Transcription:
Mike Scarchilli (
All right good afternoon everyone. I'm Mike Scarchilli the Editor in Chief of the Bond Buyer. And I would like to welcome everybody officially to the first official panel discussion of the California Public Finance Conference this year. It's been a long three years since we've been here in person after two years in a virtual realm. But we're excited to be here and looking forward to a couple of great days of discussions very excited about the panel we have right now. I've got a great group of leaders in the muni finance business representing all different areas of the business and rather than read you their bios myself I'd like to ask each of them to take a minute and give you their bio or just to let you know where what they focus on. And that'll lead us into our first topic.
Angelia Schmidt (
Hi thank you. I'm Angela Schmidt. I run the underwriting desk at UBS. I've been in syndicate and underwriting roles for the past 23 years. This year has been one of the more interesting ones which I'm sure we'll get to. But off my desk we do taxable tax exempt obviously California and then all of the sectors healthcare higher ed even corporate QIPs really glad to be here. It's great to see so many people in person. And thank you so much.
Yaffa Rattner (
Thanks Angela. My name is Yafa Ratner. I'm a senior managing director and head of credit at hill top securities. I've been in credit for over 25 years with the first 12 years of my career at Moody's investor service. Then about 13 years at Piper Sandler in a similar capacity in the last year at Hilltop securities what I do at Hilltop is I really straddle the fence between investors and issuers to ensure that investors truly understand a credit story and that as such we're able to drive down the cost of capital to the extent possible.
Rob Dailey (
Great, Hi Rob Daley executive vice president. I run the public finance business at PNC. I've been at PNC about 10 years but spent my entire career in public finance primarily in the banking side. and at PNC our model is to combine activities in commercial banking as well as investment banking in one business. We just recently completed an acquisition of a bank that brought us out to California. So this is my first California bond buyer conference. I'm happy to be here. Thanks.
Gary Hall (
Hi, I'm Gary Hall and I took Andy's lead and I've been looking at your social media and I know what's going on with your week. ut no I run public finance and a partner at CBE William shank as well as an a partner in our impact fund clear vision fund and American triple Infrastructure fund.
Raul Amezcua (
Yeah, Raoul (3:05). I run the Western region for Ramirez and company for the last couple of years. And for the previous 18 years I had the same role at Stifel and at Dell Rosa and company I've been doing this for about 30 years.
Mike Scarchilli (
Right, Thanks everyone. So wanna weave that into we're gonna start with a big broad topic that we'll probably spend the good chunk of this panel dissecting which is the current state of the municipal market as you just heard all of our panels have different areas of focus and perhaps different viewpoints on where the market stands today and what what some of the challenges and opportunities that we're faced with. So I'd like to go down the line we'll start with with Angela and we'll go down to everybody gave everybody a chance to answer just from your unique perspectives what when you think about today's useful market what what keeps you up at night?
Angelia Schmidt (
Yeah Thank you, well so as I mentioned it's been a very interesting year. We've had a pretty challenging backdrop. Fiona mentioned central bank policy being key to that and really inflation concerns and now recession concerns driving a whole lot of that. So the backdrops been quite challenging and really quite a contrast both in terms of what treasuries are doing as well as the muni market compared to last year this year our volume's actually been pretty much on track. If you look only a tax exempt we've had about 185 billion in issuance. So that's on track for the forecast that we're calling for kind of low 400 billion for the year. It's really the taxable side that has had significantly less issuance. And I think some of my fellow panelists might talk about that with respect to sort of issuers choices of products. But I think one of the bigger stories this year has been the outflow cycle. we've had 29 of 36 weeks of outflows and 23 of those have been over a billion in totaling about 53 billion. If you look at the lip data and that's really really been persistent we got some reprieve this summer with redemption money coming in but it's really been that side of the equation as well as things like bid wanteds in the secondary again start contrast from last year where this year we've had multiple days of billion plus of bonds going into the secondary market which we just really didn't have back in 2021 and the last thing I'll say is really the focus and we were reminded of this at the beginning of the pandemic then we had sort of a nice reprieve. And then we were reminded again in 2022 the value of liquidity to the investors and to the market. And that can manifest itself in a lot of different ways that can be coupon structure is the one that immediately comes to mind. Last year you could sell two handle three handle coupons very easily this year. You rarely see them unless they can be a discount bond which we're actually getting to rates at that level. We're also seeing an increase in focus from investors on security package credit structures really diving deeply into those things differentiating in terms of price or just not buying deals that they may have bought a year ago. So those are some of the key themes. I think that if what keeps me up at night to answer your question it is sort of the liquidity challenges we have since you can't short the market. we've been through this a number of times. I don't know what the solution is but it becomes really difficult for all market participants including issuers when that liquidity dries up. When we have sort of these market events are pressured periods of time. with that I'll hand it over to you yafa.
Yaffa Rattner (
Thanks Angela, I wanna take the focus that Angela shared a little bit on the micro basis and bring it down micro. and the first thing that really keeps me up at night so to speak is the concept of structural balance. And what does that mean? The question of do recurring revenues cover or exceed recurring expenses and why do I care? And the concept here is is we all know that many local units of government state governments project finance transactions have all benefited from a huge infusion of federal funds over the last 18 months. And now that federal funds are drying up entities are being asked to do with their existing revenue cycle. And to the extent that you've got revenues that are coming in and growing perhaps in low single digit percentages and you have expenses particularly inflationary pressures on labor as well as supply growing at double digit numbers you see that there's inherently a mismatch and as the trajectory continues of increasing Albe at a lower rate revenues and increasing exponentially expenses there's going to be a divergence. And now we're gonna be touching the liquidity. Now Fiona mentioned earlier the the great state of California financial reserves at this point. Well how long will those financial reserves last? If the state or if local unit of government has to pay 10% per employee more in 2023 and beyond then they did in 2021 and prior we all know that the state of state employment local government employment healthcare employment has not recovered from pre pandemic levels. There's still outflow of employees for every one person that we hire. We're typically replacing 0.8 of a body. So, the bottom line is is that these ex these expense pressures are not expected to subside anytime soon. So, I would say the first thing that keeps me up is the question of structural balance given liquidity positions which are probably at the highest and best levels. And just because the balance sheet is healthy today doesn't mean the balance sheet is gonna be healthy in 24 months from now. So that's the first question that I ask and if I'm an issuer or an investor or a ratings analyst I ask the same question regardless of what seed I would be sitting in. The next question that I would really like to focus in on and now going back a little bit more macro is just the cost of capital. We have been for the last decade in a very pervasive and permissive credit environment cost of capital was incredibly low. And given prior inflows credit was basically not predominant in decision making and collateral packages. As Angela mentioned weakened over time. Now what we're seeing is cost of capital is at least 200 basis points higher today than it was a year ago. At this point Angela already alluded to the fund outflows but literally in the last four weeks we've seen an average outflow of about a billion and a half per week. And as a result credit analysts can be a lot more discerning. So, deals that could have gotten done a year ago are not getting done now. And what keeps me up at night is for those entities that were relying upon restructuring debt service obligations to provide a little bit more runway a little bit more expenditure relief those refundings or restructurings might not happen. And we may actually see an increase in defaults because of higher cost of capital and a less conducive credit environment.
Rob Dailey (
Great Thanks, Yafa I'd sleep pretty well. So I don't worry too much. we certainly have seen unprecedented volatility this year and I think from an issuer's point of view it it I think reintroduces the dynamic around problem solving financial problem solving developing a financing plan that we all used to have to engage in to a great degree but because things got so simple over the past five to 10 years low rates fixed rates everything kind of got very simple. And we've we now face a situation with increased volatility a relatively steep yield curve some inversion in the taxable curve. You've got now questions about how do I do this in a way that we haven't had to answer for several years and I think that it reinforces the importance of having a strong toolbox for issuers. We've seen lots of situations. So so these guys have observed the conditions in the bond market. We've seen a lot of situations where people have gotten shut outta the bond market or they've had to delay whatever it is for whatever reason. And they've come to the bank market and frequently we'll find that we get hired to do do a bond deal. And all of a sudden we're doing a bank deal because that's what's available to the issuer at that point. Sometimes it goes and flips back the other way. You get hired to do a bond deal. It turns into a bank deal and then you're back in the bond market when it opens up. That's partly just volatility right? Hitting numbers. but it's also I think partly what Yafa was referring to in terms of credit sensitivity in the bank market. We have not seen the same sensitivity creep in it's definitely crept in the high yield space but it has not spread across the market. And so we're seeing in the bank market still relatively aggressive pricing and terms relatively aggressive structure not quite as aggressive as the most that we got to over the past year the most aggressive that we got to but nearly there and backing off a little bit now but still we see lots of banks with a lot of a lot of demand for exposure. so that's I think as as you think about what are the pieces in the financing plan that have to that you have to find a way to work in? I think the bank market is one of 'em. I think another thing that's gonna come back is floating rate exposure whether that's floating rate notes or VRDBS I think you're gonna see just generally with higher rates a greater focus on liability management in the short term we've already seen it. The opportunity cost used to be zero of effectively doing nothing with your short assets. But now it's actually quite substantial. And so it's something that we will all be paying a lot more attention to and making sure that we get to a to an optimization of short assets and liabilities, Gary.
Gary Hall (
So, I guess what keeps me up at night is that this is no longer what I call the field of dreams where you can just build the field and the players will come investors have leverage on their side and so probably the thing that keeps me up at night the most is that there's real risk in underwriting. we're seeing a wave of unsold balances on deals they were in. And so the marketing process really matters irrespective of rating. And our investors are actually asking for more one on one time asking piercing questions not just on the objective financial metrics but actually certain subjective things, how are you going to deal with an uptick of COVID cases and make sure that your economy will recover? What are you doing to mitigate the the strong labor and environment and keeping your key employees? How are you dealing and mitigating the rise not cost of finance but cost of construction with new money projects. So some of these factors that typically we don't get asked from time to time investors have been highly inquisitive and it's requiring us to really work with our issuers to be more engaging with investors than we have been.
Raul Amezcua (
Well nothing keeps me up at night. I married to Yogi so I sleep pretty well at night, But I have a slightly different perspective. I'm very bullish on the outlook for the market as a whole. I'll just start with where we are. I think many issuers most issuers are daresay. Don't follow the market. They borrow money when they need it. So, I know we get all alarms because rates are up MMD went up et cetera but most issuers I've always said are smart because they borrow money when they need it. They don't borrow early. They don't incur negative arbitrage on construction fonts and they don't run the risk of an IRS audit because they don't spend the money when they were supposed to. So, irrespective of where the market is I think ISRs tend to borrow money when they need it. And two I often try to explain to them it's silly to say you're locking in rates. You're not locking in rates. If you borrow money on a tax exempt basis you're issuing premium coupon bonds. You're only getting paid that premium till the 10th year. The call date you're gonna refinance those bonds. The cost of capital will be known on the second refunding. So yes rates are important. In certain instances like we were doing a pension bond deal that's clearly affected by where the absolute market levels are. But if we're doing your typical new construction tax exempt bonds I think Issuers are prettiest student been through markets that are high rates low rates and then they refinance their debt. The other thing I would say is I'm very bullish because if you believe the American society of civil engineers there's 4 trillion in needs right? On average what do we issue a new money? not even 200 million over the last 10 years on average we chip away at it but we're not even making any significant progress. So if I'm a young person coming into public finance I would say public finance and the need for public finance is gonna be there for a long long time. And it's your job to help ther figure out how to build more project within that revenue constraint or rate constraint. So I'm pretty bullish about that. The other thing that I'm very excited about in the media outlook is that we live in California and we embrace ESG. So, I've talked to many investors about this and they say we have to look at everything through the ESG lens because of the transformational generational generational transformation of wealth from the boomers to the millennials and younger generations. So, where people used to say what's my rate of return against the benchmark. Now they say how are you investing my money? What is the impact of my projects? And that matters to me. That's why we're seeing a growth in ESG funds. And that's only going to accelerate as the that I've heard the number be 30 trillion 60 trillion of wealth transfers from that generation to this generation. And Munis are just a perfect fit for anybody who wants to invest in a ESG focused investment. And the last thing I'll say about it is I would say look at ther sector as a whole many of you in the audience compare the staffing at an issuer versus the great recession. It's a fraction right? The great recession of whatever that was 14, 15 years ago resulted in a massive downsizing of government. Let's just look at the financing staffing levels of the people that we deal with on on a Dan day out basis never bounced up. Then you had COVID and people retired. I talked to a major issuer the other day and he said I'm at 50% capacity I need to hire people. I talked to other issuers and they are we can't do real many meetings with bankers because we just don't have the resources. So, my whole point is I'm very bullish on the Issuer sector because they're doing so much work with such few people. So, I'm really encouraged that they will figure out a way to tackle this huge infrastructure problem before us.
Mike Scarchilli (
All right. Thanks everyone. Before we move to our next kind of big topic I wanted to see if any of the panelists ha wanted do follow up on anyone else's comments. We can turn this into more of a free flowing discussion before we before we move on. I think we're doing pretty well on time. So anybody
Gary Hall (
Yeah. I just wanna piggyback on your ESG comment Rand while I totally agree with you that this is a great time to tap this very fervent buyer base. and especially as I said before as the investors have a lot of leverage in bringing more investors to the party can only help right. I was still cautioned that we still have no empirical evidence that there is a predetermined pricing differential on a municipal side for green or ESG bonds today. I think that gap is closing. I think maybe sometime in the future we will. So, we still have the onus of explaining to our issuer base the value in doing so other than maybe optical or intrinsic political issues for an issuer. One of the things we can say is that from time to time when you get a deal that's ESG you may get an investor or to upsize their anchor order and that swings leverage back your way but that's anecdotal and we're still not in that way where we can show proactively there's a pricing differential like we can in the corporate world.
Angelia Schmidt (
Yeah, I just wanna jump in on the ESG topic as well. and I totally agree with Gary's point in terms of a pricing benefit but I think there's really continues to be some positive I can count eight new funds or ETFs that came out just this year compared to one the past couple of years. So, there's growth on that side. And once we get a greater critical mass we'll get the subscription to make that differential we're also seeing increased use of external reviewers. So it used to be about 57% of deals had kind of self designation. Now it's down to like 39%. And I think that will help. And probably part of that's due to some of the scrutiny especially we're seeing in Europe but I think that will bolster further confidence maybe from additional participants. And, just in general I think the market is continuing to evolve thinking about labeling not just green but sustainable social has become a very large umbrella. So, I do think I'm encouraged. It's gonna take a long period of time but the signs are there. And I do think that we'll ultimately get there where there there's sort of a quantifiable pricing benefit.
Raul Amezcua (
One little thing I would just like to say about it is if you were at the CDIAC panel Tatiana from Lava was on a transportation panel and she was asked why did you guys issue green bonds recently? And her answer was we've been doing this for decades before the word sustainability was being used. We've been doing this for decades. And when I talk to ashore as I say ESG focused green bonds whatever you wanna call it. It's just getting credit for where you're doing already. It's just improving the the disclosure so that you get better credit. And the issuer's gonna like I mean the investor's gonna like the fact that they've got better disclosure more project information you'll get more investors looking at it perhaps ESG buyers perhaps larger orders. There's a benefit there. I mean I would we don't have time to argue those but I do think there's a benefit myself. And I do have a few empirical evidence that I could share with you all but in the interest of time we can have this over the bar.
Yaffa Rattner (
So just piggybacking also on Angela's comment I'm really glad that she ended up edging me right out to cuz no it was perfect because I'd like to just expand upon something that she mentioned. At the end of 2021 I did a Hilltop high yield impact survey where I pulled and received responses from about a hundred different investors in various different capacities with respect to about 10 key questions of focusing on the market. And then given the market volatility I did a similar survey six months later in about June of 2022. What was really impactful from everybody's assessment is that in December we asked the question how much extra would you pay for a project that had had an ESG stamp on it? And the answer was zero and one investor even wrote in I would not pay even a single basis point for it fast forward six months later where we've all experienced fund outflows. And as we mentioned earlier 200 basis points increase in cost of capital. We have a situation in which investors can be more discerning and investors are being rewarded a bit more with respect to yield. And, now that same survey question went out and we saw about 20% of investors saying it is important and they quantify that at between three to five basis points. So, I do think that this is an evolutionary process. I definitely look forward to asking the same question in December of 2022 and see if we could put a further quantification on this but as it stands right now it looks like it's about three to five. And what's also really interesting is that we did a deal in late 2021 that had it was for the same college same rating. It had green bonds it had brown bonds. So the green bonds were labeled as such. The brown bonds were just simple refunding bonds. There was not and they had the identical maturities and Paramounts there was not a basis point of distinction between the two series. So, more to come on that topic. I think it's gonna be one in which we'll see different sides of the equation. And one other thing I wanna quickly mention is on labor costs although you could see labor being a great example of efficiencies in government. I also see it as a key weakness because at this point labor costs in theory are at your lowest level because you have the fewest people doing the greatest amount of activities and work for that particular government. However, to replace that person is now going to cost significantly more and arguably municipalities are understaffed. And, so again the labor pressure situation is not going to abate in my assessment probably for another year to two years.
Mike Scarchilli (
All right. Thank you, So does anybody else want to comment on state of the market or anything else anyone brought up before we move to the next next topic? No. Alright great. So we wanna save time for for questions at the end. So if anybody in the audience can think of some questions in the interim we'll right now turn to a topic that's obviously impacted all of us for the last few years and the reason why we haven't been here for the last couple years which is the pandemic. Now over the last couple years we've run versions of this question and other panels mostly focused on the specific return to office component of the question but there've obviously been many impacts of the pandemic on on business beyond that piece of it. So, I'd like to pose this question to each of the panelists as well and give you all each a chance to answer this question and then turn it into kind of a free flowing discussion amongst the panelists. But what have you think have been the the biggest changes whether positive or negative that you've seen impact both the business at large and specifically your business since the start of the pandemic you wanna start?
Angelia Schmidt (
Sure, I guess the thing that immediately came to mind when you emailed us the question was just the technology aspects. Obviously everyone's it's much more seamless much more efficient but that sort of translates into to I think both positives and negatives in terms of sort of running the public finance business. So, for instance it's so much easier to run banking analyst training with zoom or Skype where you can have the instructor on one screen and have DBC or Excel on another screen and they can be learning and doing at the same time and from different locations. Obviously we've all grown to love video meetings which I would say that's a good thing and a bad thing as an underwriter I can do multiple client meetings across the country in one day. But it's really not the same as meeting in person especially when you're developing the relationship or pitching for the deal or strategizing in these these difficult markets and certainly pricing deals as well. And then the other thing I would say is for the the businesses where there's sort of a footprint across the country it does feel like the regional offices are more connected. At UBS we actually have the Intercom system I have it in my home office, So we can all communicate sort of seamlessly in addition to Bloomberg Skype zoom teams all of those things. So, I'd say the technology has really improved a lot. and I would say overall it's been a benefit. But I much prefer sort of in person when given the opportunity.
Yaffa Rattner (
Thanks Angela. When I was thinking about this question I couldn't help but reflect upon a very very brief vignette that happened in February of 2020 I had the opportunity to actually accompany somebody to an emergency room in February of 2020. And I saw a small sign not even a big sign posted as we walked into the emergency room. And it says if you have been in contact with or if you have flown in from China in the last 10 days please inform the triage nurse and the person I was with and I looked at each other kind of smugly and a falsely confidently didn't have anything to worry about. And now we're here two and a half years later and we all have what to talk about. So, what what is the purpose of that vignette it's to show how interconnected we are. And we've seen that really time in and time again over the last 24 months particularly as it relates to supply side disruptions energy costs and other various risks. And one-offs that affects an investment or affects a local unit of government. It used to be two years ago if I was looking at a project finance or if I was looking at a school and I would say oh you're building a new building. I would simply ask do you have a guaranteed maximum price contract in place? Is there payment and performance bonds? And are there liquidated damages? And if I would hear yes to each of those three questions I would figure my work as it relates to construction risk was fully mitigated and I would move on. Now I ask the same exact questions and then I will follow them up with okay what percentage of your supplies have been? Pre-ordered what percentage of the equipment is coming from out of the country? And if the number is not zero what backup plans do you have? And ultimately as I sit at the crossroads between issuers and investors my lesson from the pandemic is take a look at what are the most important elements to a successful financing and a successful investment. And the definition of a successful investment is ultimately from an investor's perspective getting repaid on time and info without needing to restructure the debt service or entering into any type of forbearance or consent agreements with your investors. So, thinking about what's driving that credit and making sure that there are redundancies in place to ensure that the risks that we know today and we'll never know all risks but the risks that we could understand today are as appropriately and significantly mitigated as possible. And that to me was the lesson of the pandemic.
Rob Dailey (
I agree with the way you described that. Yeah it's it it's amazing how many new questions came up that we weren't thinking about three years ago. And I think about that especially from a credit point of view in terms of returning to the office kind of everything seems to be kind of marching two steps forward one step back but kind of sooner or later getting to what looks like it's gonna be more or less normal we're in a hybrid format. And I think we found a good pattern and instead of arrangements for working internally it's where it's externally with clients for instance in external meetings where it's very much situational with some clients for example it's easy to get in and see them other clients as they're all mentioned not at all. And so what I've found is that it's very uneven across the country. Some markets are wide open. Some markets really feel like New York did a good six or 12 months ago. so I think a lot of the effects of COVID for me are in the way that we do our business the processes we've undertake that we undertake the way in which we carry about our business. There's been a lot more investment in technology not just zoom but but in processes in databases and a lot more AI, and I think that's something that's gonna be a trend for the next three to five years we're gonna see this play out and we're seeing it play out across the market. One of the point that I would mention is that we're it's true in my firm but I think it's true. It, most if not all banks is our underwriting firms is that we're seeing much more integration with corporate finance and other markets businesses across the bank just we're we're finding processes that we do a lot of things that are similar. And, we're finding that we can learn from those businesses they're learning from us. And we are falling into a much more of an integrated approach to all of the same sorts of activities no matter how we're organized. I think that's part of what you see in the ESG world where you see now ESG really flying through the corporate finance issuers but a lot of what they're a lot of the way they talk about their issuances and what they're trying to get done. It all has themes in our market as well. And we can probably learn from them how to tell the story better. But I do think that that's a long term dynamic. That's gonna have an effect on the way in which we staff how we allocate resources how we prioritize certain types of business and that's it.
Gary Hall (
All right, two positives one negative I'll start with the negative first. The negative has been I think we've seen some degradation in training of our junior bankers. There's nothing about being next to someone and shadowing folks when you're doing analysis to really capture the essence of what we do and though there's some absolutely some efficiency and gains through some of the technological things that we have. There's just nothing but that you can substitute for side by side. The positives is just like Rob and we are more integrated. We communicate better. We're more present. We're more available I believe just because we're not on a we work on the road as much and the other positive I realize and this is probably totally me is that I'm not that damn important. What does that mean? We have 19 offices 71 people and prior years a hundred thousand miles each year is flying all over the country. Thinking that you had to be present to get things done. You realize that you have a very deep bench with very qualified people that can get things done without you. So for me I haven't engendered a tremendous amount of confidence in my colleagues in ways that I probably would not have had otherwise because they've done a great job without outside of my presence. Wait all of my colleagues in the room disregard that statement.
Raul Amezcua (
I guess from my perspective I think that that COVID just accelerated the inevitable. So I'll go back to 2014. I asked a whole bunch of junior bankers what can I do to make sure that you continue to work here that you don't quit? And their response was they gave me a list of like 12 items but the relevant items where they basically said I want not to be frowned upon. If I don't show up at eight I want to have flex time when I come in I'd rather have flexibility to work from home or the coffee shop. And I'd be in the office all the time. I want to wear jeans not a suit. I want a laptop not a workstation in an office. And the list continued. That was in 2014. I did a panel about this at the CSMO folk conference in 2016 where we talked about the differences in managing millennials versus the boomer generation let's say so then COVID hit what COVID did was prove that we can do all this. So, the resistance that was there when I said we need to do all this to keep smart kids engaged and happy in public finance and wanna work with us was was met with great resistance. I should say by the older generation who are the people in charge. But I think the last couple years we've seen that productivity has not gone down. Proposals should get written get written deals are getting done. All the work is getting done but people are working from home. They're working from a laptop. They have flex time. They're probably walking their dog in the middle of the day and working on the proposals at 10 o'clock at night. So, work got done. COVID proved that it could be done. I do not believe that we're ever gonna go back to the way it used to be the people at apple and other companies saying we're coming back to the office. They're all boomers and their workforce is largely not the oldest millennials 42. They're not gonna do this. They're gonna they're gonna quit. The way I can prove this at today is by saying we are hitting record. Number of people resigning from their jobs today at a time when we are about to face a economic downturn or recession like who does that millennials again up to 42. They're not married. Many of 'em are not married. Don't have kids don't have mortgage don't have two car payments. They're not afraid if you don't react to what they're asking you that they need to be productive employees don't just walk and go somewhere else. The second thing I would say about the the the pandemic has been touched upon here is zoom. I first heard of video conferencing 20 years ago streaming it's gonna be possible. We'll never have life meetings. You don't have to get on an airplane. And then it never really happened till COVID. Now we have zooms. And I agree with you. We can have multiple important meetings in one day and it is a hundred times better than a conference call but never as good as an in-person meeting. So, I hope we revert back to in-person meetings cuz that's the most fun part of the job and then the last thing I'll say about this is Eric Kaufman said this is he here? I was gonna give you credit where Eric Kaufman is. But at the CDIAC conference he said COVID proved the strength of municipal credit. They improved during COVID. And he cited a whole bunch of examples of people's concern about how credits were gonna be impacted and decisions municipal governments made to make sure PNI got paid on time. And his quote was I think that municipal credits were strengthened by COVID.
Gary Hall (
I just hope this is not a digression but I think it's important just based on the perch that I'm sitting at now our industry is facing what I call a silver tsunami. iI's a lot of us who won't be in this business for long and we've gotta do what Raul's doing and being bullish and getting young folks to be attracted to public finance. And if you don't believe it's a civil tsunami just look at this audience from my perspective. And I can affirm that it is the case but but we really have to work harder and national association state treasurer has actually done some work in looking at the aging workforce in public finance on the public side. And if you look on on the public finance side we are having problems recruiting and attracting folks to this industry. I thought during the pandemic having my son next to me see me work every day that he would want to be in public finance. And he just told me he's going to McKenzie and not coming in our industry but it's very hard to get young folks to be attracted to our industry. So, if there is a takeaway for us that is that this this industry has been extremely rewarding for us all. We've gotta do our job and ensuring that others follow behind us otherwise we're gonna be in big trouble going forward.
Mike Scarchilli (
Thanks some some great points. And obviously there's been a lot of changes in the market over the last couple years. Before we move on to audience questions did anybody else wanted to say anything else about about this topic? All right, So why don't we open it up to the audience? does anybody out there have a question for one of our esteem panelists over here?
Audience Member 1 (
I heard some good things about COVID at least in the M and a market and not that this is an M and a conference but more M and a deals got done cuz of zoom. But I just want to hear about the supply chain issues and how they start right here in port long beach where it's one of the few ports in the world that's not automated. They can't expand it because of environmental concerns the unions make it really hard. What kind of impact is that gonna have with in public finance?
Gary Hall (
Well Jose right now we're seeing an uptick in our volume being more comprised of new money projects than refinancing just where interest rates are. And we're seeing a lot of cost estimate on projects being over budget. and so a lot of folks are revisiting their CIPS because of some of these supply chain issues in addition to labor costs rising labor costs. So that's probably the biggest impact is that the cost of projects are going up exponentially and exceeding the the initial estimates.
Yaffa Rattner (
Yeah I think you could even dig upon that and more deeply and think about it from all sources of government if you will whether it's local government city school district charter school county. At the end of the day the cost to build a project is probably at least 50% higher than it was the cost to man. That project is significantly higher as well as more challenging to do that and ultimately for credits that were well poised and well positioned highly liquid as they went into the pandemic and through the pandemic they're now facing new challenges as it relates to supply chain issues we saw the exact same thing as you think about it with respect to energy and what happened in Texas last February with energy side pressures and so it's basically there's spillover in every sector and every government as it relates to supply side as it relates to cost as it relates to energy which pretty much synergizes and synthesizes some of the comments that myself and my fellow panelists have made this afternoon.
Mike Scarchilli (
Right. Thank you, anyone else have a question
Audience Member 2 (
Right here, Sorry raising my hand in the back. Quick question you ended your comments around the importance of recruiting the next generation into public finance. Yet I've read several articles recently about how stressful people are feeling on the public pension side given how much politics has really come into play. I'd be curious your thoughts on how you recruit people in when politics are really making such an uncomfortable environment for some employees.
Raul Amezcua (
So, this whole thing about recruiting good people and and training them and then having them watches stay for a career has been going on. As long as I started 30 years ago we're having this discussion. And I think that the thing that we've learned collectively as an industry is if you're gonna go hire the Harvard MBA kid who had 30 options to work in public finance they're probably not gonna be here very long no offense to any Harvard grads. I know there's one somewhere here but so going back to I worked at Ramirez I work at at Stifel Del Rosen company going back to when I was working at Citi group we made a decision that we were gonna hire kids not with a Harvard MBA kids who liked politics kids who had some sort of background that led us to believe that they had an interest in government was a good indicator that they might stay beyond the two or three years before they decided to do something else. So, I still look for that. If I find someone who says my mom was a mayor I love politics. I have a minor political science. I who can tell me who their governor is who their Senator is anything anything just prove to me that something about government about politics? I think I like you as a candidate.
Angelia Schmidt (
I'll jump in on that as well. We we too also look for candidates with real genuine interests which could include politics. I also think it could tie back to ESG. We know that this generation cares a lot about that and I think we've had some success in educating early on even high school age kids what this industry does. Airports, roads all the the wonderful things we do that as well is I do think this is a unique fixed income sector and that it's truly a community. I mean the people in this room everyone's friendly there's a mission here. And I do think that appeals to the younger folks whether they stay and do it for 20 or 30 years I think that's just sort of the nature of things right now. But I do think that the best arguments are demonstrating that the positive impact we have and sort of demonstrating that it's a community that they want to be a part of. And they're not just gonna be someone that comes in and works a hundred hours a week working on banking deals or whatnot. So, I think tho those have helped us but it is a challenge and I hate to bring it back to ESG but I do think that resonates a lot.
Rob Dailey (
It reinforces the need to be able to tell the story of the industry better. we look for the same things. We're looking for people out of school for instance that wanna make a social impact. And they want to know that their work is making a difference. That's the great thing about our industry. but I'm not sure that we do a great job telling that story. In the last two years we've had a lot of situations where you get somebody who's spent a year or two outta college in a COVID environment quitting cuz all they really have to do is change laptops. And so I think that there's a little bit of an aberration there but this idea that you're gonna ultimately hook people who want to be involved and engaged in doing social good is what the that's the lasting quality of this business. And I so I think it does come back to being able to tell the story better.
Yaffa Rattner (
I think we started the question a little bit chatting about the silver tsunami of course myself not included that this industry faces. And I think that's certainly true. And then we've chatted a little bit with respect to what we've done each of the firms individually and then holistically to try to attract young new talent into the field of public finance. And I think each of our firms has done a nice job in the fact that we each have internship programs and mentorship programs in which we try to bring in a diverse class of individuals with an interest in public finance where we could let them work in the different sectors within our respective firms for six to eight weeks. And then at the end of that period oftentimes an offer of employment happens and that's wonderful and that's working positively. The one thing that I also put out there is the concept of what about the middle. So we've got some barbells here. We've got the silver tsunami that we've talked to and I've excluded myself from. And then you also have the younger folk which in theory they're coming outta college and they're active they're passionate they're full of energy and they want to contribute. That's wonderful too. So that's the other side of the barbell but I encourage each of us to reflect upon this concept because I know I do. And I challenge myself frequently. What are we doing to really try to mentor and attain and retain staff that's perhaps in the middle of their career. Those with 10 years of experience where they're perhaps at crossroads they may have an opportunity to go outside of the the public finance sector or they have the ability to be challenged and perhaps they're ready willing and able to step up to that. So, we with the silver hair have a responsibility to continue to grow and develop not only the youngest and newest talent but that talent that's ready to take the next step in his or her professional career.
Mike Scarchilli (
All right. I think we have time for one or two more questions. Anybody else? Yes sir. Mic's coming your way.
Audience Member 3 (
Thank you, Along the same question that is being discussed and I may not make a lot of friends here with this question or query but as you talk about attracting talent one of the things that's been unique about the public finance business is the ability to have opportunity as it relates to diverse candidates. I've been in this business for over 35 years. And if we're gonna be honest with ourselves about who we are attracting when you're looking at diverse candidates it's been my experience working at major firms. I was at Merrill Lynch for 15 years. I was at Barclays for a number of years. I actually actually worked with one of the panelists here long time ago at kid or Peabody. When you are looking at candidates who are diverse if they did not come from an Ivy league school they didn't have a chance of getting hired because you're looking for the best in the brightest. And particularly as it related to diverse candidates Hispanics blacks they didn't get a shot at all unless they went to one of those schools to talk about identifying. And I don't think that's changed at all in this industry since I've been in the the business you're not gonna find or are you're not gonna have candidates who are diverse that come from other than Ivy league schools that are gonna have a fair shot of getting into any of the firms. It's a challenge that that has been I wanna say unsustainable over the years. And if anything the number of diverse candidates coming into the industry has really declined in the last 20 years. So, all I'm saying is that you we really have to be fair about who we're going after where the opportunity's going to be from a diverse perspective the opportunity for anyone who wanted to go into investment banking was much higher than going into corporate finance and the primary reasons the the same reason that people get hired on a day to day basis in the public finance sector you had starting in the mid eighties mayors particularly who were appointing CFOs who were diverse. They were being elected that wasn't happening in corporate America. It's still an issue in corporate America but it was the only reason that you had a vast majority of diverse candidates coming into public finance and actually making a career out of it. And unfortunately at least from my perspective I've seen a very decline in that diversity level of people coming into the industry right now. What's really good is that things on the corporate finance side have really opened up and individuals coming out of college particularly Ivy league schools are going into those areas and not in public finance. And I wish there was something that we could do to really provide those young talent of diverse candidates a reason for coming into this industry and staying in the industry.
Raul Amezcua (
So, I think that's a great topic that you brought up. I would say I've I've addressed this topic in other similar conferences and my answer to that is people always talk about diversity and it's just talk if they really wanted to show results and hire diverse set of people primarily Hispanic African American underrepresented it underrepresented at communities they could but they choose not to. The biggest thing people can do is what they do every day. And that is act as a mentor. So, how many kids get hired in public finance in every other industry because they went to your same Alma mater because their uncle you've golfed with their uncle before because you have some sort of connection with them and then you mentor them. And those kids like like all of us, not everybody but 99% of us stumble along the way and make mistakes. But they have a mentor who helps them keep keeps them on that career track and importantly gives them opportunities opens doors hands them clients teaches them how to be move up to the next step. If you really wanted to make a difference all of you guys could mentor somebody. But the answer that you get is well I wouldn't have enough qualified candidates while you only went to Yale. And 50000 other people are trying to recruit that same kid. did you think about maybe going to a different kind of college cuz they're smart kids at all colleges did you go to Sacramento state university and and to make an effort to identify some good kids hire them give them an internship at least to see if they're gonna work out. And then when they work out mentor them the way you all were mentored. At some point someone gave you all a break. Someone helped you as you were stumbling someone opened doors someone helped you get to that next level in your career. So, that's one thing I've always tried to do is do what others did for me. And that was be a great mentor and mentors are not some boss saying Robert from now on you're gonna mentor this kid. I mean it doesn't kind of work that way. That mentor is not gonna do a good job that mentor's gotta want to be a mentor. And if I was talking to the mentee I would say kid you gotta earn that mentor's respect. How do you do that? Like like show eagerness do your homework. Don't make basic mistakes ask good questions help them do their job and then they're gonna become your mentor but the mentor's got to be willing to help that kid too.
Gary Hall (
I too appreciate the question. If you didn't know my firm is a minority firm majority woman owned firmed. And when we looked at the pool of candidates coming in the last three years we were surprised with the lack of diversity which forced us to rethink our recruiting strategy. And one of the things that we decided is we're gonna go a little bit further on in the tree. And so we are starting now to be engaged at the high school level in the communities that we bank and exposing young kids to public finance and investment banking and getting to make excited about the prospects of being a part of this industry and so that we'll get folks focused on and being a part of our internship program is they start school and with the hope of building that that pipeline of folks that come behind us but it's a real issue. I'm also on the board of SIFMA and we are doing the same thing. We're focusing very early on in the process to try to build more and more and more momentum to diversity. But as Raoul will mention it does not come unless we have a dedication commitment and being intentional both individually and collectively
Mike Scarchilli (
All right. I think that's gonna wrap us up we're outta time now. So, thank you very much to all of our panelists for your valuable insights and engaging discussion. Please join us out in the exhibit hall for our afternoon break now sponsored by Chapman. Thanks everyone.