Transcription:
Kyle Glazier (00:03):
Hello and welcome to another Bond Buyer Podcast. I'm Kyle Glazier, executive editor at the Bond Buyer, and joining me today is Emily Brock, the Federal liaison for the Government Finance Officers Association. Emily, thank you so much for joining me today.
Emily Brock (00:18):
Thanks for having me.
Kyle Glazier (00:19):
There's a lot going on up on Capitol Hill for us to talk about. I was hoping we could start with this looming debt ceiling. Cliff Treasury Secretary Yellen, of course, has said that has said quite recently in fact that June 1st could be the date for the United States to actually default on its debts. Some of the rating agencies have said that would result in a cut of a notch to the US credit rating if it were to happen. And as we know, whatever happens to the US sovereign rating tends to cascade down into the municipal space. No one's too excited about that prospect, but for issuers, issuers obviously need certainty. They're trying to budget for a lot of things that they have going on locally, and a lot of that depends on the federal dollars that they expect to receive. Can you tell me a little bit about what's at stake for issuers here and what do you expect is going to happen here? Is this going to be some of the brinksmanship we've seen in the past or are the two sides more entrenched than we've seen before?
Emily Brock (01:34):
Well, I think to talk a little bit about what we've seen before is a really important part of this conversation. So I mean the issuers, governmental, state, state and local tax exempt issuers got a sense of something is coming very quickly when last week we saw the slugs window close and usually that's a sure sign that something is coming sooner, I guess sooner than we had expected. But what's important is to kind of look back at just sort of the history of the dead dead ceiling and in that conversation now Congress has raised the debt ceiling 80 times in a row and they've never not raised the debt sailing, but there has been a time in the past and all of us know that probably listening to this column and in around the bonfire community in 2011 when we saw standard poor take a close look at the political brinksmanship of the potential downgrade of the sovereign, and in fact the downgrade of the sovereign did happen.
(02:37)
It is not something that the credit rating agencies take lightly at all, and we've been paying really close attention to what we see the Big four looking at what their proclivities are toward understanding how close we are to a 2011 event and worse, as you mentioned, Kyle, potential of a potential default of the sovereign because again, you said that there is a interconnectivity between the sovereign and the states and the local governments and is in fact there is when there is federal funds, any kind of federal funds participation or any kind of federal funds guarantees on any state or local debt, and you see that sometimes in housing, you see that in some other debt that state and local governments participate in, but that tethered nature of the sovereign to states and local governments is a true concern for us. If we do as get closer to that debt ceiling and the potential for the sovereign to receive a downgrade could potentially draw down credits of state and local governments, and at the end of the day, what we're talking about in the colloquial term is costs rising at the state and local level and we can't have that right now.
(04:03)
This is a precarious point in time where there's a lot of state and local governments participating in projects that are funded, if not in part all the way is in some cases by the federal government. And so that intergovernmental relationship is extreme right now, and we need to do the, it's important that Congress understands that tethered nature and the production and understanding that this is a decision that needs to be made now because I said, Kyle, this has been, the agreement has happened 80 times in a row. We hope that Congress will do the right thing once again and not make it to the point where there is severe concern of our accrediting agency partners on the political brinkman As it gets close,
Kyle Glazier (04:58):
The Republicans in the house have rolled out their plan to solve this of course or not solve, but at least buy more time, and it includes, of course, rather prominently clawbacks of unspent covid relief money that was designated for states and locals of course. Is that something that's at all palatable for issuers? There are reports out there that some G O P lawmakers think that that's the most likely of the Republican provisions to survive in any eventual compromise. Bill, is that something that you're willing to accept from your point of view or is that something that really needs to be solved another way?
Emily Brock (05:49):
Yeah, I think Republican leadership in the house, when they proposed their debt ceiling bill two weeks ago at this point, it included across the board cuts, it included some pretty drastic things. I mean, this is a very conservative approach to the solution, and so I'm certain that they started far out on a spectrum where they would think is a reasonable fix or at least a reasonable approach to a fix. I'm sure that when Democratic colleagues in the Senate saw that, they said, okay, well now we'll start on the other side and we'll have a proposal that somewhere in between we can meet in the middle and hopefully it does not include federal funds cuts across the board. But most particularly, as you mentioned Kyle, in their proposal and actually a proposal just prior to that, there have been Republicans who have suggested that a clawback of the COVID relief funds is the best solution.
(07:00)
Now, I think what we have to do is we have to put what does covid funds mean into perspective? So there was 5 trillion of federal relief and stimulus that happened over the course of the next, the past two years. Some of that includes infrastructure financing, some of that includes P P P E and sometimes some of that includes direct federal grants to state and local governments in the form of state and local fiscal relief. So there's a large wide variety of that 5 trillion. However, it's important to point out that at least 350 billion in the ARPA and 150 B billion in cares is that covid relief that went directly to state and local governments. So if they're saying, if in the proposal they're saying the Klaw back of unspent funds sort of cart blanche of all of those programs, which if you look at to O B's assessment, there's a nominal amount that has yet to be distributed by the federal government that is obligated by the federal governments to its direct recipients, then that proposal doesn't really impact the funds that have already been dispatched to state and local governments. It really does kind of come down to the question of obligation. Does obligated funds mean when the federal government dispatch those funds to the beneficiaries or does that mean or does obligated mean the beneficiaries have identified the recipients in their communities receiving those funds? So if it's the former, we're totally fine with that. If it's the latter, then we have some significant questions of process of qualification and of obligated direct payments made at the local level in questions of when and how that definition comes into play.
Kyle Glazier (09:10):
There's not very much time to get some clarification on this. Is there, I mean, things presumably would have to move pretty quickly over the next couple of weeks if Secretary Yellen is correct.
Emily Brock (09:20):
Absolutely. So that's why we think that the definition of obligation does reside at the federal government level. Certainly on B has stated that, and those are the conversations that we're having with Republican leadership right now.
Kyle Glazier (09:35):
Great. I know that some of the principle lawmakers in charge are supposed to be meeting with the White House this week, so, we may get some clarity coming up here. Changing gears a little bit, but keeping it on the hill, I was wondering about some of the priorities G GF a's major legislative priorities. Is there any legislation going on right now that you think could be an avenue towards getting some of those things done? Is it sort of quiet right now because of all of or on that front because of all the other very pressing things that are going on? Or is this just sort of a difficult time for muni priorities because of the nature of Congress right now where you've got divided legislature and frankly razor thin margins in both that make it difficult for anything to move if there are any defections on either side? The state of play there?
Emily Brock (10:39):
Yeah, there's different than the last several congresses. I can definitely say that where there was a freight train come in, whether it was an all Republican Congress are in all Democratic Congress and you had to find a way to attach yourself to that freight train as quickly as possible. Those are different congresses. Those are different kinds of field in this Congress. This Congress is very much a, you have to look and see what exactly are the must pass bills. Those are the bills that have to pass through Congress, and you have to make a determination of what your priorities or how your priorities align with those must pass bills. And so we do have several must pass bills. The debt sailing is absolutely one of them. Whether there will be tax titles associated with that is probably very low. However, there are tax titles that could find their way and find their way situated with, say for example, the Farm Bill where if we have a legislative priority like BQ that ultimately benefit small and rural jurisdictions, that we're certainly having calls with the committees on ag about how that may fit there.
(11:52)
And there's several other initiative, two other initiatives, at least F A A and the next federal budget, the next omnibus or CR where we would have to talk with them about what priorities can fit there. The important thing right now though, for any initiative because of the nature of Congress as you suggest Kyle, is that it has to be an equally supported bill equally between the parties. So there has to be an identical amount of Republicans as there are Democrats. As you all know. We have our advanced refunding bill that has been introduced in the House of Representatives by Ruper Berger and castoff. Now, our priority there is what we call a Noah's arc approach. If you find one from one party, you find one from the other party and then they're added on identically or at the same time onto the bill. That's the strategy moving forward.
(12:52)
Also, I think what's especially important for Muni priorities is focusing on the tax writing committee. The tax Writing Committee of course, is the Ways and Means committee in house representatives, and it has new leadership, but still many of our champions who have supported our initiatives in the past are still on the committee. Another important complexion of the Ways and Means committee is that there are now only five Republicans who set on the Ways and Means committee that voted for the 2017 Tax Cuts and Jobs Act. That was the bill of course, that eliminated advanced refunding. So we think we have a pretty good shot where we're talking with an interesting, it could be frustrating for initiatives that sort of lean more progressive or lean more conservative, but none of ours technically do. Whereas where as neutral as it gets. And so making sure that as we continue to advance our priorities in this unique Congress allows for us to be able to show that off to show, hey, union initiatives are not political initiatives. They are market initiatives and they're infrastructure initiatives.
Kyle Glazier (14:13):
Speaking of tax communication with the Treasury Department has always been important for issuers. Issuers frequently need to seek some clarifications on things that don't necessarily rise to the level of a formal request or anything like that. And for many years, issuers had a reliable friend, I guess one might say in John Cross who's the tax legislative council there for a long time, but he's been gone for a couple years, sailed off into retirement. And there have been those who have told me that communication with treasury hasn't been quite as smooth since. Is that something that you've gotten the sense of from your members who you speak to about this? Or has there been some headway made recently in that regard?
Emily Brock (15:09):
Yeah, I mean, I think, so. Look, the tax exempt market is the unique market in the world, so we need to have a treasury that understands both opportunities. And you know what, I'm going to pause right here because the plane, and I'm going to close the window really quick. Sorry, closing window. I live right near Andrews, so it's like planes that I should have known. Okay, so I'll start over and I'll give it 5, 4, 3, 2, 1. So yeah, Kyle, the United States Treasury has to continue to address one of the most unique markets that we have in the United States of America, and that's the tax exempt market. And many of the transactions that take place in our marketplace require specific conversations, unique challenges that are presented in the tax exempt space. And you mentioned John Cross. I consider him, I do consider him a friend and a mentor and hope that he's well, but his vacancy really has come at a time where it's important that we think as a market that the treasury fills that role.
(16:37)
We sent a coalition letter a couple of years ago along with friends in the market. It was the National Association of Bond Lawyers, but also National Association of State Treasurers and Counties and cities and Mayors. We all want to see that role filled because it's important that we have clarity from a tax perspective on all of that. Now, what's happened in between the departure of John Cross in that position and now has been monumental federal activities that have sucked resources from treasury. I mean, we can even start in the very beginning when we think about the municipal liquidity facility as a part of the CARES Act. And then in addition, there was also the Inflation Reduction Act where they're talking about direct pay subsidies. And then there were challenges of course with 80, filing 80, 30 eights when non-essential folks and in treasury. So I think what they've been doing, the strategy from hindsight kind of looks like they've been fighting fires, they've been staffing up certain offices and Unst staffing others, and they really haven't gotten back to sort of that norm where it that makes sense for them to fill that position.
(17:54)
However, that said, when I call the IRS lately, when I call treasury IRS lately, and we do talk with many of the same familiar faces are still around, and maybe the question is about the inflation reduction Act. You get the sense that at some point, the Inflation Reduction Act is going to start to temper down. They do have tax exempt experts on the inside that are working that issue, and maybe there is that sort of soft transition that we see in the near future where the position can be filled once this fire has been fought.
Kyle Glazier (18:30):
All right. Sounds like things. Sounds like things are interesting. Lastly, before we say we goodbye it, it's a pretty exciting time for you, rather busy time for you because the G F O a's big annual conference is coming up here in just a couple of weeks in Portland, Oregon. Why don't you preview that for us a little bit. Tell us what do you expect to be on, be on the minds of your members, and what do you expect the big topics of conversation will be, especially in the debt committee? Of course.
Emily Brock (19:02):
Well, it's hard to get too close to Portland in our annual conference without mentioning one of the major legislative initiatives we haven't mentioned yet on this call, which is the Financial Data Transparency Act. That of course, will be in lots of different iterations in and around. We're expecting about 6,000, maybe 7,000 folks in Portland, so a substantial audience coming to talk about the digitization of data in annual comprehensive financial reports. We have some amazing folks who are traveling across the country from Washington, maybe on the same plane. Who knows? We will, we'll be talking about that and the specifications of the rulemaking that we'll have to roll out as a result of that. Then of course, in addition, we're going to have some great sessions and conversations around small issuers and understanding their disclosure objectives. So continuing disclosure and conversations around voluntary disclosure. Last year, we were sort of the spearhead, if I can claim that, maybe even the year before that on E S G disclosures.
(20:19)
So that conversation will continue as we talk a little bit more about the intersection of climate and both sort of in three different contexts. Number one in voluntary disclosure and anything that has or any kind of information that has a nexus to credit. Then we're also talking about ESG in the context of number two, which is labeling your bonds for marketing purposes such as green bonds or social bonds. And then E S G in a interesting third context that has quite blown up this year, which is E S G, in the context of investing or procurement parameters where you prioritize specific vendors over others based on the complexion of their E S G. And so that of course, is a whole other conversation that we're going to be having. So not a whole lot of moss growing on this rolling Stone. I can tell you that the debt committee continues to be sort of cutting edge, looking at new things, trying to make sure that we offer the best practices that we can for the community of issuers in current contexts.
Kyle Glazier (21:34):
All right, well, sounds exciting. And of course the Bond Buyer's going to be there and we'll have all the coverage. So looking forward to that.
Emily Brock (21:42):
As am I.
Kyle Glazier (21:43):
Well, that'll about do it for us. Thank you for listening to the Bond Buyer podcast. Audio production for this episode was done by Kevin Parise. Special thanks of course this week to Emily Brock of the GFOA. Please rate us, review us, and subscribe to our content at www.bondbuyer.com/subscribe. From the Bond Buyer, I'm Kyle Glazier. Thanks for listening.