Joseph Krist
Publisher
This is effectively a double issue of the MCN. Our next issue will be the December 5, 2022 issue.
This week finds two of the major issuance and credit entities providing updated credit information. NYC saw Mayor Adams issue the November 2022 Update to the City’s five-year Financial Plan. The California Legislative Office issued a new update to its outlook for the State’s finances. Bankruptcy is in the news as the City of Chester, PA declared Chapter 9 and FTX the crypto exchange and arena sponsor chose the Chapter 11 route. The cost of the immigration stunts pulled by southern governors is becoming clearer in NYC.
As usual, we see lots going on in the power generation sector. Austin, TX is in the midst of a serious debate over rates. We see the role of solar in grid resilience and two public agency-owned nuclear power plants will participate in a pilot project to produce hydrogen. Several municipal utilities find themselves in the middle of the swirl of issues stemming from the western U.S. drought.
The Port of Los Angeles gets an upgrade 25 years in the making. Two midwestern cities are piloting various forms of income support programs. Enjoy the most universal American holiday on Thanksgiving.
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NYC FINANCIAL PLAN UPDATE
The latest financial update to the City’s financial plan was not exactly filled with good news. The impacts of the pandemic remain, the city economy has been slow to return to its pre-pandemic state, and the performance of the financial markets largely negative. So, it is no surprise that City officials disclosed that they were now projecting a combined budget gap of $13.4 billion for the next three fiscal years, compared with the $12 billion the city projected in June. The City attributes the growing gap to the travails of the financial markets. The impact from the markets is direct in terms of trading activity and pay but also has implications for future funding of pensions costs by the city.
The update comes as the state comptroller released a report highlighting the difficulties the city faces in recovering from the pandemic. The city’s full-time workforce declined by 19,113 employees over the last two years, the largest decline in staffing since the Great Recession of 2008. Despite the city hiring over 40,000 new employees in the last fiscal year, city job vacancies stand at more than 21,000.
The 6.4% decrease in the city’s workforce during the pandemic was found to be uneven across its 37 largest agencies, with 11 experiencing a decline in staffing of more than 13%. The Department of Correction had the greatest loss of employees with a 23.6% decline, followed by the Department of Investigation at 22.2% and the Taxi & Limousine Commission at 20.5%.
The ongoing issues facing the city in regard to public safety and homelessness only highlight the unplanned nature of some of the reductions in headcount. The Police Department (6.7%), Department of Social Services (13.7%), and Administration for Children’s Services (15.6%) accounted for more than half of the citywide workforce decline from June 2020 to August 2022. Divisions within Social Services, Education, Parks and Recreation, Homeless Services, and Mental Health and Hygiene had the highest vacancy rates of more than 20%.
The city’s current financial plan looks to fill 24,969 positions by fiscal year 2023. In October, more than half of the city’s major agencies had external job postings for at least 20% of their openings, while other major agencies did not show significant efforts to hire as of October 2022.
IS REAL LIFE RETURNING TO STATE BUDGETS?
The massive infusion of federal aid to lower levels of government to deal with the costs of response to the pandemic was the clear factor supporting state credits. It allowed all but one state to avoid borrowing from the Federal Reserve. It also provided a pool of cash to legislators whose existence is based on the ability to deliver government funded services. Across many jurisdictions, the cash funded either new or expanded service initiatives which required long-term sources of revenue. That has been a huge caution light when looking at the states.
Now, we see the first signs of the potential impact of removing the fiscal punchbowl. The State of California’s Legislative Analyst’s Office has released a report warning of potential shortfalls in revenues and a growing budget gap. Reflecting the threat of a recession, the LAO revenue estimates represent the weakest performance the state has experienced since the Great Recession. The result is the Legislature could face a budget problem of $25 billion in 2023‑24. The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021‑22 through 2023‑24 by $41 billion.
The $25 billion budget gap in 2023‑24 is roughly equivalent to the amount of general‑purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below the LAO revenue outlook in the budget window. LAO anticipates anticipate revenues will decline between 2021‑22 and 2022‑23 by more than the budget act anticipated, but then remain largely flat between 2022‑23 and 2024‑25, before growing again in the last two years of the outlook.
CHESTER CHAPTER 9
The latest distressed municipality to try the bankruptcy option is the City of Chester, PA. This industrial suburb of Philadelphia is a poster child for the example of historically disadvantaged cities. The City was admitted to the Commonwealth of Pennsylvania’s Distressed Municipalities program under the well-known Act 47 in 1995. A quarter century later a fiscal emergency was declared by the Governor. Now, the city, under the guidance of a state overseer has filed for Chapter 9 bankruptcy.
Chester has long had much working against it. The major industrial development of the late 20th century in Chester was a refuse to energy plant which served the city and the surrounding area. The concurrent economic decline only damaged the city’s direct revenue generating abilities. At the same time, the City was run poorly even under the best of circumstances. Expenses were delayed or not paid including nearly $40 million of required payments to fund pensions. Even the state overseer has noted the lack of information or concealment of information by city financial officers. His office has expressed frustration at city officials for what is described as a lack of cooperation while trying to get finances in order.
The city paints a dire picture of layoffs, pension reductions, service reductions. Employees blame “Wall Street” or the state or anything else that doesn’t reflect on their city managers. And yes, the issue of race will overhang the discussions. Chester is an example of the results of years of issues now generally grouped under the heading of equity. If the recent pattern of bankruptcy resolutions holds up the pensioners will take a smaller haircut than will any holders of the city’s debt. In the meantime, it remains to be seen if the Commonwealth will challenge the bankruptcy filing as it did in the case of the City of Harrisburg.
FTX AND MIAMI
Cryptocurrency was having its moment a couple of years ago and some municipal officials embraced it with a real level of gusto. As the pandemic unfolded, a variety of events and factors served to draw a number of participants in the cryptocurrency industry to the City of Miami. The Mayor of Miami has been the leading advocate not only seeking to attract traders and exchanges to the city but also advocating for paying workers in crypto and even investing city funds in cryptocurrency. Through earlier ups and downs in the value of crypto, the Mayor remained a steadfast advocate.
That led one player in the industry to locate in Miami and as was the practice of that player, take a number of steps to insinuate themselves into the community in very prominent ways. That is why the naming rights to the arena which serves as the home of the Miami Heat of the NBA were sold earlier last year to FTX. Yes, that FTX – the one which spectacularly flamed out last week. The immediate impact is on the Miami Arena which had barely gotten the name up over the entrance when it had to be taken down. Those naming rights will now be reauctioned.
It could just be that Miami is the place for trendy products or industries to die at least when it comes to naming rights. It’s easy to forget the Blockbuster Bowl games in the 90’s in then Joe Robbie Stadium. The arena had been called the FTX Arena since June 2021. The naming agreement had a 19-year term and was projected to produce $90 million over the term of the lease for Dade County. It just repeats a pattern seen over the years.
BEHIND THE IMMIGRATION STUNTS
Nothing stimulates debate like the issue of immigration. It is a subject that increasingly becomes more emotional and apocalyptic by the day. The issue has gotten much attention in NYC where the asylum seeker phenomenon has been in full view. Whether it is tent cities in the Bronx or in the middle of the East River, the issue is not going away under the current national immigration scheme. Lost in all the political hyperbole are facts about what this is actually costing NYC.
Once again, the City’s Independent Budget Office (IBO) has stepped in to fill the breach. A new report notes that as of early November, the Adams administration reported that 23,800 asylum seekers have arrived in New York City, in most cases looking to escape economic and civil unrest in their home countries—Venezuela in particular. Based on the number of asylum seekers who had arrived as of early November, IBO estimates that the city will spend at least $596 million over the course of a year.
That figure covers costs related to shelter stays, public schools, basic health services, and some legal assistance. The number just covers those who have arrived to date. Additional costs can be estimated but vary widely based on who is getting the help (individuals versus families). For example, individual cost estimates could range from about $1,900 for an individual who does not enter the city’s shelter system and receives some health and basic legal services to nearly $93,000 for a family of four who enters a shelter for a year and has two children enrolled in the city’s public schools, along with receiving some health and basic legal services.
IBO’s best estimate is that another 10,000 asylum seekers locating to NYC could generate additional expenses of some $246 million.
SOLAR AND BLACKOUTS
A newly released study by the US Energy Information Administration showed that while 2021 recorded the third highest rate of total annual electric power outages since 2013, state markets with a high rate of rooftop solar adoption have shown to have the shortest timeframe for recovery from outages and higher grid resiliency. The EIA study found that increasing solar states such as Florida, Delaware, the District of Columbia and Nevada, experienced outages ranging from 52 minutes to 102 minutes in the most recent year. That contrasts to states with prohibitive solar and net metering incentives, such as West Virginia, Louisiana and Mississippi, which saw power outages stretch from 19 hours to more than 3 days.
The US experienced a record number or 21 named storms in 2021, the third-most active Atlantic weather season on record. In addition to four major hurricanes in 2021, a winter storm affected the Midwest and Southeast as far south as Texas. Customers in Louisiana, Oregon, Texas, Mississippi, and West Virginia experienced the most time with interrupted power in 2021, ranging from almost 19 hours in West Virginia to over 80 hours in Louisiana. Louisiana also had the highest number of power interruptions, followed by Texas.
AUSTIN ELECTRIC
Austin, TX and its electric system were heavily impacted by the electric distribution disaster that was Texas in February 2021. The city’s municipal electric system is now trying to restore the utility’s financial position which was impacted by the higher purchased power costs resulting from February 2021. The city council is now considering rate increase proposals to address the utility’s diminished financial position.
The rapid spike in costs led Austin Energy to consistently over the past two years drawdown $90 million from its reserves. This led to two downgrades of its debt rating, from AA to AA minus. Now it is asking to recover an additional $35.7 million in base rates largely through residential consumers. That has led to serious opposition. An alternative proposal from some stakeholder groups would raise the fixed residential fee to no more than $12 per month rather than Austin Energy’s proposed $25. That would result in a new lower revenue requirement from $35.7 million to just $12 million.
The base rate request follows the approval just one month ago of an increase in a pass-through charge, This is intended to cover an estimated $104 million in operating costs incurred by the utility over the last year. The approved increase for average customers starting Nov. 1 was $15 a month. The regulatory process has seen Austin’s rate proposals successfully challenged before. In the settlement of Austin Energy’s own 2016 base rate review, the Council approved a revenue requirement that was $25 million lower than Austin Energy originally requested.
The cost of power in Texas in the wake of the 2021 freeze has become a real issue. The Census Bureau reports that 45% of residents said they had to forgo spending on basic necessities, such as food and medicine, in order to pay their energy bills. Texas ranked worst among all states and its reported rate was 11 percentage points higher than the national average of 34%.
NUCLEAR GOES HYDROGEN
The U.S. Department of Energy (DOE) is partnering with utilities on four hydrogen demonstration projects at U.S. nuclear power plants. Hydrogen would be produced at the nuclear plants through high- or low-temperature electrolysis, a process of splitting water into pure hydrogen and oxygen. High-temperature electrolyzers use both heat and electricity to split water and are more efficient.
The selected plants are among the most well-known and longest operating nuclear generation plants in the country. Two of them have been the subject of subsidy payments to enhance the economics of continuing to generate nuclear power and two were owned at one time by municipal power agencies. DOE is supporting the construction and installation of a low-temperature electrolysis system at the Nine Mile Point station in Oswego, New York. Nine Mile Point would be the first nuclear-powered clean hydrogen production facility in the U.S. and would also use the hydrogen to help cool the plant. The former NY Power Authority owned plant is the oldest operating plant in the country.
The second plant which formerly had municipal utility ownership to participate in the hydrogen is the Palo Verde plant in AZ. DOE is negotiating an award with Arizona Public Service (APS) and PNW Hydrogen to demonstrate another low-temperature electrolysis system at the Palo Verde Generating Station. The hydrogen will be used to produce electricity during times of high demand or to make chemicals and other fuels.
DOE is continuing to support the development and maturation of clean hydrogen production, including funding for six to ten regional clean hydrogen hubs across the United States through the Bipartisan Infrastructure Law. At least one of the hubs will be focused on clean hydrogen production using nuclear energy. Additional funding, through the Inflation Reduction Act, will be available to support clean hydrogen production via tax credits that will award up to $3/kg for low carbon hydrogen.
MORE ELECTION UPDATES
South Carolina will see its rainy-day fund showered with enough funding to increase the required level under the state’s constitution. Voters approved two constitutional amendments requiring the state to increase its budgetary reserves to 10% of prior-year revenue from the current 7%. They apply collectively to the state’s rainy-day funds — the General Reserve Fund (GRF) and Capital Reserve Fund (CRF). The higher required reserve level is an obvious positive rating factor.
The amendments boost the budget reserve funds’ required amounts as a share of state revenue, which are determined using the most recently completed fiscal year. The GRF’s requirement will rise over four years to 7% from 5% of revenue, and the Capital Reserve Fund’s will immediately grow to 3% from 2%. Balances required by the amendments as of 30 June 2022, would amount to approximately $918 million — an increase of $274 million above prior requirements.
San Francisco voters did not do the City’s GO credit any favors through approval of two ballot items. Proposition G requires the city to appropriate money to SFUSD based on estimates of the city’s excess Educational Revenue Augmentation Fund (ERAF) revenues, money remitted back to the city after it meets certain unique school district funding requirements. The city controller estimates appropriations will grow from $11 million in fiscal 2023-24 to $35 million in 2024-25 and $45 million in 2025-26.
Voters approved a second ballot measure to increase pension cost-of-living adjustments (COLAs) awarded to a subset of retirees by removing a conditional requirement tied to the funded status of the San Francisco Employees’ Retirement System (SFERS). Beginning 1 July 2023, San Francisco’s annual pension contribution requirements will rise by roughly $8 million annually for 10 years as a result of Proposition A’s approval.
COAL AND WATER
Arizona State University researchers recently addressed the issue of power generation and water supplies. Their report summarizes findings from extensive research to identify and describe the amount, source, and ownership of water rights used by coal-fired power plants and coal mines throughout the Colorado River Basin. There are currently about 37 coal-fired power plants and coal mines in the Colorado River Basin. These plants and mines are located in five states—Arizona, Colorado, New Mexico, Utah and Wyoming—and together they withdraw an estimated 131,130 acre-feet of water each year. Coal plants use the vast majority of this water, about 130,000 acre-feet per year, while coal mines collectively use a modest 1,130 acre-feet.
There are plants owned by public power agencies and cooperatives that are analyzed in the report. Salt River Project (“SRP”), an Arizona-based utility, owns coal water rights that entitle it to around 100,000 acre-feet of surface water each year in Arizona and Colorado. Coronado Generating Station is owned by SRP and located near St. Johns. Coronado used about 5,200 acre-feet of water in 2020, all of which came from about 30 groundwater wells with a combined pumping capacity of 44,000 acre-feet annually. All of the wells are owned by SRP.
Craig Generating Station in Colorado is owned by Tri-State G&T, PacifiCorp, Platte River Power Authority (“PRP”), SRP and the Public Service Company of Colorado (“PSCC”) and is located near Craig, Colorado. It used about 13,300 acre-feet of water for cooling purposes in 2020. According to the EIA, all this water was surface water from the Yampa River. In New Mexico, Four Corners Power Plant is owned by APS, Pinnacle West, SRP, TEP and the Public Service Company of New Mexico (PNM) and is located near Fruitland, on land leased from the Navajo Nation. According to EIA data, the power plant used about 17,000 acre-feet of water for power generation and cooling in 2020, all from the San Juan River.
In Utah, Hunter Power Plant is owned by Utah Associations Power Systems, Deseret Power Electric Co-op, Provo City and PacifiCorp and located near Castle Dale. The plant used about 16,400 acre-feet of water in 2021. It gets its water from Cottonwood Creek in Utah. Bonanza Plant is owned by Utah Municipal Power Agency and Deseret Generation & Transmission Co. (“Deseret G&T”) and is located near Vernal.
The plant used 5,442 acre-feet of water in 2021. As the EIA correctly reports, Bonanza Plant gets all this water from the Green River, under a water right jointly owned by Deseret G&T and the Utah Municipal Power Agency with a capacity of 10,859.5 acre-feet per year. Deseret G&T also owns another water right in the area entitling it to an additional 10,859.5 acre-feet of water per year, but it is not clear whether this right is used at Bonanza Plant.
Intermountain Power Plant is owned by Intermountain Power Agency and is located near Delta. It used about 7,233 acre-feet of water in 2020. The mine gets its water rights from over a dozen water rights, all owned in whole or in part by Intermountain Power Agency, with a total capacity of 15,300 acre-feet per year. Intermountain Power Plant is not within the Colorado River Basin, but it is near the Basin’s boundary, such that its water use could impact Basin water resources.
Just two of the largest water users on the list account for enough water each year to fill the requirements of some 100,000 homes. In a part of the country where every drop matters that puts users like these at the center of the Colorado River water debate. SRP increasingly finds itself at the center of the conflicting forces driving the climate debate. The utility maintains ownership shares of three of these plants and their associated water rights. It has also gone through a bruising process over siting a gas generation expansion. It also has lobbied against net metering rules in AZ which might raise or maintain current price requirements for excess power taken from solar users.
PORT OF LOS ANGELES
Over the past few years, the Port of Los Angeles has been at the center of many of the issues confronting port operators and providers – trade volumes, pressure to reduce pollution, pressures to implement automated operations and the historic relationship between ports and the unions representing various labor interests at the port. It created a challenging operating environment in the best of times. The pandemic raised a host of concerns – pressures on trade activities; delayed offloading as pandemic restrictions led to container backups and the potential for substantial labor disruptions through 2022 – which could have a negative credit impact.
Cargo volume at the Port of Los Angeles dropped in October as the Port handled 678,429 Twenty-Foot Equivalent Units (TEUs), a 25% decrease from October 2021. The Port of Los Angeles has processed 8,542,944 TEUs during the first 10 months of 2022, about 6% down from last year’s record pace. Our concerns over labor issues are acknowledged by the Port. “Cargo has shifted away from the West Coast as some shippers await the conclusion of labor contract negotiations. “With cargo owners bringing goods in early this year, our peak season was in June and July instead of September and October.”
This week, the efforts of Port management to handle these coincident pressures paid off in an upgrade. The Port of Los Angeles has been upgraded to an AA+ bond rating with stable outlook on its outstanding bonds by Standards & Poor’s (S&P), the highest rating given to a seaport without taxing authority. “Trade tensions with China have not resulted in weaker financial performance, and supply chain disruptions and congestion have somewhat subsided, thereby mitigating operational challenges.”
S&P also cited the Port’s continued strong business position, stable portfolio of assets and excellent historical financial performance as factors contributing to the rating. Prior to its AA+ upgrade, the Port of Los Angeles maintained an AA rating with S&P since 1996.
INCOME EXPERIMENT
The Toledo, OH City Council approved a plan which would allow the City to apply a portion of COVID related federal funding to reduce at least one category of student debt. COVID-19 Stimulus Package, which gave $800,000 to Toledo for emergency funding and relief. Lucas County had agreed it would then contribute an additional $800,000, bringing the total to $1.6 million. Those proceeds would be used by city government to buy medical debt through the nonprofit RIP Medical Debt, an organization that specializes in purchasing “bundled medical debt portfolios on the secondary debt market.
It comes after the City of Chicago approved its own plan in July of this year along similar lines with Cook County participating as well. The Illinois plan hopes to erase $1 billion in debt with RIP Medical Debt, using the $12 million in federal funding provided to them. To qualify, the debtor has to earn less than four times the federal poverty level, and the amount of the debts are 5% or more of their annual income.
PROPOSED HOSPITAL MERGER
Sanford Health and Fairview Health signed a non-binding letter of intent to combine the two regional health systems based in South Dakota and Minneapolis. The goal is to conclude a merger by the end of 2023. It is not the first time that such a merger was proposed. In 2013, the two systems proposed a merger only to have it shot down by Minnesota regulators over competition issues.
The resulting parent company, with more than 78,000 employees and dozens of hospitals, would be Sanford Health and be operated out of South Dakota. The idea is to bring a generally rural patient base and link it to a significant metropolitan base. The rural hospital sector continues to get pummeled, especially in the wake of the pandemic. Fairview’s hospitals are generally based in the Twin Cities, including the University of Minnesota Medical Center.
Sanford is rated A+ by Standard and Poor’s. Fairview’s A3 Moody’s rating had a negative outlook. The institutions generated similar levels of pre-pandemic revenues and they share characteristics such as the operation of senior care facilities and they have significant presence in their home states. There are a number of stumbling blocks to be overcome as there has been historically opposition to a merger which might give control of the U of M medical center to a non-Minnesota entity.
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