Joseph Krist

Publisher

CHICAGO

The City of Chicago received a rating upgrade from Fitch to BBB. The move rewards several actions which begin to address some of the City’s long-standing credit issues. The first is current performance. Chicago concluded 2021 (Dec. 31 fiscal year-end) with a large general fund surplus of $313.8 million or 6.3% of expenditures. The surplus reflected $221.6 million in revenue above budget, expenditures $107.2 million less than budgeted amounts and $782.2 million of American Rescue Plan Act (ARPA) revenue replacement. 

Pensions remain a significant credit factor for the City. The city increased its pension contributions from $848.5 million in 2016 to nearly $2.28 billion in 2022 as part of a five-year plan to reach the full statutorily-required pension contribution to the four single-employer pension funds covering municipal employees (MEABF), laborers (LABF), police (PABF) and firefighters (FABF). The proposed 2023 budget includes $2.39 billion in pension contributions (excluding a planned $242 million advance or supplemental payment, see below for more information), representing an increase of $92.3 million over the 2022 budget.  The statutory pension contributions are based on an amount that targets a 90% funding ratio by 2058 for all plans.

The upgrade comes in the midst of the City’s budgeting cycle for 2023. The city is projecting a surplus totaling $134 million in 2022 with year-end revenue estimated at $5.0 billion or $84.5 million above budget. The proposed 2023 budget totals $5.4 billion, which is nearly $392 million above the August budget forecast due to $160 million in baseline revenue growth, $56 million in tax increment financing (TIF) surplus and a $40 million initial payment from the city’s casino operator. The city projects a nearly 12% increase in YE 2022 sales tax revenues.

BALLOT TIME

For elections in 2022, 140 statewide ballot measures are certified for the ballot in 38 states.

The move to make it harder to get voter initiatives on the ballot continues. Whether it be Medicaid expansions or cannabis legalization, conservative (usually Republican) politicians have strengthened their efforts to take that power back for legislatures. In Arizona, voters will decide three constitutional amendments: (1) to create a single-subject rule for ballot initiatives; (2) to allow the legislature to repeal a voter-approved ballot initiative following a state or federal supreme court order striking down a portion of the initiative; and (3) to require a 60% vote for voters to pass ballot measures to approve taxes. In Arkansas and South Dakota, constitutional amendments to require three-fifths (60%) votes for certain citizen-initiated and referred measures are on the ballot. 

Marijuana is on the ballot again.

AR – Issue 4 would legalize marijuana use for individuals 21 years of age and older and authorize the commercial sale of marijuana with sales to be taxed at 10%. Of the tax revenue, 15% would be used to fund an annual stipend to all full-time law enforcement officers certified by the Commission on Law Enforcement Standards and Training that are in good standing. Adults could possess up to one ounce of marijuana. 

MD – Question 4 Amends the Maryland Constitution to legalize adult-use recreational marijuana and direct the legislature to pass law for the use, distribution, regulation, and taxation of marijuana.

MO – Amendment 3 Legalizes the purchase, possession, consumption, use, delivery, manufacturing, and sale of marijuana for personal use for adults over the age of twenty-one; allows individuals convicted of non-violent marijuana-related offenses to petition to be released from incarceration and/or have their records expunged; and imposes a 6% tax on the sale of marijuana.

ND – Statutory Measure 2 would legalize the personal use of marijuana for adults 21 years of age and older and allow individuals to possess up to one ounce of marijuana and grow up to three marijuana plants. The measure would require the Department of Health and Human Services, or another department or agency designated by the state legislature, to establish marijuana regulations, including for the production and distribution of marijuana by October 1, 2023.  

SD – Initiated Measure 27 legalizes marijuana use, possession, and distribution for individuals 21 years old and older

Taxes will be voted on in several states.

In Colorado, Proposition 121 would reduce the state income tax rate from 4.55% to 4.40% for tax years commencing on or after January 1, 2022. In Massachusetts, Question 1 creates a 4% tax on incomes that exceed $1 million for education and transportation purposes

SANTEE COOPER

Central Electric Power Cooperative is the largest customer of the South Carolina Public Service Authority. Central receives roughly 70% of its power supply from Santee Cooper. It distributes power to some 20 smaller distribution coops in the state. In the aftermath of the decision to end the Sumner nuclear project expansion, the utilities must plan for additional capacity to meet future demand. Santee Cooper was planning to develop new generating capacity which was fueled by natural gas. Now, those plans could be in doubt.

Central has announced a new power supply plan which includes purchasing power from existing and new power plants within and outside South Carolina, pursuing utility-scale battery storage projects and implementing voluntary customer programs to limit peak power needs. Like other generation and transmission coops across the country, Central faces pressure from its local utility customers to deliver power from a more diversified mix or resources.

The pressure to develop new generation continues, however. Santee Cooper plans to close a coal-fired plant at Winyah, S.C. by 2029. When it closes, the jointly operated Central-Santee Cooper system will lose 1,150 MW of electric generation capacity.

EMINENT DOMAIN

Two of the major midwestern energy projects facing issues over their efforts to acquire right of way face new obstacles. One is the Grain Belt Express transmission line. The Midcontinent Independent System Operator (MISO) which manages its regional power market has informed the Federal Energy Regulatory Commission is not eligible to be included in MISO’s long-term transmission planning process. The project is described as not an ‘advanced stage merchant transmission facility.

To be included, a transmission project must either be represented in a utility integrated resource plan — or in a “preferred plan” for utilities that do not have an IRP — or the project must have an interconnection agreement as of this month.

Summit Carbon Solutions has withdrawn its court request for immediate access to private property in northern Iowa for a land survey. The withdrawal follows an unsuccessful attempt by another pipeline company to obtain a temporary injunction in March of next year. 

AN EAST COAST/WEST COAST THING

The Ports of Los Angeles and Long Beach have long been the busiest ports in the U.S. As trade with Asia increased so did volume. This solidified their positions vs. those of the primary East Coast ports over the last two decades. Like so many other things, the pandemic impacted that long term trendline. That along with trade policy changes limited the growth of volume from the Chinese market. That alteration of trend now shows up in data.

The 10 largest U.S. ports saw a 5.5% drop in inbound container volume in September. The decline was driven by a 17% drop in inbound volume on the West Coast over the past 27 months. The report also noted a 24% reduction in ships waiting for berths compared to August. The Ports of L.A. has been delaying container storage fee increases for several months now as volumes decline.

The Ports of Savannah, New York, and Houston had the highest number of waiting ships in September. While overall volumes are expected to continue to decline, the current trend from West to East remains likely. The U.S.-China trade outlook would be considered uncertain at best with new restrictions on Chinese entities designed to reduce their trade with the U.S. There also remains the chance of a railroad strike which would impact West Coast ports unfavorably. Negotiations continue with West Coast longshoremen unions with a strike also possible.

SAN ANTONIO ELECTRIC – WHO IS IN CHARGE?

CPS is the municipal utility owned by the City of San Antonio. TX. Like many other utilities, it is planning for its future supply of power with an eye towards reducing or eliminating coal generation out of its supply mix. CPS owns one last coal-fired unit (Sprague 1 and 2) and it has committed to close Spruce 1, by 2030 and plans to convert the other unit, Spruce 2, to natural gas by 2028.  Now, the utility has admitted that the ultimate decision as to whether or not the Sprague units are closed is not the utilities decision to make.

The state grid operator ERCOT, is able to dictate whether or not the units can be shut down. When a utility seeks to shut down a generating facility it must submit a Notice of Suspension of Operations (NSO) with ERCOT. “Once the plant in question provides us with a Notice of Suspension of Operations (NSO) ERCOT performs a Reliability Must Run (RMR) assessment to determine if the retirement of the plant will cause a reliability issue. If it does, ERCOT may enter into an RMR agreement with the plant. 

CPS Energy will need to tell ERCOT exactly where the replacement megawatts will come from before getting permission to take any units offline. ERCOT may also require local transmission reliability upgrades to the grid before Spruce’s closure, which typically takes four to five years to install. In the interim, CPS drop roughly 3,000 megawatts of fossil fuel generation out of its portfolio by 2030. 

The plan to replace that power will likely leave clean energy advocates disappointed. CPS expects that some 20% of the fossil fuel generating plants capacity will be replaced by natural gas generation. The CPS plan currently calls for up to 900 megawatts of solar, 50 megawatts of energy storage and 500 megawatts of “firming capacity”.

MUNICIPAL ACCOUNTABILITY

The Portland Clean Energy Fund was created by a voter-approved ballot measure in 2018.  The fund receives revenue from a tax imposed on retail businesses. It is projected to reach $402 million by the end of the next fiscal year. Initially, it was projected to generate between $40 and $60 million annually. The flood of money has been accompanied by some shaky management and disclosure issues.

One of its initial grants had to be withdrawn and recouped when   the recipient group’s leader’s past — including a conviction for fraud and a string of unpaid tax bills. That highlighted weaknesses in the fund’s structure which raised concerns among the establishments forced to collect the tax. Those concerns were reinforced earlier this year when an audit of the fund by the City found  a lack of oversight and accountability systems and clear climate-action goals. 

Now the City is considering changes in the fund’s operations and management to address the concerns raised in the audit. The retailers had been calling for a hiatus in the fund’s operations until these issues were addressed. The proposed changes would allow governmental entities to participate in projects where before only NGOs were.

We expect that schemes such as this will be adopted on a more widespread basis. The growing pains of the Portland program highlighted important issues of disclosure and transparency. The concerns expressed around those issues are transferrable to any similar situation. It is something all investors should insist on.

JACKSON, MS. WATER UPDATE

Earlier this year we covered the difficulties at the water system serving Mississippi’s state capitol (MCN 10.17.22). One of the issues raised by activists was the role of the water system’s credit rating in raising the cost of capital for repairs and upgrades. This week, Moody’s released its latest review of the system’s credit.

Moody’s has affirmed the rating Ba2 rating for the revenue bonds of the City of Jackson Water and Sewer Enterprise of which there are outstanding approximately $240 million. The outlooks on the enterprise ratings are stable. At the same time, the rating action highlights the challenges facing the water system.

Here’s what Moody’s sees. They reference an ineffective billing and collection system, the system’s substantial and ongoing operating challenges as a result of considerable infrastructure weakness, the costs of repair and revenue loss which are still unknown. They note that environmental and managerial challenges which include last winter’s ice storm, a flood on the Pearl River in 2020, a decade long effort to update the billing and metering system, and a $900 million consent decree.

The system shut down cast a harsh light on the role of the State in the system’s demise. In response, immediate resources have been provided by the State of Mississippi Emergency Management Agency and the Emergency Management Assistance Compact and Mutual Aid Programs, which provided various technicians to the site to work on repairs. The federal government has deployed FEMA as well as personnel from the Environmental Protection Agency who are providing operational technical support.

In addition, the US Army Corp of Engineers is on site to provide assistance with an assessment of the water treatment facility including working with the city to develop a winterization and resiliency plan. The state has also committed to pay half of the cost of repairs to the water and sewer system, with the city expected to fund its share through a combination of FEMA monies, ARPA funds, IIJA disbursements or grants.

NEW ORLEANS RESILIENCE AND IDEOLOGY

While Hurricane Katrina was 17 years ago, the impacts of that event on infrastructure continue to be felt. That includes things like the source of electricity to power the drainage and sewer treatment systems. Recent near misses by hurricanes have allowed the problems with operations at the power station to go unaddressed. In the wake of these issues and the availability of additional infrastructure dollars, the Louisiana legislature gave its approval to a $44 million bond issue to replace aging and obsolete equipment for the generating facilities.

But wait! To actually issue the bonds, the Louisiana Bond Commission must give final approval. Here is where the story veers off track. Three of the commissioners, for clearly apparent political posturing purposes, refused to support the bonds for this project. The Sewerage & Water Board of New Orleans is obviously city owned and the City Council resolved not to enforce the state’s new limits on abortion. So, the three have held up the project.

Now, with the state election cycle a year away, the commissioners have relented and the bonds have finally been approved. The bond commission has not historically singled out local projects the Louisiana Legislature has already vetted and approved for state funding. It is in line with the general level of petulance exhibited by a growing cohort of conservative state officials who seek to use public finance to advance a particular ideological agenda.

It is not clear what changed in recent weeks but the bonds finally received preliminary approval last month. When it came up for final approval Thursday, it was one item in a group of more than a dozen other projects on the agenda that received approval without opposition.  

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