Joseph Krist

Publisher

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This week another state legalizes cannabis, a pond in Florida highlights a national problem, can nuclear energy be revived at an old WPPSS site, the NYS budget, NYC property values , a breather for the MTA credit, and Puerto Rico and Title III drags on.

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LEGAL CANNABIS IN NEW MEXICO

Pending the Governor’s expected signature, the legalization of cannabis for recreational use will make New Mexico the next state to do so. It joins New York and Virginia as other legislative adoptees of legislation legalizing recreational sale. Under the New Mexico law, people over 21 would be permitted to have up to two ounces of marijuana, and individuals could have six plants at home, or up to 12% per household. Sales would begin no later than April 2022 and be taxed at 12%, eventually rising to 18%, plus gross receipts taxes.

One major difference in the New Mexico legislation is that local governments are not allowed to ban cannabis businesses entirely (opt out provisions), as some other states have allowed. Municipalities could, however, use their local zoning authority to limit the number of retailers or their distance from schools, daycares or other cannabis businesses. Another difference is that the bill as amended includes language that would allow medical marijuana patients who are registered in other states to participates in other states to access.

From our standpoint, the states which have recently legalized cannabis have done it legislatively rather than by voter initiative. The Illinois legalization was a huge breakthrough in that regard. Once that was achieved, it made the effort to advance legislation supporting legalization that much more likely. No one remembers which state was the second to do anything.

PLUGGING A LEAK

As abandoned legacy industrial sites will become more common, the costs of environmental remediation will continue to pose threats to local budgets. The latest evidence  came on March 26, 2021, when the State of Florida received a report of process water bypassing the wastewater management system at the Piney Point facility, at a  former phosphate plant. The facility in Manatee County was releasing wastewater into Piney Point Creek which leads into Tampa Bay. The water being discharged from Piney Point is mixed sea water (primarily saltwater from the Port Manatee dredge project, mixed with legacy process water and storm water runoff/rainfall). 

Until this week, the reservoir storing the water was in danger of leaking at an increased rate which could eventually lead to a catastrophic flood in Manatee County. At the beginning of the week, Manatee County Public Safety officials expanded a mandatory evacuation area around the breached Piney Point reservoir. Between 2 and 3 million gallons per day of saltwater continued to flow out of the pond but the chances were increasing that a large section of the pond would wash away causing an uncontrolled release that would send as much as 380 million gallons of process water rushing out.

Wastewater storage, transport, and treatment are actually long standing environmental concerns at the site. Originally, the Borden Company (yup, Elsie the Cow) built a phosphate processing facility for the production of fertilizer. This is a significant industry in Florida. Process water is a chemical byproduct of phosphate mining that is rich in nitrogen, phosphorous and ammonia. Because those nutrients can affect local water quality, that water must be cleaned before it is released. The leaking pond contains untreated  water.

Central Florida has a large quantity of phosphate deposits which are weakly radioactive, and as such, the phosphogypsum by-product (in which the radionuclides are somewhat concentrated) is too radioactive to be used for most applications. As a result, there are about 1 billion tons of phosphogypsum stacked in 25 stacks in Florida. At least one of these stacks is in danger of collapsing which would trigger a huge spill at the Piney point pond. The site has been abandoned for nearly 20 years and natural rainfall and weather issues have accumulated some 400 gallons of water. The processing activities at the facility created significant piles of gypsum.

This week, the County finally was able to have enough water pumped out of the pond to sufficiently relieve the risk of a breach and flood. That does not mitigate the impact of threat 300 residential evacuations. (Those residents have returned.) The County did not offer government funded shelter but it did experience increased public safety costs associated with the evacuation of the county jail.

So here is one more environmental factor to consider in the analysis of local credits. As awareness of the issues grows, the potential for legacy private facilities (often abandoned) to present environmental risks which will eventually be funded by local government will continue to grow. In Michigan it was a private dam while in North Carolina it’s waste ponds for hog farm runoff, in the West its ponds full of mining tailings.  It is another important question to ask not just from an ESG perspective but a straight credit perspective as well.

NUCLEAR IN WASHINGTON STATE

It is some 38 years since the Washington Public Power Supply System (WPPSS) default on municipal bond debt issued to finance 2 of 5 nuclear generating facilities planned for the State of Washington. Since that default , the agency has been given a new name – Energy Northwest – and has moved on from the construction problems of the late 70’s and 80’s. It successfully regained market access and its debt today is rated at the mid AA level.

Now the agency is poised to try again in the development of new nuclear generating resources. X-energy, of Rockville, Md., has announced it will work with Energy Northwest to develop, build and operate an 80-megawatt reactor on land already leased by Energy Northwest at the Hanford nuclear reservation. The never completed WPPSS 4 reactor was to be built at Hanford.  

It could be the nation’s first commercial advanced nuclear power reactor. These reactors are built to higher safety specifications and have smaller generating capacities producing a smaller footprint. The plan would be to produce power to be sold to the Grant Public Utility District another long time municipal bond issuer. Power surplus to the District’s need could then be distributed through the regional Energy Northwest distribution grid.

While the project addresses many issues associated with the development of new nuclear generation as a way to achieve carbon neutrality, a shorter time frame for construction and commercial operation is not likely to result.  This plant is not anticipated to be online for seven years. This plant also benefits from the long history of acceptance of nuclear in the local TriCities area for both power generation and nuclear weapons purposes. This reduces the likelihood of opposition as the does the anticipated use of existing transmission lines.

That may limit the transferability of this project’s ultimate result for other projects in locations with fewer “pro-nuclear” advantages already in existence in the Hanford region. It is of note that each of the ongoing and proposed nuclear generation developments, they are all occurring at sites with some form of prior history with direct involvement with nuclear – either for power or for weaponry. 

NEW YORK BUDGET WILL TEST TAX THEORY

The NYS legislature has missed the April 1 deadline for adopting a budget as it seeks to increase income taxes. The political troubles faced by the Governor and a veto proof legislative majority put the legislature in the driver’s seat when it came to the FY 2021 budget. It’s what happens when one of the “three men in a room” is in a significantly weakened state.  The result is a budget filled with revenue raisers including legal cannabis and a millionaire’s tax.

The “temporary” tax increases would come through two new tax brackets. Income between $5 million and $25 million would be taxed at 10.3% and those making over $25 million would be taxed at 10.9%. The plan would raise the tax rate from 8.82% to 9.65% for single filers making more than $1 million. The process reflects the full impact of the 2018 election cycle in New York where tax policy had been moderated by a group of legislators who were essentially funded by the real estate industry. Now, many of those legislators were replaced and even though the Democrats had always had a numerical majority they now have a true working majority.

That election followed a 2016 tax cut. In 2021, the fourth year of those multi-year tax cuts enacted in 2016, income tax rates have been lowered from 6.09% to 5.97% for taxpayers filing jointly in the $43,000-$161,550 income bracket, and from 6.41% to 6.33% in the $161,550-$323,200 income bracket. 

Consistently over the years, tax rates have been identified as much less of a business factor in the decision process regarding business location. Any proposed tax increase is followed by predictions of mass evacuation of residents and businesses. Taxation is just one of many factors involved in that decision. One comment I saw put it best. “The only problem with working in Florida is that you have to live there.” The same factors which generated the recovery of the City of New York after the World Trade Center attack still hold. While business has by necessity become more tolerant of remote work, corporations still have issues with their desire to control their workforce and culture.

The conservative local media is already making turn out the lights references. There will be changes in the city economy and especially in the real estate market. The post 9/11 experience shows that one underestimates New York’s ability to recover at their own peril. The redeployment of existing space to residential along with supportive zoning in that period allowed development to thrive where many thought it could never occur. Keep the lights on, however. The tax increases are expected to affect 50,000 taxpayers while the cuts are projected to benefit $4.8 million.

PANDEMIC CASUALTIES – PROPERTY VALUES

The City of New York will now undertake its budget process for FY 22 in the wake of the completion of the state budget. That process will unfold in the face of the realities of the impact of the pandemic on the economy generally and on property values in NYC. Those realities are reflected in data developed by the NYC Independent Budget Office (IBO).

Anticipating major declines in rental income for commercial properties and residential apartment buildings as Covid-19 altered how and where people worked, the Department of Finance (DOF) sharply reduced the assessments that will be used for 2022 tax bills. As a result, IBO now forecasts a $1.0 billion decline in Real Property Tax (RPT) revenue from 2021 to 2022 , a decrease of 3.3 percent. In the last 25 years, the only other year when property tax revenue declined was in 1998, when revenue decreased by 2.8 percent.

IBO expects RPT growth to resume after 2022, although at a much slower pace than in recent years, averaging 1.8 percent annually in 2023 through 2025 to reach $31.5 billion. By way of comparison, annual growth in property tax revenue averaged 6.0 percent in 2017 through 2021. Much of the decline is not in the top level office and commercial space but in the lower classes of office space.

Some examples –  for elevator rental apartment buildings in Manhattan, the finance department projects a median decrease in buildings’ income used for 2021 to the income used for 2022 of 8.1 percent; for similar buildings in the other boroughs, DOF projected a median decline of 6.5 percent in income. Citywide, the declines in median income were larger for office, retail, hotel, warehouse/factory, and garage properties, ranging from -15.5 percent to -31.9 percent.

One thing to keep in mind is that once the assessment roll is finalized in late May, the resulting market values and assessed values are not subject to revision for 2022, even if different information about the commercial property market becomes available. Based on historical trends, IBO anticipates the final roll will show a 5.5 percent decrease in total market values, which would be only the third such decline in the last 25 years and a much larger decrease than the two previous instances.

COAL BY THE NUMBERS

A recent report from a group of environmental organizations supports our long held view that the decline of coal is inevitable simply from an economic standpoint. We believe that the market is dictating the future of coal. Nothing makes that clearer than the reality of what occurred during perhaps the most coal-friendly federal administration in decades. Coal’s long-term decline in the U.S. accelerated during the Trump Administration, with retirements rising to 52.4 GW during Trump’s four years compared to 48.9 GW during Obama’s second term.

One-third of currently operating coal power in the U.S.(76.6 GW of 233.6 GW) is scheduled for retirement by 2035. An additional 13.2 GW is scheduled for retirement between 2036–2040, while 141.1 GW of operating plants currently lack retirement dates. The 233.6 GW of coal fired generating capacity is second only to China in terms of its coal generating capacity. So there is still a lot of room for increased closures and the pressure will continue. Going forward, coal will become an issue which can be dealt with along with the market or we can revert to the recent prior administrations effort to work in opposition to the market. 

For those against a market approach, there is Wyoming. Wyoming Governor Mark Gordon signed HB 207 which creates a $1.2 million legal-defense fund to sue other states whose laws “impede” the top coal-producing state’s ability to export coal or that cause the early retirement of its coal-fired power plants. It says that laws by other states that encourage their transition to “other forms of energy … may impermissibly burden interstate commerce and may be contrary to federal law regulating the wholesale sale and transmission of electric energy in interstate commerce.”

MTA STIMULUS REVENUES AND RATINGS

We are getting more evidence of the potential credit benefits of the huge federal stimulus. The injection of such a high level of liquidity has substantially reduced the near term risks from revenue shortfalls related to the pandemic. That increased flexibility is steadily influencing ratings in a positive way.

The latest example is New York’s MTA. This week, Moody’s has affirmed its A3 rating on the Metropolitan Transportation Authority, NY’s (MTA) Transportation Revenue Bonds. The big news was that the rating outlook has been revised to stable from negative. The revision of the outlook to stable reflects the significant improvement in MTA’s budget flexibility and liquidity position for the next 18-24 months, due to its receipt of substantial federal aid for corona virus relief and recovery. 

Moody’s rightly notes that significant issues will remain after that time including an expected slow recovery of ridership and the fact that the timing and future borrowing for the adopted $55 billion 2020-2024 capital program is still being determined. The near term liquidity has come, in part, with a significant increase in leverage at the Authority. Now the credit has some breathing room to adapt to changes in demand. These will be issues not only of capacity but also of timing. It seems that the pandemic has reduced rush hour concentrations of demand but these have created differing time of day levels of demand. This will alter the historic pattern of utilization and upkeep of rolling stock. 

The improved outlook for the MTA helped the outlook for the Triborough Bridge and Tunnel Authority as well. That credit saw its outlook moved to stable from negative to reflect the significant improvement in MTA’s budget flexibility and liquidity position for the next 18-24 months, due to its receipt of substantial federal aid for corona virus relief and recovery. This reduces the near-term likelihood the MTA will use TBTA liquidity to support mass transit.

As of January 2021, traffic was down only 17.2% and revenue 11.0% down from the prior year. This recovery is faster than both the moderate and fast scenarios contemplated within the McKinsey analysis released by the MTA in May 2020, and revenue is more than 80% better than the TBTA’s budget adopted in the July 2020 financial plan. e went into effect

In addition to that recovery in utilization, a toll increase went into effect we went to press. This will generate further revenues to back transfers to the MTA as operating subsidies.

PUERTO RICO

The Puerto Rico Oversight Board  is ready to revive litigation involving so-called “claw back” debt issued by the Highways and Transportation Authority, Puerto Rico Infrastructure and Finance Authority rum bonds, and Convention Center District Authority bonds. The HTA has about $4.17 billion of revenue bonds outstanding. PRIFA has about $1.8 billion of rum tax bonds outstanding. The CCDA has about $410 million of revenue bonds outstanding. Bondholders are seeking to have the Commonwealth forced to apply tax revenues from those operations to the debt of the three agencies rather than to fund general Commonwealth operations.

The Plan Support Agreement (PSA) covers the General Obligation and Public Building Authority debt. As the PSA needs 70% support to continue and the bond insurers have voting rights on 15 percentage points, getting the involved bond insurers on board with the PSA will be important to approval of the Plan. Approval of the PSA is necessary for adoption of the wider plan of adjustment. Other bondholders of subordinate Puerto Rico Sales Tax Finance Corp. (COFINA) bonds have filed a 208 page petition for a writ of certiorari to the U.S. Supreme Court of the decision by the First Circuit Appeals Court against their challenge to the COFINA bond restructuring. 

A number of procedural steps remain as the Title III process crawls to the finish line.

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