Leaders in Infrastructure Finance and Economic Development

How are leaders in the industry looking at infrastructure finance amid Federal Reserve policy uncertainty? Are market participants planning larger capital projects? How is the private sector contributing to the market and what role is the federal government playing in project planning?

Transcription:

Kristin Stephens (00:08):

Beth and Mike, thank you so much for those opening remarks. It is a great honor to be here before you all today. To kick off the conference, you have our panelists are a group of well-known Leaders in Infrastructure Finance. So to kick off here, let me just make a few comments piggybacking a bit on what Beth already said here, but infrastructure, it's a big deal. The National League of Cities cited infrastructure as the highest priority for US mayors for the third consecutive year in the 2023 State of the city's report. Really not a big surprise, right? The American Society of Civil Engineers has identified a $2.6 trillion infrastructure funding gap in their most recent report card. But there's good news and that's what we're going to hopefully get into a bit here. The estimated 1.2 trillion in combined new spending from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS Act stand to help municipal governments finance investment in public works, be it directly or indirectly. And in fact, over 225 billion of these funds have already been allocated. Hopefully now that the processes and guidance are starting to be established here, the balance will be dispersed more quickly toward reducing that aggregate funding gap that I mentioned. There's good news, there's bad news. The bad news leaders will need to leverage this federal funding during a time of economic uncertainty and our panelists will talk a little bit about that here today.

(02:02)

At the end of it, I think municipal bonds will remain a very big part for over a hundred years. Our nation has addressed 75% of its infrastructure needs through the municipal bond market and it will remain a platform for governmental entities to access capital to fund public infrastructure in the years to come. So with that, I'd like to turn over to my panelists to each make a quick introduction and then we will dive right in.

Ben Watkins (02:32):

You want me to go first?

Kristin Stephens (02:33):

Do a quick introduction.

Ben Watkins (02:34):

So, I'm Pat McCoy with the Gateway Project. So Pat couldn't be here because of travel difficulties. So Michael asked me to stand in. I'm Ben Watkins with the state of Florida, but I've gotten crib notes from Pat on the Gateway project, so hopefully I can provide some insight around that.

Brad Guilmino (02:58):

Thanks. Brad Guilmino PFM Financial Advisors. I'm in our national transportation group with a focus on planning tolling in P3 priorly. I worked at an engineering firm, kind of leading a financial advisory practice there and before that investment banking.

Guy Logan (03:13):

Guy Logan, I worked at Raymond James, Managing Director there. I head up there newly, recently formed a National Infrastructure Group and I'd be remiss if I didn't recognize my colleague, one of the rising stars. Stephanie Lam, she's in the audience. She might be signing autographs later on.

Natasha Holiday (03:34):

Good afternoon, Natasha Holiday, Managing Director at RBC Capital Markets. I co-head our largest share of practice, which is a combination of general government, water, sewer, and then all transportation. Happy to be here.

Gary Hall (03:51):

And I'm Gary Hall and I'm a little disappointed. I thought it was 17 years too late that I was going to be named a rising star, but I saw Ben and I knew I was on the wrong panel. So I'm Gary Hall, I'm President and Head of Public Finance and Infrastructure at Siebert Williams Shank.

Kristin Stephens (04:09):

Terrific. Well, as you can see, we have a great group here. We're excited to dive in and make this interactive for you all too, but let's get all of your perspectives on this. Ben, may I kick it off with you? I'm sure you have plenty to add here. I mean in the many facets of the description for this section, this session rather one was our market participants planning for larger capital projects and I'm sure that you would have a lot to add on that as well as some other topics and apparently including Gateway too. So let us know what's on your mind these days.

Ben Watkins (04:44):

So the Gateway Project, want to talk a little bit about that in Pat's honor. So Pat is Deputy CFO of a gateway project and as you all know, it's a rebuild of the New York New Jersey tunnel under the Hudson River. Been a major project, I guess Trump vetoed it way back when or the funding for it, but it's now been resurrected and approved. So it's replacing a critical piece of infrastructure, multi-billion dollar endeavor. Obviously the funding for it should be interesting. The funding partners a collaboration between State of New York, state of New Jersey, as well as the Port Authority and Amtrak as well. So you've got four different funding partners who were contributing to the overall rebuild effort. And when you think about it and contrast it with the way we view infrastructure in the state of Florida, so Pat was telling me that the original tunnels are 118 years old.

(06:00)

Well we've hardly been a state that long. It is very different in terms of the challenges confronted in different parts of the country. Our infrastructure tends to be much newer. We are building for population growth as opposed to having the deferred maintenance and some of the major legacy assets that are going to have to get rebuilt across the Rust Belt and in the Northeast, depending on where you are, the challenge can be very, very different. So the funding, you alluded to the funding under IIJA and we are still in the process of sort of figuring that out in terms of all of the programs, the multitude of programs that have been are going to be funded under that or the programs that the criteria has to be written, guidelines have to be written, guidance has to be provided, application processes, all of that.

(07:05)

So 1.25 trillion is an awful lot of money. And you were talking about the infrastructure deficit being 2.6 trillion by the society, American Society of Civil Engineers. Well when I think about that, I think of that, I have to do the math because I'm so old. A billion used to be a lot of money and now they speak in terms of trillions. So I have to do the math. If you just talk and think about it, $2.6 trillion is actually 2,600 billion deals that are out there for you guys to go find and fund. So the gateway is just sort of the kickoff and where I sit and what I think about in terms of IIJA and funding is a lot of the money is distributed formulaically. So think surface transportation, think of the state DOT departments and those monies have already flowed out because there was an existing infrastructure in place to flow the monies from the federal level to the state level for those monies to be deployed.

(08:27)

But there's a boatload of money and grant projects that again I alluded to are going to have to be designed and applied for before the grants are forthcoming and then the financing component can be plugged in as a part of that. But in the state of Florida, so we're scheduled to receive 13.6 billion, which is under the FAST Act it would've been 10 billion. So we're 3.6 billion north of the funding that we would've gotten. But we've scheduled no new product to be delivered, no new projects to be done with that and are using those additional dollars to absorb the significant increase in costs precipitated by inflation both on the materials as well as the labor side. So that's how we're thinking about it and that's what we're looking at.

Gary Hall (09:32):

And we're not going to go in order, we're going to try not to have talking heads and just have a conversation with you guys being present. But it's funny that you mentioned that, Pat, me, Ben. What's interesting from the bipartisan infrastructure package is the amount of money for new programs like 550 million and when you look at the amount of money that's designated for local, a lot of it's actually through competitive grants, which is a new wrinkle. And so Chicago CCA just won $2 billion recently for a red line project, but how state local governments go out and compete for these grants, it's going to be very, very important. The metrics are totally different based on the type of program. It's going to require some sort of partnership with folks outside of government that will require some citizen participation and buy-in. It's going to be a process for governments to actually compete for these grants. And there's literally 180 million for 20 grants, 180 billion for 20 grants, which is a sizable portion of the new money spent. So we're going to see these state local governments or specifically local governments compete in different ways for these dollars and how they sell themselves to the federal government in order to win is going to be an interesting problem.

Kristin Stephens (10:54):

Maybe I can turn to some of the other panelists to tackle some of the markets challenges that exist as we're thinking about how do we finance infrastructure. Certainly we're doing this against the backdrop of a tight labor market. Inflationary pressures, regulations are changing. I mean Natasha, do you want to jump in on some thoughts?

Natasha Holiday (11:14):

Yeah, I mean I think that after 15 years of 15 years plus of low rates that the market is still digesting what this elevated rate market means. I actually think that the Fed has been fairly clear. I think that we just don't really want to accept it, but I think that we should all be preparing ourselves for a sustained higher rate environment, at least another 12 to 24 months of rates that are going to remain high. And so what does that mean? It's a delicate balance between trying to curb inflation and not tipping us over into a recession. And what we are seeing amongst our clients is a slight slowdown from a bond issuance perspective, it's Ben slash Pat mentioned, entities still have a lot of cash. They're still finishing spending those last federal stimulus dollars that they had. They're using that. It's slowing down a little bit of the progress as far as new issuance. And then I think the other piece is that as we see more private partners come into the marketplace that changes the dynamic in a higher rate environment. The numbers start to not work as far as return on equity and debt return on debt.

Guy Logan (12:41):

Yeah, I'll say this in terms of since a lot of us have more time on our hands than we otherwise would like because down so much. I think as an industry we got to think broadly and see what's happening. Obviously if the contraction happens, volume's down, revenue's down, issuers aren't in the market as frequently firms and businesses are getting out of the market. So I think the first thing we as an industry need to do to better serve our clients is work diligently and collaboratively on getting refunding's reinstated when any industry loses 30, 40 and sometimes 50% of your market and there's going to be follow up from that. So I think as an industry we were probably asleep at the wheel per 2017 when that tax act was implemented in December because I think the impact of that is going to be felt in perpetuity obviously until it's changed obviously, and I think it's not insurmountable as an industry come together to get that legislative change.

Kristin Stephens (13:52):

Brad, anything you wanted to?

Brad Guilmino (13:54):

Yeah, I'm looking forward to rates going down. It's kind of hard to carry a TFI, a letter of interest with an extra 75 basis points on a project that's already struggling with capital costs. So hopefully that stability starts to come back here, hopefully maybe it starts to improve a little bit, but obviously we're going to need other funding sources and IIJA was a good thing and it was also a challenge because the states a lot of times threw up their hands and said, we're good, right? Well guess what? The pipelines kind of got full, the inflation was kind of taken care of in some of those earlier projects, but now I think if you go talk to some of these other firms that are developing these projects, they're ready. But now you have the problem of figuring out what's that final funding piece going to be and is that going to be debt? Is that going to be something else that's going to take it? How long is the states or locals going to need to see the pattern on the wall before we try to get some increased funding? So I think that IIJA has to be met the same time with funding and more innovative financing and looking at things a little bit differently than we've had to in the past.

Kristin Stephens (15:00):

Great. So if you all were putting your hat on as an investor, looking forward to 2024, what sectors would you think stand to benefit most from the infrastructure package and just other what you're seeing day to day?

Gary Hall (15:17):

Well, if you look at what's been spent year to date, airports and public transit have benefited the most with dollars being spent. Only 14% of IIJA has been actually allocated thus far, but they're fast out of the gate. I think there will be a requirement for a lot of local match in the public transit space and in the airport space. What I'm excited to see, what happens with broadband and other things that can actually hit rural communities that we don't talk about a lot. So we'll see and we saw a recent announcement by the White House that they're making an intentional effort to go out to allocating those dollars. So the punchline to your question is take a step back, piggyback on what guy said, we bank differently in this current environment when you could sit at your desk and do refunding analysis and indicate where volume would be based on where interest rates were, those were great times.

(16:15)

But trying to get a feel for CIP needs that are evolving, that are being impeded by the rising cost of construction, both raw materials that are constrained by supply chain issues and then labor shortages. It's a different way to bank our state and local government issuers in this infrastructure environment that we're in now away from the rising cost of financing. So it's requiring us to be a little bit more hands-on in contacting folks to get a better feel for when these projects are actually going to be teed up and to God's point, also being creative as to how we can come up with interim financing mechanisms in order to make sure we get design and engineering done. So the ability to get shovel ready projects out the door faster will probably be the bigger driver for where these dollars are going to go and how there'll be local matches than bonding coming with them.

Kristin Stephens (17:12):

Thank you.

Guy Logan (17:13):

I don't have a crystal ball on what 24 is going to look like, but where the need is I think is clearly housing, affordable housing in particular, if you look as we recover or come out of the pandemic, you see it all over police, fire nurses, first responders, can't afford to live in the areas in which they work and being able to earn a living wage but also be able to have a home to go with it. So I think it's encouraging that the mayors are engaged, right? Because think about mayors versus governors versus folks in congress. Mayors can get stuff done in a more timely manner, but their issue is their finite resources, they can only go so far. Then it becomes a burden on taxpayers, folks like us that are paying hotel occupancy taxes when we travel, et cetera. So to me a thing that needs to continue the growth in the economy and to serve a lot of our clients around the country being able to have affordable housing because every city, state and county has police, fire and medical.

Natasha Holiday (18:24):

Yeah, I'll just jump.

Ben Watkins (18:26):

So to amplify that, both in terms of what Gary was talking about, thinking about things differently and from a finance standpoint on the affordable housing thing, just thinking about tangible examples, it was a major legislative initiative to change zoning laws to property tax rebates. The state doesn't get any property taxes, local governments do, but there were incentives specifically targeted to affordable housing and we got a thousand people a day moving to Florida and that's one of the biggest issues that we confront on a go forward basis is a affordability of housing and then thinking about it from a finance standpoint, the infrastructure's already in place, right? We've got the playbook already designed. We know how that finance both single and multifamily housing, so that framework is already in place to prime the pump and think about it, incentivize it in different ways.

Natasha Holiday (19:28):

Just to add, I mean I think it was definitely one of the areas that I think is one of the bigger issues that government officials are really focused on is affordability. And you're right, we have a playbook for affordable housing, but we don't have a playbook per say for workforce housing and it's actually probably it's the hardest housing to build and it's really an area of opportunity for innovation and ingenuity. We have seen some new structures emerge in California that's also being used in different places, the need for states and federal governments to be able to lower the cost of land. So if we're going to think about redeploying parcels of land that are government owned, federal government thinking about putting bigger parcels of their land and bidding it out, we'll be very, very helpful to helping solve the affordability issue in this country as far as living.

(20:23)

The other thing I think that will benefit tremendously, at least that we're hopeful, and I think a lot of people out there in this industry is renewables. And so it's still kind of in its infancy. A lot of people don't know, but a big portion of what RBCs Muni group, about half of our business is syndication and tax equity. So we do a lot in the renewable space and solar wind and power and the ability to leverage tax credits and ability to leverage equity differently going forward is going to be a really a big piece I think for infrastructure in our country.

Guy Logan (20:59):

And also in the market. Looking ahead to 24, I think this, we've been spoiled, Natasha indicated 15 years. I mean come on, we're refunding 25 bonds three years ago who thought that would happen? We thought it was going to last forever, however it didn't. But looking ahead, I think the Fed is telling us what they're going to do is going to be higher for longer. And if you harken back specifically to last fall, probably seems like a decade ago to some last fall, our market started to stabilize because the Fed was signaling, hey, we're going to start cutting in late 23. And from about, I want to say about October through almost second week of December, the volume was pretty heavy and steady and I think that's directly attributable to the market saying, Hey, issuers felt confident that their deals are going to get executed at proper levels and I'm hopeful that look, it rates are going to be higher for longer. We're off that spoiled plum so to speak, and hopefully that'll send a message and help spur some of our issuers to implement their capital plans as a lot of the covid money kind of wears off, runs off their balance sheet. So we're optimistic we don't need another sub 300 billion volume here.

Kristin Stephens (22:17):

Thank you for taking such a broad look really on infrastructure because I think sometimes the word infrastructure people automatically think of it's transportation, roads, bridges. I love that you all brought in broadband workforce housing, affordable housing. I mean I personally think we're in such an interesting moment in the history of public finance. You always see cities evolving, but right now this reinvention that's underway is quite spectacular and I think of some of the more innovative initiatives around the country, the efforts and strides we're making on the housing front are one of them. So I really thank you for raising those points here too.

Gary Hall (22:57):

To that point, if I'm sitting out in the audience today, and hopefully after you finish this next couple of days, hopefully we can talk about the bifurcation of outcomes based on infrastructure need. So most of the bipartisan infrastructure Act is catch up financing. We're trying to catch up with all the infrastructure degradation and lack of attention that we have for years, but what are we doing to protect ourselves for the real harm that's taken through the climate change through Ben, you're in Florida and obviously you've seen a lot more hurricanes. I'm in California where we have more wildfires and places in you in Southeast and you've got levees breaking New Orleans. I mean, what are we doing to really prepare for the perilous or adverse impacts of climate change that's going to help make us truly sustainable going forward and the funding mechanisms for that aren't really present.

Ben Watkins (24:02):

I can tell you what we're doing in Florida, please. No, but I'm not Pat McCoy though.

Natasha Holiday (24:08):

This is, he's talking about New York.

Ben Watkins (24:10):

He's worried about the tunnels being flooded with Hurricane Sandy and all of the internal infrastructure on the tunnel that's damaged and retrofitting that both well, getting the new one built but doing things differently and thinking about it differently. I know within the state we've got a resiliency infrastructure program funded. It's a match program with local governments and it basically says anything. And a lot of the resiliency is dealing with regulatory issues, coastal setbacks, stormwater, flooding, inland flooding, hurricanes. We invented emergency management, we do emergency management. Before FEMA even existed before that whole thing was federalized. So we know how to do that well the initial response, but the real key is building infrastructure to be able to withstand, and we did hurricane codes post hurricane Andrew in 93 and you can look at the Google maps after the storm and see what is pre 93 statewide building code versus post 93 hurricane building code one will be gone like Fort Myers, everything's on the ground.

(25:36)

They hadn't had a hurricane since the early 19 hundreds, so everything's built on a slab on the ground. Well guess what happens when you have 13 feet of water, it washes away. It's built on sand, but the building codes on pilings with wind loaded windows and it's more expensive, no doubt about it, but it's the kind of thing that we need to be thinking about across the country and it means different things to different people depending on where you are and what you're having to deal with. But that's the kind of infrastructure that is going to have to be built prospectively to deal with the volatility in weather.

Natasha Holiday (26:18):

Oh yeah, I was just going to say, and I know this is an infrastructure panel, but I think one of the offshoots of climate and its impact on our infrastructure is how it's insured and there's been an emergence of avoid as far as insurance around assets, whether it be residential or commercial. And so CAT funds and things of that nature I think will have a much more meaningful role to play as far as protecting our infrastructure going forward because now it's not just Florida or California. These impacts are wider reaching and I think you're going to see governments taking a more active look as private insurers decide what they are and what they're not going to be.

Ben Watkins (27:08):

Yeah, we have those too. Yes.

Kristin Stephens (27:10):

Just so you know, I spoke before the municipal analyst group of New York last week and it's amazing, but many of the same themes came up. We talked about event risk and whether it was being properly valued in the market. We talked about the bifurcation of outcomes on infrastructure needs just like you spoke about. And with respect to resiliency, and I'm wearing my credit hat here, credit and analysis hat, but making the investments today is something to do to protect your credit rating down the road. And I know in our market in any market issuers are so focused on maintaining their rating and this and that, but sometimes even if it does present some kind of modest rating pressure is the pressure of maintaining that rating worth the trade off of not being properly prepared for the events that are coming down the line. So all very interesting points.

Natasha Holiday (28:03):

I think the other flip side is that I think about an agency like Port Authority, which puts a lot of money into the upkeep of its infrastructure, but I think that we've got to also incentivize those type of issuers who are making investments. So I think we always see the downside, right? The issuer gets the knock on the downside, but I don't think we are really factoring in as a benefit for the issuers that actually are making the investments. And so we need to have I think a more balanced conversation in our industry around investment.

Kristin Stephens (28:39):

Brad, I'd like to weave you in here. I know you had some thoughts. We spoke before the panel about transportation and what you're seeing there

Brad Guilmino (28:47):

And the breadth of IIJA means if you're having a transportation project, it has to account for affordable housing. You have to pay more attention to transit and to rail inside of that to the sustainability that we now have to focus on in the design. And so really that's just coming to a head of how are we going to pay for that? And inside of transportation, I think we're a little bit of a crossroads. Is it motor fuel tax? Should it be sales tax? Should it be something completely different? Are road user charge still too much of an idea way into the future? Is tolling going to be kind of now the new primary driver to basically supplement transportation revenues? How are these different modes going to start to work together? We see it a lot of times with inside of cities with express lanes, congestion, pricing. Those conversations are way broader than they were five years ago. And absolutely we didn't have broader conversations 10 years ago. So I think that we're going to have to figure out the funding and we're going to have to make moves and not just wait around for our politicians. Otherwise these major projects are going to have a real struggle to get done.

Natasha Holiday (29:55):

And I think what we're seeing is that in this climate of uncertainty around the economy, that there is a little bit of a resistance from securitizing or dedicating new revenues. So I think we went through a phase where there was a series of revenue streams that were dedicated or trued up around infrastructure, and now you see little bit more of a little bit more reserve around the ability to commit a revenue stream when you just don't know where the economy's going to be in the next two to three years.

Ben Watkins (30:32):

Well, so one of the big, to your point on that, the biggest obstacle or challenge we confront now is that you'll have a project on the books for 50 million, a hundred million dollars and it comes in two x what the original estimate is. That's right. And in that environment people are gun shy. I mean there's no doubt about it. It's like, okay, they call it what value engineering. That means cutting some of the stuff, some of the fluff out and getting down to the essentials of what the project is but can still function. So there's a lot of apprehension on the issuer side about the cost of projects and getting them completed successfully.

Kristin Stephens (31:16):

Very good. Let's talk about a different area. What about water, for example? Water, we have a lot of investment needed there to improve supply resiliency. And I know IIJA allocated about 50 billion to address lead service lines. We've got the emerging contaminants like PFA's, we have other risk factors, and then last month the National Infrastructure Advisory Council delivered its recommendations which included removing barriers to new ways of funding water projects and including enabling privatizations concessions, other non-traditional models of funding. So Guy, I know you had some thoughts on water that you were hoping to share.

Guy Logan (32:03):

Alright, I see some people nodding off out there. So work with me here. Water stay, water, water, water, water, water. Your buddy with me. All right, here we go. Good.

(32:17)

Look, it's important. We need it for survival, right? Number one, I said it earlier, we need it. Our cities, counties and states need it for economic development water. We also need to make sure all our communities have fair access to clean and sustainable water. And then you have to make it affordable. Clearly with the infrastructure act water's at the top of the list in terms of getting that type of capital into ground to build to help with the deferred maintenance. Some of the more prominent challenges some of our issuer clients have faced over the years are tied to water. Can't mention names. These probably should be obvious to this group who some of them are, but trying to solve these problems of getting the money in the ground. It's one thing to, you need the infrastructure. So we've got a chunk of money now technology and also the deferred maintenance and ongoing maintenance because we're going to be back here again, think about it from a technological standpoint in this day and age, we can't detect early stages when there's lead in pipes measuring the diameter and the pressure on those pipes.

(33:35)

All these things that they just lapse for so long. You're starting to feel like a hundred years Ben. Really. I mean come on. But really I think this goes back to the point I was trying to make earlier. As we think about on these panels, just try and try to make them somewhat interesting. So think about our industry. Normally we have been reactive. Okay, what do I mean? So the great recession, our industry O nine, here comes Babs. Obviously that was great in the taxable market. We got little help, I guess other significant bankruptcies, two of which are very notable. So 13 Detroit and then Puerto Rico, which is still ongoing. But in each of those instances, it forced us as people in this industry to come up with creative ideas, working with our issuer clients, particularly in the case of Detroit. So what is it, since we do have a little more time in our hands, what is it as we as bankers, lawyers, financial advisors, what can we be doing now proactively to get this boatload of money in the ground and help our issuer clients with the matches, particularly related to water, but also to transportation, because we're going to continue to feel the contraction.

(35:00)

I'm not suggesting Munis is going to go out of business or in issue will be here for another a hundred years, but what is it we could do proactively to serve our clients and help them get this more user-friendly way to get this IIJA money into the ground for water projects and other projects? Quite frankly.

Gary Hall (35:24):

It's funny. So a lot was made of the bipartisan support for IIJA, which is great. We're going to see how that bipartisan support or ties extends when these dollars are allocated and water's going to be very, very interesting. So right now we've got this bifurcation again where we've got deferred maintenance and obviously safety dealing with things like we had in Flint and other places, right in Jackson, Mississippi. But on the resiliency front, and you've got states like California and Nevada and Colorado fighting for water rights. And today we don't see how that political polarization has made an impact and how these dollars are being allocated to see who's going to be a winner, who's going to be a loser. But that's something that I'm keeping my eye on and wondering whether or not we're going to start to see the polarization that we see in other aspects of public policy play itself out in the water constraints.

Guy Logan (36:23):

And there's when obviously a lot of the pressures that some of our issuer clients face, it's not a surprise. So some of the things I noted, I mean those are many years in the making. It's like a slow moving train that ultimately ends in a wreck. So it's going to, I think, require something of this ilk. I don't know how you get it done in this polarized environment as Gary's saying, however, we have to start really thinking in a serious way. I made on several calls on a client that's under pressure right now in the water space years ago, but there was not a willingness to have a partner at the state level and then subsequently at the federal level to undertake which was necessary. So now we're in a sizable American city where people can't turn on their water. I mean, that's just bananas to think that's happening, but it really is.

(37:18)

So what could I industry potentially do? I don't know. Many of the stakeholders in this room, including the ink or the website of the bond buyer can help spur something some type of, you don't need another committee, Ad Hoc group that has, I don't know, 90 days to come up with something to help put this stuff in the ground. And I think working together, ultimately it's going to first benefit our issuer clients and us as Muni professionals because can't, I don't think we're part of the problem if we sit idly by, we know these challenges. We identify them at conferences like this frequently, but what is the action? We have to be part of the solution to help come up with the new version, shall I say, of Babs, right? There was obviously a great recession. Boom, Babs, our industry came up, it benefited issuers in the industry. Likewise. So I don't claim to have an answer for it, but I think if you start legislatively and you have a group, an industry bipartisan group such as our industry to get it done and we're small enough, just a mere 4 trillion Ben.

Ben Watkins (38:35):

So Guy water's cheap. Did you know that? So no, seriously, when I think about water, the biggest issue on delivery is been a failure to maintain the systems adequately for maintenance and for maintenance. And if you look at it over the long term, it's a user charge and water's cheap, and now it's getting ready to get very expensive. To your point, if we rely on the traditional, the user and the customer pays for the infrastructure and the quality of the water being delivered. So it'll be interesting to see, and by the way, I'm Pat McCoy. So back to the politics and how that's going to play out. I'm not so sure we're going to be on the winning end of that whole thing given the competitive nature of the political landscape, political environment currently.

Kristin Stephens (39:40):

Well, what about the privatization side of it? I mean there are some smaller systems that have gone that route. I mean, do you see that picking up in water or in other sectors?

Gary Hall (39:50):

I think the drivers for are different, right? So when I used to think about public private partnerships, my focus was governments trying to get access to innovation, maybe to get a project done that had a windfall in some sort of way to enhance service delivery. But today the drivers are shifting construction risk and being able to accelerate completion of projects because the cost of construction is so significant, as Ben mentioned, when you delay getting projects out the door. So folks are turning to these availability payment structures in order to get these projects done faster and have the benefit to benefit from the projects. So I think you get more buy-in. I think public private partnerships have become a little bit more receptive by labor and I think you're going to start seeing it actually explode. I hope I should say I'm a partner in an infrastructure private equity fund. So maybe that's just me speaking out my own aspirations, but we are seeing a lot of projects in that space.

Natasha Holiday (41:02):

What I want to say, actually two thoughts. I mean the first is the UK's water system has been privatized for over 30 years at this point. So we do know that privatization works, although we're starting to see in the UK some pressure there and maybe even a little bit of a reversal or thoughts around a reversal after a 25 year experiment. So what I do think is very interesting because we are also in a higher rate environment, is that one of the things that has always prohibited the public sector from getting on board with doing more P3 is that the notion that I can do it myself cheaper. Well, that idea of being able to do it cheaper is kind of starting to go away and a higher rate environment. I think that it gives us a shot at thinking about it a little bit.

(41:57)

Like Gary's saying, the pros and cons, the ability to create real partnerships. And we've done a number of P3 transactions and the transportation space, we did a JFK terminal six at the airport leveraging debt and equity to try to get these deals done and working with the port authority, et cetera. So I do think there are examples out there. I think that from a water standpoint, I do think there's an opportunity. We've got an allocation of federal funds if we just took one aspect of it. So let's just focus on the last mile of lead pipes. If we just focused on the last mile of lead pipes, which right now in most jurisdictions is the homeowner's responsibility, what if we allocated those dollars as a subsidy? So if you engage in the last mile of replacing your lead pipes on your property, then you're going to get a tax rebate and we'll structure it in a way that we leverage some of those federal dollars to subsidize. I mean to me, those are the type of things that we don't actually even need legislation. We just need to write the rules at this point because we have an allocation. And so I think that that's a very concrete example of how we can think about tackling the water issues that we are facing bit by bit.

Kristin Stephens (43:23):

It's a really interesting thought, Natasha. I often say the same about it's the last mile of broadband. It really applies to that space too.

Natasha Holiday (43:33):

Even with the broadband, there was a federal program probably 10 or 12 years ago that finance the development of broadband. And so there's some cities out there that kind of have broadband that's actually underutilized. It was for education initiative. They wanted to ensure that there's quality broadband access for education. One of the things that we've talked about is that's one of the asset classes that is highly desirable by our private sector partners. The ability to build that out, to privatize that, to create some type of structure where the investment is actually being made by a private partner, they can build it out. They get some of the upside and a city or state gets to share and the upside as well. To me, those are our fixes that if we had, it's interesting, I think it was interesting that for the third year government officials said that infrastructure was their highest priority, but I tell you, it's the first thing to get cut or pull back on is because it's also not particularly sexy. But I do think these are some of the things, right? Thinking about broadband growth and a public private partnership structure that could really, really help move the needle for our communities that are underserved and have lack of access.

Kristin Stephens (44:52):

Thanks Brad. I know anything from you on the P3.

Brad Guilmino (44:55):

It's interesting, right? I mean when you look at transit oriented development, there's a big push out of USDOT. We have access now for RIF and TIFIA. Obviously the construction loan environment is not beneficial for the private sector right now, but tying it into rail, tying it into broader housing services is that small amount of acceptance of, Hey, how can we better leverage these other initiatives? How can our communities and our cities and congestion benefit by these type of projects starting to come in? So maybe that's going to be a little bit of an impetus. So it's not just simply we're going to have our one-off states that embrace P3 versus others that say it's just not right. Is the cost certainty piece going to be so important now because of how that looks, we'll see.

Natasha Holiday (45:42):

So Brad, one of the studies that was done, I think Dennis, who used to be at Ada, did a beautiful, just eloquent presentation pre covid that showed property values associated with proximity to transit hubs, right? That the proximity to transit hubs increased property value. And so I do wish Pat was here because one of the best deals that he did was the value capture around Hudson Yards. So this was a project to extend the subway line, the seventh Avenue subway line, all the way over to the west side highway. And what they did is effectively a value capture, which is a TIFF district. They locked in the value at a certain level and then all the incremental value that's created because of the transit expansion that fed into everything Brad talked about, housing commercial real estate office goes to subsidize the bonds and then the city put a soft backstop on it. So if there is ever a shortfall that the city would subsidize, fortunately they haven't had to. And so value capture is probably a type of structure that could be very viable in certain communities around the country.

Brad Guilmino (47:00):

Especially for not building office space.

Natasha Holiday (47:04):

Maybe.

Kristin Stephens (47:06):

This is a little different here, but if so, we can leave a little time for our audience. What if we did a quick rapid fire here down the line? I give each one of you all a chance to either leave our audience with a thought that you want them to take away or a headwind or something that keeps you up at night. But I thought we'd just go right down the list and let's hear from our audience here about what they'd like.

Gary Hall (47:28):

Sure. I'll give it a start. So we talked a lot about the cost of construction and supply chain issues and we talked about labor shortages, but one of the things I don't think we think about is the silver tsunami with construction skill labor. McKinsey just did a study, 41% of all construction skilled laborers are scheduled to retire by 2031. That's just eight years from now. So who's going to be those folks out there tomorrow on the front lines on the construction projects, we have a true labor shortage in our country that's only being exacerbated in my view by some arcane immigration policies. And we really have to deal with who's going to be this construction labor force for tomorrow's.

Natasha Holiday (48:22):

A great point. One of the things that interests me a lot is smart technology and what is the future for smart technology in our country and how does it begin to manifest itself? And so I just think that it's not core infrastructure in the traditional sense that we typically think about, but the city of Toronto had done a very interesting experiment in partnership with Alphabet and Google. They had given them a parcel, a couple acres of land that weren't being utilized to just reconceptualize what a smart city would look like. This is everything from how you dispose of your trash to sensors in the ground for self-driving cars. And so the interesting thing is that I think from a private ingenuity standpoint, I think the private side is a lot further along than the public. And so the question is at which point in time do they merge and how do they merge? And then how's that financed? Is that another application for equipment finance or is that start to fall and fold into a more broad general bond finance? But I think that that's a really interesting aspect to think about going forward.

Guy Logan (49:39):

For me it's artificial intelligence, what the impact's going to be on our issuer clients and our industry more broadly. And the other one I got a little ahead of you, I guess I offered up this ad hoc group comes together to help benefit the industry and I'd have to look to our colleagues at the Bond Buyer to maybe champion something of that nature.

Ben Watkins (49:58):

You're chairing it guy.

Guy Logan (50:00):

You have the power of the pen.

Brad Guilmino (50:04):

Yeah, I think it'll be interesting to see how collaboration and prioritization continue is there's a reason for it. IIJA reinforced it. But now with all these other issues that everybody has their hand out, whether you're water, whether you're housing, whether you're transportation, there is commonality, but at the same time, somebody's got to prioritize something because state general funds simply aren't going to be to kind of do it. So as we figure out what projects make sense as we get innovative and trying to stretch these dollars, it'll be really interesting to see if between this and the next transportation authorization bill, what comes out and can we build on those lessons learned and all that big investment and meaningfully set us up for the future.

Kristin Stephens (50:49):

Ben?

Ben Watkins (50:51):

So I was trying to think of how Pat would answer this. Well,

Kristin Stephens (50:54):

We're very glad to have you here, Ben.

Ben Watkins (50:56):

This is how I would answer it. The answer for me from my perspective is easy. That'd be a category five in Miami-Dade County. And I was thinking about Pat and I was thinking about the position that he's in and I was thinking about all of the cats that he has to heard and all of the balancing acts that he's going to have to do tap dancing on a razor blade in order to cobble together and put the funding together. And then the federal government being a significant funder of that project and managing all of the interest of those various stakeholders to get that critically needed piece of infrastructure in place is going to be a really big deal. And then as I think about that one step further, my real concern in my waning years is the propagate spending at the federal level, which seems to know no bounds in the steaming pile that we're leaving behind for this younger generation to deal with.

Kristin Stephens (52:09):

That happy note.

Ben Watkins (52:12):

I'm known for that.

Kristin Stephens (52:14):

Well, it's all so important in this time of really dramatic both demographic and technological change and there's so much for our industry to do here because at the end of the day, we need to be thinking about this and making sure we're investing in infrastructure in the right pockets. So I think it's great to have this participation and collaboration where I know we'll get to that solution. So with that, please, we really would love to hear from you and see if there are any questions you might have for our panelists here. Oh yes. Great.

Audience Member (Jillian) (52:59):

Hi everyone, I'm Jillian from a Assure Guarantee. I thought it was interesting the way you were talking about how there's been a hesitancy to securitize new revenue streams, but that there also needs to be a lot of innovation around that to kind get away from the traditional means of funding transit, not just using fair revenue or sales tax revenue. And I know that New York City has recently dedicated casino revenue for the MTA, and you also mentioned how there's been TODs with TIFFs around them to use that funding for infrastructure. I'm wondering if you can share any other examples of interesting ways that cities have used less traditional ways to fund transit infrastructure?

Brad Guilmino (53:50):

Yeah, I mean you have to overturn all of these stones, right? I mean that's what you're going to have to take a look at. We've seen some transportation funding and lottery proceeds start to creep in some places up in the northwest just because there's simply nothing else to find. I do think you're going to have to harvest a little bit some of the private sector dollars. We might have to get more creative too about maybe some backstops or some guarantees on some things so we can get down to lower coverage levels, a little cheaper cost of borrowing. I think we're going to have to look at all of these different type of sources to try to find some way to get these done. And hopefully on the TOD side and the private developer side too, they're willing to put some skin in the game and have a little risk there so we can develop something broader than just that one singular asset, right? It's going to be that combined asset that's going to have a lot more use that's going to accomplish broader regional goals.

Kristin Stephens (54:49):

Anyone else on that one? No, I mean, I would just say that there's a lot of examples of credits in our market over time where they've come up with some really creative solutions to fund surplus revenues to transit. And I think as we continue to see this sector evolve, we'll find more different funding solutions come to bear too. But it's a great question and thank you for asking that. Were there any other questions out there? Quiet group today.

Kristin Stephens (55:22):

Yes. Thank you.

Audience Member (Rich) (55:28):

Glad to ask this because it's kind of a perennial question. I'm Rich and merit research. I say that perennial issue, this is a core issue for municipal bonds. It always has been and always will be. And yet we keep repeating the same problems every year. One of the things that I've noticed that if you look at the other side is your evaluating governments and their ability to do this right, is that there doesn't seem to be the level of thought if you really closely examine it as to what the estimated useful life is of the project that's being financed so that we can better assess the government's really their financing pattern. So there's enough money to pay for it for the future. That is you try to work it out so that it's a bearable amount for the people benefiting. If we did that, I think that's going to cause ability for us to do better evaluation.

(56:35)

And I've done some research on this already and rather than get into that, the core issue I've found is it's really problematic that if you ask the accountants, the CFOs, how much time they put in estimated useful life and not just give me a range of 50 to 70 years or 10 to 30, but being more specific from an engineering standpoint on this, I'd really like to know who's putting the pressure on them. When I ask the accountants, they say, we take whatever the city gives us. When I ask the city, they say we give them whatever the department heads tell them to do. To me, I don't think it's done very well. I want to know if you have looked at this issue and whether you believe in your role as being bankers, financial advisors, et cetera, more pressure should be put on that so we can do a better job of evaluating this.

Kristin Stephens (57:27):

Great point.

Guy Logan (57:27):

I'll say this going back to my Moody's days, and that's going back a minute. In the higher education space, they used to, there's a metrics to estimate the average age of plant. And really, I think it's one thing to estimate it, but it's another thing to start funding it, right? You're talking about funding depreciation of the asset that was financed. I mean, you want to talk about a big bill. I mean, that's the solution, but how do you get that done? I'm not so sure if there's a measure out there that measure the average Asia plan. It's accumulated depreciation over depreciation expense at the time. I don't know that there's a measure out there. I know for one thing, it's not a key focus when our clients are getting their transactions rated, but it's clearly, to me it's important to measure it, but funding it, that's the home run.

Gary Hall (58:31):

I don't think I've had an investor on any deal ask that question.

Natasha Holiday (58:38):

Yeah, I mean it is interesting. I don't know if when you start to think about the politics, right? Most city and state governments beyond their rainy day fund don't have millions and hundreds of millions of dollars that's going to be able to sit steel long enough for effectively like a repair and replacement fund. So I thought, I guess when I'm listening to your question, one of the things that I thought about is just how we finance in a cookie cutter way, assets that actually have much longer useful lives. So if you're going to put a new water pipe in and you're amortizing it 30 to 40 years, that actually doesn't align with its useful life. And so the ability to spread that cost out in a more accurate way does allow, I mean, it is obviously you're paying it forth to the future generations, but it does allow you to be able to maybe accomplish a little bit more because you're spreading it out over a longer period of time as far as the pain.

Kristin Stephens (59:46):

Great. More questions? One more. Oh, hey Diana. Yeah.

Diana Hamilton (59:54):

Diana Hamilton Sycamore Advisors on the useful Life issue, actually, SRF under EPA is requiring, at least they are in the states I'm dealing with that you come up with an asset management plan prior to being approved for water and sewer loans. And this is actually a huge issue because actually, although was in Pompeii and I was thinking they had sewers then, sorry. But the point is that there is actually some technological innovation, particularly with respect to pipes, so that you're now getting certain pipes that can last 70, 90 years. And we are working with local governments, via loan, and obviously lead service lines is a huge issue in replacing those. And so again, useful life very much plays into your replacement and your asset cycle because those are significant costs. There was a term that used to be bandied about by the rating agencies. Maybe I'm dating myself, but intergenerational equity was one of the terms that was frequently used. But one of the problems that you run into politically since I've had to testify before city councils, is they automatically say, you're burdening my grandchildren. So you kind of run up against this issue of the reality of the cost. Who bears the cost of an investment that's really going to last 50 years, and how do you allocate those costs over time? And how do you do so in a way that's politically feasible?

Kristin Stephens (01:01:33):

Thank you. Is it a question or more of a comment? I think it's a statement. Statement. A statement of fact. Well, Diana, thank you for the very strong closing comment. Here it is, music to my ears to end this discussion on the topic of age of plant, which does happen to actually be one of my favorite credit ratios. But anyhow, it was wonderful being here in front of you all today, and thank you so much to our panel for your time and thoughtfulness here. Thank you.