Joseph Krist
Publisher
PENNSYLVANIA GAS
The Commonwealth of Pennsylvania has been monitoring production in the natural gas industry which revolves around fracking. Now, the state’s Independent Fiscal Office has released data which shows drillers produced 1.6% less gas in 2022 in Pennsylvania than the year before. This is the first annual drop since data became available in 2012. The decline in production in the final quarter of 2022 was a reduction of 5.1% from the same time a year earlier. This is the largest year over year decline recorded since 2015.
The average price of natural gas in Pennsylvania was $4.45 per million British thermal units (MMBtu) at the end of 2022. It represents an increase of 12% over prices at the same time the year before. In the recent cycle, the price reached a high of $6.89 per MMBtu earlier last year. The declines continue a trend in evidence since 2019. It has been attributed to a reliance on older less productive wells as new drilling sites have slowed.
Contrast this with the data from other producing states. Texas drillers reported a nearly 6% increase in gas production. Louisiana production grew by 17%.
TRAINS, PLANES, AND AUTOMOBILES
New York has long stood out for its lack of ready mass transit access to its airports. Yes, the Air Train has run from Queens to Kennedy Airport. It has not proved to be quite the convenient option of choice it was supposed it would become. Nonetheless, the effort to connect La Guardia Airport with the city’s mass transit infrastructure was considered to be a prime interest of then Governor Andrew Cuomo.
The project had drawn much opposition from those living along its proposed route. The construction of the link to JFK was a nightmare for residents as well as travelers seeking to get to Manhattan. That experience was not lost on opponents. Once Governor Cuomo resigned, the project lost its primary champion. Now that loss of support has led to a new course for LaGuardia and access to mass transit.
The Port Authority of New York and New Jersey had received expedited federal approval of its plan to build the AirTrain between La Guardia and Willets Point, where it could have connected with the No. 7 subway line and the Long Island Rail Road. As cost estimates increased to some $2.4 billion, the Port commissioned outside advisors to look at alternatives.
That panel recommended the Port Authority and the MTA should enhance existing Q70 bus service to the airport and add a dedicated shuttle between La Guardia and the last stop on the N/W subway line in Astoria. That would eliminate much of the cost (buses would be $500 million) and address neighborhood concerns connected with construction.
GIG WORK
The plight of drivers for transportation network companies (TNC) has been in the news on both coasts. Recently, NYC granted approval for drivers to receive raises of some 9%. The approval had been withheld for some time and this was the subject of protests over year-end. The raises come in the aftermath of the pandemic and in the midst of the effort to revive the city’s economy.
A California appeals court ruled that Proposition 22, the ballot measure passed by state voters in 2020 that classified Uber and Lyft drivers as independent contractors rather than as employees, should remain state law. The Service Employees International Union, which, along with several drivers, filed a lawsuit challenging Proposition 22 in early 2021, is expected to appeal the decision to the California Supreme Court.
Initially, drivers won their battle to be classified as employees which would have likely forced the TNC to pay costs that can include drivers’ unemployment insurance, health insurance and business expenses. An initial challenge to the law received a favorable decision in 2021. It is that decision which was appealed in this case. The latest ruling found that requiring collective bargaining to occur through an amendment to the proposition “violates separation of powers principles,” and ordered that clause to be severed from the rest of the ballot measure.
The case is unfolding as challenges to another law governing employee relations moves through the California courts. Proposition 22 gave gig workers limited benefits but exempted them from Assembly Bill 5, a law passed by the California Legislature in 2019 that set a new standard for determining whether workers should be considered employees under the law. If upheld, A.B. 5, is ever applied to gig drivers, the TNC could be found to be improperly treating those drivers as independent contractors rather than as employees.
MILEAGE FEES
Legislation has been introduced in the Oregon Legislature which would impose mileage fees on electric cars. Oregon has been conducting a voluntary pilot program since 2015 which imposes mileage fees. Now, SB 945 would measure the miles traveled, starting from when the car is registered, and charge at a rate that is equivalent to the gas tax owed by drivers getting 30 miles per gallon.
According to the state of Oregon, there are 60,623 registered electric cars in the state as of November 2022. The pilot program has enrolled only 2100 of them.
MARYLAND P3 IN TROUBLE
Maryland’s plan to build a new American Legion Bridge and put toll lanes along part of the Capital Beltway and Interstate 270 faces real questions with the news that Transurban – the leader of the consortium which was to be the state’s partner has withdrawn from the project. Now for the project to move forward, a new private partner must be found.
Transurban’s announcement comes two weeks before a key performance milestone. The partnership was expected to submit a detailed plan for the project this month. This also comes within less than 90 days from the change in administrations in Annapolis. It should be noted that Transurban cited challenges including delayed environmental approvals, “a changing political landscape,” and unresolved lawsuits. It also noted Maryland’s decision to pursue alternatives – whether that is in project scope, delivery, or partnership.”
The decision provides an opportunity for a “progressive” administration to see if its equity-based model for providing infrastructure can succeed. This is the second time that a major P3 project has been delayed or ended because of issues arising between the state and its P3 partners. The result has been increased costs and lengthening delays in project provision. It’s not just roads but mass transit too which has found itself in this position in Maryland.
TECHNICAL COLLEGES
Clarkson University is a private research university with a main campus in Potsdam, New York. It had 3,498 full-time equivalent students in fall 2022 and generates $135 million of operating revenue. In spite of its long-established name, it faces many of the same pressures buffeting private colleges nationwide.
Escalating student demand challenges include weak regional demographics and evolving consumer trends. This in spite of the fact that Clarkson is not considered a liberal arts college but rather one with a focus on technology and engineering programs. Nevertheless, weak operating results are projected in fiscal 2023, following a significant operating deficit in fiscal 2022. Current results are impacted by higher discounting and missed enrollment goals.
The University’s name and reputation along with currently sufficient investment assets protect its Baa1 rating from Moody’s. The outlook is negative. That outlook acknowledges the continuing student market challenges that could lead to a continuation of operating deficits beyond fiscal 2023 if the university is unable to adjust expenses to align with enrollment outcomes.
Another school with a technical rather than a liberal arts base is the Illinois Institute of Technology. Illinois Tech is a private, not-for-profit university located in Chicago, IL. In fiscal 2021, Illinois Tech generated operating revenue of approximately $274 million and enrolled 5,885 full-time equivalent (FTE) students as of fall 2022. It’s enrollments actually increased in the last year by some 7%. This has not translated into fiscal stability.
As a result, Moody’s downgraded Illinois Tech’s rating to Ba2. The downgrade to Ba2 is largely driven by rapid escalation of significant operating deficits. Meaningful structural operating deficits are likely to continue through at least fiscal 2024. The university consumed an estimated $62 million of its financial reserves in fiscal 2022 due to a large fiscal 2022 deficit.
What really hurts is the structure of the institution’s debt which includes reliance on working capital lines of credit and includes various covenants. The current trend of financial performance makes a covenant violation a real risk and Moody’s is concerned about a potential for acceleration of debt. “The negative outlook reflects prospects for further credit deterioration if the university is not able to make observable improvement in operating performance and stabilization of unrestricted liquidity beyond fiscal 2023.”
WESTERN WATER
The California State Water Resources Control Board approved a request by the U.S. Bureau of Reclamation to take more than 600,000 acre-feet from the San Joaquin River and send much of that water flowing to areas where it can spread out, soak into the ground and percolate down to the aquifer beneath the San Joaquin Valley. The areas receiving the water have been reliant on significant drawdowns of underground aquifer water supplies.
Those drawdowns have a significant downside. Declines in water levels that have left families with dry wells in rural areas across the Central Valley. Subsidence has become a larger problem in addition to the lack of water which results from excessive pumping of underground water. The state order allows the federal government to deliver floodwater from the Mendota Pool, a small reservoir on the San Joaquin River, to be used for replenishing groundwater.
The pull of the agriculture industry certainly helped the decision along. Agricultural uses were the source of some of the biggest drawdowns so now those agencies (like irrigation districts) which support it are being favored in the distribution process. With those districts benefitting, those farther down the chain are facing their own choices.
Even with other shortages like those in the Colorado Basin, The Metropolitan Water District of Southern California will relax emergency water restrictions on dozens of communities with a combined population of nearly seven million people in the face of the recent record precipitation. In place since June, the limits required parts of the state, including parts of Los Angeles, to limit outdoor watering to once a week or restrict the volume of water that could be used.
At the same time, a different approach is being debated in Nevada. The Nevada legislators are considering legislation that will give water managers the authority to restrict the amount of water available for residential use. The proposed bill would make Nevada the first state to allow a water agency, the Southern Nevada Water Authority, to shut off water use for single-family residences that use more than half an acre-foot of water, roughly 163,000 gallons, each year.
The Authority contends that the measure would only impact the top 20% of Las Vegas water users. The average customer in the Las Vegas Valley uses 130,000 gallons per year. Las Vegas depends on the Colorado River for 90% of its water supply. Nevada has already lost about 8% of its Colorado River supply from mandatory cuts by the federal government. Those cuts are occurring as the seven states in the Colorado Basin continue to be unable to agree on allocation formulas going forward.
ROTTEN AT THE CORE
Now that some time has passed from the onset of the pandemic through to its current condition, we are beginning to see data regarding population trends spurred by the pandemic. Efforts have been made to measure the impact we all see on economic activity in the core centers of major U.S. cities. The results of those efforts may give pause to holders of long-term debt from some of the cities studied.
Among the top 15 metropolitan population percentage gainers, 13 were in the South, with two in the West (Phoenix and Las Vegas). Austin had the strongest population growth (3.0%), followed by Raleigh (2.4%), Phoenix (2.4%) and Jacksonville (2.0%). Nine more metros exceeded growth rates of 1.0%: San Antonio (1.7%), Dallas-Fort Worth (1.6%), Charlotte (1.5%), Tampa-St. Petersburg (1.4%). Las Vegas (1.2%), Houston (1.2%), Riverside-San Bernardino (1.2%), Nashville (1.2%), and Oklahoma City (1.1%). Atlanta and Tulsa grew 0.9%. The largest numeric gains were in Dallas-Fort Worth (122,000), Phoenix (100,00) and Houston (85,000).
Now for the bad news. The largest losses were in the San Francisco Bay area, with metro San Francisco losing the most, (-2.6%) and San Jose second (-2.4%). Four more metros lost more than one percent, including New York (-1.8%), Los Angeles (-1.5%), Honolulu (-1.5%) and Chicago (-1.1%). Losses of from -0.8% to -0.4% occurred in Boston, New Orleans, Miami, Pittsburgh, Detroit, Cleveland, Milwaukee. Rochester and Washington.
The picture of NYC especially Manhattan is not favorable. The population and domestic migration losses in New York City were unusually high (337,000 and 383,000) over the 15 months. New York City had 43.5% of the state’s population (8,804,000) in April 2020. Since that time, the city accounted for 92.2% of the New York State’s population loss and 94.3% of its net domestic migration. Among counties with more than 20,000 residents in the nation, New York County (Manhattan) had the largest percentage population loss since the census, at 6.90%. Numerically, Manhattan trailed only Los Angeles County in terms of population loss.
SOUTH CAROLINA DISCLOSURE MESS
The South Carolina legislature is considering abolishing the office of State Comptroller. The elected position effectively makes the officeholder the State’s chief accountant. That puts the position in a difficult spot when a large “accounting error” is spotted. That is where the state finds itself after a review of the office by the State Legislature.
The Senate Finance Constitutional Subcommittee in the state legislature investigated how the state came to be overstating its cash position. The Comptroller admitted that a $12 million coding error in 2007 had gone undetected. When data was not updated in connection with an accounting systems conversion in 2011, it accelerated the impact of the error. The error effectively double counted the amount of money provided by the state to the state university system.
In the ten years after the initial mistake, the cash position was overstated by over $1 billion. Since then, the state has significantly increased funding for its university system and the cash overstatement has grown to $3. 5 billion. The Comptroller’s office admitted the mistake in February. Now, the committee urged South Carolina’s General Assembly to relieve the comptroller of his position “for willful neglect of duty”.
The comptroller general oversees the state’s annual financial report. That includes determining which cash expenditures to include or exclude in the year-end report. This raised a question as to the validity of the state’s financial statements dating back over a decade. It raises significant governance questions. It also leads one to question whether a state with clearly weak financial oversight is truly a Aaa credit.
NON-PROFIT HOSPITALS AND TAXES
There have been efforts over the years to attack the tax-exempt status of many not-for-profit hospitals. As these institutions have grown and consolidated, their operations mirror more and more those of profit-oriented enterprises. As the pandemic unfolded, hospitals were in the news for their aggressive efforts at debt collection related to stays in hospitals due to COVID. These included both secular and religiously sponsored institutions. This focused more attention on the issue of hospitals and their tax-exempt status.
Now, a study from the Kaiser Family Foundation raises issues about that tax exempt status. KFF found that the total estimated value of tax exemption for nonprofit hospitals was nearly $28 billion in 2020. This represented over two-fifths (43%) of net income (i.e., revenues minus expenses) earned by nonprofit facilities in that year. The total estimated value of tax exemption (about $28 billion) exceeded total estimated charity care costs ($16 billion) among nonprofit hospitals in 2020, though charity care represents only a portion of the community benefits reported by these facilities.
It is a long-term trend. The value of tax exemption grew from about $20 billion in 2011 to about $28 billion in 2020, representing a 41 percent increase. What is the tax loss to governments? The estimated value of federal tax-exempt status was $14.5 billion in 2020, which represents about half (52%) of the total value of tax exemption. The total estimated value of state and local tax-exempt status was $13.2 billion in 2020, which represents about half (48%) of the total value of tax exemption. This amount includes the estimated value of not having to pay state or local sales taxes ($5.7 billion), local property taxes ($4.4 billion) or state corporate income taxes ($3.1 billion).
THE EMERGING NATURAL GAS COMPROMISE
We commented two weeks ago about an apparent compromise ordinance to address the issue of natural gas usage. Denver enacted an ordinance that called for a ban on natural gas for water heaters and furnaces in newly constructed buildings. This was to address strong objections from many cooks (both individuals and restaurants) over banning gas for stoves.
Now, San Francisco is taking a similar approach to the issue. The Bay Area Air Quality Management District (BAAQMD) has voted to adopt new rules that seek to eliminate harmful nitrogen oxide (NOx) emissions from these appliances. The rules will ban the sale of NOx-emitting natural gas water heaters in 2027 and prohibit NOx-emitting furnaces in 2029 and large commercial water heaters in 2031. The Air District regulates stationary sources of air pollution in Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, southwestern Solano and southern Sonoma counties.
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