- Are there sectors that would benefit the most from investing in resilient infrastructure?
- What types of disclosure are needed?
- Should investors price in the effects of climate and severe-weather event related risks?
- Is there enough demand for the debt that will likely be needed to support the needed infrastructure?
Transcription:
Sebastian Torres (00:09):
Good afternoon everybody. Thank you for joining us in this lovely day outside. It's beautiful outside. So my name is Sebastian Torres. I'm a Counsel at the Project and Public Finance Practice Group in the law firm, Nixon Peabody. And I'm here joined by Pamela Frederick, CFO of Battery Park City Authority, Neene Jenkins, Head of Municipal Research at JP Morgan Asset Management, Christopher Jumper, Director of Assured Guaranty. Sarah Snyder, Managing Director of Ramirez & Co Inc. and Michael Wertz from Vice President and Senior Analyst at Moody's Ratings. We're going to be talking today about planning for resilient infrastructure in a high cost environment. So I want to get started. Over the past several years, the frequency and severity of climate related event has been exacerbated along with a rising inflation driving up the cost of construction. So I want to open the question to all the panelists. What is the scale of the national Brazilian infrastructure need and who bears the cost of financing those projects?
Michael Wertz (01:26):
I can take a crack at that. One of the speakers in the prior panel mentioned a figure by ACE of about $7.4 trillion of infrastructure need over the next 30 years or so, to give you a sense of the scope of the issue. To put that into further context, the EPA and their most recent national water assessment survey identified about $1.2 trillion worth of necessary infrastructure investment just for water and sewer. A lot of you may have seen the report from the First Street Foundation last week, I think it was, that estimates that there's one and a half trillion dollars of property of lost property value that's at risk over the next 30 years, mostly due to the effects of climate change on insurance and the cost of home ownerships, and then people's or consumer's potential response to those changing dynamics. So it's an immense cost, an immense toll.
(02:26):
And I think to answer the second part of your question, who will that fall to? I think it will fall where it always has essentially since the sixties, which is the state and local governments, we've seen since the sixties the federal government share of investment into infrastructure decline fairly steadily. We had IIJA sort of stopped that trend and now that's of course we'll see what happens to that over the next couple of years. But even in a scenario where that remains in place, the most sort of credible estimates that I've seen and that we've discussed at Moody's is that that would still leave about a two to $4 trillion gap even with federal investment that would have to be made up most likely by state and locals and of course at a constituent rate and taxpayers. So even with the amount of tension that this topic has gotten here and outside of this room over the last several years, a lot of work to do still to bridge a gap.
Neene Jenkins (03:26):
And I'll add to Michael's point specifically, I think that is just a great foundation, but let's focus on just the last year. There were 27 weather and climate related disaster events with losses exceeding a billion dollars. That's three times the level we've seen dating back annually to 1980. So even recognizing traditional infrastructure needs, there's an acceleration of that that I think is inherent in the comments that we've observed here in prior panels, but the numbers bear it out.
Sarah Snyder (04:11):
I think also you wonder how much is reactionary versus proactive, right, as well. And how do those numbers continue to exceed the proactive now that we have to do a lot of reactive. And then the last question that a lot of people brought up as well today is the affordability and how do you pass on the cost to everybody?
Christopher Jumper (04:31):
Yeah, again, I agree as far as the range and the acceleration. Also, I looked at anything from a trillion and a half to 10 trillion. So it's huge. It spans every sector, power, water, sewer, highways, general government, the level of storms that have been occurring and the frequency, the severity has definitely increased and continues to increase. There's been a multitude of disasters each year. It just seems like we go from one to the next. So yeah, it's a pretty big number. You saw that the IIJA and IRA got suspended. A lot of projects were depending on that money, so they'll probably have to, I'm sure there'll be some lawsuits or whatever, but it's going to fall onto the states and taxpayers and rate payers.
Pamela Frederick (05:35):
I think Sarah made a great point. Issuers state and local governments have to, they have a lot to weigh and they have a certain pool of money that they've worked with and they have to set priorities on how they spend that money. There are a lot of ongoing demands and what you find is it's very hard to set aside money for something that might happen. And so the question is, as we see the increasing frequency and severity of storms, your probability is starting to increase. And so you need to start preparing in advance our approach. We faced the reality in Superstorm Sandy, and that was well over a decade now ago, and these are very long lead time items. We are embarking on our third resiliency project. It's going to take another five years to do so. We are as active and as forward thinking as we've been. It's taken a while for implementation even with that being the focus of our capital planning. And so it's very difficult and unfortunately I think government's going to have to start setting aside what are critical dollars spent on safety and education, health, transportation, and say, how do I make sure the city is resilient and that we can continue to provide these services even during major storm events, especially with FEMA being at risk.
Michael Wertz (07:10):
Could you just make a quick comment on the point you raised about lead time, which I think is a really important point. I used to be the lead analyst for water and sewer and other types of local governments in California. And I recall one of their many droughts, there was an issuer, I believe it was San Luis Obispo, I think, who was building a desal plant to help with their drought preparedness and drought, drought responsiveness. The idea was that this plant would u them from future drought events. The problem was the regulatory environment in California was so onerous to getting the project done that by the time it was done, the drought was over and they never really started it up. So it just, that shuttered for a long time, but it speaks to the point of these are projects in addition to having this immense cost, you can't just build a sea wall overnight offshore in Miami and expect that that's going to solve the problem on Wednesday.
Sebastian Torres (08:12):
On that topic. So I think we have established that the need for funding is there. So Pamela, I wanted to ask you from the perspective of an issuer, how are the issuers meeting the growing needs? And also can you expand what has been the Battery Park City approach to Petris and that financing vehicle?
Pamela Frederick (08:29):
Sure. I think that it's going to vary. There's so many different categories of issuers, size of issuers. Resources are vary from very low resource to very high resource issuers. And we are fortunate that we fall in the camp on the high resource where resources aren't unlimited and anything that we pull from to invest in capital is a dollar that doesn't go to support other city services. So we have to be very cognizant. We are fortunate that we are part of a lower Manhattan coastal resiliency approach where the city itself is pulling together 6, 2 7, not 67, 6 2 7 separate resiliency projects to shore up the waterfront in lower Manhattan. And it's very coordinated. They're individual projects that are interconnected. We utilize similar engineering and assumptions and so that we're moving not necessarily in lockstep, but when our project is done, we independently are protecting not only Battery Park City, but we're also protecting much of lower Manhattan, which sits right across the highway from us.
(09:53):
So we have been fortunate. Our funds, as I noted, are not unlimited because we happen to be higher resourced. We generally won't get access to some local or state funding because those go to other projects or entities that are not able to sustain themselves. But I think what that brings up is an important variable in how we approach ensuring that the range of communities can support these kind of projects. And I had an interesting conversation with someone who was running a state bond bank and I think whether it's state or at the federal level, these smaller issuers, and I think if the potential of losing the tax exemption is probably going to force this issue as well, I think it's very important for them to have access to capital to have it efficient and cost effective. But one of the earlier speakers spoke to the point of there's the tension between losing local control over your projects versus having organized state level or even federal level funding available to fund necessary projects. So it's been easier for us. We still face, we approach it with a very cost sensitive view, but as long as we can continue our planning and implementation, it's gone pretty well so far. We still have a five year horizon in front of us.
Sebastian Torres (11:36):
And based on your experience of what you have just been discussing, what is the role that public private partnerships complaining, helping to mobilize projects and capital for climate seed resiliency projects?
Pamela Frederick (11:47):
I think that can be very important and probably some of the underwriters can speak to it. In my past I did project finance and it was always done on a public private partnership here there are certain projects that may not lend themselves to that. A couple factors for us is the fact that we can access the markets on a pretty cost effective way, so you don't have that driving factor. We had debt capacity, we didn't have that driving factor, but other communities may need that. And so having public private partnerships can be very important in broadening the access to capital and the ability to implement projects. But you also have to have a project that can support a private level of return on capital and that's return on capital that might be higher than that entity could have afforded that spent themselves. So it is a difficult battle, but I think it is one of the tools in your toolkit to be able to expand what you're able to implement in terms of resiliency and infrastructure planning.
Sebastian Torres (12:56):
Thank you.
Sarah Snyder (12:57):
Can I add to the P three side of it all? I think some of it also, it was mentioned by our keynote speakers, some of the barriers to entry as it relates to the p threes and the permitting and where the sources of the funds come from, as well as whether you can off outsource the supplies from outside the us. And so I think there's a lot of barriers to entry in the municipal space for private investment. I think there are larger projects that have brought in that, whether that be the JFK and other airport related projects. But I do think that from a resiliency project sometimes there isn't always that scalable option to be able to then bring in some of that private funds.
Pamela Frederick (13:38):
Or the stream of cash flows to secure.
(13:41):
Underlying project finance debt.
Sebastian Torres (13:43):
Exactly. And following on that point, Sarah, what other, because we were mentioning that Petri is just one of the tools in toolkit, right? What other toolkits do you think issuers can use to manage the growing size and scale of the need of resiliency infrastructure investment?
Sarah Snyder (13:59):
I think it's to the point of earlier of prioritizing projects as well, right? I mean there's so many options and backlog of whether it be aging infrastructure, resiliency, being proactive, reactive, maybe seeking to monetize assets as well as we're seeing some issuers do that. And then I think back to the point of being able to afford it is kind of being proactive in creating affordability programs. We definitely see that on the water and sewer side as well where they're having to create some of these programs. So I think those are some of the things that I would think about as they manage the growing sides of infrastructure needs.
Sebastian Torres (14:35):
Neene, have you seen, based on your experience, what other alternatives have you seen?
Neene Jenkins (14:42):
We have absolutely seen some private investment. I wouldn't say that it's necessarily specifically focused on resiliency projects. And when you think about the numbers that Michael outlined at the outset, nothing on the scale of the need for infrastructure resiliency.
Sebastian Torres (15:05):
So moving on, managing the high cost environment. So we have established that there's the need for the projects. We have established that there's vehicle to get the funding, but infrastructure costs ultimately they fall on the taxpayer and the rate payers. So will the cost of the much needed resiliency infrastructure entail tax increases or rate increases? And more importantly, will they be affordable for taxpayers? What is your take on that?
Michael Wertz (15:34):
Yes. No, I say that sort of jokingly, but from our perspective at Moody's, sort of steady and consistent tax or rate increases at least at regular intervals size to your need or a hallmark of good governance. So your question sort of in the face of rising infrastructure costs is not necessarily a question of if, but rather when and by what degree. And to that point, I think debt loads across the country are still largely affordable though depending on what happens with the tax exemption as we've been talking about all day, that may change that dynamic. We already see a number of water and sewer entities around the country where water rates are becoming problematic. Insurance, property insurance rates are becoming problematic for a lot of places around the country. But still by and large, I think there's a good deal of affordability. The problem is, and we've talked about this in some of our other panels, it's not necessarily uniform.
(16:36):
There are places that can implement the types of infrastructure and resilience projects that they need without too much disruption to their balance sheets. And there's a lot of places, particularly unfortunately in areas that are most exposed to climate risk and failing infrastructure. So think along the southern Gulf coast, southern Mississippi, southern Alabama, or in tornado alley, Arkansas, Oklahoma, where they have not only a high exposure, but they're also some of our most economically vulnerable and challenge areas of the country as well. So those are the areas where you might see more of a challenge with affordability, which just creates a greater onus on quality and approach of management and an evaluation of the underlying tax base and rate base that's trying to respond to the increase in charges.
Sarah Snyder (17:26):
I'd also add from a large city perspective, when the politicians or the finance directors have to think about, we have water and sewer projects, we have general government projects. Where are we raising the funds first in which it takes priority? Is it easier to raise water and sewer rates? Is it easier to raise property taxes, sales taxes? And so kind of weighing the, everyone's cost is going up, but where can I get it? Most kind of may dictate where the projects come from. And then again, to your point of certain places, being able to afford it, creating any kind of tiered assistance programs so that obviously there's disparity in certain areas of where things can be afforded and being able to pass on those costs.
Christopher Jumper (18:08):
Yeah, we've been seeing a lot more use of rate stabilization funds in addition to large capital projects. So people are trying to gradually, as opposed to imposing rate shocks and also again reducing covenants, easing up on reserves and whatnot, cutting some of the previously required opening up lower liens to allow a little more flexibility.
Sebastian Torres (18:41):
And I think, Pamela, you were talking about something earlier that really resonated with me when I was working in the government of Puerto Rico. I remember if you take money away from other projects and you put it to resiliency, there's something that is not going to be funded and you're saying we have to prepare for this contingency that is not visible. It might be hypothetical, but then something happens like Sandy and then it brings it to the attention and people are more openly willing to actually invest the money on those projects. Have you faced any sort of community concerns that have negative impact, the designer construction of one of your vicinity projects?
Pamela Frederick (19:13):
I would say that we've had very strong community input. Our community and residents are not shy, but we also have taken a very proactive stance in terms of engaging with the community. What I've found historically, often you have community engagement, but what that means is you're willing to listen. You don't actually react or respond to it. You don't have anything that sort of encourages you to address a concern that's raised. And that's what I found that's slightly different at Battery Park as well. In addition to having a range of community meetings, whether it's meeting with the community board, we have periodic meetings to update them on what planning looks like. We will have engagement where we have think separate small groups where we engage with receiving their input. The result of that has been as much as we have community input where there is an input that we can implement or have affect the design without having a negative impact on the outcome or not having an excessive cost effect, we've tried to do that.
(20:35):
So an example of that is we are finishing, we should be reaching completion on our, well, really it's our second resiliency project, Wagner Park and Wagner Pavilion. But the park was something that the community and the children and families used very much. And so we were very engaged with them with getting their input. And one of the things that resulted in two things really, we increased the amount of green space associated with the park and we also increased the density of some of the vegetation and trees. So those are things that the community expressed strong interest in and that we were able to respond to without having a negative impact nor delaying construction on the negative. We did have a situation where we had to stop the building of the pavilion because of a lawsuit brought by a group. It was found to be, I hate to call it spurious, but it was eventually denied and we were able to move forward. But that being said, as many of who's done infrastructure projects, if you have a lawsuit that is going to cause delays and delays lead to cost increases, you're keeping on your designers, you may have to prepare briefs, et cetera. So it's adding a layer of cost that even if it's a spurious claim, could affect the project. And that is what we found. We were successful in winning that suit and able to move forward. But it did have impact.
Sebastian Torres (22:13):
And I'm going to open this one to all of you because I want to hear your difference perspective. So the big question in the room, is there enough demand for debt that will be likely be necessary to support all the needed infrastructure, investment and improvements? What's your take on that?
Neene Jenkins (22:28):
I'll start. Obviously I'm coming from an investor perspective and we've all been involved in this market for quite some time. So we understand that the bond market has remained roughly flat in the amount of debt outstanding for an extended period of time. And there are a number of reasons for that, but that's meant that a lot of infrastructure needs have either gone unfilled or we've seen other sources fill the gap. But what that also means is that our market continues to turn over as it exists today that there is really a lot of demand still coming, especially with growth of SMA on the front end of the curve and a lot of mutual fund activity out long. My largest question when you ask about what the demand will be is when this issuance occurs, what will our market look like? And there's been a lot of speculation throughout the day and a lot of concern, and it's quite valid around the exemption and what our market could look like with some of the changes that are being discussed in dc. And obviously some of that comes with additional issuance costs, but I can tell you now it's a completely different buyer base.
Christopher Jumper (24:08):
I would just add that the taxes, I mean, I agree. I think investors, I think their appetite is still very strong and would continue to support this. I think it gets to a point where the issuer is now incurred so much debt because again, resiliency is a very expensive proposition, putting underground cables in or building sea walls and whatnot. So it gets to a point where when did the rating agencies start downgrading because of debt levels and whatnot? And again, I think the agencies have been pretty transparent on their financial metrics and what kind of leverage they look at. So as you see quality maybe start being compromised or downgraded a notch or two, does it retain that interest of investors?
Sarah Snyder (25:03):
I think this year obviously we saw record issuance and that was fairly easily absorbed. I think the one difference that we're seeing for the year coming up is this past year was a net positive supply from a reinvestment versus new issue. And this year we're actually seeing potentially net negative supply. But I still think that we still as a firm believe that there's still enough demand to meet that, and it's not just based on the reinvestment, but we're seeing the amount of cash coming into the SMAs, the ETFs that are not just from a reinvestment standpoint, but just from new cash. So again, I think that from what we're seeing that we can definitely absorb it obviously again in the market that we're in and assuming that we remain tax exempt.
Sebastian Torres (25:47):
Knock on Wertz.
Michael Wertz (25:48):
Yeah, I agree with much of what's been said. I would take a slightly different view of the question and try to look maybe perhaps more of a potential future state. You made the comment like the market can absorb it given our current tax exempt status. Well, one of the questions that we had on the survey a little while ago was what might investors demand of issuers? And to the question of, well, is there still an appetite for debt or will there be an appetite to absorb the type of debt? I think there probably will be. The question is at what price and is that a price that the issuers can stomach, especially if it manifests itself in additional and potentially burdensome disclosure if that manifests itself in onerous demands of yield, that type of thing. And will there be pressure on the issuers to be able to sort of rise to the level of demand that the market will put on them to make it palatable for them to absorb that? That's sort of the vantage point I'm looking at that question from.
Sarah Snyder (26:54):
I think a lot of issuers realize that they're challenged, right, with the amount of infrastructure needs that they have, right? That again, to your point, yes, there's the demand, but at what cost? And it's not just necessarily in price, but in many other things that we're talking about, disclosure, access to information, et cetera.
Pamela Frederick (27:11):
I think one of the things we at least I like to consider is what's my tail risk? I have a five-year project. What is the market going to look like? No one has a crystal ball, but one of the things I want to always be mindful of is how do I expand the pool of investors given the changes taking place in our market? And particularly if there was a loss of tax exemption, there are other markets overseas who knows if they would be available at the time, but being prepared to be able to access those markets I think is critical. They do, however, have higher disclosure standards, and so one has to be prepared to be able to be responsive to that as well. But that's certainly one of the pathways we're considering.
Sebastian Torres (27:59):
I think that's actually a pretty good segue to talking about what impact have the recent occurrence of climate related events had on the municipal bond market. And we heard this in the live update. We are hearing it now. We're talking about a lot about disclosure. Sarah, what other impacts have they been on the ability of issuers to sell bonds?
Sarah Snyder (28:20):
To your point of the disclosure I think is, and being able to describe again, both your post event and preparedness for climate risks talking about, and we've seen a lot of this change. This isn't necessarily new at this point. I think it's really just continuing to delve into it. And what we've talked to our issuers about is you're doing a lot of this work already. It's just conveying your story properly to investors and the credit community. So whether it be environmental policies, risk studies, bringing all that to the forefront. But I think that again, that's probably been the biggest impact I think over the years. But one of the transactions that we were involved in last year in 2024, both the city of Tampa and the city of Orlando came right when Hurricane Helene came and when Hurricane Milton came, and it was really on them, the POS had posted for the city of Tampa and then the hurricane hit and they were planning on coming afterwards and it was putting out a supplement to really describe what was the impact of the hurricane on the city. But they put out really great supplement disclosure that talked about the proactive emergency management plan that talked about significant investments that were already made into the system to prepare them for this event. And that with or without federal funds, they would be okay and be able to come back and pay their debt. So providing timely information like that makes a difference in your ability to then sell and come to market successfully.
Sebastian Torres (29:52):
Neene on that topic, what other types of disclosures are needed in connection with climate environmental risks? I know we've talked about insurance for example. Can you expand more on that?
Neene Jenkins (30:04):
I think when it comes to disclosure, you really have to think about pre and post-event disclosure, pre-event, much of what Sarah covered is really helpful and well consumed by the investor community to really have a sense of how prepared issuers are in the case of events. I think from a disclosure perspective, where we see a bit more work maybe needed would be with regard to post-event disclosure. Often the investor community is re-underwriting risk very quickly, as you heard on the panel, without very much information from those issuers, 3 billion traded over the course of a week related to the last storm. And so it is a reason why at the NFMA level, we are very focused on creating a best practices to help issuers really understand what the investor community is asking for in those occasions. And Angela Kota is really leading the efforts there. And I think the best way to illustrate this is that there is a large New York issuer that I'm still waiting for superstorm Sandy damage assessments from, right? And these bonds trade very regularly. I understand that during Superstorm Sandy, these events were very infrequent and you can understand that things are evolving, but the speed with which things are happening now, it's come much more routine and bonds trade faster than they have before.
Sebastian Torres (31:54):
So Sarah and Neene just mentioned that there should have done something that they didn't do. So what would be both of your recommendations on how should the disclosure look like in terms of climate change?
Sarah Snyder (32:08):
Again, I think it's what are they already doing? Again, what projects have they put in place? What are they planning on? How are they building resiliency into the projects that they're doing? Because a lot of times at this point, that's pretty much everything that the projects that are working on should incorporate some form of resiliency. And so how are they disclosing that to investors? Again, in addition to how are they putting funds into communities that may be more exposed to the environmental risk and opportunities, whether it be in low and diverse income areas, but again, kind of bringing that disclosure forefront is important.
Neene Jenkins (32:47):
I think that's right. I think a combination of mitigation and recovery strategies are really important. Some understanding of damage and an assessment and an acknowledgement of, especially when it comes to events that are very large, our market is ultimately a good partner in the recovery of that issuer. And the speed with which that information comes to us can sometimes influence what Michael talked about, which is what the pricing may be when ultimately the bonds come to market to help the community recover.
Sarah Snyder (33:21):
I would also add, we worked on a transaction down in Louisiana, which is obviously exposed to coastal risk. And on that transaction, we had talked to the issuer upfront in terms of disclosure and saying, yes, right now you're not dealing with a hurricane, but while you're building this convention center, you should discuss what kind of projects are you putting in place to avoid it. It's not just what the price is, but investors may choose to not participate because of that disclosure or lack of disclosure while what you may already be doing that you're just not telling everyone. And it's hard to give that information after you've already posted your document because obviously we all know our disclosure councils will keep us from providing information after the fact. So really talking to our issuers upfront and getting them to put that in early on.
Neene Jenkins (34:05):
And I think it's like anything else, the way you manage the environmental challenges or any challenge, whether it's financial or debt, having a proactive approach really gets investors focused on the transparency, the trust, and gets them really confident about the management team's ability to handle an event in the future.
Michael Wertz (34:31):
Yeah, I think just to add quickly to that, I think pre-event disclosure and contextualizing assets that are at risk before an event happens is really key because the size of the event sort of counterintuitively sometimes impacts in a negative way the amount of disclosure you get because of the human dynamic of it. So if I'm covering California over the past two weeks, it'd be almost ghoulish of me to call Malibu Unified School District and say, well, how many buildings have you lost when people are still dealing with the disruption to their lives? And so the market is desirous of information at a speed that is sometimes untenable given sort of the human scale of the actual event. But the larger the event, the more desirous the market is of that thing, which just makes the sort of pre-event analysis and thinking and ESG disclosures all the more important, so you're not sort of lost in the fog of the event afterwards.
Sebastian Torres (35:33):
So Christopher, we're talking about the information that needs to be put out there. We're talking about the climate related risk. So how do you look at this from an Insurance of Bond perspective? What are the characteristics that are important in your decision making process?
Christopher Jumper (35:50):
Sure, sure. So again, it's as a bond insurer, we're the last of the great buy and hold investors. Once we issue a policy, we're on it for the life so long as the bonds are outstanding. So it's critically important things. We talk about the essentiality of the asset, the financial performance, the legal provisions, the contractual arrangements that they have with other entities for reliability and redundancy, but also it's what we really focus on is management at the end of the day. And it's how did they respond in the past to challenges when they were faced with superstorm and sanity, when they were faced with a flood down in a hurricane in Florida or a wildfire in California, did they immediately take action? Do they have the ability to raise rates and a willingness to raise rates? How quickly did they respond to these events? Because again, a lot of times they're competing with corporate entities and whatnot, and they need to respond quickly or turn quickly when the pandemic hit, for example, great example that we saw a lot of our issuers immediately cutting costs, delaying CapEx programs in order to shore up revenues and reserves.
(37:23):
Liquidity became very important, and they understood that they needed to get past that. So those are the kinds of things, but it really comes down to management and how well they respond. We spend a lot of time just focused on that assessment.
Sebastian Torres (37:39):
And you mentioned one interesting aspect. So you were saying once you underwrite that insurance policy, your luck for the 20, 30 years for the maturity of the bonds. So what step has assured develop internally or externally to help mitigate the, or quantify the risk
Christopher Jumper (37:55):
Quantify,
Sebastian Torres (37:55):
On climate related events?
Christopher Jumper (37:56):
Yeah, we're not mitigating the risk, we're quantifying the risk. We are trying to understand the best we can. A lot of what we do, in addition to looking backwards and seeing how they performed in the past, what their financial metrics are in the past, we spend a lot of time with cashflow modeling, coming up with sensitivity analysis. What does it look like if they went to a no growth scenario or had to step back? A lot of times we'll take what happened in the past during the great recession, during the pandemic and superimpose that in the future come up with CapEx programs. I understand their CapEx programs for the next five years, 10 years as far as they project, and then take it a little further through the bond issue, come up with assumptions on resiliency and what do they need? Are they going to need to, if they get hit with a storm or whatnot, how do they recover and do they have the liquidity in hand? So we spend a lot of time again with that. It's really we look at both the internal and external. We have internal and external consultants. We have a climatologist on staff. He's come up with models that will look at the probability and severity for each issuer and make projections again on what does it look like, and he'll actually provide some assumptions that we need to run stress cases on to prove it out and show. And obviously it's cashflow modeling. It's never right, you're either over or under, but at least it gives you one view. And if they have the liquidity on hand, if they've got the strong customer base, and again, comes down to management that you feel confident on.
Sebastian Torres (40:00):
So Michael, moving on to you from a ratings perspective. So we know that the base of infrastructure investment has been quickening over the last few years, but is it fast enough to preserve credit quality in the face of accelerating and the severity and frequency of natural disasters?
Michael Wertz (40:16):
Yeah, I conducted a survey a couple of years ago at Moody's of large cities and counties around the country, and we found at that time only about 57%, which was actually higher than what I thought it was going to show, but about 57% of large cities and counties at that time had incorporated infrastructure costs and needs into their climate resilience plans. However, based on their responses, we projected that that number would grow to about 85% over the next couple of years. And I think that trajectory is holding true and it's, I think borne out by, as we've said a couple of times here, we had record levels of issuance last year. A lot of that was towards climate related infrastructure infrastructure projects. But the other telling thing about that survey was that those cities and counties had only identified at that point about half of the amount of funding that they would need to actually support the infrastructure projects in their climate resilience plan slash capital plants.
(41:19):
Now, some of that gap, that 50% gap is going to be closed by federal sources, but as we've also talked about, given that we've got about $7 trillion of need, that money helps us move the ball down the field, but it doesn't get us all the way to the end zone. So I think the answer is broadly speaking, yes, the pace is accelerating in terms of issuer responsiveness, the infrastructure needs, aging assets, climate resilience. But again, as I've said a couple of times, it's also very place specific and predicated upon a specific economy, economic diversity rate, payer base governance. The example I was thinking of as we were sitting here is about the difference in experience between Houston and New Orleans and their experiences going through hurricanes, Harvey and Katrina. Both of those hurricanes caused about $200 billion worth of damage, but while it essentially devastated New Orleans and caused population loss from which they still haven't recovered in Houston, they went through a very similarly sized episode without any change to their reading that was due part and parcel to size and scale of their economy, the quality of their management, their preparedness from a sort of balance sheet perspective going into that episode, all of which culminated and them being able to sort of preserve credit quality without any material impacts while New Orleans was sort of flattened literally.
(42:50):
And from a credit perspective, you see the same dichotomy between say Los Angeles County and Paradise, right? One is going through a painful episode that I think they'll emerge from looking kind of what they do today. The other one was a ghost town for a while. So I'd just like to reiterate the point, largely speaking, yes, I think we're paddling as fast as we can and at an accelerating rate, but it's very place specific.
Pamela Frederick (43:16):
One thing you noted thinking about New Orleans is the cost of the impact of the storm. And had they been proactive and put in resiliency efforts, the relative cost of the resiliency versus the actual impact of the storm, I think localities and states need to focus more on that and blend in probability of occurrence. So maybe we all need actuaries, but the fact is we really do need to balance the cost and the impact on life and livelihoods. So,
Christopher Jumper (44:01):
Just to jump in, there was a study that was done by the US Chamber of Commerce and basically equated every dollar that you spend on resiliency is equivalent to $7 saved on having to now rebuild and pay damages and liability. So there's a significant benefit to doing the resiliency early.
Sarah Snyder (44:27):
I think to Pam's point earlier was that you can't necessarily see those projects, right? You're predicting something that could happen and you're asking people to pay for it now and they're not even sure it's going to happen and maybe it's going to be in 20 years when they're not here. So there's that challenge I think with the people and the rate payers.
Neene Jenkins (44:43):
I was actually going to acknowledge that upfront that the analogy that Michael had the difference in time when it came to Katrina, which nothing like that had happened before and there really wasn't sort of a framework to address something like that versus years later when Harvey hits and Houston really could see what it's like to not be prepared and just acknowledge for the issuers. I'm going to try and put an issuer hat on. I've never been one before, but I'm going to try and say that often the political willingness you need in order to fund these projects is greater after you've already gotten the big one or tap in nearby. And many of the activity and the leadership that we're seeing in resiliency across our industry are coming from issuers that were very much directly impacted by these events. And there's a question about whether we might eventually see other issuers pick up and start to prepare sooner, understanding how frequently this is happening now.
Pamela Frederick (45:56):
They have enough examples.
Neene Jenkins (45:59):
I don't know when it's enough.
Sebastian Torres (46:01):
Nobody know. Nobody knows.
Pamela Frederick (46:03):
Use your eyes if you want to question the impact of climate change. I think we have plenty of examples in the US, but if you just go globally, I mean the impact Spain, for instance, Valencia, I think someone mentioned earlier, it was devastating seeing what happened there, but we have Fort Myers, we have the fires in California, hurricanes on the Gulf Coast, whatever that will be named going forward. And we don't have as many climatic events in New York, but we certainly want to be prepared for them because we have many waterfront communities and we'd like them to be protected.
Sebastian Torres (46:46):
Well, thank you everybody. I think that's up for our time. Thank you all for joining. I don't know if I'm allowed, but anybody has any questions that they would like to raise? Alright. I don't see anybody with the lights
Pamela Frederick (47:00):
Closer to cocktails. Oh, there's
Sebastian Torres (47:02):
One. Oh wait, we got a question.
(47:07):
Go ahead. They're going to give you the microphone. Excuse me. So sorry. Here you go.
Audience Member George Friedlan (47:19):
George Friedlander retired since semi-retired since 2016, but my hobby has been since then has been climate change and sitting here with a bunch of people from the radio agency side, I'm taking a risk, but I'm going to take the risk anyway. My belief is that in terms of the message to Congress about the tax exemption and the role that the federal government needs to play even beyond tax exemption, federalism generally, that the rating agencies, I believe need to be more assertive in saying, yes, this and this is happening, that relate to weather events and are going to cost if the federal government doesn't step in and help. And if the federal government doesn't leave the tax exemption the heck alone. So my suggestion is that the rating agencies have a really important role to play here. It's not a matter of criticism, it's a matter of request. The Congress doesn't listen real well to the muni market, but I think they might listen more effectively to groups of issuers a and to the rating agencies. And we need those messages desperately to be sent soon or we're at risk. Thank you.
Michael Wertz (49:04):
Thank you. I think the role of advocacy for any particular policy position is best taken by issuers and investors. Our role at the Raising agency is not one of advocacy, but we have done quite a bit of work research analysis talks like this on the impacts of climate change, on issuers, on infrastructure, what it might mean for debt loads and balance sheets and things like that. And we have a whole suite of research across all of the sectors addressing all of that. I can't guarantee that any members of Congress are reading it, though I recommend that they do, but it is out there. I'm confident they don't. I suspect you're right.
Sebastian Torres (49:53):
Any other questions? Thank you. Thank you so much.