Joseph Krist

Publisher

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TRANSIT IN NEW YORK CITY MOVES FRONT AND CENTER

The first significant capital project to fall victim to a different political calculus in the face of abrupt “regime change” in Albany is the proposed Air Train project in Queens to LaGuardia Airport. The chief political proponent of the project was former Governor Andrew Cuomo. In reality, the project was not clearly supported by advocates while opponents were vocal and relentless. Once Governor Cuomo was out, there was no true core support for the $2.1 billion project. Opponents were successful in taking advantage of the upcoming gubernatorial election in November, 2022. Without clear support for the project, it was harder to justify the proposed cost and disruption.

On the private vehicle front, the dispute between New York and New Jersey over congestion pricing is growing more acrimonious. New Jersey has long been concerned that its residents who commute into Manhattan will be asked to pay the fee without any of the revenues being applied to agencies other than the MTA. Now, Governor Murphy of New Jersey is threatening to put the Port Authority of New York and New Jersey in the middle of the fray. One way that a governor can influence PA activities is by vetoing the minutes of Port Authority meetings.

Such an action could prevent the Authority board from approving all budgets and contracts. For bondholders it is a procedural issue which should not impact the availability of revenues for debt service repayment. As a practical matter, it is an issue in that the Port has been a central player in recent large scale transportation projects (bridges and airports) and that the Authority is being counted on to finance various regional projects. Even Governor Murphy called the tactic a “nuclear option”. The fact is however, that it is one of the few points of leverage a New Jersey governor has over a governor of New York is the Port Authority.

The Regional Plan Association, a major influencer on economic policies in the NY metropolitan area has suggested that New Jersey drivers get credit for the high tolls they pay to enter into Manhattan. The proposed congestion plan has some unforeseen consequences for regional policy. Take the case of a doctor who would commute to work at a hospital outside of the congestion zone and pay no more than they do now. The same doctor would have to pay the $15 congestion fee if his hospital employer was located south of 60^th Street. You could have individuals working for the same hospital system but facing different transit costs just by virtue of where their hospital is located.

UNEMPLOYMENT LOAN PAYBACK

With the end of extended federal unemployment benefits and the process of economic recovery underway, attention now focuses on the need for states to reimburse the federal government for loans made to the states to fund unemployment benefits. According to an analysis from the Tax Foundation, states have paid out $175 billion in UI benefits since the pandemic began in March 2020, with the federal government providing an additional $660 billion in extended and expanded benefits.

States often initially finance sudden growth in unemployment claims through borrowings from the federal government. If a state maintains a loan balance at the beginning of two consecutive calendar years, federal law triggers a series of automatic unemployment insurance tax hikes on businesses in the state. The federal government waived interest payments on state UI loans until September 6 to aid states struggling to pay UI benefits because unemployment rates soared during the height of the pandemic.

Every major recession creates liabilities for states which have had significant spikes in unemployment. The loans are repaid from the proceeds of assessments levied against businesses in those states. They can be paid in one sum from the proceeds of borrowings undertaken by states issuing bonds which are repaid from those assessments.

What is different this time is the magnitude of the unemployment problem which resulted from the pandemic. Those assessments become a cost to businesses in those states and weaken their competitive position.  Ohio officials cited a potential 50% increase in 2022 federal UI taxes for Ohio employers if the state’s loan was not repaid. Borrowing for funding repayments of federal unemployment insurance loans is a tried-and-true practice and not considered to be credit negative. 36 states and territories borrowed from the federal UI trust fund during the 2008-09 recession. Eight states issued bonds to repay the loans.

So, Ohio decided to be one of the states which found funds to repay their unemployment insurance loans before the federal interest waiver expired. It joined Hawaii, West Virginia, and Nevada in the group of states which repaid their loans. 31 states applied at least some portion of federal Coronavirus Aid, Relief and funding to replenish their UI trust funds, for a total of $15.4 billion in transfers. At the end of September, 11 states and the US Virgin Islands began to make interest payments on amounts borrowed from the federal government.

SALT, CONGRESS, AND THE COURTS

In a 3-0 decision, the 2nd U.S. Circuit Court of Appeals in Manhattan said the federal government had authority to impose a $10,000 cap on the state and local taxes that households’ itemizing deductions could deduct on their federal returns. New York, Connecticut, Maryland and New Jersey challenged the so-called SALT cap implemented as part of a $1.5 trillion tax overhaul in 2017.

The decision comes in the midst of the debate over the bipartisan infrastructure and reconciliation bills. The states’ arguments centered on the idea that eliminating the SALT cap was “coercive”.  The Court found that the states did not show that their injuries were significant enough to be coercive. The Court pointed to many federal provisions which do not have even impacts on the states. “We do not mean to minimize the plaintiff states’ losses or the impact of the cap on their respective economies but we find it implausible that the amounts in question give rise to a constitutional violation.”

On the legislative front, Congress’ nonpartisan Joint Committee on Taxation has said repealing the SALT cap could cost the U.S. Treasury $88.7 billion this year. That could make the deduction a casualty of the horse trading which will apparently be required to get an infrastructure bill.

TVA AND CLIMATE CHANGE

A coalition of TVA distributors has requested that Congress amend the proposed Clean Energy Performance Program (CEEP) to alter the potential penalties facing cities and power coops that rely upon TVA for nearly all of their power if the federal utility doesn’t meet the new standards to cut its carbon emissions. The CEEP would impose a $40 per megawatt hour penalty on any utility that does not boost its share of carbon-free energy by 4% a year. The penalty payments cannot increase customer bills.

There are 153 municipal and coop distribution customers of the TVA. They do not have direct control over how the TVA manages the generating assets which provide for the overwhelming bulk of their power supplies. Most of TVA’s distributors have signed 20-year power purchase agreements to buy 95% or more of their wholesale power from TVA.

The Southern Alliance for Clean Energy (SACE) has analyzed the integrated resource development plans for the four large utility holding companies in the Southeast. That includes the TVA. TVA has set a long-range goal of being carbon free by 2050. That is on the longest end of most target dates. It plans to achieve at least a 70% reduction in carbon by 2030 and an 80% reduction by 2035 while keeping electric rates stable. TVA says it has already cut its carbon emissions by 63% since 2005.

SCAE has calculated that among the four, the TVA (and by extension its customers) are the most exposed to the need to pay penalties under the plan. The annual increases in clean electricity under the TVA plan range from 0.2-0.3% at TVA. This would require TVA to pay the largest penalties.

Two major municipal utilities are at the center of the issue. TVA’s two largest local power companies (LPCs) — Memphis Light, Gas and Water Division (“MLGW”) and Nashville Electric Service (“NES”) — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for 8% of TVA’s total operating revenues during the nine months ended June 30, 2021. Sales to MLGW and NES accounted for 9% and 8%, respectively, of TVA’s total operating revenues during the nine months ended June 30, 2020.  

ALABAMA PRISON FUNDING

In the summer, the State of Alabama tried to execute a public/private partnership to build new prisons. The State has long operated under federal consent decrees to address overcrowded and squalid conditions at its maximum security prisons. The plan originally would have funded the construction of the new facilities by a private contractor but the prisons would have been staffed, managed, and operated by Alabama Department of Corrections staff. The facilities would have been leased to pay off debt issued for the prisons and then the facilities would become fully owned state property.

Political considerations drove pressure on the state and the underwriters of the proposed debt to finance the project. There were objections to the fact that the proposed builder also operated private prisons. Opponents felt that the company should not profit in any way from the construction contract even though they were only acting in the capacity of builder. That pressure caused underwriters to drop out of the financing and the public/private plan was scrapped.

That did not end Alabama’s obligation to comply with consent orders and it did not improve conditions. Now, the Alabama Legislature has approved the use of $400 million in CARES Act monies to fund the project. This has met with predictable outrage from anti-prison activists. They believe that the use of these funds for this purpose violates the Act. Those arguments are offset by the actions of some states to fund tax cuts with the CARES money.

ILLINOIS ENERGY FALLOUT

Coal fired generating assets owned by the Springfield, IL municipal electric utility were at the center of this summer’s debate over Illinois’ clean energy plans. The city’s three generating plants along with the Prairie States generation plant were prime targets of the legislation. While a compromise was reached allowing the plants to gradually close, the effects of the legislation are still having impact.

Springfield has announced that one of three plants which are not operating and scheduled for future retirement has now been retired permanently. The cost of compliance with new legal requirements drove the decision. The plant be will be decommissioned two years ahead of schedule and will never run again. An outside entity reviewed the plants and established that the cost of repairs needed to operate the plant again were prohibitive given that the plant is scheduled for retirement in 2023.

HUDSON YARDS

The massive Hudson Yards development area on Manhattan’s west side has managed to be able to cover its debt service obligations in spite of the effects of the pandemic on office occupancy, retail demand, and tourism which benefits the development. Now that it has survived the pandemic and managed to achieve a level of critical mass, the area is better able to fully meet its obligations to support Hudson Yards Infrastructure Corporation’s (HYIC) $2.7 billion outstanding revenue bonds.

This improvement is reflected in the Moody’s upgrade of Hudson Yards debt by one notch to Aa2. The project is now generating enough revenue such that the expectation is that the City will no longer need to appropriate monies any interest support payments for the remaining life of the bonds. The City is not yet off the hook entirely. When the original bonds were issued the city committed to pay interest on the bonds if the underlying Hudson Yards revenues were insufficient. That commitment will remain in place for the life of the bonds. The city’s obligation to make interest support payments, if required, is net of any available HYIC funds, and like the Tax Equivalency Payments, is absolute and unconditional, subject to annual appropriation.

WORKER SHORTAGES, SUPPLY CHAINS AND MUNICIPAL OPERATIONS

As is the case with so many industries, municipal governments are facing some worker shortages as well. This weekend, you need to have a reservation for some Washington State ferry (WSF) routes. Beginning in mid-week, the system had to cancel 16 scheduled sailings impacting residents of the San Juan Islands. WSF officials said there were not enough Coast Guard Documented Crew Members to continue some services. The staff shortage has been an ongoing issue since this spring.

Colorado’s DOT is facing pressure with the onset of snow season. They report that they are nearly 200 workers short, a 150% increase above the normal average of unfilled spots. The shortfall is attributed to the shortage of licensed commercial vehicle drivers that is impacting all sorts of businesses and school transit all over the country. Colorado DOT is already making plans to prioritize roads for plowing which will extend the time needed to clear roads.

The Maine DOT is delaying some major projects including a bridge replacement due to an inability to garner sufficient building supplies. In Maine, the issue is components being not available for construction to conform to specifications. “A national resin shortage is slowing our ability to obtain the additional material we’ll need in order to get the site ready for the accelerated bridge construction process.” The project may have to be delayed until the Spring as a result of the product shortage.

This highlights a concern that the recovery could be held back by a lack of sufficient labor and supplies to effectively undertake many of the projects proposed in the infrastructure and reconciliation bills. There are a number of instances where worker shortages have limited the ability of many municipal services to return to desired levels. It has only been a couple of weeks since the widespread adoption of vaccination mandates and the of extended unemployment benefits. We will see if this remedies some of these situations. 

SOUTH CAROLINA NUCLEAR FOLLOWUP

The aftermath of the ill-fated Sumner nuclear plant expansion continues to leave a trail of wreckage. Former SCANA Corp. CEO Kevin Marsh becomes the first criminal casualty of the effort to conceal problems and delays at the project. He reached a plea agreement which will result in a two-year federal prison term. He plead to conspiracy to commit wire and mail fraud. Marsh has also pleaded guilty in state court to obtaining property by false pretenses. He awaits sentencing on that charge.

A second former executive at SCANA and a Westinghouse Electric official, the lead contractor to build two new reactors at the V.C. Summer plant, have also pleaded guilty.  One more Westinghouse employee has been indicted and is awaiting trial. The CEO blamed Westinghouse for misleading him.

NEW YORK CITY AND TAX INCENTIVES

We have historically viewed the use of tax incentives negatively. We question the real impact of these programs and the lack of good comparative data has always complicated the analysis. Now, the NYC Independent Budget Office (IBO) has delivered an analysis of the City’s Industrial Program. The program was established under the Giuliani administration to respond to the fact that from 1990 through 1995, the number of manufacturing jobs in New York City fell by about 55,000 to reach 206,000.

The program provides tax breaks, primarily property tax reductions over 25 years, to encourage the preservation of industrial space in the city in order to retain and create manufacturing, warehousing, and other industrial jobs and to diversify the local economy. The same sorts of property tax breaks for development have been a constant since WWII in New York. The program provides for the Industrial Development Agency to acquire nominal title to the site and then lease it back to the firm seeking to develop the property.

Ownership of the site by the IDA allows the firm benefit from a tax break on the land and building. The firm then makes a reduced property tax payment in the form of a payment in lieu of taxes. The firm also becomes eligible for sales and mortgage recording tax breaks.

Since its inception in 1995, 370 projects have benefitted from the Industrial Program. In 2019, 200 projects received tax breaks, at a cost of $31.5 million in foregone revenue for the city.  For the first 21 years of the program, manufacturing and wholesale trade accounted for well over half of the new projects nearly every year. Since 2016, though, these two sectors have typically made up less than half of the new projects and the number of projects entering the program has been declining. 

While recent attention to tax breaks has focused on efforts to attract new businesses, most of the firms receiving benefits from the program were already located in the city and had fewer than 100 employees. IBO estimates that about 60% of the firms were expanding employment in the years leading up to receiving Industrial Program assistance, while around 20 % were contracting. 

Just over half of firms (54%) that had employment in New York City in the year of project start expanded their employment in the three years following the completion of their capital project. Another 9% maintained the same size, while about 37% contracted. Overall, IBO found that less than a third of these firms met or exceeded the employment goals set when they applied for the program.

IBO did find that the majority of firms that received assistance through the program either expanded employment or stayed about the same size three years after completing the construction or renovation of their industrial space. They did offer evidence to support one complaint of critics of tax incentives. The Industrial Development Agency could not provide detailed information on the actual capital investments at the site made by participating firms. Lack of hard data has always complicated both sides of the debate about tax incentives. 

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