The Issuer Roundtable-How Do They Plan Anything-in Today's Environment

Transcription:

John (00:05):

Good morning everyone, and welcome to the issuers round table. I figure before I introduce the speakers, we'll start today's discussion with a brief look at Great American traditions. When I think of Great American traditions, I think of the ball dropping New Year's Eve Times Square, I think of the Macy's Thanksgiving holiday parade. If you come to the West Coast, I think of the Rose Bowl, the Rose parade, things of that nature. But for those of us in this room, I have to ask you, do you think there's really any greater American tradition than the issuer round table at the Bond Buyer conference? I mean, and I get to host it. I feel like I'm hosting the Emmys or I've been appointed to the Letterman slide or something like that. So we're all very excited to be here, but seriously though, once a year, the Bond Buyer affords us the opportunity to hear from some of the largest and most influential issuers in the state. And so that's the opportunity we have now. So introducing the panelists to my left Anna Van Degna from the city and county of San Francisco, Nathan Bostrom from the University of California and Rodney Johnson from LA Metro. So without further ado, we'll get going. The panelists are going to start by just giving us a brief overview of the current overall state of their agency. So Anna, do you want to kick us off?

Anna Van Dena (01:38):

Sure, I'd be happy to, and I know we all enjoyed hearing from San Francisco City administrator Carmen Chu this morning. So I'm not going to talk about the entire state of the city and county of San Francisco, but instead talk a little bit about my office and what we're currently working on. So I work, I'm the public finance director in San Francisco. Our office sits under the controller and we are a small but growing team. We've doubled in size since I joined about five years ago. We're in charge of managing and issuing the city's general obligation bonds, lease debt, short-term commercial paper, and then a growing responsibility of ours is managing special tax and infrastructure financing districts. That is definitely a growing area for our office. In total, these districts have about 20 billion of debt authorized. And to compare that to what San Francisco currently has outstanding with its debt issuing entities, it's about $20 billion when you look at the PUC, the airport in this city. So this week we were very busy. We were in the market with two competitive sales. We sold a hundred million dollars of taxable COP's for affordable housing and community development projects. Affordable housing is definitely a key priority in the city. Our office sits on the city's affordable housing loan committee and participates in many financings.

(03:12)

Additionally, the city is currently considering asking voters for another $300 million of general obligation bonds to continue to fund affordable housing here in the city. The other part of the financing was something that we haven't typically financed with COP's, critical repairs and recovery stimulus projects as well as streets. This is really something after the pandemic when we were in a little bit more cash constrained than previously, we decided to use these COP's to help make sure our buildings were being maintained and that we were really incentivizing recovery in the area. So it was exciting to be in the market today, but our disclosure council has recommended that I don't answer a lot of questions since this is our blackout period. Also, this week we were able to take investors to see some of the city's development projects. So we started on Treasure Island, which is really kind of incredible to see the construction going on there.

(04:21)

We also did a drive by tour of Mission Bay, kind of looking at the changes there over the years. And then finally we ended up at Mission Rock where the Giants Tishman have partnered together. The first building that received its certificate of occupancy there is for Visa's headquarters. We also got to tour a residential apartment building really amazing views of the ballpark. So it was great to be able to take investors on this tour and see these great development projects with a lot of unique kind of sustainability features such as a Blackwater recycling treatment plant and mission rock and hand it over to my next colleague here.

Nathan Brostrom (05:12):

Thanks, Anna. And it is really great to be here and see so many old friends and colleagues. I think it would be an understatement to say the pandemic caused disruption in every single aspect of the university. Healthcare. A lot of people don't know healthcare revenues are now over 50% of the revenues of the University of California and our hospitals, including Mission Bay. They had to switch on a dime to Covid care and telehealth and defer all elective surgeries and all normal patient visits education. I was actually at the Merced campus at the time. We actually shut down the campus overnight, emptying all the dorms and switching everything to hybrid and remote instruction. Our labor force, probably similar to my panelists, we've had tremendous turmoil there with the switch to remote work and very, very high turnover rates. And then as all of you know the capital markets, we are over 160 billion in investment assets, 30 billion in our debt portfolio, and we've just seen incredible volatility in the last few years.

(06:19)

That being said, the university is in a very, very strong position right now and in spite of all of these factors and what is really driving it is just the sustained and burgeoning demand for a uc education. And this is in the face of declines nationwide College going. The number of students peaked in 2010 after 25 years of consistent growth at 18 million across the country. This last year is down to 15 million. Some of that reflects just the decline in the number of high school students, but it also reflects some concern about the value of a college education, especially with the growing amounts of student loan debt. We are actually counter to that, and I would say some of that is because some of the declines in college education are more pronounced in the Northeast and other parts of the country, but even CSU is down about 6% in enrollment.

(07:22)

The community colleges went down 20%. A lot of that caused by the pandemic. Our campuses continue to grow. We have over 300,000 students right now, and I apologize to all of you with high school age students, but the four of the top six most demand colleges are UC campuses led by UCLA, which had over 150,000 applications for their freshman class last year. So that is what is continuing to sustain us. I mean, there are a lot of warning signs that we look for. There has been a decline in some of the persistence and retention rates, especially of our first generation and Pell Grant students, which make up nearly 40% of our undergraduate population. The community college decline has led to a decrease in our transfer enrollment. So we are going to continue to watch that very, very closely. But on the whole things at the University of California are strong and sustained running.

Rodney Johnson (08:24):

Good morning everybody and thank you Rodney Johnson. LA Metro. As you may well know, LA Metro runs the buses, the rail lines, express lanes, freeway work, local programming. So you can imagine we're quite busy, 10 million population, 88 cities. There's a lot going on. What's happened recently with the pandemic sales tax hit? Sales tax got hit pretty hard, but you know what? It came back really strong and that was one of those unknowns. You never quite know when something this unusual happens. And what we found was there was an insatiable appetite for Americans to spend money. I think we're probably all guilty of that in this room in a good way. So things came back. They came back strong areas that we were concerned might show weakness did, but others came back strong enough to mitigate that impact certainly to our investors, which we were very happy about.

(09:25)

So that same story with sales tax is great. Ridership not so much. Things have come back a little. Things haven't come back a lot, and we're working through that. We have the same issues that any large city has with crime drug use. Take your pick. It's important to provide a safe alternative to your vehicles, but it has to make sense. So we're working on that looking forward long list of projects and initiatives. I think most of you in the room know what those are because you keep an eye on that sort of thing. That's how you make your money. The 28 28 Olympics are coming soon. We're excited about that. We had a senior leadership retreat a couple of weeks ago where we did some breakout sessions with the different folks on the leadership committee to look at funding, financing, operations planning, and if you were paying attention in that meeting, you walked out just a little bit scared because it's a big lift. It really is. But we're excited about it. We get to have a dry run of sorts with the 2026 World Cup that will be at SoFi Stadium in Inglewood. Again, SoFi is a huge success for the region. Getting the World Cup is great for us on several fronts, so we're very excited about that.

(10:46)

A lot of logistics with events like that. We're going to need to ask for the public's help. 1984, we asked them to stay home and they did. They went on vacation. They didn't drive they telecommuted long before telecommuting was okay, we're going to be asking that same thing now. We're going to be borrowing buses probably from some of you folks in the room. We need the number that was thrown out there, a couple thousand additional buses as to what we have right now to shuttle athletes, to shuttle to visitors. There won't be parking in a lot of these venues, so we need to plan accordingly. So that's, like I said, a big lift is an understatement. So as far as LA Metro, we're on good footing. We're fortunate to have the mayor of Los Angeles, Karen Bass, who is also our chairman of our board right now. So she swings a pretty big hammer and right now she's in Washington DC asking for resources and I'm pretty sure she's going to get it. So we're looking forward to that. So that's where we sit. Thank you.

John (11:52):

All of you sort of touched on the pandemic. Let's dig into that a little deeper. What issues have you experienced because of the pandemic and what are you doing to mitigate those? Anna, you want to go first again?

Anna Van Dena (12:05):

Sure. So I know San Francisco's come up a lot at this conference. Obviously during the commercial real estate panel, we're seeing record vacancies in our downtown area and it's hard to go from being one of the hottest markets in the country to the most challenged. So certainly things like that are impacting us where it impacts our office directly. So we're responsible for modeling for the city's 10 year capital plan. The majority of our capital plan is funded by general obligation bonds, and the city has a policy limit to try to maintain tax rates at 2006 levels. And so when we do our general obligation bond projections and folks in the city ask us what our capacity is, we found out this go around, it was more constrained because we're using the city's five-year projections for AV and they're just not as rosy as they were two years ago when we last updated the capital plan.

(13:09)

But in terms of one of the key things that our office has been doing to try to mitigate some of the issues that came on because of the pandemic, a major issue was we had a lot of very large development projects that had development agreements that were negotiated, but they just became stuck. The math didn't pencil anymore. So the controller's office partnered with the Office of Economic and Workforce Development, and over several months we worked on, we brainstormed ideas, but ended up deciding to update the city's infrastructure financing district or IFD policy as folks know this is Redevelopment 2.0. And what we did is we said, okay, citywide, let's allow these projects to come forward and ask for IFD dollars or tax increment dollars, but we're going to cap the revenues that we give out at 5% of citywide tax revenues over time, and we're also going to have a use it or lose it clause.

(14:23)

So yes, we'll help you form your IFD, but if we don't see buildings with a TCO or Certificate of occupancy after a certain period of time, then you're not getting that money and it's going to go to a different project. And so having this new updated IFD policy I think is a big deal for us. And we've heard very positive feedback from developers as Carmen mentioned earlier. So we are partnering currently with the developer of the Power Station project, so that is about 29 acres on the waterfront in San Francisco and the dog patch neighborhood, ultimately it's scheduled to be about 2,500 homes, mixed use, mixed income development, which it's very exciting and we hope to post our infrastructure financing plan this coming Friday actually.

Nathan Brostrom (15:32):

Well, I've already touched on a couple of the things, but we experienced a real drastic decline, billions and billions of dollars in losses in our healthcare, six academic medical centers across the state. Again, all at switch to covid care and loss, the billions of dollars from voluntary and elective procedures. Fortunately, that came roaring back. It was really a v-shaped recovery. And similarly, when our auxiliaries, we emptied all of our dorms and they lost hundreds of millions of dollars, but they are now over capacity. And in fact, we are trying to add as many student housing beds as possible. We've built 30,000 in the last decade and have plans to do another 20,000 more. I'd say more of the persistent issues are around labor flexibility. I think this is a double-edged sword. It has been very, very positive in terms of recruiting some people who are able to do remote or hybrid work, but it's also hurt.

(16:28)

Several of our campuses. I mentioned Merced and Riverside, they have some very talented people that do contracting, grant administration. They would make $40,000 more if they work for UCSF or UC, San Diego. They can still live in Merced and come in a couple of times a month to do that. So there are disparities across our system. And then I'd be remiss if I didn't say this, turmoil has affected everything including intercollegiate athletics. We already had the whole issue with name imaging likeness, but then during the pandemic, they opened up the transfer portal, which allowed student athletes to move between colleges without taking a year off. And then I think the reconfiguration that is affecting all of us, but moving to the Atlantic Coast Conference and UCLA moving to the Big 10, I don't think it was lost on people that the SEC during the pandemic was still playing to full stadiums when we had games with no fans. And that led to a lot of the turnover in the conferences. So the Rose Bowl will be very, very different. John going forward.

John (17:41):

Nathan.

Rodney Johnson (17:44):

Okay, LA Metro, right? The pandemic just stopped everything with public transit and when everybody stayed home, the criminal activity went up, right? The homeless, the changes we've had to make because of the pandemic are around cleaning, around law enforcement safety. We're still battling all of those things. We're renegotiating with the city of Los Angeles, the LA County Sheriff's Office, long Beach PD to adjust to the contracts but also change the focus on how are we going to get our arms around this? We want people to come back and unless people come back, the elements that you don't want there will keep coming forward. Early on in the pandemic, one of the great things about it was our construction kept moving forward because there was no traffic. We didn't necessarily have to do all of the improvements at night.

(18:47)

We didn't have to shut down streets. We could just work. And so some things were getting done. Then we ran into some supply chain issues, which many of you have. A lot of that has been fixed. One of the other issues, and it's twofold, is labor. A lot of folks are working at home. Folks on my team of course, have been very productive, but I'm not sure that that's the case for everybody. So we've had to make some adjustments in that regard. We lost in my department alone, three people to early retirements, and we were a department of 10, and so I lost 75 years worth of metro experience on March 30th, 2021. So that was an adjustment. And so again, we've been able to bring on a couple people and we'll likely bring on a few more if anybody's interested. Maybe not somebody David Brostrom's age, but somebody a little more motivated to, it's okay there.

(19:46)

So on that labor front, we're recovering when you look at what it takes to deliver large infrastructure projects. We're competing against the SoFi stadiums, the developers around South Park, other agencies, and there's only so much out there, and that's slowed us down a little bit. We thought we'd be a little bit farther along with some of these projects that we are now. It doesn't mean they're going away, they're still planning on happening, but it's definitely caused us a pause and certainly been a challenge to the CEO's office and everybody that reports to them because we're having to make a lot of explanations for why what looked really good on paper is probably not going to happen exactly the way it was drawn up. And that's in a nutshell of what the good and the bad out of the pandemic. But we're turning the corner I think in a lot of ways, but it's again, an outfit the size of LA Metro, it's not going to turn that fast. So there's a lot of work to be done.

John (20:56):

Rodney, you kind of mentioned a positive that during the pandemic you guys were able to work on highways more easily, closures weren't necessary and such. Are there ongoing positives that were caused sort of by the pandemic improvements that were made because that happened, Anna?

Anna Van Dena (21:16):

Sure. I mean, I think a lot of positive things came out of just the awful pandemic. They're the obvious things, like just the unbelievable efficiencies that exist. Now, seeing government take on technology, we use Microsoft teams so quickly and being able to meet face-to-face with your consultants, yes, you're just seeing on a computer screen, but folks aren't having to travel to fly and you can just get so much done in a day. It's amazing. I mean, another obvious one is just with government. There's a lot of paper everywhere I mentioned my team doubled in size. Well, we also were doubled in size, but can stay in the same office because we got rid of all our paper. You're not printing out stacks and stacks of documents for legislative approvals or reviewing all these paper invoices. So those are definitely a couple of the more obvious ones that came out of the pandemic.

(22:18)

I think also the pandemic, it kind of forced the city to look at some harsh realities. So a couple challenges that the city has had and is still working on have to do with time to hire in our contracting process. So the city was able to recognize that this was a real, real problem after having vacancies, following the pandemic, for example. And so they developed a team, a government ops team that consists of employees in our office, the controller's office, Carmen, the city administrator's office, and human resources. So about 15 people with a $3 million budget. And just all this group does is strategize how do we fix contracting? How do we fix time to hire? And it's really critical. I think folks in this room may have noticed one of the things that came out of that the policymakers decided to eliminate 12 x 12 x was the headquarters limitation that we had on contracting where we basically couldn't do business with half of the states and the country. And that limitation was proving to be quite costly for the city. So I would say that development of that group has certainly been a positive thing that's come out of the pandemic.

Nathan Brostrom (23:38):

Yeah, I would agree with a lot of the positive factors that Anna had just laid out. Two that are quite specific to the university. One is I mentioned online education and we flipped entirely to online during the pandemic, and we learned a lot about what classes work well online and what classes don't. So coming back into in-person instruction, we still have a great increase in the number of online credits, and this is really going to help us a lot in terms of summer sessions, in terms of reducing time to degree, increasing graduation rates. We also have one of the largest cohorts of population in the state of California are people who identify as some college. They've gone, they've done some credits, but they never got a degree. This is going to enable us to reach out and welcome them back mostly through online courses that will meet what they're doing in terms of their work and family schedules and help them complete a degree at UC or CSU.

(24:37)

And then the other one is telehealth. We went entirely to telehealth appointments a hundred percent, but now it's starting to stabilize. About a third of our appointments are now still done via telehealth. And this is, as Anna was saying, this is great for in terms of productivity and commuting, but it's also great for a statewide reach. One of the areas we see this most in is mental health. So our students, regardless of where they're at in the state, are able to access mental health practitioners in Davis or San Francisco or LA, and this really helps address a glaring need without needing it to be in person.

Rodney Johnson (25:20):

Yeah, I agree with all of that. If you ask my staff, certainly, and most of Metro staff, telecommuting was the greatest thing to come out of the pandemic being a father and some of the folks I work with have younger kids than I do. It's never in my life that I think I would be able to manage my career, be productive, and still take my kids to school. I mean, it was just an unbelievable gift. Other positive things, sales tax we touched on earlier, again, you just don't know, say those top fives, those sales tax generators, the household names, your Home Depots, Costco, target, Amazon, Amazon Services, those all stayed right at the top of the heap. But below that, there are literally thousands of sales tax generators in tens of thousands, probably in Los Angeles, the top 100, well, let me rephrase it this way, outside of the top 100, those small places, whether they're small service stations, restaurants, boutiques, whatever, they generate 60% of the sales tax revenue in the county.

(26:34)

So that was kind of a staggering number for me. And I'd been watching the number for a while even before the pandemic because I wasn't sure what would happen something if there was a different type of event. But what we found is all of that really stayed intact. Now, there were somes that really had some movement, some of your fast food companies that took a hit, but again, like I referred to earlier, other things picked up the slack, and though a lot of those smaller businesses remained intact, they created a strong base for us to continue moving forward. And that was one of those unknowns that I think that we can put behind us as a positive and move forward.

John (27:22):

Switching topics then a little bit in terms of employee retainage. Even at Wilmington, we're finding that younger employees, their ideas and expectations of what a job should be have changed dramatically. Are you guys experiencing the same thing and how's employee retainage going?

Nathan Brostrom (27:42):

So as I had mentioned, the turnover rate has increased dramatically. It was about 7.3% across higher ed in 2019, and it's now over 14.7%. So there is a lot of fluidity, a lot less loyalty, or as Rodney was mentioning, the institutional knowledge that you get from long-serving employees. Our campuses are now open, and so a lot of our jobs are in person. We are mostly in a hybrid environment where you come in three or four days a week and you work from home the other day. But there are a large number of our jobs, finance, administration, legal and others where people are finding the benefits of being fully remote. I myself think the hybrid is a better model. My team is in three days a week, and especially for younger employees, the ability to have mentorship, training and development, just even the informal learnings that happen through in-person interaction rather than having it all on Zoom, I think is very, very beneficial. And we get some pushback, but I think now that people are back in, it's especially true on campus because you get the whole vibrancy and dynamism of being there with the staff and faculty and students that really energize a campus.

Rodney Johnson (29:12):

Yeah, I will talk to that a little bit. Again, turnover has been an issue. We think we're working through it. Like I said, we're actively looking for talent. One of the constraints is while we've had some turnover and a higher vacancy rate that we wanted, some of those vacancy rates are in human resources. So if we have a depleted human resources department, they're the ones that we rely on to help us go through the process of bringing people on. And for those of you that have ever submitted an RFP or tried to apply for a job with a government, it takes forever. And so from finance's perspective, it's easy us to sort of pick on some of our other departments, but we're really in this together and it's forced us to become better partners. I think, and I've talked with my team about it, we have a skillset that maybe some of the other departments don't.

(30:05)

So if you really want to solidify your spot here and move up, make yourself useful. And so we've had to actively reach out to other departments, offer our skillset, become a better partner. And I think that if we were all just in the office, we were for years, it's easy to get stuck in your silo. It's easy to focus on your desk. But because we've gone through this change, I think that it's helped us look at the employment landscape a little differently and look at ourselves a little differently and say, Hey, what can I do to make this better? What can I do to make myself more valuable? And that in turn, I think is benefiting the organization, but it takes time. You still have those constraints. I can't lend my folks to human resources and have them run a recruitment, but I rely on their expertise of the HR process while my folks can focus on their knowledge of the business and who's out there and those two strengths together, hopefully we'll get something done, but we need more people to move forward.

Anna Van Dena (31:13):

And I spoke a little about the challenges in San Francisco. I think what I noticed most is definitely in the finance and the accounting world, a lot of turnover there, a lot of challenges. I think we're working on our practices, and I will say while I said that I love the efficiencies that came out of the pandemic and the use of teams or whatever. There's nothing that really replaces being able to see folks face-to-face, have team building activities, our office plans, lunch and learns. We've been able to do team trainings and things like that in person more recently. And I think that that's really kind of the glue that holds people together. I think about this group. I've been coming to this conference for over 20 years, and there's nothing better than seeing a familiar face in person, grabbing a coffee, just catching up on things that you might not otherwise, and you just don't have that same kind of water cooler conversation without seeing people in person. I think that's important for retaining and developing relationships and having employees want to stay at work.

John (32:27):

So we all live in California, which seems like it's getting a little bit crazier and crazier by the day weather cyber attacks. I mean, Southern California was nearly hit by a hurricane earlier this year. That was a new one for me. In terms of outside forces, how much time are you spending thinking about that? And is there anything in particular that's really worrying you guys?

Nathan Brostrom (32:53):

Well, maybe I'll start because we think about it every single day, and part of my portfolio involves getting commercial insurance for our 10 campuses, five medical centers and national laboratories. And that market has been really dysfunctional in the last several years. We've been really benefited by, we've created a captive insurance company, Peter Taylor, many of you'll remember. And I created that about a dozen years ago, and that has helped us in a lot of ways. We're no longer able to get insurance for sexual misconduct, and that's a function of Michigan State, Ohio State, USC, UCLA. We can't get insurance for traumatic brain injury. Cyber is becoming increasingly difficult. I was in London at the renewals and all of the questions were about artificial intelligence and really focusing more on the threat from it rather than the opportunities that are in it. And then property, we get not only the threat of wildfires, which not only affect our campuses, but we have 42 natural reserve system locations around the state.

(34:06)

We have ag and experiment stations, which have been actually affected by wildfires. We had a vet med facility in Tulare that I think is still underwater from Lake Tulare. But all of these are, we think about every day, not only in terms of the day-to-Day emergency of it, but also in mitigating the financing aspects of it. So one thing I've really appreciated about this group is just the creativity that comes out of it. We were very fortunate this year and we instituted a central bank just in time for the volatility of the market, and several of you were involved in helping us structure that. We have a mortgage program that our mortgage rates for our faculty are about half of what they are on the commercial side, and that's helped a great deal in recruitment and retention. But the next thing I'm going to be reaching out to all of you is creative financing ideas for risk management and self-insurance.

Rodney Johnson (35:08):

Yeah, for us, there's always a threat of outside. You just don't know. You can't be afraid of it, but the best way to prepare for it is make sure you have your shop in order and it starts with your immediate team, right? For me, it's treasury and like I alluded to before, you get solid footing with your treasury folks and then you let them help others in the organization. They have a lot of expertise in terms and conditions and time value of money that maybe other parts of the organization don't understand. So again, they help the others get stronger in that regard, which helps us prepare for unforeseen events. Cybersecurity super important. We get lots of questions about it. We have a strong cybersecurity force. It's something we're very cognizant of. We work with the rating agencies on it. I think that you have to, again, take those steps when things are going really well so that when something does happen, it's not quite as big a shock because I mean, you can't really prepare for everything. You don't want to waste your time thinking about all the awful things that could happen because it eventually will in some juncture, but you've got to take care of your day-to-day stuff. And we found that to be the best way to manage the unforeseen.

Anna Van Dena (36:26):

And I think, I mean, one thing the pandemic taught us is we always have to expect the unexpected. I was impressed when I spent the majority of my career in the private sector, but moving to the public sector and just seeing, learning every city employee's, disaster service worker, just whenever you're called to duty, you are just seeing the teams of people that work on emergency management and planning and just seeing those teams mobilize and come together when you do have a crisis or an emergency. I would say there's a lot that keeps me up at night, but just knowing that you've got government that's focused and doing this behind the scenes work, even when there might not be an issue, is comforting to me.

John (37:06):

Alright. Let's do one more question then we'll turn it over to the audience for questions. Rise of interest rates can talk about effects and what you guys are thinking. You want to kick that one off?

Rodney Johnson (37:20):

Sure, I'll take it. We have four different sales tax measures and if you talked to us five years ago, we would've thought we would've been to the market a dozen times. There just hasn't been a need for a series of other reasons. Most of them good, right? We have a fairly robust investment portfolio that now is actually making money. Nice change, right? It's been a few years for that. Do we plan on issuing debt? The answer to that is yes. Will we do it based on where the interest rates are? Probably not. And as much as I'd like to say that we have that ability when a project of the size and scale of a large telling project needs money, it doesn't care what the market's doing. We just have to issue to make sure that we keep moving forward. As much as I wish we could move the markets, we just can't. Will we structure things a little differently? Sure. Historically, we've always used a lot of variable rate. That commercial paper to get the ball rolling right now, that's not quite as attractive as it was a few years ago. So we find ourselves pivoting a little bit, but what drives our reasons to go to the market really doesn't change based on interest rates. It just becomes a little less fortunate.

Nathan Brostrom (38:42):

As I mentioned, John, we just instituted a central bank for our main lien, our general revenue lien, and our limited project revenue bonds, which are what fund the majority of our student housing and other auxiliary. So we've been very fortunate and being able to offer campuses an internal lending rate of four and a quarter that they can plan now and well into the future. So that's been helpful. We do not have that on our MedCenter lean, and that is where a lot of our borrowing is going to be in the coming years. We are all under the pressure of SB 1953, which requires us to seismically upgrade by 2030. So we'll be completely rebuilding Parnassus, the Parnassus Med Center in the next few years, completely rebuilding Hillcrest in San Diego and adding a new bed tower in Davis, which is a total of 13 billion, about 9 billion of which will be financed. The area where it's really affecting us is we really need to focus on staff and faculty housing as much as student housing. Student housing, we have a known rate. Typically we've relied on the commercial market for financing staff and faculty housing, so that's completely dried up or is double digit in rates. So we are looking at ways that we might be able to internally lend to some of these projects to keep it going because it's just critical for recruiting and retaining the best faculty from around the country.

Anna Van Dena (40:15):

I will say that when we were in the market earlier this week and for our taxable 20 years, CP, we saw true interest cost of 6.3%. I was a little blown away. So yeah, I mean, I think the good thing is we budget conservatively, we will continue to do so, and yes, we, like others mentioned, are seeing that the earnings rates come up and definitely BLX is more of a frequent company that we chat with these days as we monitor our investment earnings.

John (40:49):

Good. If we still have a little bit of time left, I'd like to give the audience an opportunity to ask questions if there are any. Nikolai.

Nikolai (41:01):

Just a follow up on the interest rate question. Could you each talk about how you're planning for borrowing in the future relative to interest rates?

Nathan Brostrom (41:17):

Well, I think the advantage of the Central Bank, Nikolai is that we are able to borrow, we're able to pick off our spots on the yield curve and use a combination of floating rate debt and swaps to ensure this. We're such a large portfolio that we're able to do that and really mitigate the impact onto the campuses so we can give them the internal loan rate and then Megan Gutstein her team really monitor it closely to make sure that we have enough cushion built in to continue to provide that. So I was very fortunate. It's something we looked at for years and years and we finally put into a place and we did it at just the right time, which was more dumb luck than anything.

Anna Van Dena (42:00):

I would say for us, there's a couple things when we go through this next budget cycle, I think just going to be extra conservative when it comes to forecasting our debt. Just kind of an obvious one. I don't know if our debt plans will necessarily change because other than refundings going away, not like the capital projects don't need to be funded, but another thing that I think we're going to trying do more too is all the departments that we work with that we finance these small projects or just make them aware of the rates for commercial paper, the rates for COP's, and just make sure that folks are aware of the costs that go into these borrowings.

Rodney Johnson (42:42):

And for us, there's not going to be a lot of major shifts and how we get there because of rates. It may make sense with Measure M, which is our most recent sales tax that's heavy capital driven in large projects. But like I said, we would've started off with a commercial paper program. We may still, if it makes sense to just do a fixed rate deal out of the gate, then maybe we'll do that. But again, it's being conservative, it's watching those fund balances, watching our spending rate, really working both sides of the Treasury House with the investments in the debt to make sure that everybody has their finger on the pulse of the agency because when rates go up, there's less margin for error on the debt side. So keeping an eye on that is really the key over the next, what we think is at least 18 months.

John (43:37):

Let's see. It looks like we've got a couple in the back there and one up here in the front.

Audience Member 1 (43:41):

Hi, Rodney. I was wondering if asking people to stay home during LA's upcoming major sporting events, suppress economic activity and ultimately offset any gains from the games, is there a better solution?

Rodney Johnson (43:57):

You're right, it definitely could. There has to be an impact if people are staying home or if they're vacationing elsewhere. We think that the influx of visitors is going to more than make up for any economic loss of staying home. But you're right, there's only so many pieces to that pie. Is there a better solution? If there is, we hope to find it before the next two years and start planning for it.

Audience Member 1 (44:22):

Thank you.

John (44:28):

Go ahead.

Audience Member 2 (44:31):

Hi, good morning. Nice to see you all. So I think one of the major outcomes of the pandemic was really public's perception of, and the actual role of government in our day-to-Day lives. Just wondering how do your entities actually evaluate, it's almost like counterparty risk to the feds, right? How do you think about that? What's the context? Has that changed since the pandemic? So just your perspective on the feds and reliance on or lack thereof.

Nathan Brostrom (45:03):

Well, I'll start because I think one of the positive aspects of the pandemic, Esther, was the real collaboration, not only with the federal government. I mean it was a lifeline for us in terms of getting through with liquidity and here funding and the support for our students, but also the collaboration with both the state and local governments. I mean, we were in daily conversations with California Department of Public Health about vaccines and monitoring. And then on a local basis, all of our med centers work very closely with their local government. So San Diego, you may have seen UC. San Diego ran the vaccine center at Petco Park with the city of San Diego and the county of San Diego UC. Davis was featured internationally for one Davis, where they had the highest vaccination rates in the world because this collaboration between UC, Davis, and the city of Davis, I think it's going to strengthen going forward. And already a lot of our medical centers and campuses are working on public health, just getting ready for the next pandemic. So I think it took a relationship that was not necessarily adversarial, but was a little standoffish and made it much more collaborative and close knit.

Rodney Johnson (46:24):

From our perspective, the results were great, right on our collaboration with the feds and with the rescue money that came in and we put it to good use. So looking back makes you proud, right? And it worked the way that it was supposed to. In some ways going forward, I'm not quite as optimistic. We are looking like we might have a government shutdown. We have a lot of people digging their heels in. I don't know what that means for us. I know we have a lot of plans that rely heavily on federal funding, whether it's through the Department of Transportation or others. Yes, we have strong sales tax to provide our local contribution, but if things continue to escalate, things that we have no control over, I'm a little concerned about that.

Anna Van Dena (47:12):

I think in San Francisco we definitely saw significant health and partnership with other government entities, certainly helping a lot with transportation. I think the port receiving money and now coming out of the pandemic cruises are hot again and they're building back up their reserves. I think during the pandemic we saw things like money coming in for Project Home Key, San Francisco was able to keep our death rates pretty low. We purchased hotels for the homeless and we also purchased not just rooms, but actually ended up purchasing hotels themselves. We saw Litech kind of dry up a little bit or the city's ability to access, but then we did get some awards from the state to help support our affordable housing projects. So definitely seen great partnership in the past and can only be hopeful about the future.