Joseph Krist

Publisher

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PURPLE LINE

The long-awaited light rail project between Prince George’s and Montgomery Counties is moving forward under the recent agreement between the State of Maryland and the private consortium constructing the Purple Line (4.25.22 MCN). Now the contractors have given more detail in an interview with the Washington Post. It includes new estimates as to the schedule for completion and the likelihood that it will be achieved. We are struck by a couple of items sprinkled amongst the rest of the interview.

Obviously, the level of due diligence undertaken by any of the potential contractor groups would be a major component contributing to a more solid and likely completion estimate. “We had an opportunity [to inspect the work done by the initial contractor] during the proposal phase but only for those things that we could actually see above ground. Now it’s a question of having a look at, understanding and feeling confident with those things that are below ground, things that we have to uncover.”

We note this because of our comment just last week about a Virginia P3 that had contract issues related to soil composition along the project route. That is one potential risk to the date. The contractor did note that there is a $200,000 daily penalty for a late project. It would still be a surprise if the current completion date holds.

PENN STATION

One of the Bloomberg administration’s primary successes (in its view) was the development of Hudson Yards. The formerly industrial area was rezoned and developed into office and residential space. The development was supported in part by debt issued through city and state agencies and debt service on some of that debt was supported by annual appropriations by the City.

Now, just one block east of the Hudson Yards area a new development is being proposed to generate tax dollars for the reconstruction of Penn Station. There is 

no need to belabor the present state of the station and the continuing inability to bring the project to fruition. The scale of the proposed project and the need for it to meet projected revenue expectations have raised concerns among many that the plan as it exists could turn into a fiscal issue for the State and City.

The NYC Independent Budget Office was recently asked to review the current plan advanced by the Sate’s Empire State Development Corporation (EDC). The project, announced by then Governor Cuomo and now being continued under the current Governor, ESD would take title to eight sites surrounding Penn Station and allow private developers to build greater density than city zoning currently permits, bypassing the city’s normal land use processes. The expected property tax revenues and fees from the new development would be applied to the repayment of the debt funding Penn Station’s improvements and nearby public space upgrades.

Here are the conclusions of the IBO review. They raise some red flags. The total cost of the Penn Station improvement project and, therefore, the revenue needed to cover those costs remains unclear. ESD estimates the total public cost of the transit improvements, including the Hudson River Tunnel, to be $30 billion to $40 billion, with costs shared by the federal government, New York State, and New Jersey. New York State estimates its share of the cost from $8 billion to $10 billion, and thus far has authorized $1.3 billion in capital funding for the project.

Bond or other debt financing is expected to cover most of the remainder, although ESD has yet to provide details on how exactly this debt would be structured. ESD would use value capture financing, where payments in lieu of property taxes (PILOTs) and fees from the development sites are used repay the debt funding the station project costs. Because the Land would technically be owned by the state, it is exempt from city property taxes. This makes the funding mechanism the payment of PILOTs to ESD, not property taxes to the city.

The state has not released any revenue projections for these PILOTs, nor has it specified how the PILOTs would be structured, including, importantly, to what extent any property tax discounts would be offered. 

Currently, there are 55 property tax lots on the eight sites slated for new development. In fiscal year 2022, the city collected $60 million in property taxes on these sites, a very small share of the city’s more than $29 billion in total property tax revenue. ESD has indicated that it intends to reimburse the city for this lost tax revenue (with annual escalations), although this also has yet to be formalized.

Did the City learn anything from the Hudson Yards experience? Apparently not. The report clearly notes that ESD’s plan would finance near-term station improvements with revenue from future private development, posing a timing risk. The station reconstruction and expansion projects are expected to be completed by 2032, but the development sites would not be fully completed until 2044. When there was a similar timing issue for the nearby Hudson Yards development—financed by the city in a similar manner—the city provided hundreds of millions in debt service payments from its own coffers until adequate revenue was available.

NYC OFFICE CHALLENGE

The Partnership for NY, the entity which represents the major New York business interests released a survey covering the return to the office. In this case, it’s more like the lack of it. The Partnership surveyed 160 businesses and found that only 8% of full time return to the office has occurred. On the average weekday, 38% of Manhattan office workers are in the office. Respondents reported that employers expect that the number will rise to 49% by September. 

That would be the level projected to already be achieved by this April when the same questions were asked in January. Before the pandemic, 6% of businesses were operating under “hybrid” models. Now, that number has grown to 78%. Those changes grow in importance daily, as reduced office attendance shows up in mass transit use and general economic activity in central business districts.

It is clear, at least in Manhattan, that the local economy is a long way from full recovery. The small businesses which drive much first time and less educated employment to the benefit of those are still reeling. This has reduced employment and threatens to prolong and dampen the recovery.

It all matters because the City has baked in a fair amount of permanent increased spending and must make some difficult capital spending decisions. The speed and magnitude of the recovery will go a long way to determining the long-term credit outlook for the City.

SEC AND ESG

The Securities and Exchange Commission has extended the comment period for its proposed disclosure requirements related to climate change issues. Issuers would have had to be able to provide more disclosures regarding their carbon footprints. The rules were seen as requiring companies (and municipal bond market issuers) to be able to provide information even as it relates to actions by suppliers. The Commission received much criticism for an initially short comment period and this extension is in response.

The proposals have not exactly generated a rational response. One Utah state official likened the effort to a form of financial terrorism and at the federal level Republican House members called it an attempt at a scorched earth regulatory policy.

MILEAGE FEES

The Pennsylvania Department of Transportation (Penn DOT) is working with the state legislature on a proposal to enact alternatives to its gasoline tax. A series of proposed revenue sources are being examined with a mileage- based fee being the most likely alternative. The process is a reflection of the complex set of issues that make road finance and funding reform such a contentious issue in the Keystone State.

It’s easy to forget that the first commercial oil well in the U.S. was in Pennsylvania. The Commonwealth’s reliance on coal production and products which relied on coal like steel have long driven energy policies. This was only reinforced through the introduction of fracking which accessed vast natural gas supplies. That’s 175 years of reliance on fossil fuels.

So, Pennsylvania is using the tried and true process of identifying a question to be answered by a commission. Legislatures use this to try to fend off opposition to contentious provisions of legislation. In this case, the Governor formed a commission and that group has now made two primary suggestions for hybrid or electric vehicle owner fees: a flat annual fee or a fee based on actual miles driven.

The process has yielded data which has been used to serve as a base for estimating and comparing fee alternatives. PennDOT research found that the average passenger vehicle driver pays 2.9 cents per mile in gas taxes. For hybrid drivers it’s 0.7 cents per mile. An electric vehicle operator would pay nothing. Current driving habits show the median number of miles driven by passenger vehicles is about 9,000 a year.

Approximately one in four drivers travel account for in excess of 14,000 miles a year. The data showed that a 14,000-mile driver generated gas taxes of $400 per year. That number could serve as a jumping off point for calculating a fee which would generate revenues while being publicly acceptable. The amount of the fee will be one hurdle. The next will be the ever present issue of “privacy”.

Privacy concerns have always been raised when it comes to the introduction of technology which generates location information. Urbanites can laugh at those issues but it was a real issue when electronic payments were introduced into urban metro systems. It comes up with electronic tolls and is an issue with congestion fees. Now it comes to the issue of mileage fees.

There is data on what attitudes really are. The Eastern Transportation Coalition (the former 17 state I-95 Coalition) has produced research which weakens some of the claims of fee opponents. The tests conducted in Oregon and Utah have used plug-in equipment to monitor mileage. There are two plug-ins: one with GPS and one without. It matters if one drives a lot out of state as the fees only apply to in state use.

The Coalition’s 2020-2021 State Passenger Vehicle Pilot provided participants with two mileage reporting options, both of which utilized a plug-in device that inserts into the vehicle’s on-board diagnostic (OBD-II) port: plug-in device with GPS and plug-in device without GPS. How important was “privacy”? The vast majority of participants (80%) chose the plug-in device with GPS. This option used GPS technology to differentiate mileage by the state where the miles were accrued. The state-specific per-mile rates were applied to the mileage driven in each state, less a fuel tax credit based on the fuel consumed in each state and the state-specific fuel tax.

We think that the long-term answer is mileage-based fees collected with electronics and GPS. This will enable states to levy different rates reflecting their unique transit profiles.

PORTS

During the pandemic we commented on the impact of the pandemic, capacity issues, and the economy in general on port revenues. Whether it was revenue constraints due to pandemic limitations on operations or pressures associated with cargo backlogs at the major commercial ports Los Angeles and Long Beach, ports have been a good indicator of what was happening in the economy as a whole. In the Fall of 2021, those ports threatened the imposition of fees for containers not promptly moved to address trucking-based backlogs. Recently, after a period of more regularized operations, the waiting time for ships entering those ports was approaching one week.

Now, labor issues at the ports may be the next stumbling block. This past week, negotiations between the major West Coast ports and the unions representing dockworkers commenced. The existing contract expires July 1. The International Longshore and Warehouse Union (ILWU), represents dockworkers at the more than two dozen ports on the West Coast. They have long been aggressive negotiators very willing to use strikes. The ports include the Los Angeles Harbor Department, CA, Long Beach Harbor Department, CA table), Port of Seattle, WA and Port of Everett, WA (A2). The Alameda Corridor Transportation Authority, CA), a rail project jointly owned by the ports of Los Angeles and Long Beach, would also be affected.

Pressure will come from the effects of the pandemic and the potential for more future automation. After the development of containerization and its resulting crushing impact on port employment some 60 years ago, automation is a key component of every dockworker negotiation. Wages and salaries may be the easiest issue. It will be hard to argue that the ports aren’t busy and generating revenue. Maintenance of staffing requirements will likely be a key source of contention as the ports and shippers seek to speed the process of unloading in an effort to help the supply chain.

VOUCHERS

Vouchers have been a favorite of many conservatives to address a range of issues. It has been more acceptable to them than direct housing development as it also allowed proponents to claim racial integration benefits. In much the same way, voucher programs to address education inequality have been a favorite solution for “school choice” advocates. Now, in Connecticut we see vouchers offered as a solution to some environmental justice and equity issues.

The omnibus Connecticut Clean Air Act was enacted this week. The legislation significantly expands funding for an existing electric vehicle rebate program. The program – the Connecticut Hydrogen and Electric Automobile Purchase Rebate, or CHEAPR – offers rebates of $750 to $2,250 on the purchase of battery-electric vehicles and plug-in hybrid electric vehicles. Higher incentives are available for fuel cell electric vehicles.

Before the legislation, the program was funded by the first $3 million in greenhouse gas reduction fees paid every year on car registrations. As of July 1, all of those fees will be directed to the rebate program. It is estimated that this could increase funding by as much as $5 million annually. The program will be required to give the highest priority to residents of environmental justice communities, residents with incomes at or below 300% of the federal poverty level, and residents who participate in state or federal assistance programs, including the Operation Fuel energy assistance program.

COAL REALITIES

Even in a friendly regulatory environment there is only so much one can do to fight the market. The news that the owner of one of Montana’s major generating facilities will shut down last a large coal plant as a part of the bankruptcy of its owner. Talen Energy specifically cited the non-competitive nature of coal generation versus primarily natural gas. The Colstrip plant in Montana is not being converted from coal by Talen.

The closure affects the last of three units at the site. In 2020, Talen and Puget Sound Energy, which evenly split ownership of Colstrip Units 1 and 2, closed the units because the generators were no longer profitable. The situation highlights the ability of regulators in one state to influence the operations of a facility in another even though it is operated under its home state’s regulations. Oregon and Washington have set firm dates for their investor-owned utilities to stop using coal. Those utilities own 70% of Colstrip 3.

As the company’s filing said ““The previously low price of natural gas has meant that coal-fueled assets are no longer economical to run or keep updated. “

EMINENT DOMAIN UPDATE

There seem to be constant developments in the effort by the sponsor of a proposed carbon pipeline to move carbon dioxide from ethanol plants toa storage facility. The South Dakota regulators have noted that they have received more comment on proposed regulatory actions involving carbon capture pipelines than any other issue in memory. Five North Dakota counties have issued resolutions (albeit non-binding) against eminent domain use to acquire pipeline right of way.

The issue still remains on a larger scale in Iowa. Legislation to halt its use for one year was passed in its lower chamber but ultimately did not make it out of the Senate. With both carbon capture and transmission line developers seeking easements from landowners in the state, it remains a significant issue.

In Missouri, legislation was enacted that requires companies to pay landowners 150% of the fair market value on their land; would require that developers start construction within seven years of getting easements. If that did not occur, their rights to the property would expire. Court-appointed commissions would be established to undertake the process of determining the fair market value of a farmer’s land during eminent domain proceedings. They would be required to include a farmer who has lived in the area for at least a decade. 

Prior Grain Belt legislation required that at least 50% of the power carried by a transmission line be kept in the state for use by Missouri customers. Under this overriding bill, it would be required that transmission lines be set up to provide an amount of power to the state proportional to the length of the line running through Missouri. 

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