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%).
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