Joseph Krist

Publisher

This week we look at corruption as a governance issue, the CA drought increases restrictions; a bad week for fossil fuel in court; the house insurance mess in Florida; Tri-State Generation dragged in to the future; the SEC and climate change; pressures on college enrollments; and the latest moves to limit gas taxes.

The next issue of the Muni Credit News will be June 13. Enjoy the weekend. Make sure you take a minute between cold drinks to remember what Memorial Day is for. You would not be here without those we remember.

______________________________________________________________________

GOVERNANCE

The mayor of Anaheim, CA resigned this week in the midst of a federal investigation of alleged corruption associated with an effort to sell Angels Stadium. The publicly owned facility would be sold to the owner of the Los Angeles Angels and in return he would be allowed to develop land around the stadium for an entertainment complex. The charges are that the Mayor was trying to leverage his approval and support for the project in exchange for campaign funding.

The situation highlights the increasing role of real estate development tied to the financing of new stadiums. It’s been clear that the overall economic impact has never lived up to the projections of stadium proponents. A logical political response would be to have these facilities privately funded. Private funding has helped to drive support from political establishments in the various locales. Tying real estate developments to stadium development allows supporters to feel that these projects are economic development schemes rather than subsidies for rich owners.

The proposed deal would allow the owner of the Angels to develop    homes, restaurants, hotels and shops. It has run into opposition as the result of state law which requires local government to prioritize the use of “surplus” lands for the development of housing. In an indication of how potentially lucrative the proposed deal would be for the developers, Anaheim and the state agreed to resolve the matter by having the city pay a $96 million fine. 

As these projects get bigger and more complex, the pressure on local officials only increases. At the same time, the increasing value of professional sports franchises continues to grow rapidly. The future of stadiums and arenas will be increasingly tied to real estate development. This will increase the pressure on local officials.

MORE DROUGHT IMPACTS

As the Colorado River system continues to dry up, the impacts of the drought in the West grow. This week, the State of California adopted emergency regulations to require local water agencies to reduce water use by up to 20 percent and prohibit any watering of ornamental lawns at businesses and other commercial properties. require local water agencies to reduce water use by up to 20 percent and prohibit any watering of ornamental lawns at businesses and other commercial properties. 

The rules sound draconian and conjure up visions of grassless lawns and yards and athletic facilities without grass. In reality, the rules ban anyone from irrigating ornamental lawns at commercial and industrial properties with potable water. Individual house yards, parks or sports fields are not subject to the limits yet. The rules do limit watering of decorative turf at businesses and in common areas of housing subdivisions.

The move comes as local regulations begin to take hold. The Metropolitan Water District of Southern California’s already has more restrictive limits on outdoor watering. The city of Healdsburg bans irrigating yards. Santa Clara County became the latest locality to announce fines of up to $10,000 for wasting water.

CLIMATE LITIGATION

The fossil fuel industry continues to have a tough time convincing state courts around the country to have cases brought against them for their lack of disclosure of the environmental risks of their businesses. The two most recent examples come from New England. The first is case brought by the Massachusetts attorney general which charges that Exxon Mobil lied about the climate crisis and covered up the fossil fuel industry’s role in worsening environmental devastation.

Exxon tried to follow the latest tactic from the industry playbook by arguing that their misrepresentations to the public and to investors are a protected form of free speech. The company also tried to have the litigation halted by what are known as anti-SLAPP laws. Originally, these laws were used to protect individuals from strategic lawsuits against public participation (SLAPPs) filed against those opposing the interests of companies and wealthy individuals. The court rejected this argument out of hand. It follows a March decision if federal court which requires Exxon to meet discovery requests.

It did not get any better down the road in Rhode Island.  A federal appeals court ruled that a lawsuit by Rhode Island against 21 fossil fuel companies, including Exxon, BP and Shell, can go ahead in state court. The decision follows a pattern of losses by the industry in federal appeals courts in Colorado, Maryland and California. In March, a Hawaii state court gave the go-ahead for a case to remain within its jurisdiction. 

A most recent effort to fight climate mitigation efforts fell short in the U.S. Supreme Court this week. The Supreme Court allowed the Biden administration to continue to take account of the costs of greenhouse gas emissions in regulatory actions. It rejected an emergency application from Louisiana and other Republican-led states filed with the court asking for an expedited review of its appeals of unfavorable lower court decisions. The states had hoped to block the use of a formula that assigns a monetary value to changes in emissions.

FLORIDA INSURANCE

The problem in the West may be too little water but the problems in Florida are arguably from too much. The recent years have seen casualty insurers take it on the chin serving that market. As storms become more intense and frequent – the NOAA estimates that there will be 7 serious hurricanes this season – the damages pile up and the costs to insurers continues to rise. The insurers are left with a choice between massive premium increases and exit from the market. More are choosing exit from the market. This has led to political pressure to find ways to provide coverage while holding down premium increases.

The Florida legislature previously established the state-run insurer of last resort, Citizens Property Insurance Corp. That entity has seen doubled in volume in the last 18 months to absorb newly uninsured homeowners. Its activities are funded through bonds issued by the State backed by assessments against program participants. This entity too faces a potential need to impose significant assessment increases. The potential increases coupled with high rate increases from private insurers led to a special session of the Florida legislature.

Much of the pressure on the primary insurers comes from the reinsurance sector. These providers are proving reluctant to take on more of the increasing costs of development in a climate challenged market. Without reinsurance, primary insurers are limited in terms of which properties they can insure at what customers would consider reasonable or affordable rates. That was the focus of legislators.

These concerns produced legislation to create a $2 billion reinsurance fund to be called Reinsurance to Assist Policyholders, or RAP. The bill would allow insurers to charge separate deductibles for roof damage of up to 2 percent of the home’s total insured value or 50 percent of the cost to replace the roof. Deductibles would not apply to a total loss of the structure, a loss caused by a hurricane or a tree fall, or a loss requiring repair of less than half of the roof.

The final bill came after a series of Democratic-sponsored amendments, including a one-year freeze on rate increases, a mandatory 5 percent reduction in premiums, requiring insurers to disclose the effects of climate change on their business, and breaking down their policy issues by race and sex was voted down.

REALITY COMES TO TRI-STATE GENERATION

The realities of climate change continue to impact the Colorado-based regional energy wholesaler cooperative Tri-State Generation, As we have documented, Tri-State is under enormous pressure from its member distribution co-ops to deliver cleaner energy. This drove efforts by the distributors to free themselves from power supply contracts with Tri-State. The resulting disputes have garnered headlines for the contentious nature of the negotiations.

Recently, three distributors were able to negotiate contracts which reduced but did not eliminate power supplied by Tr-State. Now, three additional distributors across three states in the Tr-State service area have negotiated agreements as well. Currently, utilities working with Tri-State may source only 5% of their energy from outside sources or solar power within the communities they serve. The partial requirements membership option would allow utilities to source up to 50% of their energy from outside sources, in addition to the community solar and other self-supply projects.

Tri-State’s largest customer United Power, which serves 900 square miles of Northern Colorado, filed a non-conditional notice of intent to withdraw from Tri-State with the Federal Energy Regulatory Commission April 29. The new notice changes the intended departure date from Jan. 1, 2024, to May 1, 2024.  It was United’s efforts to leave that generated much attention on Tri-State’s efforts to use huge withdrawal fees as a mechanism to retain customers.

The Federal Energy Regulatory Commission held a hearing earlier this month to determine an exit fee for United Power. Previous calculations indicated Tri-State could charge United Power up to $1.6 billion to leave. A judgment on new exit fees is expected by the end of the summer.

SEC ESG PROPOSALS

From our perspective, the increased emphasis from investors on environmental, social, and governance (ESG) based investing has been hampered by the lack of consensus about what exactly that means. This has generated opportunities for lots of confusion about what funds invest in, how they determine what constitutes ESG investing, and how effective ESG investing is.

The rating agencies are trying to fill the resulting void by trying to establish and measure various ESG metrics through their existing ratings infrastructures. Individual entities have been trying to tackle the problem for some time but with varying rates of success. As the process unfolds, questions have arisen about how to best judge which funds truly are ESG funds and which ones are really efforts at “green washing” by firms.

The SEC is being looked to as a source of guidance on the issue as it appears that a regulatory entity may be the most effective driver of change in this area. This week, the Commission proposed amendments to enhance and modernize the Investment Company Act “Names Rule”. The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”). The proposed amendments would enhance the rule’s protections by requiring more funds to adopt an 80 percent investment policy.

Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors. The amendments also would limit temporary departures from the 80 percent investment requirement and clarify the rule’s treatment of derivative investments.

This follows another proposal which would categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.

Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

COLLEGES UNDER PRESSURE

The National Student Clearinghouse Research Center has released its latest data on enrollments at U.S. colleges and universities. The data shows that some significant trends which began to emerge over the last few years continue to impact these institutions.

Total postsecondary enrollment, which includes both undergraduate and graduate students, fell a further 4.1 percent or 685,000 students in spring 2022 compared to spring 2021. This follows a 3.5 percent drop last spring, for a total two-year decline of 7.4 percent or nearly 1.3 million students since spring 2020. The declines this spring are also markedly steeper than they were last fall, when total postsecondary enrollment declined by 2.7 percent from the previous fall.

Undergraduate enrollment accounted for most of the decline, dropping 4.7 percent this spring or over 662,000 students from spring 2021. This is only slightly less than last spring’s 4.9 percent loss. As a result, the undergraduate student body is now 9.4 percent or nearly 1.4 million students smaller than before the pandemic.  Undergraduate enrollment is also falling more steeply this spring than it was in fall 2021 (-4.7% vs.3.1%).

The declines were seen more acutely at the public institutions both two and four year. The pandemic clearly impacted enrollments as much of the decline was seen in lower income student categories. This cohort was severely impacted by employment limits due to the pandemic. Many students simply could not afford even local community college tuition as family members were laid off or eliminated due to pandemic changes. At the same time, the focus on student loan debt forgiveness has raised real debates about the need for a four-year degree.

GAS TAX

The Maryland legislature will not take up proposals to limit or eliminate a scheduled rise in the state’s gas tax on July 1. Maryland already had a 30-day gas tax holiday. Now, estimates that the state would be giving up $200 million in new funding for roads, bridges and transit projects provided by the upcoming automatic increase. Each year the tax is adjusted statutorily to reflect inflation. The change will increase the tax from around 36 cents to about 43 cents per gallon.  

The issue is being complicated by election year politics in many of the states. Florida has scheduled a suspension of its tax for the month of October (25-cents per gallon) during the month before the November election. New York’s suspension begins June 1 through year-end.  Georgia will extend a gas tax suspension into the middle of July. That occurred after the Governor was renominated. Georgia has among the lowest average gas prices in the nation at about $4.13 for a gallon of regular compared with $4.60 nationwide, according to AAA. 

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.