Leveraging Dollars from Washington

Transcription:

Alexc Zaman (00:06):

Great. Well good afternoon. Thanks for joining us here on the last full panel of our first day at the conference. My name is Alex Zaman I am with Citigroup. I am the co-head of our national transportation Practice and for the next 45 minutes, we're going to be talking about an issue and an environment that really is at the forefront for many and that is the impact of the landmark bipartisan infrastructure and energy packages that we're passed in 2021 and 2022. Before I introduce our very distinguished panelists here, I did want to mention that following this session in this ballroom, we'd encourage folks to stick around for what will be a very special moment as we will be honoring and inducting the late Tim Schaefer into the Bond Buyer Hall of Fame. As many folks know, Tim most recently served as the Deputy State Treasurer for the State of California and had such a tremendous impact on our industry in so many ways.

(01:07)

So please do stick around for that. That should be commencing right around 5:50. So I'd like to now introduce our panelists here, starting with Emily Brock. Emily is Director of GFO a's Federal Liaison Center and leads coalition and advocacy efforts of the Public Finance Network on behalf of GFOA members in Washington dc her advocacy includes anticipating and responding to federal legislative and regulatory activities that impact the finance functions of public sector entities. And we're really excited to have Emily here for one of her two panels that she'll be doing at the conference. Next we've got Greg Dawley, who's a Managing Director in RBCs Los Angeles office and serves as Head of the firm's West Coast municipal operations at the beginning of Greg's 30 year career in government and public finance. Greg served as Deputy chief of staff to LA Mayor Richard Reardon from 1993 to 1997, where one of his responsibilities was Intergovernmental Affairs in both Sacramento and Washington.

(02:18)

We also have Cyrus Torabi at the end here who's a shareholder at straddling Yucca Carlson and Ralph Cyrus has served as bond and disclosure counsel to public agencies since 2008 and has experience in all areas of public finance with a particular focus on water, wastewater utility and lease revenue financings throughout California. We've also got David Erdman here who's a Managing Director who recently joined Baker Tilly Advisors after a 33 year career as a frequent issuer of municipal securities as capital finance director for the state of Wisconsin. In his new role, David assists Wisconsin municipalities and large governments across the country in addressing capital needs, economic development and good debt management practices. And last but not least, we do have Randy Gerardes, who's a Managing Director at Assure Guarantee, where he focuses on business origination and marketing of the firm's financial guarantee products. Prior to joining Assured, Randy was Head of municipal strategy at Wells Fargo where he managed a team of analysts responsible for publishing market commentary and investment recommendations to the firm's institutional investor clients.

(03:31)

So happy to have this great group here. So I'll just briefly set the stage for our discussion. In November, 2021, the Bipartisan Infrastructure Investment and Jobs Act or IIJA authorized $1.2 trillion in spending, which reauthorized the previous transportation package, the FAST Act, and also created a number of new infrastructure funding programs for sectors like broadband and carbon capture. A year later in August, 2022, the Inflation Reduction Act marked a historic 437 billion investment in clean energy climate mitigation in resilience through a variety of existing and new tax credit and funding programs. Together, the two pieces of legislation really represent a transformative set of investments in our nation's infrastructure, which many California projects are now benefiting from. Now of course, these packages really did not result in dollars out of the door on day one. It did take some time for US Treasury to come up with the appropriate guidance for each of these and also release various funding opportunity notices to the industry, and those have been rolled out on an ongoing basis. And so with that, I'm going to start with Emily. Since the passage of IIJA and IRA, municipal agencies and other stakeholders have taken advantage of the expansion of funding for both previous programs as well as the creation of new programs. What has your assessment been of the rollout, how it's gone, and what resources are available for agencies to really stay informed on top of funding opportunities as they come out?

Emily Brock (05:12):

Thanks Alex. So before I get started, I want to offer just a little bit of perspective because in one of the last panels, Gary and Rob both said everybody's numbers are different, and it's true, there's a lot of different assessment numbers, but I want to offer three pieces of perspective. Number one, GOA did issue a report showing that ARPA funds are less than half spent, in fact 40% spent. So there's still a lot more spending to be done by ARPA. Number two, without a speaker advancing legislation, getting support from Congress is going to be difficult because they've got other bright shiny objects that are happening right now. And third of all, and I'll talk about this in the second half of the conversation, a government shutdown stops NPRM. That's another fancy way of saying they notice a proposed rulemaking. So rulemaking will stop if the government does shut down.

(06:07)

So that all impacts the timeline. So I want to talk a little bit about the timeline for IIJA is, as we remember, $500 non-discretionary, 500 billion non-discretionary, 500 billion discretionary. It passed in November of 21. And so what that means is we're about three fiscal years into the books now, what we found, of course with ARPA and with other federal legislative conversations and especially funding them, the sequence of the dollars really matters. And this goes back to what Gary and Rob were saying. How much has been awarded, how much has been obligated, and how much has been allocated. Those are three different phases that the money have to go through. And so while there may have been an award, the process of signing the documents and exchanging the money could take 14 to 18 months. So I think it's super generous to say, as Gary said, something about a quarter has been awarded.

(07:15)

I would say there's probably less than that. Probably half of that has been obligated and probably another half of that has actually been allocated. So a fraction of IIJA, I would say is out the door now considering we have three more fiscal years to go. So that's an important sort of timeline to keep in mind. I would also say too, most Department of Transportation grants are reimbursable. So those monies haven't gone out until the project has actually begun. So now let's switch and look at the Inflation Reduction Act, which famously is a, well, it's a reconciliation bill, which means Democrats only voted for it. It's also one of the longest tenured grants that are out there, elective pay grants where the extending timeline of IRA is actually through 2031. There's a 10 year timeline and several programs of it have begun in earnest. That is your clean vehicle credits or your retail credits as they are taking place, transportation related tax credits, those are going out the door.

(08:21)

And in fact, some of the other parts of the clean energy efficiencies in other parts of the administration, DOE, that is Energy Department of the Interior, even the postal service, there is some money that's out there for greening of infrastructure and vehicles that are happening right now. But the one thing that we're focusing on, of course, is that elective pay for nonprofit or tax exempt entities and our instrumentalities. Now we're waiting on any kind of guidance that we can get from Treasury IRS, and I know that several folks are going to be talking about the process of that, but I want to talk about it from an issuer perspective. So there are a couple big things that need to be learned from an issuer perspective before we're ready to claim these credits. Number one, all of a sudden we are entering a tax year because we have to file paperwork to the IRS.

(09:16)

This isn't something that we've done before. This isn't something that we know. So the nine nineties are a new process for a lot of us and they have to be learned. Number two, the portal. How many issuers are here and does the word portal send a shiver down your spine? The portals are new learning infrastructures and many times it takes a lot of trial and error, a lot of beta testing on what type of information needs to be put into these portals and whether your eligibility will come back clean. So that's another process that's going to be a part of it. And then last, looking at those qualifications in the law. So prevailing wage was mentioned in one of the previous panels. You have to make sure you are abiding by prevailing wage, but then in addition, there's this domestic procurement requirement, which is turning out to be a big challenge for an investment of those tax exempt entities in these green and renewable energy projects. So those things are all part of the timeline. And when you talk with treasury IRS like I did today, I asked them, I said, when are we going to see that portal soon? Well, when are we going to see the rules soon? Well, when are we going to be able to reap the rewards of what's happening soon? I think the way that we can interpret that is that we should be seeing something by the end of this year. But that said, the government shuts down on November 17th, things will come to a scratching hole.

Alex Zaman (10:45):

No, appreciate those comments Emily. And when we did this panel last year, I remember we were talking about all the notices of funding opportunities, the NOFO, and you like to coin the term NOFO, FOMO for a lot of folks who were eager to keep track of what was going on, and it seems like there's a lot of resources, but also a lot of uncertainty still in terms of timing for these programs. I'm going to turn it to Greg next, and I think for folks in the back if we could pull up the presentation that Greg's going to be walking through. Greg, could you walk us through just some of the high points of the inflation reduction act? There's a lot of complexities to it, a lot of details, and I think we'd also like you to spend just a moment on some of the new elements of IIJA as well.

Greg Dawley (11:27):

Sure. And these are the slides for the other part of the presentation. So if you can go to the first one, that'd be great. So Emily just gave us a graduate level course in Washington sausage making. I was going to take a step back and kind of look at IRA in five minutes, kind of the quick view of IRA and go through that, talk to folks about that. So we sort of get past it, we go. So inflation reduction Act passed last year, 2022, 369 million of funds for climate mitigation and energy security broken down into a number of different categories on the left there on this slide. The largest amount is for wind, solar and storage tax credits, which is similar level to what was historically given to this area, but this bill is three x the amount of spending for energy projects at the federal level. So a huge, huge catalyst. And as those in this room know, California has also spent billions itself, so a very, very big spending level for clean energy.

(12:32)

As I mentioned before, when we had programs, we had wind PTCs and solar ITCs, and that's on the top of this chart. What we have now is on the bottom portion, the bulk of it, which is just a mix of wind, solar storage, renewable natural gas, nuclear green hydrogen and possibilities for municipalities to issue taxes, exempt bonds and receive direct credits, which we'll talk about in a minute. Looking at the general funding levels that have been out there, California has received a bunch of money that's being distributed by the California Energy Commission. This is kind of a summary of that. Some of the biggest areas are electrical vehicle charging infrastructure, which is also coming from the federal government, and then it's also being backed by the state, multiple levels above what the federal government's providing. So a lot of different programs here, a lot of grant programs that folks can participate in.

(13:35)

Looking at what's happened recently on Friday, I was talking to a couple of folks in the room here who are part of this California got 1.2 billion for a clean hydrogen hub plan. And so this was something that was initiated in a joint application with many, many different folks in government. It's called Arches, Alliance for Renewable Clean Hydrogen Energy Systems. It's for decarbonizing public transportation, heavy trucking and the ports. And so ports of LA Port of Los Angeles, state of California, UC, regions, cities of la, Lancaster, Riverside, a lot of different people involved through our left, some names out Northern California Power Agency and SMUD and LA Water and Power, all part of this application. A lot of different purposes using renewable energy to produce hydrogen, so it's called green hydrogen. So a big deal that's going to create underestimates a couple hundred thousand jobs in the next 5 years to 10 years in California.

(14:42)

Back to what Emily said about guidance, treasury is putting out guidance on all these IRA regs on a very regular basis. It's impossible to read. This obviously is a lot of guidance. The ones that are in blue, one is related to domestic content and this is a very major issue given the industry that exists in the US today for renewable energy components and making sure you comply with that. And so there's becoming more and more specific over time. The second part is guidance on the ability of a municipal government to issue tax exempt bonds and receive 85% of the tax credit. So that's also, and still being discussed, there was a panel, a webcast that the bond buyer org did last week just on that aspect. So very complicated still in developing.

(15:32)

One thing to be interested in here is if you're curious, how were energy projects funded before was they were funded by the blue box on the left there, which were basically municipalities would sign a power purchase agreement with a renewable developer and have a project built solar wind, geothermal would be built and they would pay if they received the energy. This was done for several reasons. One of the primary reasons was technology risk, that folks didn't want to take the risk on the solar and wind, which were new technologies at the time. Also, they were able to receive the benefits of the tax credits because the developers and the banks that back them were using the tax credits for tax benefit. Now we have the ability on the right to look at different options. You can issue taxes, exempt debt and claim some of the tax credits. You can also claim various bonus credits that exist as well. So again, very complicated. You could spend the whole session on this. This gives you a snapshot of it. And that's it on my section I believe.

Alex Zaman (16:36):

Great. Thank you Greg. I'd like now to turn it over to Cyrus. Cyrus, if you could just speak to us about some of the transportation specific provisions within IJA that are noteworthy here. And I think you also have some great perspective on the practical hurdles that will be need to address for issuers to take advantage of some of these programs.

Cyrus Torabi (16:56):

Yeah, thanks Alex. So on transportation, I just want to mention from the IIJA, some of the amendments to the TIFIA program. So the first thing is if you have a master TIFIA agreement, you now have five years to close your deal. That's up from three years. Used to be prior to the IIJA for every deal over 75 million, you had to get a credit rating. They bumped that up to 150 million. So a little bit easier to get a deal done without a credit rating. And you can, sorry, fund public infrastructure. Now in the vicinity of transportation facilities with the TIFIA funds, you can also acquire mitigation land. And then the final thing was the requirement. There were certain requirements where excess revenues that were pledged had to go to prepay the TIFIA program or the TIFIA loan, and that is no longer the case.

(18:05)

And in terms of the practical hurdles, I think Emily mentioned a bunch of good points on the tax year issue. I just wanted to explain a little bit more about what that means. So if you pick your tax year for instance as July 1, 2023 to June 30, 2024, any project that you were working on from January one of 23 to June 30 of 2023 will not count, not be eligible for the credit. So there's a little bit of kind of hard thinking that needs to go into picking that tax year. Also mentioned the fact that there's a production tax credit and an investment tax credit. The production tax credit is paid over time. The investment tax credit is a one-time payment. And so certain projects are eligible for both, but you can't get both. You have to pick one. So there's some kind of strategic thinking that needs to go into that.

(19:10)

And then as well, just the base of some of these projects needs to be considered, do you do your own facility or do you enter into a power purchase agreement for instance? You might make a different decision depending on what kind of credits you're eligible for and how likely you think you would be to benefit from those credits. So that again, a kind of a strategic thinking approach that needs to go into whether we build it ourselves or just do a PPA. I wanted to mention as well the by American, and again Emily mentioned this, the by American, the prevailing wage, the apprenticeship requirements, I think at straddling we're not a hundred percent convinced that the legislation is clear that that would not apply to the entire project. So in other words, you're getting a credit for part of a larger project. Do you have to follow those by American, the apprenticeship and the prevailing wage requirements for the entire project or just the part that's entitled to the credit? I think there's some ambiguity there that is yet to be resolved.

(20:31)

And then what was the other one I wanted to mention? Yeah, the portal is still unfortunately not ready. And so it's a little bit unclear about how this is all going to work. I mean, we eagerly the federal government's opening of the portal so we can see what we all need to do. And I think the other thing I just wanted to mention was the sequester issue. So for the production tax credits, there is some language that would shield them from a sequester, but Congress could change that. And it's also not clear that it applies in every case. So that's just something to watch out for. And then finally, the investment tax credit, the one-time credit can be recaptured, so you can't sell or change the use of a facility that's constructed and gets those credits. You have to maintain that use, otherwise you risk having the money taken back. And I think I'll leave it at that. Thank you.

Alex Zaman (21:41):

Really good insight there, Cyrus. Thank you. I'd like to turn it to Randy now with a question that I think is on a lot of folks' minds with the significant influx in dollars, even though the rollout has been relatively uneven, what has the impact to municipal instruments been in the first one to two years of these programs? What can we expect over the next three to five years? And just from your vantage point, how do folks in their credit world look at infrastructure activity, particularly in the very high interest rate environment that we find ourselves in today?

Randy Gerardes (22:17):

Thanks Alex. And thanks to the Bond Buyer for having me. I would say that you guys read the Bond Buyer. We're all here for the bomb buyer conference. I think most folks in the room are aware that issuance is down. This past month actually is not a good month of September. Actually volume was up, but overall volume has been down for the year to date about 9%. Now, plug in that time, insurance penetration has gone up 9%, which is a little bit in line with the interest rate question you talked about, which I'll get to in a second. One of the things that investors have asked for many years, not only in the role I'm in now, but in my prior role is why we haven't seen more infrastructure before. It was rates are low, we should be seeing a lot more projects to take advantage of infrastructure.

(23:06)

Now rates are high and people are saying, well, I don't need to issue now because rates are high. There's sort of that sticker shock layer into the fact you have inflation eating into some of those project budgets and you have a situation where you're not necessarily seeing people taking advantage of accessing the capital markets. But I think bigger than that is kind of this crowding out effect where the federal government and the programs that we've sort of talked about that funding has been utilized to offset bonding in certain cases. And so what we've seen is federal dollars are being used to either defray higher costs of projects for inflation or they're using some of those dollars to actually pay for projects out of the grants that they're getting from the federal government. So that's led to a reduction in issuance sort of going forward. I think from an investor standpoint, which is kind of how I try to approach things, it's kind of been my background. Investors value infrastructure in these times. They're a hedge against inflation for most investors. And so investors are saying not just in the United States, but overseas are saying, why haven't we done more infrastructure? We love it and I love it. I think infrastructure is essential. It's proven through shocks, whether it's SARS or it's terrorist attacks, knock on wood earthquakes, which apparently we got notified today there was an earthquake.

(24:33)

It has stood the test of time and has been extremely resilient. So from a credit standpoint, I think that I am, and we as a firm are very bullish on infrastructure and transportation in particular. I think the challenge sort of going forward is on that sort of three to five year term, the credits are very strong, again, supported by whether it's operating or capital grant funding from the federal government. That's been a huge support from the credit side. But I think sort of going forward, and I don't know how else to say this, but a bit sarcastically is no one really wants to pay for it. There's a lot of anti tolling sort of sentiment in various parts of the country or user fees if we want to call it tolling user fees. And then you also have obviously a lot of debate about taxation and whether or not we're spending too much on the federal budget side.

(25:25)

So that leads us to a situation where we continuously get a report card in the United States from the American Civil Engineers of a C or lower. And I think the question that I think we as a country need to sort of ask ourselves is what is the economic cost for us not investing in infrastructure? What is the economic cost of having infrastructure that's a C? And it's significant. I don't know the numbers. I'm sure someone with a PhD probably has done that analysis, but I think I sort of sit there and say, because we have a important resource that needs to be invested in and we have somewhat of a support to do it, I think three to five years out we're going to continue to see support for infrastructure from the buy side of the house. The question is how many projects are going to get financed and how are they going to be paid for to provide that return to investors? And that's really been the question, and I think that's really why we haven't seen more infrastructure getting done. So I'll sort of stop there. For my chair, it's a transaction business, and so the portal getting dollars in ultimately leading to investment opportunities is really what I see at the end of the line. So I'm very curious to see how we can get more into the pipeline so that there's more to come out of the pipeline and help us to ensure and or invest in.

Alex Zaman (26:54):

Thank you, Randy. David, you've spent a lot of time on the issuer side now that you're on the advisory side, just piggybacking off of Randy's comments, we'd love to hear just what financial products and project delivery strategies issuers are currently looking at, especially given the uneven rollout and the timing of federal funding as well as a lot of cost escalation that we're seeing in terms of inflation and every other cost under the sun.

David Erdman (27:21):

Okay, thank you. Before I answer that question, I just want to from an issue or an advisor perspective, kind of talk about the inflation reduction act and some of the issues that we're seeing. It's been mentioned by many of the panelists here about regulations not being out there, and that's going to start to be a stranglehold here pretty soon. Looking at some of the tax credits, and again, the IRA is huge. There's 70 different tax credits, different regulations you've heard of production tax credit, investment tax credit. All this has to be looked at, but if you look at the tax credits on the private side, that used to be private governments or private industries got a 30% tax credit. As we've rolled this out to municipalities, your base credit is only 6% and you can multiply it by five times if you follow the prevailing wage rate and apprenticeship requirements.

(28:09)

So they've put some more requirements on government issuers in order to get that 30%, which was just a flat 30% before. What's interesting is when they rolled out the program, they want to get the money out as soon as possible. So basically they be in the federal government says, we'll waive that production, or we'll waive that prevailing wage rate and apprenticeship requirement if you have a project that begins construction before January 28th, 2023. So there was an impetus to kind of move some projects along. Well, now a full year has gone by and some of these projects are getting to the point they're being placed in the service and based upon the tax year you collect, there's going to be some projects that are going to be ready to receive some of these tax credits next year. And yet there's no portal. There's no guidance out there as to how the direct pay will be worked in for governments to get that money.

(28:55)

So it's going to become a problem here pretty soon. The other issue is the domestic content that was mentioned. That is a challenge, a lot of projects coming through. Can the US economy support and provide for that in addition to receiving an additional tax credit for the domestic content? Some of the investment tax credits, if you don't do the domestic content, you're actually going to lose some of your tax credit going forward. It starts out in 2025 and by 2027, you potentially won't be able to receive any of the tax credit if you don't have the domestic content. So some conflicts there as to how you can pursue that and if you don't pursue it, how it may actually come back and hurt you. But as for the question about timing, we had a panel this morning talking about where the interest rates are.

(29:47)

Previously for many years, a lot of issuers had variable rate in their portfolio as the issuer for the state of Wisconsin. I had commercial paper, I had a couple of different flavors of commercial paper VRDOs. But with the interest rate environment that we've had, a lot of issuers have basically dried up. Those programs evaporate on, they're no longer around. So where can you get some interim financing that could be used on an interim basis is a little bit of a challenge with inverted yield curve. I think most of the clients that I see are basically still going out and doing bands. They understand that it's not a great environment, but doing that short-term, borrowing to pay for the project cost, knowing they're going to be getting some serious grants, makes it a little less painful. Other clients that I have are using internal funds advancing money with the idea that at some point, either they're going to get the money from the federal government or will have to do some sort of financing.

(30:35)

Getting the money from the federal government. It was mentioned about the production tax credit and being anti sequestered. Many issuers felt the pain from the Build America Bonds. We were promised 35% tax subsidy, and that evaporated down to 28% timing of payments for the federal government. When I was at the state of Wisconsin, we built a new veterans' home with the idea that we're going to get 60% of that paid by the federal government. I retired last year and I think the state's still waiting for that 60% from the federal government. So the timing when you get the federal funds is also a challenge as you're setting up interim financing options to cover that with respect to future activity, which I think has an impact as to options you're looking at right now. There is a lot of federal money. It's financing a lot of the project costs, and it has an impact on the current volume.

(31:28)

I believe that with time, and it's not going to be maybe next year, it may not be the year after, but a lot of governments are going to be starting these projects and getting some federal money and the grant programs are going to run out. IIJA is going to be done, and you're going to have half completed project. So you're going to be in a position where you're going to have to do some debt financing to finish some of these projects or good projects spun other projects. So there will be an increase in volume, I think resulting from this. It might just be a little bit of time. That's coupled with we have a full ocean full of 5% coupon bonds out there right now with the inverted yield curve. Maybe the refinancing transactions aren't working, but at some point the curve will stabilize and we'll have many refunding, current refunding transactions available to complete all again, meaning that more transactions give you more opportunities to enter the capital markets to do some sort of financing on an interim basis while you're waiting for the funds to come from the federal government. I think that's all I have to offer on that question. Great.

Alex Zaman (32:25):

Thank you, David. Spot on with those comments. I'd like to turn it back to Randy. We touched upon this a little bit, but which sectors and types of projects do you really see benefiting from some of these new programs out of IJA and IRA?

Randy Gerardes (32:40):

I mean, I was very, very interested to see the broadband as a focus. I think broadband is a huge opportunity, especially for rural communities where there's not a great means of raising funding sources or financing sources, either one for broadband. So I think broadband is very interesting. I was very interested in Greg's slides in terms of the ITC and the PTC because for public power issuers for example, there really wasn't an incentive to build a new public, a new power plant, let's say, because you weren't getting the tax credit. You could just buy the power from an IOU or a tax paying entity that was getting the tax credit. So again, that was a situation where maybe you're a public power entity and you do need more generation capacity, but you're getting it from an IOU and you're not issuing bonds in the tax exempt space.

(33:33)

So again, for people that are trying to deal with transactions, there weren't as many because that was sort of done by the IOUs. I always think that there's an opportunities for ports. People don't realize how much actually comes through our ports and we're sitting here in San Francisco, but if we went down to LA, you would just be amazed at the port traffic and what happened when ports, we saw them have some issues, whether it's labor, et cetera. So I think ports, I think airports always, but I think we're pretty well going there. I think ports, I think broadband, I'm also interested in trying to be a little bit more using funds the best way we can for managed lanes, et cetera. Tough from a credit standpoint, but I think managed lanes are one way we can use congestion. Pricing was mentioned in New York, that's the same concept using economic tools to try to help manage traffic. So those are areas of opportunity, I think, but generally pretty bullish on infrastructure of all sorts and fashions.

Alex Zaman (34:44):

Great. Thank you. Randy. We're going to take it back to DC and Emily, I know we chatted a little bit about the government shutdown, a lot of noise in Washington. Obviously we're coming up into an election year. Want to know kind of what the impact of all that noise is? And just coming into election year, we will have on just dealing with federal agencies in the near to immediate term. And in addition to that, I know the topic at a lot of these conferences is where do we stand on our tick list of advocacy items for our industry and any signs of progress on some of the things that we've been pushing for as a constituency here for our public finance sector?

Emily Brock (35:23):

I feel like the depressing one on the panel in some cases, when you, let's go back to Washington. So Jim Jordan only got 199 votes, one vote less than the last time. So we still don't have a speaker. McHenry is still pro team and that means that he will not be advancing those spending legislations, which adds to our budget. In fact, it sounds like Hakeem Jeffries got several votes. I'm sure there was one in for Liz Cheney, you heard it here first. I'm ready to be a vote. I'm ready to be a part of the process. But no speaker, no progress on those spending bills. And that means the farm bill. That means word A. That means NDAA. That means a lot of spending bills are not going to advance. So what does a shutdown mean for local governments? Well, shutdown means several things. Where do you investigate your federal fiscal ties?

(36:14)

If you're a community? I think all of my credit rating analysts in the room very well know what are those federal fiscal ties? Well, if you're a military community, if you depend on tourism and revenue in tourism in your areas, that's a big risk. If you have a lot of federal employees like we do in DC, obviously that's a big risk. But I think more importantly for a finance officer, you're going to look at the federal fiscal ties to individuals in your community. What about wic? What about headstart? What about all of the different programs that TANF like that are dedicated to those who are in your community? But now all of a sudden we have those federal fiscal ties deep inside of our local governments to the federal government. It's kind of the reason I asked treasurer Amah that question. How tied are we to the federal government?

(37:05)

Well, we're deeply tied. So if there is a federal government shutdown, what we have to focus on at local governments is we have to focus on what's essential and what's not essential. David Erdman was on the debt committee when we found out that filing your 80 30 eights for getting your Bill America bond subsidy payments back while the person processing the claims was essential, the person opening the envelopes was non-essential. So we're going to be focusing on that. There are resources for that, but we're going to try to make sure that we focus on that in the event of a shutdown. So let's go to our old standby favorites. We do have an advance refund bill, knowing full well that of course the 11 funding bills are the most important to advance before November 17th. We do have an advance refunding bill. It's bipartisan, it's sitting in, wait, just like a lot of other pieces of legislation.

(38:00)

I'd like to also mention addressing Litech and efficiencies in Litech, increasing volume caps and creating sort of a market of exchange for private activity bond volume caps. FEMA loan interest deferments, representative Kilty out of Michigan has a Clean water Act called the Flow Act. I mean, we have a lot of stuff going on in the bond space, but the likelihood of it advancing without a budget is not going to happen. And so I think we need to frame our perspective where that needs to be in Congress. I would also say it's really important to know GFOA is focusing along with the rest of the public finance network on a lot of regulations that are gaining steam while Congress is not. So there are changes to procurement guidelines to two CFR 200 ESG is still a lively conversation as we'll find out tomorrow in a very political conversation. And the Financial Data Transparency Act is also gaining steam. That's the second panel that I'm on tomorrow. It's a great conversation about the use of technology and disclosure. So things haven't slowed down necessarily. It's been a confusing shift of priorities, but we are certainly very interested in staying in touch with the market so that we can communicate our priorities if things do change.

Alex Zaman (39:28):

Great. Thank you, Emily. Appreciate those comments. A little sobering, but definitely forward-looking, and I know that you and your team are very active and a number of folks in the room have been very helpful, just mobilizing the forces to get our collective infrastructure objectives accomplished in DC and in the state. Back to Greg, I'd like to just ask you about any specific California projects that have taken advantage of some of the programs that we've been discussing here today.

Greg Dawley (39:56):

I'll mention a couple things. One thing that Emily mentioned early on was the ARPA funds, and there was $5 trillion of money that was given to all the states. California received $555 billion, so money to individuals, government agencies and businesses. So a huge number, A lot of it's unspent and it's been a very big ballast for budgets around the state. If you look at states aggregated together, normally they'll have a budget balance that'll be plus or minus 3%. What we saw last year and the year before were budgets on average in the US that were growing for states by 15% on a nominal basis. And so I have a graph, which I'm not going to pull up. It shows a direct correlation to that in issuance, kind of Randy's point earlier about the largest of government kind of reducing municipal debt financing needs that will change over time.

(40:58)

But those numbers are unprecedented in terms of what was put into the system and what's helped create. They sell the golden age of public finance in terms of budgets and people having very strong balance sheets. So that's bigger than any of these IRA opportunities. And just wanted to mention that. Number two, Randy mentioned earlier broadband. And so California has received 1.8 billion from the federal government out of the 43 billion that is being given under the infrastructure bill for broadband. We all saw during the pandemic the critical need for broadband. Lots of kids couldn't get on and go to school with video because they didn't have broadband. Lots of people couldn't work from home. And so the effort there was made to try to address that with this money. The state has also put in billions of dollars over the last couple of years as well. So this is a very large amount of money.

(41:49)

The budget this year included $728 million for this topic. So this is an evolving area. And one interesting aspect of it for municipal finance industry is there's a new private activity bond class created under broadband two years ago that allows, if you meet certain criteria, the ability to issue taxes bonds, as long as you have volume cap for that. And so we have not seen very much of that happen yet. The National Association of Bond Lawyers sent out a very detailed memo earlier this year describing some of the impediments to the program being implemented. And so I think back to Emily's point about it takes a long time, the money's there, the ability to do the bonds and the need for it is there just hasn't gotten the guidance yet. So it's another interesting niche aspect in our business to think about.

Alexc Zaman (42:43):

Great. Thank you, Greg. Cyrus, I know one area that we really haven't spent a lot of time on today is water. Could you shed some light on what we're seeing in the water space, California and nationally?

Cyrus Torabi (42:55):

Yeah. Thanks Alex. So yeah, just wanted to make a couple quick points about WIFIA and SRF. So on WIFIA, we're in an odd market. I think everyone would agree it's been a strange couple years or maybe year and a half, but the WIFIA rate that you get is tied to treasury rates. So as treasuries and tax exempt rates kind of diverge, your WIA rate can do screwy things depending on how long your borrowing is. And that's something that we're seeing clients have to grapple with, agencies have to grapple with. And then the other thing is, so WIFIA funds 49% of a project cost, but the other part that people forget is that the rest of the project costs cannot be funded with federal dollars. So you can't use WIFIA and any of these other federal programs together. You got to find other revenue sources. And again, that's something that we're seeing agencies have to grapple with on the SRF program.

(44:07)

So I just wanted to mention this. This has come up for clients just very recently. So the state water board's council's office has indicated that they think it's appropriate to, if you're a water agency that purchases water from a wholesaler, say Metropolitan Water District, they want to impute metropolitan's debt to you basically. So you have to not only cover your own debt service, you have to cover your portion of metropolitan's debt service basically on a parody. And when I say cover, I mean account for that in your rate covenant and basically treat it as if it's your debt. And again, that's true, even if you're not getting a bill that says you're paying X percent of our debt service, it's just included in the bill that you pay to your water wholesaler. So that was a new one for us, and we're working through those issues with certain clients and the council's office at the State Water Resources Control Board, just a little editorial from my perspective, WIFIA the last couple of years and the EPA have been easier to deal with than the State Water Board. For whatever reason, they've been more rigid in their lending requirements. And so agencies are kind of dealing with that going forward and happy to talk to any of you out there who are experiencing those issues, but we can commiserate together. Thank you.

Alexc Zaman (45:53):

Thanks Cyrus. David, I'd like to close things out with you and we might have time for a question or two after that. The current administration, as well as the prior administration placed a pretty high value on private sector involvement in funding and financing infrastructure. Certainly those two pieces of legislation do provide vehicles to enable that and further that, what have you seen in terms of high value add roles for the private sector to play, given the current federal funding climate in these programs?

David Erdman (46:25):

Well, I think it's true that the IIJA and the IRA does promote some private involvement on the IIJA Front. For example, the private activity volume cap was doubled for certain surface transportation projects. There was also a new category added for broadband, which was mentioned. We mentioned the WIFIA program and the TIFIA program, and there's also a SWIFIA program. The IIJA actually creates a CIFIA program for carbon capture projects. So there are different opportunities that are out there from these legislations. I guess as I look back, P three is a topic that comes up at a lot of conferences as to public-private partnerships, A lot of money has gone out the door. It's going to be going out the door for infrastructure projects today. Have we made enough changes in tax laws to promote private involvement going forward? In other words, yeah, there's a lot of money dealing with infrastructure today.

(47:21)

50 years from now, where are we going to be sitting? Have we changed the game enough with some of the regulations that allow for some sustainability ongoing so that in 50 years we're not in the same boat that we are today? And that's debatable. I think there could be some more changes. The White House talked about privatizing water systems. Yeah, good. But a lot of these SRF programs, finance water systems with 40 year taxes, financings. So how are you going to be able to privatize that quickly in light of federal tax laws and changing use? That's just one example. I think one way to promote more private involvement is look at some of the regulations that you have on banks, make it easier for banks to get more involved in financing some of this infrastructure, reducing some of the capital requirements or whatever else. But again, there is some good things in the IIJA, there's good things in the IRA, but again, to address sustainability of infrastructure needs, I just don't think we've done enough with both these acts to allow for more private involvement over the next 50 years.

Emily Brock (48:22):

If I, again, just to say that is an excellent point that we've fought so hard to get these, and it sounds like we've been kind of negative on this panel. I think all that we're trying to do is suggest there are ways that the White House can make this simpler and we are willing to work with them from the public market perspective that we do not, we have zero interest of leaving any money on the table.

Alexc Zaman (48:48):

I think that's a nice recap in summation, Emily, of where we stand in this space and on this topic, do we have time for a question or two from the audience? We'll just throw it out there. Any questions for our panelists here?

Audience Member 1 (49:09):

When do you think the rules about (Inaudible)

Emily Brock (49:26):

The section 45 I think is, yeah, actually, I asked that question of the treasury IRS today on our call, and the answer was, guess yes. So I think that's, well-known that Section 45 is well-known and they have heard from the market, they have heard from all of us, and I think that they've started to prioritize the distribution of those rules soon.

Alex Zaman (50:02):

Any other questions? Alright. Well, I do want to thank our terrific group of panelists here for an extremely insightful, informative discussion. Not an easy one, very complex, but a lot to keep track of and look forward to. So thank you all for spending some time with us. Thanks for the audience for sticking in with us late in the afternoon. I do want to remind folks that we are going to currently host the induction of Tim Schaefer into the Hall of Fame. So definitely would encourage folks to stick around for that. Thank you all.