Joseph Krist

Publisher

COLORADO RIVER SETTLEMENT

Arizona, California and Nevada – the lower basin states -have agreed to take less water from the Colorado River. The federal government has agreed to pay about $1.2 billion to irrigation districts, cities and Native American tribes in the three states if they temporarily use less water. In aggregate, the reductions would amount to about 13 percent of the total water use in the lower Colorado Basin.

The agreement struck over the weekend runs only through the end of 2026. The majority of the cuts — 2.3 million acre-feet — would come from water districts, farm operators, cities and Native American tribes that had agreed to take less water in order to qualify for federal grants offered under the 2022 Inflation Reduction Act. Those payments will total about $1.2 billion. 

The plan as is provides some political shelter over the 2024 election cycle. It does not really address any of the long-term issues around that of water. The individual states will manage the specific cuts to specific agencies so that will leave issues like agricultural versus residential water use for later discussion. The melting snowpack is providing additional supplies to southern California through temporary water diversions. This will temper the impact of proposed cuts but that sort of weather cannot be counted on.

ILLINOIS BUDGET

As we go to press, a budget agreement has been announced for the State of Illinois. The legislature had failed to reach agreement before last week’s deadline. The spending plan is estimated to be $50.5 billion. Governor Pritzker’s proposed budget plan from February totaled $49.6 billion in spending. The budget framework includes a $200 million additional pension payment, bringing total pension stabilization investments to $700 million.

As is often the case, education funding was at the center of the debate. The budget plan provides $250 million to fund the first year of the governor’s early childhood plan to eliminate preschool deserts and help stabilize the childcare workforce. It also includes $50 million for early childhood capital improvements — and $350 million for the state’s evidence-based funding formula for K-12 schools. The plan funds a $100 million increase for public universities.

With Chicago being a favored destination for asylum seekers, the City sought additional funding for things like healthcare costs for the immigrants. As has been the case in New York, pinning down a realistic cost estimate for these costs has proved difficult. While the numbers are substantial, there are real arguments about the actual cost. The city has estimated its cost at some $1 billion.

KENTUCKY PENSION CHANGE

Kentucky announced that the County Employees Retirement System (CERS) has increased its assumed rate of investment return to 6.50% from 6.25%. The rise in general interest rate levels is the ostensible cause. In reality, governments will be required to contribute less to CERS beginning July 1, 2024 (i.e., fiscal 2025). Using the system’s most recent valuation, the actuaries for CERS preliminarily estimate that contributions from participating governments will fall to around $814 million from $866 million in fiscal year 2015, roughly a 6% reduction.

The move will be a short-term benefit for the county governments. In the longer run, the changes will lead to less cash inflow and slower asset accumulation for the historically underfunded CERS. The change occurs in the context of the Commonwealth’s history of severe underfunding of pensions. Moody’s valued CERS’ unfunded liabilities for pensions and OPEBs combined at $19.8 billion, with a funded ratio of 44%. This was based on Commonwealth of Kentucky data most recently audited financial statements as of June 30, 2022.

We view the change negatively on several levels. The assumption that the current interest rate environment will become the norm seems to ignore the economy. It is clear that current rate levels are suppressing parts of the economy. With enormous pressure being brought to bear on the Federal Reserve to slow if not reverse the interest rate trend, the move to increase the discount rate for a long-term portfolio seems questionable.

At the same time, the liability to pensioners continues at the same level. What the move does is to take a step back from addressing Kentucky’s long-term pension issues. It took a long time for any positive trends to be established. It would be a shame to see that change.

MASS TRANSIT AND BUDGETS

New York’s Metropolitan Transit Authority has announced the inevitable. It plans to raise bus and subway fares to $2.90 and increase the cost of a weekly pass. The announcement comes as the Authority continues the process of levying congestion fees against drivers. The 15-cent increase could be in effect by Labor Day. The hike is part of a proposed package of 3 to 5 percent increases in transit fares and railroad ticket prices, plus a 6 to 7 percent hike in bridge and tunnel tolls.

The announcement comes on the heels of the documentation of lost revenues of nearly $700 million due to fare evasion. The package will raise approximately $300 million annually for the agency — slightly less than half of the losses from fare-beating last year. The fares for the express bus favorited by commuters in neighborhoods with limited subway access would jump by a quarter from $6.75 to $7, while the cost of a seven-day pass would increase from $62 to $64. Railroad riders would see the cost of a monthly or weekly pass increase by 4.3 percent on average, though the MTA will still cap the price on the most expensive 30-day tickets at $500.

The fare increase process of public hearings and votes will focus unwanted attention of the subway system which continues to experience challenges in its efforts to restore patronage levels. The city continues to lag in its recovery from the pandemic. While employment has returned to prepandemic levels, attendance at the office has not.

In Illinois, the Chicago Transit Authority is looking to the State of Illinois for increased operating funding. CTA has identified a $400 million gap to be closed in its budget. Federal dollars have been offered for rolling stock replacement but funding for operations has been scarce. It comes at a time when big city mass transit systems are hard pressed to employ enough operators to maintain service.

In California, mass transit agencies in the state are seeking significant operating subsidies as well. The statewide ask is some $6 billion.

HIGHWAY ERA ENDING

The latest example of the move to remove highway infrastructure designed in the 1970’s continues. The focus has been on elevated highways which cut right through urban areas effectively creating barriers to movement within the city. From time to time the debate has unfolded in the aftermath of accidents or disaster. In the 1970’s it was Westway in Manhattan. In the eighties and early nineties, it was the Bay Area and the replacement of the Embarcadero and elevated sections of highway in Oakland.

The success of those projects led to the consideration of elevated road replacements not driven by disaster. In Seattle, the Alaska Way was dismantled after many years opening up access to the Seattle waterfront significantly. In upstate NY, the replacement of the I-81 viaduct in Syracuse moves forward. Now, the latest example of the movement’s strength comes from Milwaukee.

A process is underway to determine the best costs of action for the replacement of infrastructure for I-794, an elevated road slicing through Milwaukee’s downtown. The City has undertaken a plan for downtown development and hopes to connect more of its downtown with the City’s waterfront. The state is undertaking a process to determine the best course of action to deal with the structures need for renovation.

One of five possible approaches is the removal of some of the elevated road and its replacement with a street level boulevard. It would not be the first such road to be dismantled in Milwaukee. The first was some 20 years ago and that plan is considered to be a success.

PUBLIC POWER UNDER PRESSURE

The New York State Legislative Commission on the Future of the Long Island Power Authority, have been studying the feasibility of not renewing the current management contract with PSEG Long Island, a unit of New Jersey-based Public Service Enterprise Group (PSEG) when it expires in 2024. The company was hired in the wake of high levels of customer dissatisfaction with the recovery of Long Island’s energy grid after Superstorm Sandy. As the legislative process unfolds, the politics of the issue get more complicated.

Supporters of the plan to revert to direct control by LIPA believe that direct operation would provide better service through more accountability. Opponents cite “lost taxes’ and greater taxpayer liability for the systems operations. On April 17, a feasibility study was released which concluded that the public would likely reap some financial benefits if the utility was transitioned to a public power authority. According to the report, LIPA customers could conceivably save $50 million or more annually by replacing PSEG Long Island. Much of that assumes that direct control will keep rates lower than would be the case under the status quo.

The irony is that the direct operating model was seen as a weakness given its susceptibility to local political pressure. Now, it is seen as salvation. The process will continue over the summer with a goal of having a legislative plan in place for the 2024 legislative session. In the short run, the status quo prevails.

In California, a public agency which distributes “green” energy to its customers faced possible dissolution. The Orange County Power Authority was established to develop aggregate demand for non-fossil fueled power. It serves eight localities but the two largest customers – Huntington Beach and Irvine – account for 70% of the power demand. The existence of the Authority has been a contentious issue in more conservative Orange County.

The agency has been under pressure as the result of transparency and management concerns. The CEO was fired and new procedures adopted. Nonetheless, discontent with the agency grew. Recently, Huntington Beach voted to withdraw from OCPA and return to being a Southern California Edison customer. The city accounts for 30% of demand. This focused much pressure and attention on the other large customer Irvine.

Huntington Beach residents and businesses will likely no longer be able to choose to pay for 100% renewable energy. And their electricity bills may actually go up — currently OCPA’s basic rate plan is cheaper than the one offered through Southern California Edison. All of this may have influenced the City of Irvine to choose a different path. It voted to remain a customer of OCPA.

PORTS

Ports continue to be impacted by slower activity levels. The West Coast ports where labor negotiations color the outlook for the ports reported significant drops in throughput. The Port of Los Angeles reported a 22.5% decline when measured against 2022’s strong year. The port processed 688,109 20-foot-equivalent unit containers compared with 887,357, or a decline of more than 199,000 TEUs. The adjacent Port of Long Beach also reported a 19.6% year-over-year decline as the complex moved 659,049 containers in April compared with 820,718. The Port of Oakland processed 180,482 TEUs, compared with 188,442 for a 4.2% decline from 2022.

It is a national trend. Ports in Seattle and Tacoma, Wash., reported a 12.8% decline to 232,321 containers in April compared with 266,635 a year ago. On the East Coast, the Port of Savannah, Ga. processed 408,686 containers in April, its second-highest month this year. Still, it marked a 17.5% year-over-year decline from 495,782. However, that’s up more than 11% from 367,880 in March, which was the slowest month for the port since July 2020. Volume at Port Houston also slowed by 8% in April to 307,879 containers compared with 334,493 a year ago. The Port Authority of New York and New Jersey reported that in March, volume declined 33.4% to 574,452 TEUs compared with 862,117 a year ago.

CARBON CAPTURE

Summit Carbon Solutions is a familiar name to readers as the sponsor of a carbon capture pipeline network through the Midwest. Iowa farmland owners have been among the leading critics and opponents of the project. In North Dakota, a different source of opposition has arisen. The legislature has requested that the state investigate the ownership structure to see if the proposed pipeline violates — Senate Bill 2371 and House Bill 1135 — which were passed earlier this year and go into effect Aug. 1.

Senate Bill 2371 prohibits foreign adversaries of the United States and foreign business entities with principal executive offices located in a country that is identified as a foreign adversary from owning and developing property in North Dakota. House Bill 1135 prohibits people who are not a U.S. citizen, U.S. permanent resident or Canadian citizen from directly or indirectly acquiring agricultural land in North Dakota.

The bill also states that limited liability companies can’t directly or indirectly acquire or otherwise obtain any interest in any title to agricultural land unless the ultimate beneficial interest of the entity is held directly or indirectly by citizens of the United States or permanent resident aliens of the U.S. The request reflects the fact that Summit has listed five owners of which one – TPG Rise – is supported by investment from The Silk Road Fund — an investment fund backed by the Chinese government.  

These concerns come in the wake of The Department of Energy’s announcement that it would not follow through on a $200 million proposed grant to Microvast Holdings Inc., a lithium-ion battery company that is planning a manufacturing facility in Tennessee, seven months after the award was tentatively approved. A Securities and Exchange Commission decision in 2022 added Microvast to a list of companies subject to potential intellectual property violations in China.

UPDATES

More support for the development of a lithium extraction industry in and around California’s Salton Sea came when Ford announced a large purchase from a Salton Sea producer. Energy Source Minerals will supply Ford with lithium hydroxide produced at ESM’s Project ATLiS, located in Imperial Valley California. Project ATLiS is expected to be operational in 2025. GM had already been involved with another Salton Sea producer since 2021.

Moody’s assigned a negative outlook to California’s GO rating. The surprise increase in the budget gap garnered points with no one.

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