Joseph Krist

Publisher

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WHY REEDY CREEK MATTERS

The effort on the part of Florida Governor Ron DeSantis to punish Disney becomes more embarrassing by the day. This week, the Governor’s office admitted that there is no plan to actually implement on a practical basis the dissolution of the Reedy Creek Improvement District. There needs to be a resolution of the emerging conflict between the goals of the Governor and the Legislature and state law.

Disney points out that “Pursuant to the requirements and limitations of Florida’s Uniform Special District Accountability Act, which provides, among other things, that unless otherwise provided by law, the dissolution of a special district government shall transfer title to all of its property to the local general purpose government, which shall also assume all indebtedness of the preexisting special district.”  That would be mostly Orange County and some to Osceola County. That is something the counties do not support. DeSantis’ office released a statement Friday saying it does not expect any tax increases for any residents from this new law. Without additional implementing legislation, the details of any transfer are unknown.

What is clear is that the concept of non-impairment whereby an entity like a state covenants not to take any actions which would impair the ability of another debt issuer to meet its obligations is now subject to question in Florida. It is a view shared by Fitch Rating’s which said that Florida’s move to dismantle Reedy Creek “heightens bondholder uncertainty” and if the state doesn’t find a way to resolve the debt issue it “could alter our view of Florida’s commitment to preserve bondholder rights and weaken our view of the operating environment for Florida governments.”

ILLINOIS

Two years ago, Illinois was the only state to borrow from the Federal Reserve Bank’s Municipal Liquidity Facility. Now, with the recovery from the pandemic underway the State’s financial position is much improved from that time. Between better than expected revenues and a windfall of aid from the Federal government, the State’s fiscal position is clearly sounder. This set of circumstances has manifested itself in a rating upgrade from Moody’s.

Moody’s Investors Service has upgraded the issuer rating of the State of Illinois to Baa1 from Baa2. This change supports the following upgrades: to Baa1 from Baa2 the rating on the state’s outstanding general obligation bonds, to Baa1 from Baa2 the rating on the state’s outstanding Build Illinois sales tax bonds. Moody’s has affirmed the Baa3 rating on outstanding Metropolitan Pier & Exposition Authority bonds that are partially paid with state appropriations. The outlook is stable. The upgrade reflects continued progress towards paying down accounts payable. The state is also increasing pension contributions, indicating increased commitment to paying its single-largest long-term liability.

The stable outlook balances the financial progress being made by the state with the uncertainty of the present economic climate. The state’s lean financial reserves, and heavy long-term liability and fixed cost burdens make it more vulnerable than other states to a negative shift in the national or global economy, which presently limits the probability of further rating improvement.

UTAH AND ESG

The State of Utah is emerging as the lead dog in an effort to discourage the use of ESG factors in determining creditworthiness. In March of this year, the SEC proposed new disclosure requirements for securities issuers regarding climate factors and their exposure to them. This will include municipal bond issuers as well as corporations. As one might expect, the proposal has generated some strong responses.

The most recent example comes from the State of Utah. The State’s political establishment authored a letter to S&P signed by Gov. Spencer Cox, Treasurer Marlo Oaks, other state constitutional officeholders, legislative leaders, and Utah’s Congressional delegation, stated their objection to any ESG ratings, ESG credit indicators, or any other ESG scoring system that calls out ESG factors separate from, in addition to, or apart from traditional credit ratings. The State considers ESG issues to be non-financial and therefore of no consequence to investors. It implies that environmental concerns are a leftist plot against the fossil fuel industry.

Here is what the SEC proposes to be included in financial statements and other disclosure from issuers. They will be expected to address how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; the registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.

If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks; if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts; if a registrant uses an internal carbon price, information about the price and how it is set; the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements.

Some of the details will be harder for governmental issuers. Those items include the registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production); indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emission, in absolute terms, not including offsets, and in terms of intensity.

It is a lot for issuers to deal with and it is likely that the requirements will be modified. Nonetheless, the knee jerk ideological reaction in Utah is not realistic either. The State has had a hard time as proposals for “inland coal ports” and efforts to establish facilities in West Coast states for the export of coal have been rejected. The large Intermountain Power Agency is converting its massive coal generating facility in Utah. So, it is a tough time for coal in Utah.

In many ways, the effort to reject ESG considerations in the investment process is a case of closing the barn door after the horse has left. The Commission began efforts to provide investors with material information about environmental risks facing public companies in the 1970s and most recently provided related guidance in 2010. Over that time, ESG investing grew from a niche position and increasingly has become a major driver behind the investments of large institutional investors. In the case of fund groups, retail mutual fund investors are driving the demand for more ESG investment.

Ironically, the letter was released as Utah’s Intermountain Power Agency was issuing revenue bonds. And what are the proceeds being applied to? The new debt issued by Intermountain Power Agency (IPA) will finance the construction of a new 840 MW natural gas generator with up to 30% hydrogen burning capability power plant (the new Intermountain Power Project or new IPP) and a new natural gas pipeline connection. This is the first of three expected bond issuances for the new Intermountain Power Project with the others expected to close in 2023 and 2024 for a total estimated par amount of about $1.5 billion to $1.7 billion depending on market conditions.

The project received a big boost with the announcement this week by the US Department of Energy (DOE) that the proposed source of hydrogen for the plant would be the beneficiary of a loan guarantee for $500 million. DOE said the project would include “one of the largest deployments in the world” of electrolyzers, which can use wind and solar power to split hydrogen from water molecules, in a zero-emissions process.

REGULATION

Washington State is the first to establish regulations requiring builders to install electric heat pumps for space and water heating in most new commercial buildings and multifamily residences with four or more floors. The Washington State Building Code Council (SBCC) also sent several proposals requiring heat pumps in residential buildings to technical advisory groups for review. The SBCC is the entity which could ultimately regulate residential fossil fuel use. Cities do not have the authority to amend the state residential energy code, which covers single-family homes and multifamily buildings with up to three floors.

In California, Carlsbad is considering an ordinance that would require all-electric residential construction as part of the 2023 update of its Climate Action Plan. It would join 54 other governments in California which require water heaters, clothes dryers, space heaters and other appliances in all new construction to be electric instead of natural gas.

Tennessee has enacted legislation which would preempt lower levels of government from regulating oil and gas facilities especially pipelines. One source of power which the law would reserve to localities – regulation of solar energy projects. The legislation was driven by the Tennessee Chamber of Commerce and the Tennessee Fuel and Convenience Store Association supported the legislation.  It comes after community opposition in Memphis halted a pipeline development.

In the Midwest, carbon sequestration and capture proponents are pushing for legislation which would transfer the liability associated with carbon capture and storage to governments. Four states have passed laws over the last year that allow companies to transfer responsibility for carbon storage projects to state governments after the operations are shut down. The concerns over carbon capture liability parallel the situation facing states with abandoned oil and gas wells.

Supporters say the legislation establishes certainty for investors who may have concern with liability issues. Opponents fear that the liability shift from operator to government will encourage less stringent operating conditions and allow the industry to walk away from its damage. It is legitimate to ask if the technology is so safe, why is the industry so afraid of potential liability?

CANNABIS TAXES

The Institute on Taxation and Economic Policy has released a study of trends in the growth of revenues associated with legal recreational cannabis sales. The study focused on 11 states where cannabis sales have been in place for several years. In 2021, the 11 states that allowed legal sales within their borders raised nearly $3 billion in cannabis excise tax revenue, an increase of 33 percent compared to a year earlier. Seven of those states that allowed cannabis sales last year raised more revenue from cannabis excise taxes than from alcohol excise taxes and profits (in the case of state-run liquor stores). In total, cannabis revenues outperformed alcohol by 20 percent by this measure.

Michigan, Oregon, Alaska, and Maine still collect more taxes from cannabis than from alcohol. The relationship between the two sources can be influenced by the divergence in tax policies governing pot and alcohol which yield some surprising results. Colorado has the biggest proportional disparity. Yes, it’s the home of Coor’s but Colorado also has among the lowest alcohol tax rates in the nation at 2.7 cents per shot of liquor, 1.3 cents per glass of wine, or 1 cent per pint of beer. Those taxes raised a total of $53 million last year. Colorado’s cannabis taxes are levied at higher rates per serving (a 5-milligram edible might incur around 16 cents of state tax, for example) and raised $396 million. 

The growth remains consistent. It is enough that in more established jurisdictions, King Tobacco is no longer the source of the most “sin tax” collections. Cannabis revenue outperformed tobacco by 17 percent in Colorado and 44 percent in Washington State last year.  As rates of tobacco use continue to decline, it becomes more likely that cannabis will become the leading source of these excise taxes. 

NYC BUDGET

New York City Mayor Eric Adams presented New York City’s $99.7 billion Executive Budget for Fiscal Year 2023 (FY23). It projects increased revenues from the mayor’s first Financial Plan update in February. Revenues of $1.089 billion would provide additional monies for programs as well as increased deposits to the City’s general reserves and rainy day funds. The budget will undergo significant review and debate but, in the end a balanced package will result.

We are more interested in where the relative spending occurs and how it relates to the budget as a whole. The Plan submission shows that the City will spend more on pensions than it will on debt service. The City will spend $8.1 billion on public assistance including its share of Medicaid. That is 7.5% of the budget. Debt service is a manageable 6.1%. Personal income taxes project to some 22% of tax revenues. Federal and state transfers to the city comprise some one-quarter of proposed city spending.

FY 2023 is balanced but the ensuing years follow a fairly traditional pattern by showing expected budget gaps of $3.3 to $3.9 billion in fiscal years 24, 25, and 26.  One concern is the size and timing of projected gaps. The great influx of federal aid to states and localities effectively dries up after 2024.

DECARBONIZATION

The process of decarbonizing Colorado’s electricity grid continues to unfold. We have been following the ongoing saga of the tax-exempt borrower Tri-State Generation and its disputes with its members over their desire to decarbonize. This week, The Federal Energy Regulatory Commission (FERC) rejected United Power’s attempt to provide Tri-State Generation and Transmission Association with a non-binding, conditional withdrawal notice. FERC agreed with Tri-State’s position that conditional withdrawal notices are not permitted under the contract termination payment (CTP) tariff that the federal regulator accepted in November 2021.

While seen as a reprieve, other pressures could force Tri-State to decarbonize faster. The State’s other major investor-owned generator is moving in a different direction. Xcel Energy submits an electric resource plan every four years to regulators. It projects the amount of electricity the utility will need and the sources it will use. The latest iteration of the plan speeds up the timetable for the retirement of coal generation and the full termination of the last unit in Pueblo, Co. That plant has been often inoperable adding to the pressure to close.

If approved as is, Xcel projects it will meet more than 80% of its customers’ energy needs with renewable sources by 2030 and cut carbon dioxide emissions by at least 85% from 2005 levels by 2030. Pueblo County will receive 10 years of property tax payments to compensate for the earlier retirement of Comanche 3.

DROUGHT

The Metropolitan Water District of Southern California declared a water emergency. The declaration allows the District to impose usage restrictions. The first takes effect on June 1. It would restrict outdoor watering to one day a week in parts of three counties – Los Angeles, Ventura and San Bernardino. A population of 6 million is covered by the limits. The MWD’s board has never done this before. Cities and smaller water suppliers that get water from the MWD are required to start restricting outdoor watering to one day a week, or to find other ways to cut usage to a new monthly allocation limit.

The latest projections for water levels in Lake Powell show they may get as close to 11 feet away from the hydropower cutoff in less than a year, even with the new round of releases. The decline has been the subject of much concern. (See MCN 3/28/22) Now, four impacted Colorado River states have agreed to the release of 500,000 acre-feet of water from the Flaming Gorge Reservoir, located on Utah – Wyoming border.

This follows a proposal from the US Department of the Interior that would cut back on allocations to California, Arizona and Nevada. The water would instead support the retention of some 480,000 more acre-feet of water in Lake Powell. The two moves could support hydrogeneration at the Glen Canyon Dam. Snowpack in the Colorado River basin is largely near or below average. Water storage in the Colorado River reservoirs is at a historic low with Lake Powell at 25% capacity, and Lake Mead at approximately 35% capacity. Releasing less water from Lake Powell has the potential to reduce Lake Mead by about another seven feet in elevation.

The Southern Nevada Water Authority draws its supply from Lake Mead. The Authority was scheduled to turn on a low lake level pumping station to a full operational status instead of its current testing status. Designed to draw water from the lake bottom, this pumping facility would be unaffected by the decline in water levels. SNVA has three intakes. One is now above the water line, the second is close to its required line.

NET METERING VETO IN FLORIDA

Florida Governor DeSantis has gotten plenty of publicity for his efforts to punish Disney for opposing legislation. Now the Governor has delivered an unexpected veto of legislation backed by Florida’s largest investor-owned utility. The Governor vetoed legislation which would have sharply reduced the benefits to customers of installing rooftop solar.

Was it a policy issue that drove the veto or was it a short-term political consideration? “Given that the United States is experiencing its worst inflation in 40 years and that consumers have seen steep increases in the price of gas and groceries, as well as escalating bills, the state of Florida should not contribute to the financial crunch that our citizens are experiencing.” The initial bill would have eliminated net metering. It was amended to instead call for solar panel owners to get a decreasing rate over time until 2029, when no more subsidies would be allowed. Solar panel owners also would have been grandfathered in under the bill for 20 years.

BUDGET TRENDS

While non-financial issues are getting much attention during the budget season, a number of trends in terms of taxes and gas prices are emerging. New York enacted its budget with gas tax reductions beginning July 1. Connecticut will enact a $24 billion state budget that features nearly $600 million in tax cuts, including up to $750 later this year for families with kids, and an extended gasoline tax holiday running through Dec. 1. More than half of the nearly $600 million in tax relief in the plan is guaranteed for just one year.

In Virginia, Gov. Glenn Youngkin’s proposed three-month gas tax suspension did not make it out of committee.  The plan would have taken 26 cents off each gallon for consumers – and cost the state about $437 million. The debate over the issue came in the wake of the end of a one-month gas tax holiday in Maryland.

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.