Join Pamela Frederick, Chief Financial Officer of the Battery Park City Authority, and Adam Barsky, Chief Financial Officer of the New York Power Authority, as they discuss how threats to the tax exemption, changes in federal funding and grant programs, and other federal policy shifts are coming amid a vast and growing need for more infrastructure investment across the country.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Lynne Funk (00:16):
Hello everyone and welcome to this Bomber Leaders Live. I'm Lynne Funk with the Bomb Buyer and I'm delighted to welcome you all and our esteemed guest. Today we have Adam Barsky, who's the Chief Financial Officer of the New York Power Authority, and Pamela Frederick, CFO of the Battery Park City Authority. Welcome to you both. It's really great to have you here.
Pamela Frederick (00:36):
Thanks, Lynne.
Lynne Funk (00:38):
Excellent. So Pam and Adam are joining us today to discuss the importance of the municipal bond market, particularly the tax exemption itself. We will discuss how this more than central market finance is critical infrastructure across the country. As you all know on the audience from bridges, roads, ports, airports, schools, power grids in the largest cities to the smallest townships. And as we like to note here in red states and blue states, the tax exempt market I think is really the definition of fiscal federalism just leading to the states and its cities and towns and agencies to build the infrastructure is taxpayers want and need. So to set the stage here, we know that there are threats to the tax exemption, perhaps maybe more tangible, more palpable than maybe ever before. This is coming at a time where I'm sure we all have seen last week the American Society of Civil Engineers just gave the country a C for a grade for its infrastructure and there is at least a $7 trillion shortfall in infrastructure development across the us. So I think let's set the stage for the audience. Adam, maybe you could kick us off on the threats. The threats to the tax exemption they're facing the market.
Adam Barsky (01:57):
Yeah, I think this threat has been out there at different times in the past, but what I would say is that this time it's more real than it's ever been. And my major concern is really twofold. One is that because in the past it's come up and it's never been eliminated and there have been fights over this that people are sort of shrugging it off and say it's just going to be like it was before. At this time, no different. And I do think this time is different because of what's at stake right now in Washington and this is very much on the table. So that's number one that I do believe it's real. I don't think people, whether it be in government, in the market are treating it as real as it is. And the other is that with everything that's going on in the Trump strategy of flood the zone, it's hard to mobilize all the people you need to around an important issue like this when there are so many other issues that are competing for the attention and opposition that needs to be mobilized. So right there we put those two things together and I think we have the makings for a real issue that we need to keep an eye on and raise the level of awareness and really get people talking about it seriously.
Lynne Funk (03:11):
Okay. Tam, would you maybe talk about some of the potential implications of the dollars and cents of, of losing the tax exemption?
Pamela Frederick (03:23):
I think it's vitally important to state and local governments in terms of minimizing the cost of what you've already stated is a huge dearth of infrastructure needs throughout the country. It's a bipartisan issue when you look at what at least ways of means has cited as the potential savings for the budget over 10 year period. It's somewhere in the order of 375 billion, but in terms of cost to issuers, and that means cost to state and local governments, which then rolls down to actual tax paying citizens that cost on a per issuance basis could be and has been estimated to be anywhere from 150 basis points to 250 basis points. So let's call it up to two 50. So let's call it 200, which is a massive amount of incremental costs for what's already, municipalities are trying to minimize taxes as the federal government is doing. And so it's really a shifting of a tax from the federal level to the state and local level. And unfortunately it also results in a shift from local decision making to the state levels if this were to occur. And so as you noted, it would be very important, I think most cities would like to maintain that level of control over what their needs are and how they get it financed.
Adam Barsky (05:10):
Just to emphasize on what Pam is saying, so from the state, city county perspective, it's going to hit in two ways. One, it's going to, as you increase the interest costs, as Pam is saying, it could be as much as 200 basis points if not more. And there are other nuances that exist in the tax exempt market for particularly infrastructure that don't necessarily translate well into a taxable market. We could talk a little bit more about those technical fine points a little bit later on if you like, but really what it does is it a shrinks capacity for capital. So it just means that the higher interest costs, there's less that you can actually do. So less infrastructure will be built or maintained or addressed. The other part is as debt service becomes a bigger part of the annual operating budget that starts to either compete with or cause cuts in other vital services that have another downward pressure on communities, societies that are being served by this or the other option is you raise taxes. So either way it has a capital component, then it has an operating expense component, both of which could be very detrimental to all these municipalities.
Lynne Funk (06:29):
Right. And we haven't even talked about thinking about just the cost of, in general, the cost of building construction costs that have grown in significance over the past few years
Pamela Frederick (06:41):
And really since Covid where we saw significant higher inflation starting and constraints supply chains, that has not gone away. In fact, it's just continued since that period. Unfortunately we'd like to see it lower, but some of the current legislation could potentially prolong that if not increase it. And so during covid we saw costs increase of 20 to 30% and as that's continued, inflation was in the seven 8% level getting there and now it's come down to it's more in the four level. The fed would like to see it back down to three, maybe 2%. I don't see that happening in the foreseeable future. So adding inflationary costs as well as a potential hit on tax costs. And we didn't talk about the credit component of that, we can get into that layer, but those are multiple layers of incremental costs either causing municipalities and local governments to delay projects or they will be forgone altogether because you may not hit the hurdle rate necessary to pursue the project.
Lynne Funk (07:58):
I mean, I think one of the things too is when you think about a taxable municipal market, what 50,000 some issuers across the country, various sizes, presumably a very large portion of those smaller issuers which makes up a good portion of the issuing community across the country, might not actually really be able to afford to price into a taxable market, nor would there be as much investor interest in buying those securities at a taxable level.
Pamela Frederick (08:34):
Would you agree? I mean, I would say the smaller issuers are going to have a number areas of concern just from tax driven investor, tax paying investor, they're going to have higher hurdle rates. More than likely they will also gravitate towards larger, the larger issuers, the higher credit quality issuers. There may be a rerating of how one assesses credit risk in a municipal market. I think the municipal investors are very, have a lot of understanding and information about how the municipal market is structured. You shift to taxable where you're moving away from maybe seven to 8% of municipal issuances have been taxed on a taxable basis, now you have to do a hundred percent. So you're making up 93% of a 500 billion annual number. That's a large amount of supply to then shift over to a taxable base that was only maybe looking at, let's call it 50 billion. So it's very huge. Now you'll also potentially be broadening the number of issuers and so maybe now we'll start to attract some from the European market, but that takes time and we only have a very small number of taxable investors in the muni space right now. And so I think it's going to take more time than people anticipate.
Adam Barsky (10:08):
Yeah, I agree. And I think that to Pam's point, the investor base is very different. Their understanding of municipal credits are very different. Start discussing with people subject to appropriation risk for the first time and see how easy it's going to be for them to get their arms around that. And we had the days of more obligation bonds. I mean this is not something that's common in the taxable market, it's a shorter market. They won't go as long with the same features that you would get in tax exempt market. Tax exempt market has a commonly a 10 year call at par. Taxable market really doesn't have that. They're make hold calls and things of that nature, but it's going to be very difficult for smaller issuers to get any kind of long-term financing. So it'll be looking more like shorter term bank financing that's going to carry with it a lot of repricing risk that a lot of issuers today don't have to face.
(11:11):
And to Pam's point, yes, there'll be a broadening of the investor base going to Europe. There is an appetite there, but again, there has to be a lot of education and getting them up to speed on the credits, you probably will have to force people to pull their credits because it wouldn't be efficient for people to do what they do today on a one-off basis as a single lit work. So there's going to be a wholesale upheaval of the market if this were to happen and a lot of dislocation and a lot of bad pricing as a result.
Lynne Funk (11:40):
I was going to mention the structure of the muni deals, the call option, all the idiosyncrasies of this market would be much more challenging to do in a taxable space. So do you want to talk a little bit about actually the credit implications? I think you sort of getting to that in certain ways. What does it mean for municipal credit? I guess I'll even say one step further. There's balanced budget requirements across the country from the state level. They don't have the luxury of printing money. What does it mean for credits generally?
Adam Barsky (12:15):
I dunno if you want to
Pamela Frederick (12:17):
Take first, I'll
Adam Barsky (12:17):
Take first year. So again, it's going to be a credit issue in a number of ways. As I mentioned before, just the fact that debt service will be taking up a greater percentage of budgets. That right there will cause a credit concern and a credit issue. The refinancing risk, that rollover risk, all those things will factor in. But on top of that, and this is why I got to that point about flood the zone and other issues that are going out there, if this were just the only issue that were happening,
Pamela Frederick (12:52):
Yes,
Adam Barsky (12:53):
You'd have the Governor's Association League of Cities, counties, you would have a full court press from all elected officials on killing this idea. But we're looking at other implications. We're talking about probably the largest shift from federal spending, forcing it down to the states that we've probably seen since 1986 and the 86 Tax Reform Act and all of those things. So this is probably the biggest shift we will be seeing. And you start talking about issues like Medicaid, once the Medicaid starts getting cut at the way it's being proposed, it's going to put lots of pressure on municipal budgets. So you combine that with the fact that you're going to have higher borrowing costs right there, you have all the makings of a perfect storm for negative credit outlooks and downgrades as a result. So it could be disastrous for the municipal credit market.
Pamela Frederick (13:47):
I have to say, and I'm here speaking as an issuer and not representing any other organization, but I know that there are a number of municipal securities organizations who have been taking a full court press to try to educate lawmakers to help them to understand the implications of what we're speaking about today and the concerns that we have about dislocation and disruption of a very stable market. And I was in Washington this week meeting with the legislators and trying to not only impress upon them the impact on their specific districts, but the impact more broadly on infrastructure improvements throughout the us The top four issuer municipal securities issuers in the us two are red and two are blue. You have California and you have Texas, you have Florida, and you have New York.
Pamela Frederick (14:57)
And
Pamela Frederick (14:57):
So when we say it's a bipartisan issue, that is very true throughout the states. While the size of issuances per state are very greatly, much of it driven by size of population, every state has some level of municipal issuance outstanding. So it's going to impact everyone. And one of my concerns, particularly for smaller issuers who are going to face challenges getting to market is timing. Depending on when this happens, this dislocation, we don't have a sense of how long that would take. It certainly will be easier for your high credit large issuers to get to market and attract investors. But for the smaller ones, as Adam noted, we're probably going to have to have infrastructure banks at the state level to aggregate credits. But that takes a while to put that kind of infrastructure in place. And so if you're a small issuer planning to come to market this year, maybe even next year, that's going to be a challenge to try to get that replaced and to get it replaced for a cost effective level or cost effective rate. So that is a huge concern for us.
Adam Barsky (16:12):
And just to show you how real it is or the concern is that, again, trying to heighten the awareness here and get people focused on it the first time, I can remember while these issues have come and gone over the years, current issues that are being done right now are now including a specific disclosure around these threats that you haven't seen in the past because of how real it is that you're disclosing to investors now that you're, you going to buy these bonds on a tax exempt basis, but there's no guarantee that this is going to hold for the foreseeable future because there is a real threat out there. So it's even risen to the level of forcing that kind of disclosure in current official statements that are being done now, which it should tell people that this is a real issue and something everybody should be concerned about.
Lynne Funk (17:09):
Right. There are some areas too of the market that I know we've all heard that maybe if it's not a full scale, full scale elimination of the tax exemption that some areas are being targeted such as healthcare, higher education, private activity bonds, specifically what does that do? What kind of damage would happen to those sectors? I mean, that's a big question.
Adam Barsky (17:47):
First, the tax exemption for municipal issues as we have it today. And then the concern is even if we're successful with that, when you're a hundred percent right, they may be going after some of these different areas like private activity bonds, and what does that mean? Well, for a place like New York, all of New York's private volume cap for activity bonds goes to housing. And at the time when we have a housing crisis already trying to build affordable units, we have a huge gap in New York. This will completely kill those efforts. 80 20, 70 30 projects will not happen. It'd be a huge devastated blow to the housing market On the other side, look at what we're doing in New York. We're talking about rebuilding a JFK airport, we're looking at LaGuardia, all of those type of big infrastructure projects for airports, which thankfully they were able to lobby very well back in the day and get a no cap on those private activity bonds. And if not for that, we would not be able to be overhauling those airports the way we are doing today. So all those kind of projects would be really be at a loss significantly.
Lynne Funk (18:59):
You're really eliminating just more tools in the toolbox for the issuing community.
Pamela Frederick (19:04):
And private activity bonds have been a fairly significant portion of the annual bond issuance, I think between 2017 and 2021. The IRS tracks that and it's been somewhere in the order of about, call it 100 to about 140 billion on an annual basis and to eliminate that where the lion's share of the private activities bond goes towards affordable housing. And then after that, you've got education. Some states who are already getting hit by their universities, having some funding pulled back at the federal level, this will be a second hit for them really. So not only are you having your funding sources reduced, you're also seeing your cost increase and that's a squeeze. Speaking about operating budgets and forecasts, that is a really heavy lift. And many times when a district, US district has a university that falls in that district, that's often one of the largest employers. And so you're really going to see that trickle down quite a bit. We're very hopeful that private activity bonds remain viable alternatives for these kinds of entities. Often the sector that takes the greatest hit or it's the lightning rod sometimes for private activity bonds or your stadiums
(20:42):
And because that's joyful entertainment and we all love our sports, but when I see a stadium, what I see, especially a new stadium, what I see is community renewal, removing blight from neighborhoods, bringing in new jobs, all kinds of renewal in terms of new businesses, new entertainment that venues bringing communities to the stadium neighborhood. And so those things actually are very important, not just for the tax benefit that they get to fund those stadiums, but the follow on effect of what it does for a community and for a city.
Adam Barsky (21:20):
And that's become sort of the poster child just says,
Pamela Frederick (21:23):
When
Adam Barsky (21:23):
We talk about on the energy side, renewable power president has made offshore wind as that poster child that he's specifically going after. He has made a case around the stadium that that was on his radar and something he specifically wanted to go after. And Pam couldn't be more right about that. Just look at what has happened in Brooklyn with the Brooklyn Nets Arena and how well that has helped that area, Yankee Stadium, city field, all these major projects that happened in New York particularly, but around the country. Yeah,
Pamela Frederick (21:58):
I talked to a, it really is, Atlanta is another case of that where it's just a complete renewal to a neighborhood. People go there not just for the sport, but for the entertainment that's surrounding the arena. So it's very important throughout the country and we're true to our New York sports, but it really is impactful almost anywhere that a stadium has been redeveloped. You've seen that kind of follow on effect in the neighborhoods.
Lynne Funk (22:25):
Absolutely. Let's keep it in New York for a couple minutes here because I think it's important to maybe talk about you're both New York based issuers this market. Well, New York has gone through some pretty big disasters in its time, right? From nine 11 Hurricane Sandy, the role that the municipal market plays and played in those recoveries, you both are quite acutely aware. Yes. Can you talk about what happened, what it did?
Adam Barsky (22:54):
Sure. So at nine 11, I was a budget director for New York City
(22:59):
And I knew right away that we were going to be faced with significant issues and even on a cashflow basis. And what I can say is that New York came together and the country came together that night. I had my staff drafting a bill that would allow us, allow New York City to borrow billions of dollars in anticipation of future federal funding. We didn't know how long it was going to take. The night of nine 11, the bill was drafted. We had it introduced on the 12th, the legislature passed it on the 12th. The governor signed it until on the 13th, which is probably a record for any bill getting done in New York, right? Maybe anywhere to show how people were coming together. And then I issued about three weeks later, recovery bonds. We took out a full page ad in the New York Times and Wall Street Journal, and people came together as buyers of those like the by war bonds kind of effort. And people bought it out of their sense of patriotism and helping New York come back. It was an overwhelming success. We paid a very low rate and it was significant in helping us meet a very difficult time. We had the budget director from Washington come down, Mitch Daniels.
(24:22):
I gave him a tour of the site with the mayor and he said, what are you guys looking for here? You're looking for just money to actually just build, rebuild the buildings. I said, no, the money that we need in terms of an appropriation, it's really for the infrastructure. We need it for the transit hub, we need it for the PAT station, we need it for Route nine, eight, those big areas. But for the buildings that were there, if you gave us tax exemption to be able to sell those bonds, to rebuild those commercial towers between insurance proceeds and the commercial market, we should be able to do those. And we did. And he got it and he said, we'll do this. We'll carve out this special authority to do Liberty Bonds. It was a liberty bond creation at that time, seven and a half billion dollars of bonds.
(25:16):
And it worked so well that others copied it. A few years later, we had Hurricane Katrina, and that became the opportunity zones of bonds that were done in Louisiana. So this really take off, so the municipal market has come together at times when there have been these disasters and have had these crisis where using tax exempt bonds help really meet an immediate need. You take that tool away, it's going to be very difficult then in the future when something similar happens. Not to mention what they're talking about doing with FEMA on top of that. So we're getting on the spending side and you're taking away the one tool. States and localities have to address it on their own,
Lynne Funk (25:59):
Right? This isn't just throwing a bucket of money at you. This is usually you securitize it, you bond it out, it's an investment that multiplies. Right. Has a multiplying effect. Absolutely. Pam, what are your thoughts here?
Pamela Frederick (26:14):
Well, as Adam was describing, lower Manhattan we're right across nine a. And in fact, we partnered with the city at that time, but in addition to some of the infrastructure that was built, because we connect to the major transit hubs and there was a big infrastructure project that we supported there, but for our buildings, we were nearing the end of the development of the land and space down in Battery Park City. And several of the buildings were able to benefit from able to continue their project because as you can imagine, when you have a cataclysmic event like that, capital dries up because of the uncertainty, because of the risk, because of the volatility and having the ability for vehicles, financing vehicles such as that to be put in place so that you can continue to build and grow. A couple of our buildings probably are still have some of the bonds outstanding that's associated with that. But we were able to continue projects that were already up and running and by up and running, I mean being structured from a development perspective, but having that financing and pace was really, really pivotal.
Lynne Funk (27:35):
So I guess I'm curious then your thoughts on, you mentioned fema and really I'm curious, is there an alternative? I mean, truly,
Pamela Frederick (27:48):
Well, there's taxable.
Lynne Funk (27:50):
Taxable of course.
Pamela Frederick (27:51):
Yeah, that's really, I mean, yeah, you take away the exemption, you're left with taxable. It's just more cost, just cost. I think as much of the cost, I think is the market dislocation of the uncertainty for investors, the uncertainty for issuers. And I think that projects will get done at a price and the market will respond. It's left. And what mayhem happens in the meantime and how quickly can we recover from it?
Lynne Funk (28:30):
And if we're looking at something along the lines of in the past there's been questions about a national infrastructure bank or some they've been proposed over the years,
Pamela Frederick (28:39):
Many years,
Lynne Funk (28:40):
Many
Pamela Frederick (28:41):
Years. And many administrations, it has not gotten done. I know. So imagine, how long would that take?
Adam Barsky (28:47):
Well, not only that, but I would say given the philosophy of the current administration, that's the last thing you're going to see. I mean, the whole philosophy here is to push to the states
(29:01):
Away from the federal government, make federal government smaller. It's a little bit of a reaganesque approach. I mean there's, I'm not saying all of it is bad. There's some sense of some of the things that you could take a look at and maybe do differently. But if you're going to take that approach to push things from federal to state, you must give the states and localities the tools. You must give them the ability to decide how the money should be spent and how to access markets in the most efficient way. And you can't take away something as critical as tax exempt bonds. I mean, this is really, it should be a right of the states and not a privilege. And unfortunately, they lost that Supreme Court challenge back in, was it Baker versus South Carolina? But that could have gone the other way and we wouldn't be here talking about it's right. It's been the age old debate, but it really is, I believe it is a right for the states to be able to issue their bonds on a tax exempt basis.
Lynne Funk (30:03):
What do you think about, I guess I'd ask about, Adam, you mentioned state bond banks. I mean, what sort of solution do either? I
Pamela Frederick (30:16):
Think there's some good examples of that that exist. There's Vermont Bank, shout out to Vermont, Michael Go. But there's also New York has infrastructure bank as well has the water revolving fund, which could be a type of example. So I think throughout the country there are a number of these banks that do actually fill that role as trying to create a best practice model that can be easily rolled out. I think we could have that model, even if we are able to keep the tax exemption to make it much more efficient for small issuers to come to market.
Adam Barsky (31:01):
And we have some success in New York of having done that. Pam's raising the Environmental Facilities Corporation has, they do big single issuer deals for say, New York City. New York City's the biggest user. New York City Water Finance Authority actually is the biggest user of EFC. And their ability with the state revolving funds to provide lower interest rates, they actually subsidize the interest rates in many cases. But for the smaller projects, again, it's not efficient for them to do it on their own. So they do pool financings today for those smaller issuers. The Dormitory authority is another good place
(31:40):
That has done pooled financings for school districts, for school construction, and have been able to securitize aid from the state building aid and actually make that a much stronger credit for all of those participating school districts. And if they were a, to do it on their own or have to pay issuance costs on their own. So it makes it somewhat more efficient in that regard. So yeah, the idea of localized pools and banks, there is some efficiencies to be gained there, but it depends if it's homogenous need. Many times these projects are very idiosyncratic, requires structuring that's unique to that particular project, and it doesn't really lend itself well to being in a pool. So it really, there's no cookie cutter solution, but you really have to address and have all the tools available to you to meet the needs as effectively as you can.
Lynne Funk (32:39):
What do you think about, we are going back to private activity bonds. This came up as I were talking and I forgot to ask it. Would private capital come in in the same manner? Could private capital come in in any meaningful way without some sort of incentive to co-partner with the governments like this?
Pamela Frederick (32:59):
Yeah, I think public-private partnerships is a model that has been out for quite a while, particularly in the power space. I did that in the nineties and definitely you are bringing capital. We have a hybrid of that going on right now, but private capital needs private returns. And the thought is that that will offset some of the risk and potentially ensure a timely completion may maybe, but I think there is private capital there, but it will be a private cost, which is much different than a municipally financed project.
Lynne Funk (33:48):
Would you even say similar if these smaller issuers who might just have to go to direct bank loans, would that cost end up being, I think that would be hercule land
Adam Barsky (33:58):
Actually. And I think
Lynne Funk (33:59):
Do they have it? Do they have the capital to even lend in that capacity?
Adam Barsky (34:02):
And I would say no. What we're seeing, I mean, I would say in general, the changes in the bank rules for their capital requirements, Basel requirements have really limited where they are choosing to lend today. I'm not even talking about municipals, I'm talking about throughout the credit markets. The bank lending market is shrinking and it's being crowded out a little bit. Now the emergence of the private credit market has taken up the slack there. And there's also the emergence today, which we didn't have in the past. All these infrastructure funds, many of these private equity funds, KKR, Blackstone, Apollo, they put in massive infrastructure funds. So I do believe that is a place that will be a partner, but we're using them today and they're looking to us to help them come up with ways to have a tax exempt solution. So we're working on some projects today with some of the private equity partners, and we're coming up with conduit vehicles to securitize revenues, but allow them to participate, say in a subordinated debt position or provide some equity to take care of any of the taxable pieces. So that's where the private partnership, the three P partnership really works is bringing to private capital with the municipal need and the municipal tools of tax exemption together to get the optimal solution. You take that away, it's just going to make things cost more, whether it be toll roads, airport fees, energy costs, I mean, all of it will hit everybody.
Lynne Funk (35:40):
I mean the P three market, often people say, oh, look to abroad, Australia, Europe, but just the actual geography and the size of the United States it, it's big. The needs are vast. The scale is much bigger,
Pamela Frederick (35:58):
I think for the infrastructure needs. And we noted earlier 7 trillion, I think Brookings put out a report, maybe 9 trillion. So I mean, it is a huge number, and I think that it is important to find ways to bring together public as well as private. But to Adam's point, the public benefit would be having a tax exempt element to the capital stack. It's just one of the pieces. And you'll continue to bring in private equity and other layers in the capital stack. And at the end of the day, it's just a matter of how you keep the cost down such that you can justify and projects and lever them in appropriate and lower cost ways.
Lynne Funk (36:53):
So there's a question from the audience actually that just we talk about costs. What is this going to cost the average taxpayer? Do we have any estimates out there? I'm turning on my tap, I am driving on the road. I am flushing my toilet, doing all the things. Does the industry have an estimate there?
Adam Barsky (37:13):
There is a few estimates. There was a Moody's report out recently. I think they put it at $6,500 per family over some period of time that it would be an additional cost that they don't have today. But the costs then get added up with everything else that they're being faced with today. That's not to mention higher taxes as a result of losing these benefits, higher electricity costs that people are facing if you don't have all these benefits. So it's just another hit to the average consumer that they're going to have to shoulder all of these additional costs that's going to be pushed down on them. And I think so it is significant. And the only other thing I wanted to mention is that all of this in Washington is really going to go around on this scoring how things are scored. So the big piece is they're trying to baseline with 2017 tax extensions,
Lynne Funk (38:13):
Which cost, right? It'd be 4.6 trillion, 4.6 trillion.
Adam Barsky (38:16):
So what they're trying to say is, and this is the big fight, they're saying, well, we don't need to pay for that 4.6. It should be baselined. Now if that is agreed to, it will relieve some pressure on all of these scorched earth type of proposals we see out there. And I think that has to get resolved. If they get resolved that way, it'll take some of the pressure off to do some of these things. But one of the things about the scoring is when they say, well, it's worth 400, 500 billion to pay for tax cuts if you take away tax exemption, that assumes that all of the borrowing is happening in a tax exempt is going to result in a new borrowing that's going to generate interest, that's going to be taxable, make its way to the treasury. And that's not always the case because people have ways of offsetting those interest income costs with interest expense and other deductions.
(39:07):
And that is not a dollar for dollar income to the treasury if you make everything taxable. So this idea of dynamic scoring I think plays itself into this argument as they try to say when they say, well, tax cuts shouldn't all be scored as to the tax loss. It could result in further economic activity that will generate more overall revenue to be tax and not cost as much as they say. So if they want to have the dynamic scoring conversation on that side, we should have the dynamic scoring conversation on what does it really mean to lose tax exemption? Is that money going to make its way back into the treasury? And I would say no,
Pamela Frederick (39:49):
I don't doubt for sure. We've looked at various districts and the impacts on their local taxpayers, and it really is a range depending on what the bond issuance is. And I think we also have to be careful of how we look at numbers in terms of savings, et cetera, because they're looked at differently. Some are looking at a full retroactive elimination, which would result in an expected large number, but it would also completely cause an upheaval of the muni securities market. So I think if anything, people don't think that has a feat,
Lynne Funk (40:34):
Right? Meaning if I hold, I'm an investor and I hold outstanding taxes and bonds, all of a sudden I'm going to get a tax bill that says, you owe the federal government X amount and my entire portfolio.
Pamela Frederick (40:45):
Yeah, you're entire
Adam Barsky (40:47):
And whoever's holding that bond, all of a sudden it's worth a lot less today than it was yesterday. So it'll create massive potential losses if you tried to sell.
Pamela Frederick (40:58):
Yeah. So we don't see that as having a high probability because of all the things we talked about today, which is why we think it's really important that all the various associations who are trying to do their best to get at as many of the lawmakers so that they could truly understand at a local level, how would this impact your district and make it very real so they can own it. And the result we've had, bond dealer I know has gone over, gone down. GFOA has made the rounds. MSRB has had certain educational meetings with lawmakers. And so there's a number of organizations who are really attempting to do that and just making ourselves available to those who want to know, Hey, how would this impact my taxpayers or taxpayers investors? How would this impact X market that I've invested in? And so hopefully people will reach out to the various organizations to try to get that information. But loss of, it's not only an impact on individual taxpayers, a loss potentially for investors and certainly for states and local communities.
Adam Barsky (42:19):
And one of the things also people should remember is that in 2017 when they were first negotiating those tax cuts that happened then that are now expiring, they're trying to extend when they were coming up with the how do we pay for this? Munis in tax exemption was on the table as well. The lobbying effort did help. It was put off. But one of the things that happened as a result of that was what they call salt,
Pamela Frederick (42:46):
Which
Adam Barsky (42:47):
Is the eliminating the deductibility of state and local taxes or having a very low level cap of 10,000, what have you, which particularly hurts high tax places like California, New York. And that has been a rallying cry of many since then. I give a lot of credit to Congressman Tom Swazi, who's made this a real pitch on his part, and he's really campaigned on that. And to the extent that when they were fighting over those congressional districts on Long Island, and candidate Trump came out at that time, went to Nassau County, a coliseum, he said, I'm going to dress salt this year. I'm going to fix the salt. So many people think whatever they do for salt, they're going to look to offset it in the tax exempt muni market to pay for whatever they do in salt. So that's the other thing that I think we need to keep an eye on and make sure that that doesn't happen. Yeah,
Pamela Frederick (43:41):
When you talk about scoring, I think that the elimination of that cap on salt actually has a much larger contribution than eliminating tax exempt. So if they do try to do something to either lower the cap, some say they're increasing the cap, so we'll see, that might be his win to get that number higher, but it has a pretty significant cost effect in terms of tax savings or tax costs if they raise it. So I think salt is going to be very challenging, and I think it's going to be harder to touch. My bet would be that they leave it it alone because you have people on both sides, those who would like to see it eliminated. Some who say, we'll give, we can increase it and generate more savings, but I think it's going to be a really difficult one, and you may not have enough, unlike the tax exemption, which is bipartisan, and every state is going to be impacted. To your point, salt is typically high taxpayers benefit. And so that one can lead in a direction that would lower the number of votes that they could get in support of reducing or eliminating.
Lynne Funk (45:12):
Well, I think this has been a really, thank you both so much for this conversation. I often say this is a market, I've spoken to other groups, and this is a market that nobody really understands, but everybody should
Pamela Frederick (45:25)
Because
Lynne Funk (45:25):
It really does impact everyday individuals. It is your schools, your bridges, your public power. So outside of, did I miss anything asking you today? And by the way, if you asked a question, we didn't get to it, we'll try to get back to you. Is there anything that I didn't ask you to that you want to leave this audience with? I know that what should everyone be
Pamela Frederick (45:50):
Doing? The one thing that I would like to touch on is the fact that many have used as a dog whistle that the tax exemption is benefiting wealthy individuals. And I'm hoping from the conversation today, people could say, no, it is benefiting all individuals and all taxpayers even more. And then when you look at who are the investors, individual investors, makeup is significant portion, I think it's 44% of actual all the bonds that are outstanding. And it's actually higher than that because the others may flow to ETFs or Mutual. So a lot of the retirement savings are through vehicles like that as well. So I would like to make sure the conversation shifts away from a benefit that is accruing to wealthy investors and shift the focus to what does it do to individual taxpayers
Adam Barsky (46:54):
And cost those municipalities and what it's going to do for infrastructure where we're saying, obviously there's already a gap, and now it's going to make that gap larger. I think the message I would leave and times like this, I miss not having Jim Leventhal around anymore. I mean, he would've been the best spokesman for this there ever was, right? So I always think about him, and I wish we did have him here to do that, miss him a lot. But really, it's about the lobbying effort. I'm part of the large public power council at nypa. Tom Falcon, former CEO of Lipa is now the head of that entity. And he's been mobilizing that group to lobby Washington not only on tax exemption, but the direct pay for municipalities under the IRA for all the renewable energy credits. Those efforts are very important. Governor's Association, all those are being done in Washington. But what I would say to local municipalities, you really need to go after your local congressmen. You need to go after all those people, and they need to hear from you. If they don't hear from you and you're not screaming loud, they're going to think there's no impact on you for this. So if they don't hear from you, they'll take it to mean you're not concerned. They need to hear your concerns.
Pamela Frederick (48:17):
And one great source of information, the University of Chicago is put together a database that's easily accessible online that can help quantify the numbers on a per state basis and maybe drill down below that as well. And so I think that people could use that as resource, as a resource to have to really quantify what is the impact on my community.
Lynne Funk (48:41):
Excellent. For those who don't know, Jim, he was the, what was his catch phrase? I got to bring that up. What'd he say? I saw his video. I remember by
Adam Barsky (48:51):
Bonds
Lynne Funk (48:53):
Built by bonds. He had the,
Adam Barsky (48:55):
Well America built by Bonds. I mean, that was really his pitch.
Lynne Funk (48:58):
He also had the video. I remember I seen the video that he had produced. It was all about New York City water because New York City Water is very good. A whole history of how it comes to play and comes into
Adam Barsky (49:10):
The, well, you can thank Alexander Hamilton for that because the one that drew the lines of where the water should be, and he acquired that property on behalf of New York City. And that water is why New York City has got the best bagels and pizza pizza in the country. So thank New York City Water for that.
Lynne Funk (49:30):
Well, listen, thank you both so much for your time. Thank you for coming in on a Friday afternoon. Thank you all to tuning in on a Friday afternoon. This conversation's definitely going to continue, and I'm very grateful for your expertise and your insights today. So thank you again.
Pamela Frederick (49:45):
Sure. Thank
Lynne Funk (49:45):
You. And hope to see you all soon. Hope to see some of you maybe in Texas in two weeks at the Bon Buyers Texas Public Finance Conference. We'll talk about that. This there as well. Thank you everybody. Thank you. Bye now. Thank you.
