD FUNDING

Clark County, NV has long used fuel revenue indexing — FRI — to adjusts the county’s portion of fuel tax to inflation. The tax has been a major source of funding for roadway projects in Southern Nevada since going into effect in 2014. FRI is currently scheduled to sunset at the end of 2026 unless voters approve an extension next year. RTC currently receives 24.6 cents of the total 75.8 cents per gallon fuel tax

The Regional Transportation Commission of Southern Nevada (RTC) has warned that ending fuel revenue indexing will decrease roadway funding by two thirds — from $300 million to $100 million annually. RTC has proposed legislation which would allow the Clark County Commission, by a two-thirds vote, to extend FRI an additional decade beyond its current sunset date. Continuation beyond 2036 would require voter approval. The practice was first authorized by the Commission for the period 2014-2016.

Voters in 2016 approved a ten year extension. That ballot measure passed with nearly 60% support. A 2023 FRI bill that passed the Legislature with bipartisan support would have allowed the Clark County Commission to extend FRI indefinitely without a direct vote of the people. It was successfully vetoed by the Governor.

PURPLE LINE

The long anticipated, much delayed Purple Line light rail system in Maryland has moved one step closer to actual operation. The Maryland Transit Administration has announced that a Purple Line train is being tested on tracks using the overhead electrical wires that give it power. The plan is to test braking, propulsion, electrical, signaling, and communication systems on a fully fitted out one mile stretch of tracks. The combined design and construction process for the Purple Line is 76% finished. Track installation is 35 percent complete. The target operating date remains December 2027. That is well beyond the 2022 target date originally envisioned.

TOURISM

Recent reports show that foreign arrivals fell over 20% year-over-year at the 10 busiest U.S. airports, based on a seven-day rolling average. A slight recovery was observed, but the numbers were still down 18.4% as of March 28, 2025. Meanwhile, U.S. citizen returns increased by nearly 14% during the same period. The drop in foreign arrivals is reflects uncertainty, trade tensions, political volatility, and concerns over possible detainment or harassment for international travelers. Travel advisories issued by key American allies, including Canada, France, and Germany, have also contributed to the decline.

As of late March, international airlines have reported a softening of demand for U.S. travel, with some routes experiencing cuts. In tourist dependent New York, the Port Authority found that in February that international passenger counts at its network of airports were 1.1% lower than for February, 2024. The number of international flights was lower by some 6.3%. In anticipation of tariffs, international freight tonnage increased in that period.

HOSPITALS ON THE BRINK

The board of the Rhode Island Health and Education Building Corporation approved $165 million in debt to facilitate a sale of Our Lady of Fatima and Roger Williams Hospitals. The two hospitals are set to shut down without a sale to the nonprofit Centurion Foundation. Prospect Medical Holdings, a for profit entity which owns CharterCARE and operates Roger Williams and Fatima hospitals in Rhode Island, filed for bankruptcy in January.

One contentious issue which remains unresolved is that of property tax losses to Providence and North Providence. PILOT agreements to replace some of the lost revenues may yet be executed with the new non-profit owner but the bankruptcy proceedings did not make such an agreement required to close the transaction. North Providence estimates that it could cost the owner of an “average” home between $250 and $420 more each year in property taxes if no PILOT agreement can be reached.

In New York, Mount Sinai was finally allowed to close its east side Manhattan location. The closure had been held up by a variety of legal actions which have appeared to have run their course. Losses related to Beth Israel will decline with the reduction in services that has already occurred and the final closure now approved by the courts. The action coincides with Moody’s action to revise the outlooks for Mount Sinai Hospital’s (MSH) (NY), Icahn School of Medicine at Mount Sinai’s (ISMMS) (NY) and Mount Sinai South Nassau’s (MSSN) (NY) to stable from negative. That keeps the credits in the investment grade category.

WIND

It could likely be the exception rather than the rule over the next four years, but construction of a new offshore wind farm in NY has begun. Empire Wind is an 810-megawatt wind farm effectively breaking ground less than 20 miles from New York City. It is the first U.S. project to start at-sea wind turbine construction under a Trump second term.

On Inauguration Day, the President issued an executive order that effectively froze all offshore wind permitting and leasing pending a federal review. Empire Wind 1 is one of nine projects which had their federal permits in hand before the order. Empire Wind 1 is scheduled to finish construction by 2027. A new Brooklyn-based substation will connect wind-generated electricity to the city’s grid. which is a first. The project is advertised as being adequate to power 500,000 New York homes.

In the Atlantic, four other commercial-scale projects actively under construction are Coastal Virginia Offshore Wind, Massachusetts’ Vineyard Wind 1, New York’s Sunrise Wind, and Revolution Wind, which is shared between Rhode Island and Connecticut.

ILLINOIS COAL

The Chicago suburb of Naperville, Illinois is the largest of the 30 municipalities which purchase power for their distribution utilities from the Illinois Municipal Power Agency. The City’s purchase contract expires in 2035 and IMPA would like very much to extend its agreement with Naperville for twenty more years. IMEA has given the city until April 30 to decide if it wants to extend its contract out to 2055. A majority of IMEA participants have extended contracts.

Some 80% of the energy IMEA delivers to Naperville comes from coal-burning power plants. IMEA owns a 15% stake in the Prairie State Generation Station, a massive coal-fired power plant in southern Illinois that in 2023 released 12.4 million tons of heat-trapping carbon dioxide into the atmosphere. If Naperville chose to determine its own electric supply, it could buy energy directly from the market, contract out for power generation, or possess and operate its own generation assets — or some combination of all three.

CARBON CAPTURE

The Environmental Protection Agency has approved Occidental Petroleum’s application to capture carbon dioxide from the atmosphere and inject it underground. The facility would be the first of its kind to be approved in Texas where the oil/gas industry has great hopes for its success. Located 20 miles southwest of Odessa, the project could start storing 500,000 metric tons of carbon dioxide in deep, non-permeable rock formations 4,400 feet underground as soon as this year. 

The technology for the plant is direct air capture, or DAC. It pulls the carbon dioxide from the atmosphere and separates it from other particles in the air by incinerating them. The equipment then compresses the gas to a brine before transporting and storing it permanently underground. The Texas Railroad Commission, the state agency regulating oil and gas companies, has applied to the EPA for the power to issue similar permits. The EPA is currently accepting public testimony.

Ohio legislators are considering bills that would bar local governments from having a say in permitting projects that capture carbon dioxide emissions and inject them underground. The legislation could even force some landowners to let their property be used for carbon dioxide storage. Carbon capture and storage projects would follow a process similar to what’s used for oil and gas drilling, in which property owners must allow development on or below their land if enough neighbors support it.

Ohio’s House Bill 170 and Senate Bill 136 would give the state Department of Natural Resources ​“sole and exclusive authority to regulate carbon sequestration,” a power the agency also has over oil and gas production via existing law. The Ohio Supreme Court has interpreted the oil and gas law’s language to block local government regulation of drilling, even though general zoning rules that apply to other businesses.

The bills would also authorize a ​“consolidation” process that operators can undertake to force landowners to allow carbon dioxide storage in their property’s subsurface ​“pore space” if owners of 70% of the remaining area for an injection project have signed on. The bills call for compensation, but it’s subject to adjustments for the developer’s expenses. Neither HB 170 nor SB 136 requires any minimum payment to landowners.

The South Dakota Public Utilities Commission voted 3-0 to deny Summit’s request to put its application on hold. The PUC directed Summit Carbon Solutions to present a plan during its next meeting illustrating how the company can move forward — or not — under recently enacted legislation barring its use of eminent domain. It comes as a review shows that Summit brought 232 lawsuits against landowners across South Dakota, North Dakota and Iowa – including lawsuits seeking access to property for surveys. All 156 of the eminent domain actions were brought in South Dakota.

Iowa’s permit, which allows Summit to use eminent domain, is conditioned on the company getting permits to build its pipeline in the other states, including South Dakota.

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

Where to begin? If you are a budget maker in capital gains states like New York, California, Massachusetts and Illinois you have to take a serious look at revenue projections. Add to that the policy whipsaws from the White House. If Trump is to be believed, disaster recovery and healthcare will all become primary state responsibilities. Really, every state will have their own FEMA? You want states to increase taxes but you won’t allow those newly self sufficient state taxpayers to deduct those taxes? You want to give more responsibility to state and local government but you want to take away the exemption that makes it easier and cheaper to finance?

Maybe the market comes back. Maybe there are capital gains to be paid instead of losses to be deducted. Maybe a President shouldn’t tank the markets based on his own stubborn ignorance? Then again, should anyone listen to Peter Navarro?

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TRANSIT

According to the American Public Transportation Association, American transit systems have about 80 percent of their prepandemic passenger counts. Some have recovered better than others; the Metropolitan Transportation Agency in New York has roughly 85 percent of its prepandemic passengers, while the numbers for systems in Chicago and Boston hover around 70 percent. At the same time, the USDOT is threatening to withhold federal assistance to systems it perceives as not safe enough.

Bay Area Rapid Transit has lost more than half of the ridership it had before the pandemic, more than any other major system in the nation. BART is facing such difficulty that its leaders have warned of not only ending weekend operations and reducing train frequency, but also ending service altogether. This week, California legislators introduced a bill to put a sales tax measure on local ballots. It will be a hard sell especially if the economy turns sour. The region was already being held back by the difficulty in reestablishing prepandemic office attendance and associated economic activity.

GAS BANS

Last week, a federal judge dismissed a lawsuit brought by plumbing and building trade groups against a New York City ban on natural gas in new buildings. The decision is the first to explicitly disagree with a previous ruling that struck down the first in the nation ban on natural gas enacted by Berkeley, CA.. 

In 2021, New York City adopted Local Law 154, which sets an air emissions limit for indoor combustion of fuels within new buildings. The law bans the burning of “any substance that emits 25 kilograms or more of carbon dioxide per million British thermal units of energy”. That standard effectively bans gas-burning stoves, furnaces, and water heaters, and any other fossil-fuel powered appliances. To comply, developers have to install electric appliances, like induction stoves and heat pumps. The policy went into effect in 2024 for buildings under seven stories, and will apply to taller buildings starting in 2027.

Last year’s denial of a rehearing included a detailed dissent by eight of the 29 judges on the 9th Circuit, who argued that the court’s ruling had been decided “erroneously” and “urge[d] any future court” considering the same argument “not to repeat the panel opinion’s mistakes.” 

The unios argued that the city’s electrification law is preempted by energy efficiency standards under the federal Energy Policy Conservation Act of 1975, or EPCA. This law sets national efficiency standards for major household appliances like furnaces, stoves, and clothes dryers. Under the law, states and cities can’t set their own energy conservation standards that would contradict federal ones. The trade groups argued that EPCA should also preempt any local laws.

Regulating fuel use within certain buildings is standard practice in states and cities, she noted: New York City, for example, has banned the indoor use of kerosene space heaters for decades. 

PENSIONS AND CLIMATE

In a unanimous 5-0 ruling, the appellate division of the New York State Supreme Court dismissed a lawsuit that challenged the city’s decision to divest from investments in fossil fuels. The case was brought by four current and former city employees who claimed that the pension funds — representing teachers, public employees, and Board of Education staff — violated their fiduciary duties by shifting away from fossil fuel investments. It’s a tired tactic in an effort to encourage fossil fuel divestment. It is usually easy to refute.

ELECTRIC VEHICLES UNDER TRUMP

Michigan had to ‘decouple’ its first mega-subsidy deal to allow General Motors to sell one of two factories that shared a $600 million incentive. GM is transferring $120 million in incentives to LG Energy Solutions. Both companies say they’ll still reach the goals of a combined 3,200 new hires between the two plants. The state allowed General Motors to transfer $120 million in state funding and the incentive terms for its former Ultium Cells EV factory near Lansing to factory buyer LG Energy Solution Michigan.

This will enable LG to complete its purchase of the 2.8 million square foot battery factory that GM built in Delta Township. The two companies are still obligated to deliver the jobs in exchange for the already-spent $600 million in state funding awarded in January 2022. Under the terms of a revised agreement, GM will need to hire 1,840 workers at Orion Assembly. Wages originally were to be about $27 per hour, but will be set by United Auto Worker contracts. LG Energy Solution will need to hire 1,360 at the former Ultium site near Lansing. The company estimates wages of about $55,000 per year for manufacturing workers.

EV sales in February increased 10.5% from a year earlier, but they represented an overall market share of under 8%. That is one element behind Hyundai’s announcement that its new production facility near Savannah, GA will build hybrid models in addition to straight electronic vehicles. Ford, GM and Volvo have all slowed some EV plans and focused more on hybrids. The demand just has not been there. Trump’s policies against tax credits for electric vehicles are another headwind.

GAS TAXES

A MassINC Polling Group survey published last week found fifty-one percent of respondents in the Bay State said they would somewhat or strongly support replacing the gas tax with a “fee based on how much people drive, whether they drive a gas car or an electric car,”. A more specific question found a nearly identical split for eliminating the gas tax and instead deploying “tolls on more Massachusetts roads”: 52% support, 32% opposition and 16% who said they did not know. 

Gas tax revenues increased from $603 million in fiscal 2023 to $615 million in fiscal 2024, according to the Department of Revenue. Asked if Massachusetts should study the use of congestion pricing in and around Boston, 48% said yes and 35% said no.

In Oregon, a proposal has been put before the legislature to raise more than $1.9 billion in new taxes and fees every two years once fully implemented. Oregon would raise its gas tax by 20 cents, create a new 1% tax on cars sales and require electric vehicles to pay an entirely new “use charge”. Democrats have a three-fifths supermajority in both the House and Senate, meaning they can theoretically pass anything they want.

The details include: A staggered 20-cent increase to the state’s 40-cent-per-gallon gas tax. The tax would increase by 8 cents at the outset of next year, and another 4 cents in 2028, 2030, and 2032. It would be indexed to increase with inflation afterward. A new tax equal to 1% of the sale price of all cars sold in Oregon, new or used. Oregon is one of just five states without such a charge.

A new “road usage charge” that electric and highly fuel efficient vehicles would pay – either as a flat fee or based on actual miles driven in Oregon. Existing electric vehicles would be subject to that still-undefined charge beginning in July 2026. New EVs, plug-in hybrids and cars with fuel economy of 30 miles-per-gallon or better, would be added in subsequent years.

Additionally, there would be a separate usage charge for delivery vehicles used by companies with at least 10 such vehicles. The fee is meant to impact corporate delivery services like Amazon. An additional $66 onto Oregon vehicle registration fees would accompany adding $90 to vehicle titling fees, which currently range from $90 to $190. It would increase the state’s weight-mile tax on heavy vehicles by 16.9%.

Other components of the funding plan include a 3% tax on tire sales that would send $25 million a year to rail operations, safe highway crossings for wildlife and improving salmon habitat; an increase to an existing tax auto dealers pay for the “privilege” of selling cars in Oregon. The tax would be raised from 0.5% of the price of a vehicle to 0.8%. It would add $9.50 to an existing $15 tax on sales of new bicycles that cost at least $200. Funding from the tax goes to bike and pedestrian facilities. It would also increase a tax dedicated to transit service that Oregon workers pay from their paychecks from 0.1% to 0.18%. 

CHICAGO PUBLIC SCHOOLS

The Chicago Teachers Union (CTU) will vote this week on a proposal for a new contract. The deal is the product of a year’s worth of negotiations. It gets so much attention because of the Mayor’s history as a lawyer for CTU and its role in the Mayor’s campaign for office. Funding for CPS was also a major issue in the negotiations over the City’s own budget.

The offer includes teacher raises of 4% the first year and up to 5% over the next three; class-size limits of 25 in kindergarten and an average of 29 in most other grades, down from 36 or 32; doubling the number of bilingual teachers; 90 more librarians over the life of the contract. If ratified, the median CPS teacher salary would be $95,000, according to CPS. CPS says the contract will cost $1.5 billion over four years, down from an initial CTU proposal that it said would have cost $10 billion over that period.

If this contract settles the labor dispute, it still leaves the funding needs of CPS front and center as an issue for the City’s GO credit as well as for its own.

HIGH SPEED RAIL

In light of the efforts by the Trump administration to weaken mass transit and federal funding for it, much has been made of the “success” of the Brightline project in Florida as a private rail provider. The thrust of recent press has been that the project shows that high speed rail can’t be developed by the public sector. The California high speed rail project is considered to be the posterchild for inefficient government infrastructure development and is cited regularly by proponents of other projects.

That project as well as the Brightline West project were conceived to utilize existing right of way as much as possible. In Florida, the trains max out at 70 miles per hour (Acela on the Northeast Corridor top 100 mph) and they operate on existing tracks. They pass over grade crossings. Those are not what people think they are talking about when they talk about high speed rail.

As for true high speed rail projects, hurdles continue to arise in Texas where opponents of a proposed Houston-Dallas line have fought its development for more than ten years. Now the Texas legislature will consider legislation designed to impede that project. House Bill 1402 would prevent the use of state or local funding to alter roadways for the construction of high-speed rail. It has attracted a cross section of supporters.

The opposition is not just from small individual landowners. So long as potential right of way issues remain unaddressed, some developers cannot move forward with projects. As for the sponsor of the project – Texas Central – its position is that the route wasn’t chosen by them and that the current plan is the most environmentally friendly that they could come up with. As for the issue of right of way acquisition, the over 500 homes which would have to be removed are compared by Texas Central to the number of homes some Houston road projects expect to move.

That raises the whole issue of how private projects like these actually are. No one likes moving residential properties to make way for projects. There is a history of law in this country which establishes clear boundaries between public and private projects. Arguments like that of Texas Central unwittingly focus attention on the private structure and weaken support for eminent domain when it is used to facilitate private profit.

Are they reliant on the government? Here are the words of the Texas Central CEO. “I mean, obviously, we don’t have the financing put together. We don’t have all the right-of-way acquired. We’ve acquired approximately 25% of the parcels that are needed. … We’re not asking the taxpayers to pay for this project right now. What we’re saying is we have to ultimately partner with the State of Texas and with TxDOT [Texas Department of Transportation] to figure this out.”

LIFE AFTER COAL

The site of what was once Pennsylvania’s biggest coal-fired power plant will be repurposed into a $10 billion natural gas-powered data center campus. The former Homer City Generating Station, about 50 miles (80 kilometers) east of Pittsburgh, will host seven gas-fired turbines to power data centers on site with up to 4.5 gigawatts of electricity. It would be the nation’s largest gas-fired power plant and the nation’s third-largest power generation facility after the Grand Coulee hydroelectric dam in Washington and the new Plant Votgle nuclear power plant in Georgia.  

Construction is expected to begin this year and power could start flowing by 2027. Much of the critical infrastructure for the project is already in place from the former Homer City power plant, including transmission lines connected to the mid-Atlantic and New York power grids, substations and water access. That sort of infrastructure is difficult to relocate or replace at current costs. The ability to show that coal plant repurposing is viable will be through successful projects.

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

AFTER THE FIRE

The city of Los Angeles has approved permits to rebuild three homes in Pacific Palisades after January’s wildfire. As of last week, 72 property owners had submitted applications to the city. An additional 98 have filed with L.A. County for rebuilding in unincorporated areas after the Palisades and Eaton fires. We point this out to highlight the realities of recovery from natural disasters.

The City and L.A. County leaders committed to streamline permitting procedures for property owners who want to rebuild. The Eaton fire, which ignited the same day, displaced 6,900 households from Altadena and nearby communities. The city and county have opened one stop permitting centers for fire victims and waived discretionary hearings and other zoning reviews for those who want to build new homes that are roughly the same size as they were before.

The regulatory framework is a work in progress at all levels of government – city, county, state. The City has established that new accessory dwelling units would qualify for streamlined permitting and issued another order with plans to further expedite reviews for homeowners who choose to rebuild with all-electric systems and appliances.

The obstacles to rebuilding center on the need to clear the debris. To this end, some of the delay can be attributed to residents. For example, there are more than 1,000 property owners who have not opted in or out of the federal government’s free debris removal service. Permits are not being issued to properties which have yet to clear debris. The issue of toxicity from firefighting foam used to fight the fires is an additional complication.

These are the real life factors that make recovery a much more time consuming process than anyone would hope. The sheer scope of the recovery – 16,000 structures – and the limitations on resources especially skilled tradesmen create significant hurdles. Only so many structures can be built at one time. Concurrently, rebuilding is impacted by the reality that the true replacement cost of a house is often significantly higher than the insured value.

BRIDGES

The headlines made it sound like the Brooklyn and Golden Gate Bridges were about to be toppled by ships. The National Transportation Safety Board (NTSB) completed a vulnerability assessment which identified 68 other bridges frequented by ocean-going vessels that were constructed before American Association of State Highway and Transportation Officials (AASHTO) standards were updated in 1991. The Board issued a report with the release was timed to hit the first anniversary of the Key Bridge disaster in Baltimore. 

The Board urged the FHWA, Coast Guard, and Corps of Engineers to form a dedicated, interdisciplinary team that provides guidance and assistance to bridge owners on evaluating and reducing the risk of a bridge collapse from a vessel collision. It also urged the owners of the 68 identified bridges to calculate whether the probability of a bridge collapse from a vessel collision is above the acceptable risk threshold established by AASHTO.

The FHWA requires that new bridges on the National Highway System be designed to minimize the risk of a catastrophic bridge collapse from a vessel collision given the size, speed, and other characteristics of the vessels navigating the channel under the bridge. The Board found that the 30 owners of 68 bridges over navigable waterways frequented by ocean-going vessels are likely unaware of their bridges’ risk of catastrophic collapse from a vessel collision and the potential need to implement countermeasures to reduce the bridges’ vulnerability.

So, is a wave of financings and borrowings coming on to implement lots of updates to the bridges? We don’t think so. There is no requirement that the owning agencies conduct the recommended review let alone perform any of the proposed fixes. We note the wide variation in terms of type of bridge and age of bridge. Several are constructed after the AASHTO standards were established. One of the “vulnerable” bridges is the Sunshine Skyway over Tampa Bay which was built to replace a bridge which was damaged by a ship collision.

POLICY AND PORTS

The Port of Los Angeles processed 801,398 Twenty-Foot Equivalent Units (TEUs) last month, which was 2.5% more than last year and marked the Port’s second-busiest February on record. At the same time, the results acknowledge the uncertainty associated with White House trade policy. “Many retailers and manufacturers have been importing their products through Los Angeles earlier than usual as a hedge against tariffs. Given the substantial inventory already here, and the uncertainty of tariffs, it’s possible we could see a 10% volume decline in the second half of the year.”

What isn’t mentioned is a new non-tariff policy. President Trump is drafting an executive order that would rely on funding from a U.S. Trade Representative proposal to levy fines of up to $1.5 million on China-made ships or vessels from fleets that include ships made in China. Those potential port fees have limited the availability of ships needed to move agriculture, energy, mining, construction and manufactured goods to international buyers. Vessel owners have already refused to provide offers for future U.S. coal shipments due to the proposed USTR fees.

Industry groups have been consistent in their response. Among the groups fearing restricted exports are the West Virginia Coal Association, the American Petroleum Institute, and shipping associations. The shippers contend that very few maritime operators will be able to document that their annual share of U.S. exports meets the required 20% carried on U.S. built, U.S flagged vessels.

The USTR proposal also seeks to shift domestic exports to ships that are both flagged and built in the United States. The current fleet of U.S.-flagged cargo vessels numbers less than 200, and not all are U.S. built. To completely avoid the fees, vessel operators must be based outside of China, have fleets with fewer than 25% of ships built in China, and have no Chinese shipyard orders or deliveries scheduled within the next two years

The proposed shipping restrictions come as the US agriculture sector is already dealing with the impact of tariffs. The inability to secure ocean freight transportation from May and beyond has restricted their ability to sell bulk U.S. agricultural products like corn, soybeans and wheat because exporters are unsure what the final cost would be.

The United States exported more than $64 billion in bulk crops, bulk animal feed and vegetable oils in 2024, according to U.S. Census Bureau Trade data. Bulk agricultural exporters could face an additional $372 million to $930 million in annual transportation costs from the fees.

BLAME CANADA

Nearly 500,000 fewer travelers crossed the land border from Canada into the U.S. in February compared to the same month last year, according to data from U.S. Customs and Border Protection (CBP). The number of travelers entering the U.S. in a passenger vehicle — the most common way to make the trip from Canada — dropped from 2,696,512 in February 2024 to 2,223,408 last month. The number of travelers driving over the U.S. land border is the lowest it’s been since April 2022.

The number of cross-border travelers headed for the U.S. in October, November, December and January were all well above the numbers reported for the same month the year before. All categories of transit have declined beginning in February. That even includes those who walk across to shop or visit. CBP reported the number of walkers fell from roughly 117,000 in February 2024 to 99,000 last month. 

The anecdotal evidence is that fewer Canadians are maintaining their historic presence in Florida this year. I can tell you that the sentiment in Canada is strong. I see a lot of broadcasts of Canadian NHL teams. The advertising is telling. Companies are flooding the airways with ads emphasizing Canadian products. The political ads shifted in tone quickly last month and no longer focus on getting along with the U.S.

That has real implications for those businesses with significant demand from Canada. Small businesses nearer to the border all already taking a hit. Large entities are vulnerable as well. One credit that comes to mind is the Destiny USA mall in Syracuse. It derives approximately 20% of its visitors from Canada.

CLIMATE BALLOT IN COURT

Initiative 2066 which is viewed as protecting natural gas as an energy choice in Washington state was approved by the voters in November, 2024. A King County Superior Court Judge ruled that the scope of I-2066, approved by voters in November, was too broad and violated the state Constitution’s single-subject requirement.

I-2066 was in response to HB 1589, which was passed during the 2024 legislative session. The bill directs “large combination utilities,” or combination gas and electric companies that serve more than 800,000 customers, to plan for the development of specific actions “supporting gas system decarbonization and electrification” in alignment with the state’s goals to move toward 100% clean energy. I-2066 was aimed at resisting some of these moves.

The judge ruled the ballot measure’s title may have confused voters who could have voted “yes” to support the choice of natural gas but did not realize building codes would have to be amended or that there could be climate impacts as a result. Here is where the situation becomes amusing. Over the years we have covered laws and regulations on the conservative end of the spectrum often written by organizations like ALEC on the right. Now, the gas industry is complaining specifically about the involvement of the Pacifica Law Group. The gas industry is charging that the Group essentially wrote the judge’s decision for her.

Did they? Who knows and it’s not our point. We hate the ideological approach to governing on either end of the spectrum. We see fewer and fewer rational reactions to legal outcomes which is bad in an environment where legislation is almost impossible. It does no good to rely on the courts to do the work of citizens if we’re going to undermine the courts. There will be a motion supporting a direct appeal to the state Supreme Court.

NEW YORK STATE BUDGET AND FEDERAL MONEY

The New York State budget process is supposed to wind up on March 31 with the new fiscal year starting April 1. The already complex process was further complicated by the latest cuts being made by the DOGE. Two New York State agencies working on addiction services and mental health care told nonprofit providers that two federally funded state grant programs, which totaled about $330 million and were supposed to run through the end of September, had been halted.

In the fiscal year ending this month, New York State received an estimated $96 billion from the federal government, with roughly $57 billion going to the state’s Medicaid program. About $10 billion went to schools, about $4 billion to law enforcement and public safety and $2.5 billion to transportation programs.

Ms. Hochul had based her initial $252 billion state budget proposal for the coming year on the assumption that almost $91 billion would flow from Washington.

The budgetary meat ax being waved around by the DOGE reflects a complete lack of understanding as to how Medicaid works and how it covers people. There is a discussion to be had over whether all of the things that Medicaid in New York covers can continue to be supported. For some services, the states have longed relied on a private non-profit infrastructure network to provide many of the specialized services Medicaid covers like those provided by mental health providers. These abrupt cuts will leave many of those providers unable to operate.

FEDERAL FUNDING AND THE STATES

I have no doubt that the squad of boy wonders in D.C. has no understanding of the role of these funds and the non-profit service providers in the provision of addiction and mental health services. There is no way to provide these services privately in the sense that the providers would be hard pressed to self-fund. At the same time, governments would never be able to go back to what was another form of mass incarceration. So, the effort to reduce spending here is just going to cause more problems than it solves. 

Some research from the Pew Charitable Trusts published in September, 2024 provides a backdrop for the actions currently underway to cut and hold back federal funds to the states. It provides some clues as to what is currently going on. There are some caveats. The data covers 2019-2022, a time of extraordinary circumstances which are certainly not sustainable.

Nationwide, states received 60.8% more in federal grants in fiscal 2022 than they did just before the pandemic—ranging from 130.5% more in South Dakota to 32.8% more in California. The federal government awarded states more than $800 billion in COVID-19 relief. Fiscal 2022 was the first year states were eligible for the more than $760 billion authorized through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. 

Federal funds, rather than state tax dollars, accounted for the largest source of revenue in 16 states, up from five states in fiscal 2019 and 15 in fiscal 2021. In fiscal 2020, federal funds made up the largest share in 18 states, the most on record. California and Montana were the only states where the federal share of state revenue was lower in fiscal 2022 than in fiscal 2019. 20 states reported their largest share of revenue from federal funds of any year in the past 50 years.

South Dakota experienced the biggest annual percentage-point growth in the federal share of state revenue, up 11 percentage points from fiscal 2021. This swing was related to the timing of receiving and spending federal pandemic aid. North Dakota experienced the biggest annual percentage-point decline, with the federal share falling 17.5 percentage points from fiscal 2021.

So where does this matter? Louisiana reported the highest percentage of revenue from federal funds (50.5%). North Dakota reported the lowest percentage (22.2%). The percentage of state revenue from federal funds in states with the largest federal shares—Louisiana (50.5%), Alaska (50.2%), and Arizona (49.7%)—was roughly double what it was in those with the lowest shares: North Dakota (22.2%), Hawaii (25.9%), and Virginia (27.6%).

REALLY?

The United States Department of Agriculture has moved to cancel $13 million in funding for Pennsylvania farmers who provide products for food banks. The funding came from the Local Food Purchase Assistance Program established in 2021. The purpose was to help both farmers struggling during the COVID-19 pandemic, as well as food banks that may not have a budget for fresh food. Since the program began, Pennsylvania has received over $28 million.

This move comes after Pennsylvania succeeded in a legal action against the effort to cut off $2 billion of federal funding for Pennsylvania by the Trump administration. Those funds are now being restored while a lawsuit against the cuts is still standing despite the fact that the specific cuts which are the subject of the suit have been restored. The congressionally-approved money for Pennsylvania saw most of those dollars be used for environmental programs like plugging abandoned oil and gas wells, building out clean-water infrastructure, and helping low-income households retrofit their homes to lower utility bills. 

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

CONGESTION PRICING

The Trump administration appears to be using its Canadian playbook to manage its opposition to congestion pricing. March 21 was supposed to be the date by which the MTA stopped collecting congestion fees. Given pending litigation, MTA has continued to collect the fees and plans to keep doing so until it is legally stopped. Like it did with tariffs, the administration has now delayed taking action against the MTA for 30 days. MTA now has until Easter to collect fees.

Whether this indicates a clear softening in the administration’s position remains to be seen. The extension of congestion fees was accompanied by threats to withhold federal operating aid to the MTA. Ostensibly, this is supposed to lead somehow to reduced crime on the City’s subway system. While it was presented as a move against more than one transit agency regarding the issue of crime, its pretty obvious that the threat was designed to accompany the fee delay.

AFTER THE FIRE

The credit impact of the wildfires in January in California has begun to take shape. The placement of a negative outlook for the City of Los Angeles and other impacted municipalities was not unexpected. Now, the ratings impact is expanding to the utilities. This week, S&P placed seven municipal power agencies on negative outlook.

They are Lassen Municipal Utility District (‘BBB’); Modesto Irrigation District (‘A+’); Transmission Agency of Northern California (TANC; ‘A+’); Sacramento Municipal Utility District (SMUD; ‘AA’ senior lien and ‘AA-‘ and ‘AA-/A-1’ subordinate liens); San Francisco Public Utilities Commission (SFPUC; Hetch Hetchy Power Enterprise; ‘AA’); Truckee Donner Public Utility District (‘A+’); and Turlock Irrigation District (TID; ‘AA-‘, including bonds issued by the Walnut Energy Center Authority [WECA] and the Tuolumne Wind Project Authority [TWPA] that are payable as an operating expense of TID).

S&P noted “The negative outlooks reflect our assessment of the heightened longer-term credit pressure from the rising potential for future liabilities and operating and infrastructure costs associated with wildfires, which have grown more frequent and intense in California in recent years given the region’s increasing susceptibility to these events.

“The negative outlook also reflects our view that there is a one-in-three chance that we could lower the ratings on these various utilities within the next one-to-two years by one or more notches should we determine that wildfire mitigation measures combined with liquidity and wildfire liability insurance coverage are no longer commensurate with current ratings in light of the changing environmental conditions increasing wildfire vulnerabilities, particularly given California’s interpretation of inverse condemnation, or if infrastructure hardening costs materially pressure rate affordability,”.

As for the City of Los Angeles, the budget news gets bleaker. The city’s administrative officer testified before the City Council. He compared the city’s financial straits to the aftermath of the 2008 financial crisis and said the budget gap estimated for the fiscal year that starts in July represented an eighth of the $8 billion general fund. Los Angeles is facing a projected shortfall of nearly $1 billion next fiscal year, and significant cuts and “thousands” of layoffs are “nearly inevitable,”.

Preliminary estimates of the city’s costs from the January wildfires are more than $282 million just for expenses such as firefighter and police officer overtime and infrastructure replacement. The city controller estimated that city revenues would remain flat or decline next year, partly because of fire losses and the soaring costs of disaster insurance and partly because of “uncertainty generated by the new presidential administration’s radical policies on tariffs, federal spending cuts and immigration.” 

At the same time, the Controller reported that salaries and benefits this year had added more than $343 million to the city’s obligations as a result of new labor agreements, police and fire overtime and retirement and sick payouts. The city had spent more than $246 million on liability payouts for legal claims this fiscal year, roughly three times the $82 million the city had budgeted for such obligations. 

NUCLEAR

The U.S. Department of Energy on Monday announced a second loan disbursement to Holtec toward restarting its decommissioned Palisades nuclear power plant in Michigan. The action released nearly $57 million of an up to $1.52 billion federal loan guarantee for Holtec. The Palisades plant, if restarted, would generate 800 megawatts of electricity. Holtec officials last month announced plans to install the first U.S.-built small modular reactors on the Palisades property in Covert by 2030, in co-location with the restarted plant. The proposed two new modular nuclear reactors, dubbed SMR-300s, would each generate approximately 300 megawatts of energy.

WIND

The 1.5-GW Atlantic Shores 1 wind energy project in progress offshore New Jersey had its Clean Air Act permit from the Environmental Protection Agency remanded by the agency’s Environmental Appeals Board. The decision reflects the freeze on funding underway from the Trump administration. The permit remand comes a month after EDF Renewables, one of Atlantic Shores’ developers, booked a $980 million impairment associated with the project. Shell, EDF’s partner in the joint venture, booked a $1 billion impairment associated with the project in January, which EDF referred to as a “withdrawal” in its annual financial report.

REGULATION LITIGATION

Hearings were held this week before the Ohio Supreme Court on whether The Ohio Power Siting Board was within its rights to reject a permit application for a solar power facility merely on the basis of local governmental opposition. In , the Board rendered a decision denying Vesper Energy the right to build a 175-megawatt solar facility in Greene County, OH. The company claims the siting board failed to follow state law in its analysis of whether its project (Kingswood Solar) is in the public interest — one of eight criteria that power generation projects must meet to receive a site permit.

A 2021 law lets counties block most new utility-scale wind and solar energy projects before they even get to the Ohio Power Siting Board. Others, like Kingwood Solar, have been denied based on local opposition, even though they are exempt from that part of the law because they filed permit applications or got in the grid operator’s queue prior to the legislation’s passage.

In 2022, the board found that the proposed Kingwood Solar facility met all the other legal requirements for a permit, yet it concluded ​“that the unanimous opposition of every local government entity” bordering the project was ​“controlling” on the public interest question. The board denied the permit. Another part of Ohio law that says local governments can’t require their own consent for the construction of power facilities. 

A decision will come later this year. In the meantime, large scale solar will slow down in the Buckeye State.

EV POLICY REALITIES

A Princeton University study has evaluated the potential impact of Trump administration energy policies on the emerging electric vehicle industry. The report notes that the plans to eliminate tax credits and other federal support will have significant negative impacts especially in states considered to be Trump states. Through executive orders, President Trump has indicated intentions to eliminate federal regulations aimed at reducing greenhouse gas emissions from cars and trucks, repeal subsidies supporting electric vehicle (EV) purchases, and halt or redirect federal grant programs designed to expand EV charging infrastructure.

Their findings: If EPA tailpipe emissions regulations and federal clean vehicle tax credits are repealed: Sales of battery electric vehicles could drop about 30% in 2027 and 40% in 2030 relative to a scenario where current policies are continued. The share of battery electric vehicles in new light vehicle sales could drop from about 18% to 13% in 2026 and 40% to 24% in 2030. Cumulatively, 8.3 million less EVs and plug-in hybrids could be on U.S. roads in 2030.

As much as 100% of planned construction and expansion of U.S. electric vehicle assembly and half of existing assembly capacity could be at risk of cancellation or closure. Between 29% and 72% of battery cell manufacturing capacity currently operating or online by the end of 2025 would also be unnecessary to meet automotive demand and could be at risk of closure, in addition to 100% of other planned facilities. There would be further (unquantified) impacts on U.S. materials, parts, and component suppliers upstream of EV and battery assembly. 

POLICY REALITIES – NEW YORK

A report from State Comptroller Thomas DiNapoli reviewed the impact of the withholding of funds under current federal policies. The Inflation Reduction Act (IRA) of 2022 contained significant provisions related to taxes, health care, energy and the environment. Specifically, the IRA provided roughly $400 billion in clean energy investments to mitigate the causes and effects of climate change and air pollution in the form of rebates, tax credits, grants and loans. New York State agencies and authorities, municipalities, businesses and non-profit organizations have been awarded nearly $2 billion in grants to date.

Two projects will clearly be impacted by the withholding of grant monies under current Trump administration policies “pausing” these programs. The first is $451.6 million for the Port Authority of New York and New Jersey to reduce air pollution from port activities. Federal spending information indicates that there have been no outlays of funding from this grant. The second is $180.0 million for the New York State Department of Transportation’s I-81 Connecting Syracuse Project. It is not clear if there have been any outlays from this grant.

The latest congestion pricing twist and turn was the announcement that the secretary of transportation had extended the deadline for the State to end its collection of the fees by 30 days.

MISSISSIPPI

The Mississippi legislature is trying to reach agreement over competing plans to reduce if not eliminate the state income tax. The effort comes as the nation’s most federally dependent state – for every dollar paid to the federal government the state receives three – faces the risks of significant cutbacks in federal spending. The state Constitution requires a three-fifths majority of lawmakers to approve tax bills. There are significant gaps between the plans passed in the respective houses of the legislature.

The House would fully eliminate the state income tax by 2037. It would cut about $2.2 billion from the state’s current $7 billion general fund while it would increase the state’s net sales tax from 7% to 8%. It would also include an additional 15-cents-a-gallon excise tax on gasoline. The tax increase would be phased in at 5 cents a year over three years. This would be added to the current 18.4-cents-a-gallon. The plan would also transfer $100 million per year from the state lottery system into the public employee retirement system. 

The Senate would decrease the 4% income tax rate by .25% each year from 2027 to 2030 and leave it at 3% in 2030. The plan would reduce the sales tax on groceries from 7% to 5%. It would also increase the 18.4-cents-a-gallon gasoline tax by 9 cents over three years, for a total of 27.4 cents. Going forward, the tax would increase automatically based on the cost of road construction. To address pension funding, the Seante would change benefits for government employees hired after March 2026 to a “hybrid” retirement that includes part-defined benefit and part-defined contribution.

The likely result is that the state’s tax structure will be more regressive. That in a state with some of the highest poverty levels.

BABY BONDS IN NEW MEXICO

Legislation in New Mexico is being considered which would provide that each child born in New Mexico would receive a state-funded trust fund at birth. The bill estimates that a $6,000 award at birth could result in $20,000 at age 18. At that point, the funds could be accessed for higher education, homeownership, business ventures, or investments.

The recipient must maintain residency in New Mexico until they turn 18. To access the funds, they must graduate from high school or earn an equivalent diploma. The money can only be used for specific purposes, including: Higher education (tuition, books, or related expenses); Purchasing a home; Starting or investing in a business; Other approved investment opportunities.

ALASKA PERMANENT FUND DIVIDEND

For 2025, the Alaska Permanent Fund Dividend was set at $1,702 per person.  The Alaska Department of Revenue announced that the dividend will begin to be distributed on Oct. 3. The $1,702 includes a special energy relief bonus to help with high fuel costs. The Alaska Legislature allocated about $914 million for the 2024 PFD distribution, with more than 600,000 people eligible for the payment. This means roughly two-thirds of the state’s population will receive a cash infusion, collectively injecting nearly $1 billion into the economy. The 2024 dividend is $390 higher than 2023.

It can be argued that the Permanent Fund Dividend is essentially a basic guaranteed income plan. There are obvious differences. As opposed to a monthly check, the payment is one time a year. This tends to encourage spending on less essential things versus a monthly payment. The University of Alaska Anchorage’s Institute of Social and Economic Research found that spending was concentrated over approximately one quarter.

The research found that after receiving their PFD, “Alaskans spend significantly more on non-durables (such as cosmetics, cleaning products, food, fuel, and other consumables) and services in the month when they receive the dividend payment. Other studies by the University have documented that “the PFD has resulted in substantial poverty reductions for rural Alaska Natives,” with particularly pronounced benefits for elderly residents​. 

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.