Joseph Krist

Publisher

The Muni Credit News will take its summer break and the next issue will be the September 12 issue.

HE’S MAKING A LIST, HE’S CHECKING IT TWICE

The Texas Comptroller Glenn Hegar has released his list of financial firms which are now prohibited from doing business with the State of Texas or its underlying municipalities. It is based on his determination that “The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.” 

Black Rock, BNP Paribas SA, a French international banking group; Swiss-based Credit Suisse Group AG and UBS Group AG; Danske Bank A/S, a Danish multinational banking and financial services corporation; London-based Jupiter Fund Management PLC, a fund management group; Nordea Bank ABP, a European financial services group based in Finland; Schroders PLC, a British multinational asset management company; and Swedish banks Svenska Handelsbanken AB and Swedbank AB.

The move is consistent with Governor Greg Abbott’s continuing effort to achieve his own political goals via a series of political stunts. Whether it’s shipping migrants from the Mexican border to Washington, D.C. and New York City and dumping them on the street or efforts like this against ESG investment, it is not a serious debate.  In the end, it’s what the taxpayers think that matters. We refer you to our recent discussion of the observed cost of this move (MCN 8.15.22).

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SLOW COMEBACK FROM PANDEMIC

One of the casualties of the pandemic was the live entertainment industry. In the larger cities, these activities are always major contributors to those economies. With cities like NY and SF struggling to recover prepandemic working and entertainment patterns, the revival of the arts and entertainment industries are seen as key to longer term economic strength. It was hoped that “pent-up” demand might drive a quick return to prepandemic levels.  That does not appear to be the case.

Recent press reports have cited data showing that movie theaters have yet to recover their prepandemic audiences. Domestic box office revenues so far this year are down 31.2 % compared to the same period in 2019.  There are fewer releases but the pandemic did drive substantial demand for streaming services. Major League Baseball has been drawing fewer fans than it did before the pandemic.

TRG Arts is an analytics firm which serves the arts industry. It authored a recent study of 143 performing arts organizations in North America. It found that the number of tickets sold was down by 40 % in the 2021-22 season, compared with before the pandemic, and ticket revenues were down by 31 %. 

One of the sectors that New York is counting on is the theater, especially the Broadway theaters. Fewer than half as many people saw a Broadway show during the season that recently ended than did so during the last full season before the coronavirus pandemic. The 2021-22 season was still not a full one. The recovery in demand for Broadway started slow and concerns about virus variants limited attendance as the industry gradually reopened. There were 6,860 performances seen by 6.7 million people, grossing $845 million.

Those factors impacted other pillars of the New York cultural environment. During the 2018-19 season, the last full season before the pandemic, there were 13,590 performances seen by 14.8 million people, grossing $1.8 billion. The Met Opera saw its paid attendance fall to 61 % of capacity, down from 75 % before the pandemic. 

DETROIT AREA CREDIT UPSWING

This week, Moody’s revised its ratings and outlooks on three prominent Detroit area credits: the Great Lakes Water Authority Water and Sewer Revenue bonds and Wayne County. Moody’s affirmed the A1 senior and A2 second lien ratings on the water and sewer system’s existing bonds. Moody’s also revised the authority’s outlook to positive from stable. After the current sale, the water system will have about $1.6 billion of senior lien and $700 million of second lien revenue bonds outstanding. the sewer system will have about $1.8 billion of senior lien and $800 million of second lien revenue bonds outstanding.

The outlook is positive because the authority has strong management and stable operations and its underlying service area continues improve, particularly in the City of Detroit, as well as across Wayne (A3 positive), Oakland (Aaa stable) and Macomb (Aa1 stable) counties. The good ratings news comes amid the Authority’s efforts to replace a broken water main which generated some bad publicity.

Moody’s Investors Service has upgraded to A1 from A3 the issuer rating of Wayne County, MI leading to the upgrade of the county’s general obligation limited tax (GOLT) bonds and lease rental bonds. The upgrade of the county’s issuer rating to A1 reflects the continued strengthening of operating reserves and liquidity, aided by the restructuring of retiree benefits and proactive management. Once again, the benefit of dealing with retiree costs is clear as Moody’s noted that a retiree benefit restructuring has provided a level of budgetary predictability. 

MUNI UTILITIES AND COAL

Emissions data from EPA and power plant information from the U.S. Energy Information Administration has been released which shows the ten dirtiest coal fired generating plants based on emissions of greenhouse gases. That data was used to generate a top ten list which no power producer wants to be on – the ten worst emitters in the country.

Two of those plants are owned by municipal utilities. The Prairie State coal plant in Illinois is owned by nine different municipal utility owners. It may be one of the newest coal plants in the country but it ranks as the eighth dirtiest. The plant was at the center of the debate in Illinois over how to deal with carbon emissions as the state established emissions reduction limits in an effort to phase out coal plants. Illinois passed a law last year requiring all privately owned coal plants in the state to close by 2030. The law contains a carve-out for Prairie State, which must reduce its emissions 45 percent by 2035 and achieve net-zero emissions by 2045. 

The second plant on the list is the Fayette plant in Texas. It is owned by the Lower Colorado River Authority and the City of Austin electric system. Austin has attempted to reach an agreement with LCRA to divest itself of its interests in the plant but was unable to.

Some may have thought that the U.S. Supreme Court decision in June which questioned the ability of the EPA to regulate greenhouse gases at power plants may have granted some of them a reprieve from regulatory pressure. The Inflation Reduction Act amended the Clean Air Act and defined the carbon dioxide produced by the burning of fossil fuels as an “air pollutant.” In 2007, the Supreme Court, in Massachusetts vs. E.P.A., No. 05-1120, ordered the agency to determine whether carbon dioxide fit that description. In 2009, the E.P.A. concluded that it did. By classifying carbon dioxide as a pollutant, under the terms of the IRA the EPA can limit power plant emissions. 

IRA, AMT BACK TO THE FUTURE

The corporate AMT was eliminated under the Tax Cut and Jobs Act (TCJA) in late 2017.  Now, the Inflation Reduction Act of 2022 includes a 15% minimum tax on the adjusted financial statement income for corporations with three-year average incomes of more than $1 billion. It takes effect in 2023. While a change to the status quo, the revival of a corporate AMT is actually a trip back to the future. So far, the reaction has chiefly been on the legal side.

Newer official statements are including advice that “interest on the bonds will be taken into account in computing the alternative minimum tax imposed on certain corporations under the code to the extent that such interest is included in the ‘adjusted financial statement income’ of such corporations.”

Our biggest takeaway is the continuing lack of relief in the form of issuing flexibility for municipal bond issuers. It was not unreasonable to think that the largest infrastructure legislation might have taken full use of the municipal bond markets experience and position in the finance and development of infrastructure. Whether it be the AMT, the SALT deduction, or limitations on private activity bonds, the loss of those abilities limits flexibility and increases costs.

PA. TURNPIKE RECOVERS

In late 2013, Pennsylvania enacted Act 89 as a comprehensive funding plan for the Commonwealth’s road system, especially the local roads. That plan looked to the Pennsylvania Turnpike System to use its tolling powers to provide “excess” revenues for transfers under Act 89. The result was lower ratings for the Turnpike’s existing revenue bond debt and the need to create a subordinate lien of debt to finance the increased funding demands being made on the Turnpike. It took a strong credit with a long track record and a history of relatively stable tolls and diminished it unnecessarily.

The pandemic pressured tolls and forced the System to eliminate physical toll collections as a source of cost savings. Its bigger concern was the chance that once again the Turnpike could be caught up in the ongoing debate over how to fund roads and particularly bridges. It was a major uncertainty holding the credit back and there were concerns that Act 89’s clear statement that the Turnpike’s obligations to fund state roads at the end of the most recent fiscal year would not be respected.

In connection with its upcoming bond issue, Moody’s has reached some positive conclusions about the Turnpike’s post FY 22 exposure to revenue transfer demands. It announced that it had revised its revenue bond outlook to positive from stable on its A1 rating. “The revision of the Commission’s toll revenue bond rating outlook to positive from stable reflects our view that there is increased certainty that the Commonwealth will honor Act 89 given other available sources of funds for other state transportation needs. The change in outlook to positive reflects increased certainty about the forecast deleveraging expected over the next several years as the Commission increases the amount of its capital spending funded from future excess cashflow rather than debt.

ANOTHER VIEW OF CONGESTION PRICING

As the congestion pricing debate in NYC unfolds, we are seeing different jurisdictions taking different approaches to the issue. The latest example comes from Massachusetts. Many think that congestion pricing would be useful in Boston where there are mass transit alternatives. When the legislature passed an $11 billion transportation funding package in the recent session, it included a plan to create a state commission to study “mobility pricing,” which could include both tolls and congestion pricing.

So, congestion pricing is coming soon, right? Well, the governor doesn’t think so. As is permitted under Massachusetts law, Governor Baker returned that section of the bill unsigned, citing his long-standing concerns about “equity” issues associated with congestion pricing. He raises a fair point in the debate over congestion pricing. “Workers who have the financial means to pay a congestion price are best able to adjust their commutes to avoid it, and those who don’t have the financial means to pay a congestion price are those with the least flexibility in their schedules.” 

The move comes as Massachusetts voters will be asked to approve a constitutional amendment to fund transit. The proposed constitutional amendment, if approved by voters, would set a 4% surtax on the portion of an individual’s annual income above $1 million.  That money is intended to fund education and transportation but there are no restrictions formally established to insure where those funds go.

TOLLS ARE A DIFFERENT STORY

One coast is seeing the process of establishing congestion fees unfold. At the same time, another coast is seeing tolls move in the opposite direction. The Tacoma Narrows Bridge in Washington State collects tolls for the repayment of debt issued to finance its construction. While there is still debt remaining (until 2032) the debt service requirements are lower. That drove legislation enacted in March to encourage a toll reduction.

It is being portrayed as the first toll reduction in Washington State history. The reduction goes into effect October 1, 2022. Currently drivers with Good to Go passes pay $5.25 to cross the eastbound bridge. Those who choose to pay with cash are charged $6.25, and drivers who pay by mail pay $7.25. Truck drivers in vehicles with more than two axles will see reductions of more than $1.

The irony is that the toll decrease is occurring in a state which seeks to take a leading role in addressing climate change. For us the lesson is that the road to dealing with climate change is ever longer and rockier. The pressure on tolls is leading to moves like this while at the same time limiting funding via other options (mileage fees, e.g.).

CLIMATE LITIGATION

Another effort to move lawsuits against fossil fuel entities from state to federal court has failed. A federal Third Circuit panel rejected efforts to move lawsuits filed against the fossil fuel firms from state to federal court. This is the fifth time that the companies have failed to convince federal judges that their position is valid. The State of Delaware and the city of Hoboken, NJ lawsuits were at issue in the case.

The argument that the federal government leases the companies offshore drilling rights, and that they have contributed oil to the Strategic Petroleum Reserve and have provided specialty fuels to the military has not created a federal issue for the courts. This decision is fairly clear on that. “Most federal-question cases allege violations of the Constitution, federal statutes, or federal common law. But Delaware and Hoboken allege only the torts of nuisance, trespass, negligence (including negligent failure to warn), and misrepresentation, plus consumer-fraud violations, all under state law.”

LEGAL WEED ON THE MARYLAND BALLOT…

A marijuana legalization referendum will appear on the November ballot in Maryland this November. The referendum will finish a process which began in April of this year with legislation to put the question of legalization to voters as a constitutional amendment on the ballot and a complementary measure that will lay out the implementation framework.

“Do you favor the legalization of the use of cannabis by an individual who is at least 21 years of age on or after July 1, 2023, in the State of Maryland?” The existing legislation only authorizes the vote. If voters approve, implementation would be “subject to a requirement that the General Assembly pass legislation providing for the use, distribution, possession, regulation, and taxation of cannabis within the State.”

The implementation framework would allow for the purchase and possession of up to 1.5 ounces of cannabis by adults. The legislation also would remove criminal penalties for possession of up to 2.5 ounces. Adults 21 and older would be allowed to grow up to two plants for personal use and gift cannabis without remuneration. True “legalization” would be achieved gradually. Possession of small amounts of cannabis would become a civil offense on January 1, 2023, punishable by a $100 fine for up to 1.5 ounces, or $250 for more than 1.5 ounces and up to 2.5 ounces. Legalization for up to 1.5 ounces would not take effect until July 1.

BUT MEDICAL MARIJUANA MISSES THE NEBRASKA BALLOT

Ballot initiatives are always tricky. In some states where citizens have the right of initiative or referendum, rules for getting those items on the ballot often make the process less straightforward. The latest example comes from Nebraska where medical marijuana advocates saw efforts at a ballot item to approve it fail to make it over all of the hurdles.

To get on the Nebraska ballot, an initiative petition needed nearly 87,000 signatures — or a total of 7% of registered voters — as well as 5% of registered voters in at least 38 of Nebraska’s 93 counties to put the proposals to a vote of the people. The first of these intended to protect patients and caregivers from legal jeopardy – the Patient Protections initiative – collected 77,843 valid signatures, and the 5% threshold was met in only 26 counties. The second would have legalized the possession, manufacture, distribution, delivery, and dispensing of marijuana for medical reasons and would have established a commission to regulate a state medical cannabis program.

NET METERING WARS CONTINUE

Net metering – the method by which excess residential solar power can be sold back into the grid – has been the subject of much debate as utilities seek to minimize the financial impact of residential solar on their operations. Utilities which have attempted to limit net metering include municipal utilities like Salt River Project in AZ and San Antonio, TX. On the investor-owned side, Florida utilities have been especially aggressive in their effort to reduce if not eliminate net metering.

The latest chapter in this fight is taking place in Kentucky. Kentucky legislation allows power providers to restrict their programs once they reach 1% of a company’s “single-hour peak load” — the maximum power demand a company receives. Kenergy is a rural electric cooperative serving some 57,000 customers across 14 Kentucky counties. In Kenergy’s program, the co-op offers its qualified members credits on their power bills. Kenergy has been limiting its net metering program under the law. The PSC opened an investigation into Kenergy in October 2020 on the grounds that the power provider was restricting its net metering despite being under the 1% threshold.

This month, the PSC ruled that those limits were being imposed on customers in violation of the law’s requirements. “Kenergy’s cumulative generating capacity of net metering systems has not reached 1% of its single hour peak load during a calendar year, and Kenergy must continue to offer net metering under its Net Metering tariff until the cumulative generating capacity of net metering systems reaches 1% of Kenergy’s single-hour peak load for all sales within its certified territory during a calendar year.” 

AMERICAN DREAM DEFAULT

The American Dream mall in East Rutherford, NJ is showing the impact of the long delays in its development and the pandemic’s impact on travel and retailing. The developers were late in making a PILOT payment due to the Trustee for the bonds issued by the Public Finance Authority (WI) to support the project. The payment was due on August 1. It was ultimately made on August 11. That is within the stated cure period established at issuance. The amount received equaled the required payment but interest on the payment accrued beginning August 1. Until that amount is paid or waived, the bonds are in technical default.

It repeats a pattern of late monthly payments which began in May of this year. The interest on that late payment was eventually paid. Given all the impacts on travel, in-person shopping, and the cost of transportation it should not be a surprise that the mall would be underperforming. Given the highly leveraged nature of ownership, the current environment of rising rates and continuing patronage issues at the mall, it is not a surprise that the credit remains under pressure.

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.