Investing in Infrastructure

Arizent will survey municipal finance and rating agency business leaders to examine opportunities and obstacles in three key areas of infrastructure over the next 18 to 24 months: 1) Transportation (bridges, roadways, airports, rail and public transit), 2) Utilities (power generation, water and refuse) and 3) Education systems. We'll investigate the role of government financing, public-private partnerships and new government legislation to determine the effect they will have on accelerating investments and reducing bureaucracy.

Transcription:

Michael Moeser (00:08):

Anyway. Hello everyone. I'm Michael Moeser, Senior Analyst with the Bond Buyer. We're going to be talking today about Investing in Infrastructure, recent Bond Buyer research sponsored by Assured Guaranty. I am joined by my C colleagues, Ben Watkins from the state of Florida, and Chris Jumper from Assured Guaranty. This presentation is available to you for you to download from the conference, we'll be revealing research results and this panel will be providing their insights and interpretations. And from what I've chatted with these gentlemen earlier, we have about an hour and a half's worth of convo to fit into 30 minutes. So without further ado, let's dive into the research. And so this research was conducted earlier this summer among over a hundred qualified municipal finance industry professionals. And really the purpose of the research is to explore things like regulations, predictions, concerns, weighing on the muni industry.

(01:10):

And in terms of the folks that we talked to roughly over half were director level and higher. And what you can see on the left hand side, a wide array of people ranging from analysts, issuers, investment bankers to attorneys and muni advisors, and both buy side and sell side as well as the issuers. So let's just dive into the research. So the first question that we ask folks is what do you see as the most critical infrastructure initiatives or needed areas of investments in the US cities and towns over the next five years? And to be honest, I was on stage two years ago with both these gentlemen in Washington DC and the slide looks exactly the same. It's roads and bridges, waters and sewers. And I guess I've got to ask here, maybe starting with Ben, it's like we're at the roads and bridges and I live in Texas. We talk about a lot about high speed rail, but it's the roads and bridges that get funded. And Ben, what's your thought here in terms of is this strong demand to replace crumbling infrastructure, deal with disasters, lead pipes, or is it for expansion? What do you think here?

Ben Watkins (02:25):

Right. So from our perspective, I think you lose the ability to generalize makes it really difficult. And what I'm talking about that is, so Florida is largely reflective of these same things. So it's roads and bridges and water and sewer, but what that means in Florida is very, very different from what that means in Jersey and New York and California, for example. And probably not a good example,

Michael Moeser (02:56):

Don't forget Texas.

Ben Watkins (02:57):

Yeah, well there is Texas. So we don't have crumbling infrastructure in Florida. That's the bottom line. And so the spending and the priorities are exactly the same relative to what's reflected here, but ours is driven by population growth, not aging infrastructure. And so those are two fundamentally different things in terms of how do we fund those and how do we provide for the need. And the further you get away from on the ground, rubber meets the road, the less effective the solution is.

Chris Jumper (03:31):

Very good.

Ben Watkins (03:31):

Chris? Thoughts?

Chris Jumper (03:32):

Yeah, so again, I agree with you. It kind of looks the same, but these are long-term projects. Also, we're still way behind the curve when it comes to the infrastructure report card by the American society was still engineers. I think they came out with a C minus, which it's passing grade and it beats the heck out of where we were like two years ago at a d plus. It's roads, bridges, we're seeing a lot. We're seeing a lot of water and sewer. Also, the one thing I thought was interesting here is we've seen a flurry of airport deals and in particular like JFK, just a tremendous amount of airport deals, which I'm surprised it only got 10% here. The other thing is rails. We did a big bright line deal this year and we're seeing more and more of that. We're seeing a lot more public transportation things like gateway and whatnot, doing the tunnels underneath the Hudson River. So

Ben Watkins (04:37):

On the Bright Line deal, thank you very much, Chris.

Chris Jumper (04:40):

Oh, well that wasn't me, but I'm sure Lauren and Sam will appreciate that. Thank you.

Michael Moeser (04:46):

Well definitely hear you. My hometown of Austin, we're on the second airport expansion in less than 10 years. And for the next slide, I really want to draw your attention to the fact, and Chris raised this here, there's 10 priorities. How can you have top 10? I remember when Starbucks bought, what was it? Lab, lounge or that bakery, and they said, if it ain't 10%, forget about it. And you've got eight out of these 10 priorities that are top 10, right? They're top priorities. And so when we think about the next slide in terms of we ask muni leaders how confident, how optimistic are you that we're going to meet these critical infrastructure needs in the next five years, 10 years, over 10 years, and we don't even have half being very optimistic in the next five years. Okay, so that's one administration. Next 10 years, it barely moves. 44 to 45 is not statistically significant. And then when you get to more than 10 years, that's pretty far down the road. You're barely over half. And so maybe Chris, because you brought up the priorities, do we have too many of them?

Chris Jumper (05:52):

Well, and again, I think we do have a lot of needs. They seem to all have come at once. And again, I live in the northeast, so a lot of ours is rebuilding, upgrading, expansions, replacements, that kind of stuff. It all seems like everything from roads to power, water and sewer, ports, airports, everything is hitting at once. I think the big challenge is affordability. I think some of the concern is probably based on history and what they're projecting in the future. You had interest rates spike up, you had construction costs, significant increases, material and supplies delays. So judging from all that, the past couple of years have been pretty rough. Hopefully things are improving today. They're supposed to cut rates. Maybe that starts to relieve some of the blockage.

Michael Moeser (06:49):

Ben, my dad always said, you either got to fish or cut bait and you talked about rubber meeting the road. Let's get the brass taxes is expiring. Legislation like IJA, the jobs and tax acts cut is legislation. Some of the issues here, why are people not overly optimistic

Ben Watkins (07:09):

And enthusiastic about this? So listening to the mayor yesterday, mayor of Philly, for you guys that were here, intergovernmental collaboration, let me translate for you. That means let's find somebody else to pay for it.

(07:29):

And in terms of the northeast and what it means and what the cost is, it's very challenging. The thing that occurs to me, and I think how I can help inform the discussion is relative to our own experience. So how does Florida react to this? Well, in our world, it's all about self-help. I mean, relying on DC for solutions is not a good bet. That's what I would say when I think about these projects. And I understand the challenges, especially in major metropolitan areas and the affordability issue. But is this a federal or a state responsibility? That's what I would say. And so I think about the infrastructure and some of the things that are being provided in the IJA. Most of it is transportation spending and it's formulaic. It's not even project specific. And then when you get into the grant program, you get the political patronization and our state is not the right color to be the beneficiary of that.

(08:35):

I'll say that. So we talk about equity. Well how about equality in terms of how the funding works? The other thing I would say is it's a responsibility of state and local governments. And that mechanism has been muni finance and has worked very, very well for many, many years. And not withstanding the, and so I think of tax credits and I think the roach motel of Muni finance, I mean that's what it translates to me. And there's zero accountability around the space. You have no idea how much it costs, it's not targeted. And the further you get away from the project, the less effective it's going to be. And so I'm a big proponent, I'm an old guy and an old fashioned guy. Let's use the traditional mechanisms that have worked for this marketplace and building America's infrastructure for the last a hundred years and that's called tax exempt financing.

(09:34):

And you look at these great new programs, new shiny object, and they're all funded with tax expenditures and tax credits primarily. And that's not good for our marketplace. And that leads to not the desired result in the money coming out of DC is what I would say. So there's a more efficient and effective methodology mechanism that works. Think about sfs. Let state and local governments make the decisions about what projects work for them in their jurisdiction. You can tailor the project to the funding and meet the need. We're about developing solutions to problems, not about saving the world. And that can be done very efficiently, very effectively with the models that we have rather than creating this new thing.

Michael Moeser (10:33):

Well, let me stop you there. This is a great, it's not the Ben Watkins hour. Oh yeah, sorry. Let's talk about saving.

Ben Watkins (10:39):

I have a lot to say. I have a little time to say,

Michael Moeser (10:41):

remember 90 minutes into 10. So I want to talk about this optimism, the inability to get things done or the perceived inability. And I want to talk about conflicting priorities. The next two slides we're going to talk about just that conflicting priorities and strangely enough political dysfunction, which you'll see why that's important. So on this next slide in the research, when we went out and we asked folks, muni leaders about EVs, now we all want to save the planet, definitely understand climate change. But the reality came down to what do you think about hybrids and EVs? Does it have a negative impact on funding stuff like roads and bridges? The number one initiative priority, and I just want to raise a few stats here.

(11:28):

Pennsylvania pass an EV tax. When you have an EV and you want to register the car, you pay the typical registration fee. But on top of that, you're paying EV tax. It's $200 first year, 250, the second 250 plus cola for the third year in Texas, it's 400 bucks up front. We used to call that the Elon Musk tax, but we sell a lot of rivian and lucid, et cetera. So it's an EV tax. We collect it for the first two years. We realized after 30 minutes you may not want that EV anymore, but we want the $400. So it's for two years and then it's 200 every year after that. My previous state where I lived California, it's a hundred a eight to be exact. The average car in California gas car pays $300 in gas taxes that are used for roads and bridges.

(12:22):

If you multiply the delta between the $300 a gas car pays and the a hundred bucks a Tesla pays for the roads, you're at a $200 negative. You multiply that by the 1.1 million EVs in California, you're at a two $20 million hole in your budget. And newsflash, if they actually do ban the sale of gas cars and 2035, that hole is only going to get bigger. And so we've got about 30 states that actually have an EV tax. California's in the middle, Pennsylvania and Texas are on the high end with 20250. And so I guess the question here, maybe I'll start with Chris, so we don't get on the Ben Watkins hour. Does this get in the way of issuing bonds? I mean thinking about, you're talking about the gas tax.

Chris Jumper (13:19):

The short answer is yes it does. Because again, it's a concern if you're an analyst and you're looking at this, your first question, especially as a bond insure where you're a buy and hold investor, we don't have the option of selling out or trading a bond. We're looking long-term and we're looking at that risk. And again, we credit it. The question is also in addition to the fuel tax, which is the obvious one, and you're missing that, there's a lot of other revenues. And I was trying to kind of think of what are some of the other impacts. What about lottery taxes or lottery revenues where so many people buy their lottery tickets at gas stations and the convenience stores at gas stations, that accounts for like 70% of the lottery sales places like Delaware account for, it's their fifth largest revenue source. So there's that issue.

(14:18):

The concerns with the increase in maintenance costs of roads and bridges that you don't really think about that an EV is actually 30% heavier than a gas car. So there's going to be more maintenance on roads, more maintenance on bridges. There's challenges like that we're presented with something like this. We're looking for what are some of the other revenues or reserves that can be pledged. Obviously it's not going to happen overnight. Anyone that thinks that EVs are going to magically take over even, I doubt that they'd be regulated out. But it is a concern. It's a long range concern. Does it occur in 2035? Is it 2055? Seems to be that gradual progression. So we do take that into,

Michael Moeser (15:14):

So I'm guessing you're an old fashioned muscle car guy. You like the sound of the V eight? Is that it?

Ben Watkins (15:19):

Well, Dodge Charger.

Michael Moeser (15:21):

Dodge Charger

Ben Watkins (15:21):

Charger. Ben Camaro, one of the two. I can see.

Michael Moeser (15:27):

Ben, I guess I'm not going to ask the question. Is this challenge real? We're clearly seeing the $200 million hole in the California treasury. How real is this challenge and maybe how does it impact Florida?

Ben Watkins (15:41):

Yeah, so growth is a beautiful thing and we're on the receiving end of in migration, which has been remarkable over the last five years post COVID. So it's hard to see, but the numbers that the re said revenue estimating conference put on it in Florida is 2% to 3% to 20% over the next 10 years on an annual basis. So 20% on the aggressive end of penetration on EVs, it could be as much as 20%. That's a big number and something to pay attention to and something to account for, if you will. The $200 a year registration fee for EV in Florida did not pass this year, surprisingly. So we don't have a backfill mechanism for that, but I feel legislatively and from a policy standpoint, that'll get fixed over the longer term. And as long as you're getting a contribution from both gases and electric vehicles,

Michael Moeser (16:44):

You should be doing. But it's 200 bucks enough. I mean, clearly in California, California is a hundred,

Ben Watkins (16:50):

287 is what an average driver pays or is in gas taxes. So it's in and around the zip code. But again, our growth so far outstrips any loss. It just gets lost in the noise.

Michael Moeser (17:06):

Got it.

Chris Jumper (17:07):

There are also some other ideas like a road use charge where the EV is charged per mile and it's

Michael Moeser (17:17):

Tracked seen certain states are doing the pilot. So that is an interesting point, but let's talk about maybe the donkey, the elephant in the room. I don't know what it is.

Chris Jumper (17:28):

So the biggest whip,.

Michael Moeser (17:29):

Right? Right. The biggest, we ask the question among muni leaders, what is the biggest challenge you anticipate your government or business will face next year? And surprisingly, this is the one thing that Republicans and Democrats could agree on is that political dysfunction is going to be the top challenge in 2025, bigger than inflation, which fortunately has come down. But as you look at these other factors, I don't need to ask if this is real. I see it on TV and I can't wait for the election to be over whenever it is so I can stop seeing these ads. But how do we get past this maybe Ben, what types of issues does this cause lost time, scope, expansion, reduction?

Ben Watkins (18:16):

Well, I think about getting wrapped around the axle politically. And the best example, I don't think there's any doubt stating the obvious. That's the biggest challenge. And the example that I would use for folks in the room to how to think about things and most importantly how to talk about things is the whole ESG debacle. And so it started out in our space, which has largely been agnostic politically for a long time. And so it morphs into a political and ideological statement and movement. And then there's obviously pushback from the other side on that. So the important thing is to be really specific about what we're talking about. We've been a strong advocate of better risk disclosure at MR Doe's insistence, and we can agree on that. I think we can all agree on that, that we need better, more thoughtful information around long-term risks associated with climate change. That's perfectly fine. You cloak it in ESG and you immediately lose half the room at best, probably more. But so it's the politicization of issues because we're not being very specific about what we're talking about. So we conflated impact investing with risk disclosure. And so now we don't know what we're talking about when we talk about ESG. So being very specific is really, really important from a technical perspective to avoid getting wrapped around the axle politically.

Michael Moeser (19:59):

Chris, you're the insurance guy, the risk guy in the room.

Chris Jumper (20:02):

Thoughts. So listen, as far as political dysfunction, yeah, it's a major challenge, but I firmly believe, and these are my thoughts either way, complacency is not an option. Alright, you've got basic infrastructure. That is what I'm talking about is roads, bridges, ports, airports, shortfalls in infrastructure are going to impact our economy, our competitiveness in global markets. There's going to be, I think a difference in priorities as Ben suggested. One might be more in favor of climate change kind of projects versus the basic, but I think neither candidate or neither administration, potential administration is going to want to see collapsing bridges or increasing traffic congestion or power outages. And so I think as far as the water, the sewer, the power, roads, transportation, I think those are the ones that either are going to support even with the dysfunction.

Ben Watkins (21:15):

So in thinking about it, I learned something last night again from my friend Tom do who's a lot smarter than I am in terms of investing in infrastructure. We call it resiliency infrastructure. And we spend an awful lot of money in and around the space in Florida from coastal mapping and think stormwater and think emergency management. I mean those kinds of things are critical to proper functioning and continuing to support a growing economy. But there's different flavors. So there's investment in adaptation, which is us, which is think about stormwater. That's probably our biggest single and rising sea levels. And how do you prepare yourself for that versus so adaptation versus mitigation, which is greenhouse gases. And we're not about saving the world. That's not what we do. That's not what we invest in. Who knew there were two different flavors of resiliency infrastructure, not me, until I was educated. So we have to be careful about what we talk about. That's the point.

Michael Moeser (22:21):

Well, that's a great segue to the next slide because when we ask folks how worried are you about things like interest rates, not that worried and hopefully Jerome Powell's listing and we see a cut this week, a nice size one hopefully, but folks are more concerned about higher construction costs. And Ben, you just talked about resilient infrastructure. Does this force pairing back as you consider not only that two by fours and cements costing more, but now all of a sudden you have to build in these additional features such that it's more resilient. You're talking about not the hundred year flood, but the thousand year flood and you're having to deal with these infrastructure issues. And then Chris, does this create an impasse to get things done? And maybe Ben, you were talking about resilient infrastructure. What does higher construction mean? Higher costs?

Chris Jumper (23:22):

I'll start. Yeah. So again, higher interest rates historically over the past three, four years and higher construction costs, higher material costs. We've seen a lot of projects get downsized. We've seen a lot of projects have to go back to their city councils to get re-approval or to get delayed or postponed. One classic example are the offshore wind projects that were being constructed off Jersey and Connecticut and Massachusetts that got delayed. There's I think two projects that got delayed because their project costs or financing costs went up 30 to 50% I think was it Ted was one of the developers that ended up pulling to two of its projects. There's still some that are going on, but the costs have just gotten out of control. Now hopefully the interest rate costs reductions hopefully later today are something that start to restart some of these stall projects.

Ben Watkins (24:29):

You know how to push my buttons.

Michael Moeser (24:31):

I definitely do. And you know what? Given the time, we're going to move on to the ITAA,

Ben Watkins (24:36):

Which is a great button. I can't see the shock clock. I was admonished before that I needed to pay attention to this. And it's below where

Michael Moeser (24:46):

I can see cable move. So I could see it. But the thing we asked in terms of commercial real estate, that's a hot button in the industry and not necessarily from the banker side, but from the muni side in terms of how concerned are you about loss tax revenues. They're concerned but much more concerned about the impact on what it means to raising funds, the credit for cities and towns by the loss of businesses moving out the whole work from home or relocation to states. So that is a key concern. And then we asked muni stakeholders regarding IIJA and Ben asked about buttons here and why is there such low interest in the IJA? Why did we miss it? What could be done for legislation? We had a lot of conversation within the bond buyer about this particular slide because I'm told, okay, I look at the left side, it's a quarter of all people, but when you break it down to the buy side, sell side, and I was told Michael, 47%, half of issuers have either applied for the IIJA or are thinking about it before it expires. And my response was, look, when Nikki Ds came out with a $5 meal deal, if they had a 47% response, that thing would've been cut in June or July when it started. They're moving it till December. So clearly the $5 meal deal works. Why isn't this? And maybe the question to you, Ben, is why did we miss it and what could be done for future legislation? So if we have IIJA 2.0, where do we get it? Right? Yeah.

Ben Watkins (26:29):

So I alluded to this earlier and I'm going to circle back to the inflation issue and what that means and what that means for our space, at least from our perspective. Every project was coming in say 21 to 23 coming in 50 to 80 to a hundred percent over what the original estimates were. And I think we're seeing some catch up. People alluded to it yesterday, getting our head around the issue, upsizing the issue, building the finance plan or cutting back on the project. And I think that can be largely attributable to the big volume this year is catch up from getting our heads around. So FSU student union up 80% the business school up 80% IIJA money 16 billion plus 17 billion for the state distributed formulaically. We did not put one single new project in DOT's work program. All that did was soak up the cost overruns on all of the estimates.

(27:28):

So it produced no new real dollar spending. And we have a name for the acronym IRA in Florida. It's not the inflation reduction Act, it's the Inflation Production Act in terms of additional spending and what it's costing. So there's that. And I think I alluded to IIJA and what is the right solution? And that's traditional muni finance, not this made up esoteric product that doesn't exist. And I can tell you this in terms of a partner to provide funding for needed infrastructure, looking to DC and inside the beltway is a solution, is false hope. And when I think about how they're managing their balance sheet from a business standpoint, oh my God. And then so what is it? $11 trillion in deficit spending in the last five years, 1100000000000 2.1 trillion in the current year. That means 27 cents of every federal dollar that's spent in America is borrowed money that's not sustainable. So in terms of reliance on that partner over the long term to deliver, they got some serious issues. And it's not an RRD issue. It's a simply inside a mentality of arrogance inside the beltway that they think all the good solutions are formulated in DC. And I'm here to say, no, it's not. We've got things that work. It's worked. Just provide the funding. Let us formulate the solutions and figure out what to spend money on and we can solve the problem.

Michael Moeser (29:08):

We should have had this closer to cocktail hour. I think.

Chris Jumper (29:11):

I have to call Chris. Any thoughts here? I mean, I was going to talk more about the challenges of actually accessing the money and the compliance standards that required the wage requirements, the apprentice requirements, sourcing your materials domestically, extensive documentation and reporting requirements, plus the IIJA was supposed to be targeting rural communities and the lift and the time that the federal application takes, it wasn't worth going through the process, especially for some of these smaller communities. Plus the match requirements were a problem for a lot of the smaller rural. That's why I don't think you've seen that.

Michael Moeser (30:05):

Got it. That makes a lot of sense. So let's talk about our last slide to stay here on time. We asked the question, how confident are you that current legislative actions and policies, we'll meet the infrastructure needs in the US and a relatively high degree of pessimism, particularly driven by Republicans, but also driven by folks in the west large democratic states like California. And so maybe Chris, if you could give your final thoughts here,

Chris Jumper (30:33):

I'd like to go back to the commercial real estate and avoid this one, but yeah,

Michael Moeser (30:37):

Are you going to me closing thoughts here?

Chris Jumper (30:39):

Closing the audience. The opinions I express are clearly my own. I think you have two political parties, again that have deep differences, but I think on everything from regulatory powers and whatnot, but I think they do are going to share, are going to have to share common goals as far as nation's infrastructure and meeting the day-to-day needs of the citizens and supporting a growing economy. So I'm going to stop there,

Michael Moeser (31:07):

Ben, I see Ben's got a lot of notes here. Ben, if you could keep it to 30 seconds, and by the way, he's on at six 30, the wind down hour. So Ben, closing thoughts here for the audience?

Ben Watkins (31:19):

Yeah, so my disappointment is no coherent federal policy. And what do I mean by that? Let me connect the dots for you. So in thinking about all the Green New Deal and the transition to more sustainable power production, let's just use that. So I listened to Nikola yesterday who's very, very good at his job and they do their thing and take advantage of those federal programs. Well, that's just power centric. So then you pick up the Wall Street Journal, I read the Nat Gas executives are complaining because there's no thought about transmission and power production besides the green stuff. And so you think about the grid and you think about power production and you think about powering America, we better be thinking about more than there's no silver bullet is the point. And we have to enhance the infrastructure along multiple fronts in order to make it work.

(32:22):

So we're tamping down on the Nat Gas that we've got tremendous resources in this country on Nat Gas for power production. We think about the demands of power from AI. We read about it in the newspaper. Don't you think we ought to have some coherent federal policy around that rather than chasing the bright new signing object. So that's my disappointment. I guess in terms of the federal programs that are pushed down and their efficiency and the cost of those programs over the long term. We could be a lot smarter about the needed investment we're making in terms of advancing the ball for everyone's benefit.

Michael Moeser (33:07):

Well, I want to thank everyone for attending today's session. A quick round of applause for Chris and Ben. So thank you everyone.