Joseph Krist

Publisher

The reversal of the pandemic has reinstated pressure on many credits. Many areas are reinstating limits on activities. School districts are having to quarantine students who test positive. Indoor activities are increasingly seeing mask requirements and testing requirements. Reopening of cultural and entertainment facilities are being delayed. The specter of a second Christmas season is a real risk to local finances.

It is not realistic to assume another massive federal bailout. So, the risks of the pandemic, especially in those states most resistant to regulation, are arguably as big a threat to credit as they have been at any time since the onset of the pandemic. So, we look at local credits, hospital credits, and higher education credits as likely being at the front of the line in terms of exposure to pandemic risk.

GIG WORK BACK IN COURT

After we went to press last week, a California judge found that determined that Prop. 22 infringes on the power the state Constitution explicitly granted to the California Legislature to regulate compensation for workers’ injuries. This is the law which sought to treat workers like those for Uber and others as independent contractors. The initiative had several different goals. The judge in the case cited that factor in declaring the law unconstitutional. The ballot measure also violates a constitutional provision that requires laws and initiatives to be limited to a single subject.

The ruling is based on the idea that a ballot initiative cannot be amended after it is passed by voters, any unconstitutional provision renders it unenforceable. The decision effectively kicks off a period of what is likely to be a year while appeals work their way through to the California Supreme Court. If the TNCs are successful in getting an initiative on the Massachusetts ballot in 2022, the election and the court decision could occur at the same time.

PUERTO RICO WATER FLOATS

Once again, the long-term financial strength and credit strength reflected in water and sewer utilities has been validated. One successful part of Puerto Rico’s financial stabilization was completed when the Puerto Rico Aqueduct and Sewer Authority restructured its outstanding debt. The refinancing, which was priced on Tuesday, will generate approximately $570 million in debt service savings over the life of the refunding bonds. The Authority was able to execute transactions that included an exchange, a tender for cash, a current taxable refunding, and a forward delivery refunding.  

The all-in interest cost, including expenses associated with pricing and selling the new issue, was 3.24%. If that doesn’t validate the notion that it is a great time to be an issuer, I’m not sure what will. The pricing reflects an assumption that a net rather than a gross revenue pledge will secure debt service. All in all, it marks an important milestone in the process of Puerto Rico’s financial recovery. A successful refinancing in December 2020 and this current transaction have lowered Prasa’s annual debt service requirement by an average of $35 million per year and approximately $920 million during the life of the bonds. 

INTERSTATE REGULATION

The Commonwealth of Virginia State Corporation Commission approved a request for a rate increase for Appalachian Power. So far so good. What did not get approved was the full request made by the company. That request was designed to generate revenues sufficient to fund environmental improvements to two coal-fired power plants that generate the bulk of the utility’s electricity. The SCC’s ruling, while not final, could force the closure of the Amos and Mountaineer plants — both in West Virginia — by 2028, Appalachian has said.

This puts the West Virginia plants in jeopardy even though the Mountaineer State’s regulators take a more sympathetic view. Once completed, the improvements will keep the plants in operation until 2028. The denied portion of the rate request would have funded additional surface water protections, which would have extended the plants’ lifespan by another 12 years. It’s not like there is a strong forward market for coal generated electricity past then.

The Virginia Clean Economy Act passed in 2020 requires Appalachian to use all carbon-free electricity by 2050 for its approximately 524,000 customers in Virginia. So, despite the location of the plants in another state, the regulatory requirements of the service area apply.  It is an example of a number of similar situations where operations of generating facilities in one state can be impacted by regulatory actions in another.

The municipal angle is that there are several municipal agencies who either own or participate in fossil fueled generation with investor owned partners from other states. Their state regulatory schemes will apply and could force changes in ownership of out of state generating assets. The Pacific Northwest is the likeliest region to see these phenomena as strong regulation in Washington State is threatening the ability of the state’s utilities to hold fossil fueled assets.

NYC REBOUND

With so much attention focused on the course of the pandemic as the Delta variant expands, it is easy to overlook some positive signs for NYC. There remains significant concern about the outlook in an environment where limits on rental payments and evictions expire.  Yet there are signs that the residential market is returning to form. July is typically the highest turnover month for apartments in the city.

While many tenants are in place as the result of rent and eviction imposed for the pandemic, the demand for new apartments has skyrocketed. Along with that boost to demand has come a major escalation in rents. In light of the recent experience, it is not surprising that landlords are seeking every dime they can. Not only are sticker prices up but the days of discounting appear to be over.

Nonetheless, the recent positive turn in the residential market does not necessarily bode well for the commercial market. It is still unclear what the ultimate breakdown will be between in office vs. remote work. The full approval of vaccines may finally alter that dynamic. While we believe that some greater proportion of workers will be permanently remote than was the case before the pandemic, we think that ultimately the realities of corporate management and culture will lead to most office workers returning to that setting.

That will be the long-term key for those businesses reliant on essentially daytime traffic associated with work versus the kinds of establishment which rely on tourism and/or entertainment.

EVICTION MORATORIUM

“If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.” And with that the federal moratorium on evictions currently authorized through executive order comes to an end. Now we move into the next phase of recovery from the pandemic, a return to more “normal” conditions. The decision from the Supreme Court holding that the C.D.C. had exceeded its authority will now either force Congress to enact legislation or end the moratorium.

The decision comes as there is much focus on the poor distribution of funds authorized to provide aid to renters directly. In turn, the pressure on landlords continues as owners have not been allowed to avoid the costs of operating buildings. Localities still need to collect property taxes. Only about $5.1 billion of $46.5 billion in aid authorized had been disbursed by the end of July, according to the Treasury Department.

Now that the moratorium has been declared illegal, the focus turns to those states where tenant protections are weaker and eviction proceedings more rapidly concluded. Four states – South Carolina, Tennessee, Georgia and Ohio – have the highest levels of rent backlog and will be at the leading edge of the issue. The long-term answer is legislation but we see that as unlikely.

METROPOLITAN OPERA

This leading cultural institution and contributor to the NYC economy has been on a pronounced downward trajectory for the last ten years. Changes in management led to changes in the Opera’s programming with an emphasis on “newer” (younger) customers. As the transition unfolded over that time period, attendance and demand continued to be pressured as the new offerings did not generate enough new interest to offset the negative impact of the programming changes.

Since then, the Opera and its unions have engaged in pitched battles over the effort to contain costs in the face of disappointing attendance. That continued as the Opera faced the realities of the pandemic including giving up a bit over a season and a half of cancelled performances. This culminated in the decline of the Opera’s credit ratings to Ba2.

Looming over the Opera regardless of the course of the pandemic was its problematic relationship between it and the employees, especially musicians. The ongoing labor standoff threatened the reopening of the Opera even as the pandemic waned. Now, an agreement with the most prominent union, that representing musicians has been reached. This should enable the Opera to conclude remaining more minor disputes and allow performances to occur.

That is good for the City and its tourism and entertainment industries. They lie at the heart of any city recovery. At the same time, the Met’s settlement with its workers reflects its long-term operating realities. The pay deal reached reduces the number of permanent musicians and it requires the remaining musicians to take a 3.75% pay cut. There are provisions linking pay levels to attendance levels and resurgent revenues. Nonetheless, the immediate impact is negative.

NPPD STUCK IN THE CLIMATE MIDDLE

Nebraska Public Power District has long been a reliable electric utility credit. Its construction programs were generally successful and it managed to be a stable credit even through construction of nuclear generation. It is not a criticism to view it as a sleepy credit. Now, the District finds itself in a controversial position despite its history.

As the owner of a nuclear facility and a large coal fired generating facility, NPPD now finds itself in the political crosshairs. The climate debate has now extended its reach into the Cornhusker State. On one side are environmental and climate activists who oppose fossil fueled and nuclear fueled generation. They would like to move the District away from both of those sources and develop new renewable generation. They also wish to prevent large scale transmission projects.

On the other side is Governor Pete Ricketts. He advocates the use and expansion of nuclear power and investment in carbon capture in order to save coal plants in general and the District’s huge Gentleman goal fired generator. A recent opinion piece from the Governor sums up his position. He buys into the notion that wind and solar are unreliable and that only fossil and nuclear fueled generation is the answer. To that end, the District has been encouraged to partner with a private carbon capture developer to employ carbon capture at the Gentleman plant.

The real game is revealed farther on. “Nebraska is the second largest ethanol-producing state in the nation. The future of ethanol is tied to the future of oil production and combustion engines. “This is the kind of ideological approach that puts tried and true credits in the middle of an argument over which it has no control nut for which it may ultimately incur a financial obligation. So far, efforts to involve NPPD in this sort of project has not put it at significant financial risk.

The concern is that the devotion of effort and resources in an effort to preserve 20^th century legacy assets could put NPPD at a disadvantage if the plants can’t be operated. Carbon capture just has not been able to work at scale and certainly not at the scale required to make it an economically viable technology.  The effort to enlist NPPD in the carbon capture effort has been going now for eight years.  It would be disappointing to see a conservative run financially sound credit harmed by ideological considerations.

THE WATER WARS GET LOCAL

So far, we haven’t seen a municipal system lose its water supply directly due to competition for groundwater sources from agriculture interests. Yet we are seeing on a smaller scale what might happen as drought conditions drag on in the American West. As the drought continues to impact surface water supplies, agricultural interests are often the first target of water use restrictions and supply cutbacks. In those cases, the use of groundwater supplies is the preferred alternative even if it is costly.

Now the impact of the long-term drought becomes clear. In addition to the obvious impact of lower snowpack, runoff, and river and lake/reservoir levels, the lack of water from the atmosphere prevents underground aquifers from having their supplies recharged. Ultimately, those sources will become far less reliable. In the short run, we will see residential and agricultural issues clash as they are currently on a smaller scale.

We came across a story about residents near Klamath Falls, OR. They are finding that local aquifers which supplied water to their area have been being depleted at rates well above historical levels. This is occurring because of significantly higher use of underground water by agricultural interests in the face of reduced rain and surface supplies. The greater use of the water has put residential wells at a disadvantage. This results in individual residential wells drying up leading to reliance on outside supplies.

This takes on more relevance as population trends show people moving to areas without sustainable long-term water supplies.

WIND PRODUCER HEADWINDS

One of the major obstacles to the development of offshore wind turbines has been concerns expressed by fishermen about the potential disruption of fishing grounds. It has led to changes in Maine’s offshore permitting process to placate lobstermen. Now, concerns about aquatic wildlife are being used in an attempt to delay the Vineyard Wind project which will be located off the shores of Connecticut, Rhode Island, and Massachusetts. The question is do the plaintiffs in the latest case really care about the whales or is the issue people’s view of the ocean.

Opposition to wind turbine locations have long characterized the islands off the New England coast. Opponents of early projects were pretty straightforward in framing their opposition as one of aesthetics. The concern about ocean views drove much opposition to proposed plants off Martha’s Vineyard. As the demand for and acceptance of renewables accelerated, there was less support for the aesthetic concerns.  Now, project opponents are trying a different tack – saving the whales.

ACK Residents Against Turbines is a group of Nantucket residents who oppose the siting of wind turbines some 14 miles off the coast. The basis for the suit: a belief that the proposed turbines will negatively impact whale breeding grounds. A closer look at the plans makes a good case that the environmental issues are just a smokescreen for the latest form of NIMBYism – not in my view. This project has been through its environmental review process and received federal approval to begin development.

The group of plaintiffs had participated in litigation against earlier projects. That experience has emboldened opponents of the turbines.  So far neither side has been able to amass enough objective information to persuade the other. In the absence of such data, it makes it look like the aesthetic concerns are what is driving the litigation.

Those concerns are cited by opponents of wind and solar power. The panels might cause too much glare, they might take away my view (usually of someone else’s farm), they might do any number of things. The irony is that much of that opposition comes from people who claim to be environmentalists and/or supporters of renewables. In the end, the arguments come down to NIMBY.

ZONING UP FOR A VOTE

Zoning rules, specifically those rules governing the development of housing, are at the center of the debates over economic justice. Numerous attempts have been made to legislate answers the issue of housing supply and affordability. One issue which can be addressed legislatively is zoning policy. Zoning is under scrutiny as a tool of economic injustice, Regulating lot sizes and individual development limits has long been understood as way to influence development. In particular, single- family zoning has been under the most focus.

Affordable housing advocates have long sought to permit lot owners to be able to create multiple residential housing units on traditionally single-family land. Now, legislation is moving forward in the California Legislature which could permit two-unit buildings on currently single-family lots. That could potentially create a net 3 new units on parcels which only had one. The move comes after previous efforts to encourage development of multifamily housing near transit facilities (high rises around BART stations, e.g.) failed over concerns about potential gentrification and displacement of current residents.

Rhetoric on both sides has been predictably hyperbolic. There is not a lot of objective research to assuage all possible concerns.

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.