Week in Review for 9/8/14 - 9/12/14

Downstate – Fracking Rules 
Fracking advocates call for new rules. Horizontal drilling into shale beds for Illinois oil and gas (fracking) was legalized by SB 1715 in spring 2013. Implementation of fracking was delayed for more than one year, however, because the Illinois Department of Natural Resources (IDNR), an arm of the Quinn administration, was writing administrative rules to implement the new law and enable engineering crews to apply for drilling permits.

When IDNR unveiled its new fracking rules in late August 2014 – more than a year after the passage of SB 1715 – fracking advocates responded with sharp concerns. Several facets of the rules go outside the scope of SB 1715, or arguably even contradict the law. Segments of the rules appear to be designed to discourage or even prevent horizontal shale drilling rather than encourage it. Based on the number of jobs created in other states that have legalized fracking, headed by North Dakota and Texas, critics characterized the new rules as a serious negative to the economic prospects of Downstate Illinois. A fracking-ready shale bed, called by geologists the “New Albany Shale formation,” lies underneath a large swathe of counties in southeastern Illinois, primarily south and east of Mount Vernon, Illinois.

IDNR’s fracking rules must be approved or disapproved by the General Assembly’s Joint Committee on Administrative Rules (JCAR), the panel that measures whether rules promulgated by the State’s administrative departments conform to the separation-of-powers role imposed on the administrative branch by the state Constitution. If JCAR finds that the IDNR fracking rules fall seriously outside the shadow of what is explicitly authorized by SB 1715, the panel could delay or prohibit the rulemaking, leading to the possible promulgation of revised fracking rules. JCAR is scheduled to meet in Chicago on Tuesday, September 16. A Chicago Sun-Times summary of the situation can be found here.

Economy – Baxter International
Baxter International’s pharmaceutical arm to change name; headquarters to remain in Illinois. The pharmaceutical division will be spun off from Baxter International, a Deerfield, Illinois-based firm that historically specializes in health care supplies, to form a new, global stand-alone company. The new firm, Baxalta Incorporated, is expected to become fully independent in mid-2015.

The Baxter pharmaceutical division has global revenues of approximately $6 billion/year. Its growth within Baxter into a unit of autonomous, international scope is attributed to its concentration on challenges of biopharmacology. Large-molecule pharmaceuticals have opened the door to treatments of many health conditions that have, until now, resisted treatment. Baxalta’s announcement indicates that the new firm will build on its current standing in bleeding disorders and immunology. It will continue to move forward in unmet-need areas of oncology and gene therapy.

The Baxter press release, dated September 10, 2014, is available here.

Energy – Natural Gas
Large operator of freight vehicles announces CNG transition plans. Operation of fracking technology, made legal by laws and rules passed in Austin, is one of the factors that led to booming supplies of natural gas in Texas. The Budweiser brewery in Houston (owned by Anheuser-Busch InBev) announced plans this month to switch its 66-vehicle Class A heavy truck fleet from diesel power to compressed natural gas.

The move, motivated by the comparative market prices of liquid fuel and natural gas, is seen as a straw in the wind for major trucking operations throughout the United States, potentially including Illinois. Anheuser-Busch operates an in-house trucking fleet, rather than using contractors as do many other high-profile firms, and its freight fleet painted in Budweiser red-and-white colors is seen as a component of the brand’s identity.

Should the Houston experiment be a success, hundreds of other trucks operated by the major brewery elsewhere in the country could follow. Movement of heavy-truck engines from diesel to CNG could reduce price pressure on liquid fuel and support pricing for natural gas. The current status of compressed natural gas for truck fleet operations is covered by an article in Forbes magazine this week.

Gambling – Riverboats 
Riverboat revenues down. In a report released on Tuesday, September 9, the Commission on Government Forecasting and Accountability (CGFA), the General Assembly’s in-house budget monitor, reported a significant decline in Illinois tax revenues from casino riverboats.

Riverboats pay taxes based on a sliding scale that is adjusted to their customer gross receipts – which are, in turn, related to the number of people who visit a riverboat to play. In FY 2014, which ended June 30, 2014, all of these variables declined relative to the numbers that had been posted one year earlier. In FY14, riverboat admissions declined 10.2%, adjusted gross receipts paid by these visitors in their play dropped by 6.7%, and State riverboat casino tax receipts declined by 7.5%, all relative to FY13. CGFA derived these numbers from its ongoing monitoring of the raw numbers received by the Illinois Gaming Board, the regulatory body that actually oversees Illinois’ ten riverboat casinos and collects taxes on riverboat gambling.

The decline is significant as a further pressure upon Illinois’ stretched general funds revenues. Monies from the casino riverboat tax are added to State general funds and used for educational purposes. CGFA staff pointed to increases in video gaming as one possible component in the trend. Illinois video gaming, which takes place on land, is taxed separately from casino gaming.

The CGFA report, “Wagering in Illinois,” discuses current trends not only in riverboat gambling, but also in video gaming, thoroughbred racing, and horse racing.

Health Care
Public health experts sound alarm in Midwest. With an epicenter in Missouri, an outbreak of a contagious virus (enterovirus 68) is endangering the health of Midwesterners. Children under age 5 are described as being especially susceptible to the virus, which can cause respiratory distress and even hospitalization in some cases. Cases have been reported in Chicago and from downstate Quincy, Ill., adjacent to Missouri.

Health providers are urging parents to closely monitor the respiratory health of children with asthma or immunosuppressive conditions. Children, especially at-risk, should be shielded from the sick or should visit them under reasonably sterile conditions (i.e. no open sneezing or coughing and infected persons should frequently clean themselves or be cleaned). This advice closely matches advice given to parents and caregivers of children with severe colds, as the enterovirus (although it has been classified as a rare illness up until now) is genetically related to the rhinovirus, a virus that causes the common cold.

A news story from Chicago’s CBS-TV Channel 2, posted on Monday, September 8, describes the outbreak.

Horse Racing
Horse racing “handle” continues decade-long pattern of decline. The 2013 “handle” of $618 million, reflecting totals wagered by Illinois horseplayers at racetracks, off-track betting (OTB) parlors) and advance deposit wagering (ADW), dropped 8.2% from 2012 wagering levels. The early-2013 horse racing “handle” was severely impacted by the decision of Illinois to take a “pause” in its legal acceptance of ADW wagering. The ADW pilot program allows approved bettors, who possess an established relationship between themselves and a licensed racetrack, to place bets from home by telephone or via the Internet.

The ADW blip is not expected to be repeated in calendar year 2014. All parties have agreed to a long-term legal extension of the ADW pilot program. However, changes in technology had not yet been able to reverse an eleven-year trend in declining overall Illinois horse racing revenues. While Illinois’ six operating racetracks operated 518 race programs in calendar year 2013, down only 1 from the 519 race days in 2012, betting activity continued to be affected by competition from lottery ticket sales (including new online lottery games), riverboat casinos, video gaming, and gaming opportunities offered by other states.

The Illinois Gaming Board’s summary of the status of Illinois horse racing was published in the 2014 wagering annual report, released on Tuesday, September 9.

Debt-rating agency once again points to Illinois’ unfunded pension liabilities. Moody’s, the world’s largest debt-rating agency, reported on Saturday, September 6 that Illinois’ pension liability is 258% of annual state revenue. The debt-to-operating income metric is a fundamental tool used by bankers and lenders of all sorts in settings such as a household applying for a home mortgage. The 258% figure confirms that Illinois the most pension-burdened state in the United States. A similar ratio posted by the #2 state, Connecticut, is 200%.

Moody’s numbers explain and justify the decision of the firm and its competitors, Standard & Poor’s and Fitch Ratings, to mark down Illinois debt. Current debt-rating trends threaten Illinois’ status as an issuer of non-junk debt. Moody’s report is a follow-up to a similar report released by the firm in June 2013, when the firm measured Illinois’ adjusted net pension liability at 241% of annual cash flow general revenue. The firm notes that the pension-liability trend for Illinois, from 241% of revenues to 258% of revenues, continues to be negative.

Were Illinois’ pension plans to be fully funded, Illinois would have to have invested approximately $100 billion more in these plans than has in fact been invested. A summary of the “Moody’s report, published by USA Today, can be found here.

Public Health – Raw Milk
State proposes rules to squeeze raw milk udders dry. The rules from the Illinois Department of Public Health would sharply restrict the transfer of raw milk from producer to consumer in Illinois. Nearly 400,000 Illinois customers are said to consume unpasteurized milk, a foodstuff that has not been heated to kill dangerous bacteria (such as salmonella).

While 11 states have explicitly authorized the sale of raw milk to customers, 17 other states have explicitly banned the substance. Illinois is often described as being one of the states where raw milk is discouraged but not explicitly banned. Health experts describe the invention and spread of milk pasteurization, in the early 20th century, as one of the great triumphs of public health care. They point to renewed outbreaks of communicable diseases among raw milk drinkers as sufficient evidence to ban the substance as a public danger.

Raw milk customers point to the natural state of unpasteurized milk and urge those interested in the issue to look at the many countries around the world that allow customers to freely purchase the substance. In some cases, farmers and distributors of raw milk are allowed to sell the beverage but must post health warnings. Throughout the United States, farmers and distributors concerned about liability attempt to ensure that cows that produce raw milk are carefully and continually inspected for communicable diseases and other health problems. These inspections are among the factors that raise the price of raw milk well above the cost of its pasteurized counterpart. A widely-distributed news story from Chicago-based WBEZ-AM 91.5 radio quotes the current price of raw milk in Chicago at from $4 to $17/gallon, depending on the supplier.

As with other administrative rules, this proposal will have to go through the Joint Committee on Administrative Rules, the General Assembly’s “rules watchdog.”

Smoke-Free Illinois Act – Outdoor Patios
Department of Public Health (IDPH) taking comments on new rules. The Illinois Department of Public Health is taking comments on proposed new rules intended to reduce public exposure to secondhand tobacco smoke by withdrawing the rights of businesses that serve food or alcohol to offer a patio option to their customers. In many Illinois communities, local zoning allows a tavern or restaurant to open a patio or “beer garden” where customers may smoke.

These patios were explicitly allowed under the former Clean Indoor Air Act, which confined its regulations to indoor locations, and many of them have continued to operate under the new Smoke-Free Illinois Act. In many cases, small businesspeople carefully designed their smoking areas to conform to sections of the new State law that forbade smoking within a specified distance to a door or window. However, the new rules are expected, if they are approved in their current form, to withdraw this permission and force the complete separation of any form of smoking and all forms of food and beverage serving.

The Peoria Journal-Star describes the proposed new rules here.

Transportation – Gas Tax Warning
Nonpartisan entity warns that gas tax is inadequate long-term source of road funds. The Transportation for Illinois Coalition (TFIC), a nonpartisan advocacy entity that supports increased investments in transportation infrastructure, believes that excise taxes on motor fuel sold in Illinois can no longer be trusted to serve as an adequate funding stream for needed investments to serve Illinois’ new jobs, growing population, and mobility needs.

While the 19-cents-per-gallon excise tax on Illinois motor fuel is charged at a rate that has remained unchanged since 1990, an increasing percentage of Illinois residents have turned to hybrid cars, plug-in electric cars, carpooling, and mass transportation. While Illinois’ road funds will continue to enjoy essential funding help from the motor fuel tax, declining rates of liquid-fuel consumption are expected to cut long-term proceeds from this source.

Some neighboring and comparable states, such as Indiana, have adopted or are looking at alternate forms of transportation funding such as increases in motor vehicle registration fees and adoption of a compulsory mileage tax. A mileage tax could be especially controversial because it would involve the placement of an automated electronic monitor, similar to an electric “smart meter,” on Illinois motor vehicles.

The Southern Illinoisan discusses this issue here.

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