Breakout 2: K-12 Sector Outlook

Transcription:

Todd Tomich (00:10):

Welcome to the school district sector panel that we have today. My name's Todd Tomich. I'm with Build American Mutual. I've been working with BAM since we were founded in 2012. I'm based out here in San Francisco and I manage the western region. I'm joined today by a terrific panel. I'm going to introduce them and then we're going to kick it off. Adam Bauer is here from Fieldman – Rolapp. Adam's, the CEO and President. He is a expert in school finance and land secured finance, both in California and the west, and he's a graduate of San Francisco State University. We also have Frank Vega, Frank's Managing Director at Stifel. He's based in Los Angeles. Frank has been in this business for more than 17 years, focusing exclusively on school districts and community college districts in the state, and we also have Lauren Herrera. Lauren is a Senior Associate with Orrick here in the Bay Area. She focuses on the school sector and she's also done some work in the workforce housing sector, which she's been able to apply within the school district space. So it's terrific to have you today and we appreciate you joining us following lunch.



(01:31):

I just have a quick question for those that have looked at their ballots, who's got a local school bond on their ballot this year? It's definitely something that we're going to cover today and it's what makes this sector exciting for us all. Just a little bit about bam, if you didn't know it already, more than half of BAMs business in California is in the school district sector. Since we started, bam, we've insured 785 new series of school bonds in the state for more than 13 billion of par insured. 29% of that has been in the AA category, so we're not just ensuring single A rated or triple B rated opportunities. A lot of the school districts here carry high ratings and BAM has been very successful in that space. In terms of go versus general fund credits, it's not surprising. Most of our exposure, more than 11 billion of par insured has been in the geo space versus general fund. This year, BAM has insured about 800 million of par and that's down from recent years and it reflects a little bit of a lag in what we've seen in the sector this year, but that's mainly because of the expectation of the upcoming election and what we're about to discuss.



(02:57):

So with that, I'm going to hand it over to Adam and we're going to talk about the election and all the opportunities that we're seeing right now.



Adam S. Bauer (03:05):

Great, thank you. And once again, my name is Adam Bauer from Fieldman – Rolapp & Associates, and before I give you some of the numbers of what we're looking at for 2024, I think it's important to put it in perspective. You've heard in two sessions about Prop five and how that might help cities and other governments where you take the voter approval threshold from two thirds to 55 for school districts or K 14. That happened in 2000 and it took about eight years to really ramp up, but by 2008 we were in full fast elections every other cycle. So over between 2008 and 2022, this K 14 space average 141 elections on the even years, even years are important because you can only do it in primary general unless you're agency takes up, unless you have an over lighting jurisdiction that had an election that you could tack it onto.



(03:59):

So the average was 1 41, the maximum was 229 and the lowest amount was 2010 and 83 2010 was a bit down because 2008 was a really robust cycle. So what does that mean for today? Oh, another thing we should talk about is passage rates. Up until the pandemic, the average passage rate was about 84%. There are some ups and downs that are on the way. General elections do better than primaries, but about 84% was the average. Then we had March of 2020 and that cycle we had 36 elections pass. Several things going on there. That election came right as school districts and others were realizing they had to close. It was a March primary. That also happened when the stock market just had cratered and I think that school districts got more aggressive about putting measures in a ballot because they had done it so well for so long that when they put one on in a bad cycle, it really came back to get 'em.



(04:56):

So that was 36% in March of 20. We come back in November of 20, but it goes up to 80%. But I want to caution you with that number. The number was about half of what it normally would be. So if you see a 36% passage rate at the beginning of the year, the only reason why you put it on in November is you absolutely know you're going to pass. You've been probably working on this for three or four years. Your survey results probably say a 95% passage rate, so why not just put it on? You've already done a lot of work. So that passage rate wasn't representative of where the state was, it was just those folks were very well prepared. 2022 volume was up a bit. We're about 74% passage rate, but this march, another March primary, we only had 60% passage. So once again, those early primaries have not done well for K 14.



(05:48):

But now in November of 2024, we have a record. So I already told you that 2016 we had 229, we have 267 on November alone when we count the parcel taxes, that's 293 and it's not even counting the ones that we're on in March of 2024. So quite a few measures on that's really what we're looking at. Why is there so many that pent up demand between 2020 and 22 to give you some perspective on what that was like? You had this high loss rate and then you also didn't have folks or kids fully back in school. And so we had a district that was so desperate to put a measure on, they actually were going to have to shut schools if they didn't come in and repair. And I we're sitting there at the podium and I get a text to CBO and he says, Adam, I can't put a measure on the ballot when a guy's holding up his underwear saying it's a mask, and another guy's dressed up as a devil saying, I'm taking people. You just can't put a measure on the ballot in that environment. So even though they had this desperate need, they delayed, they actually passed one in early 2024.



Todd Tomich (06:53):

Adam, I'm going to stop you right there, Frank, what's the relationship between perhaps the state bond measure and the local activity that Adam is referring to?



Frank Vega (07:03):

No, it's a great question and I intend to use my time to continue to rib Adam A. Little bit. One, he's a Yankee fan and in my parts of Los Angeles where I'm from, we're not too kind of Yankees right now. The baseball team, not the guys from the north. So it's a great question. So Adam raises a point about pent up demand and the idea that school districts are putting bonds on the ballot because of deteriorating schools, and of course that's all true, but there's also the dynamic, the state bond, as everyone knows is all meant to be a matching program. So when the state bond in 2020 failed, it also had provisions that were going to greatly expand access for school districts. And again, maybe a different topic for a different panel. There are just, in my opinion, some pretty significant inequities for small school districts, rural school districts as far as state bond laws concerned. Prop 39, it disproportionately favors larger school districts. And so when the state bond in 2020 was going to increase body capacity was going to increase access for school districts. When that failed, that created a real pinch point. So it's not uncommon to see local school districts try and align to try and get their project funds, their local match in hand. I would also probably make the argument, and we'll get to this when we talk about differentiation a little bit on credit school districts are in an arms race.



(08:34):

I have many flaws. One of 'em is my world is all about sports, and so I'm now a volunteer high school baseball coach in my local public school district, and I only bring that up because I see it firsthand. The amount of monies that are available to local public schools, it's pretty dire. I tell parents on my team when we have to raise money for equipment and uniforms and the parents get upset, and I tell them when teachers have to buy their own school equipment just to teach, where do you think we're going to fall in line as far as priorities go? It's a real dire situation. So the idea that school districts are trying to leverage state funds, they're trying to leverage local dollars, yeah, I think that's where that demand also really comes into play.



Todd Tomich (09:19):

Lauren, from a legal perspective, are you seeing any new way that the ballot language is being crafted or are you preparing for a continuation of maybe challenges that we saw during the last election cycle?



Lauren Herrera (09:32):

Yeah, so actually in the last several years, we've seen increasingly litigious public targeting a number of public agencies, bond measures and school district measures in particular. I think some of these earlier challenges from 2017 moving forward focused on whether agency's ballot question was compliant with the fairly new at that time AB 195 requirements. So the AB 195 requirements in a lot of ways hamstrung public agency's ability to write their ballot questions in ways that were straightforward and provided a lot of information about the priority projects of the particular agency. Now, at least half of the words in the 75 word ballot question are inserted to meet the requirements of AB 95 to provide information on the expected tax levy rate, the annual amount that's going to be levied to repay bonds and how long the bonds will be outstanding. That eats up a lot of space that makes it harder to reach voters about priority projects that they might care about.



(10:41):

And so that's, we've seen a lot of challenges in the last few cycles that focus on those specific things. I would say that the vast majority of those brought by taxpayers associations are meritless and are for the most part dismissed in summary judgment very early on in the process, but that doesn't make it less of a distraction during the campaign process that public agencies are taking. And so instead of being able to focus on the issues, the types of projects that they're aiming to build with bond proceeds, they're having conversations where they're defending bringing the measure forward at all. And then I think more recently we've seen some school districts, especially in large urban areas, is they face mounting pressure to provide salaries that pay teachers a living wage for the area in which they're located. Districts have been exploring the possibility of using bond funds to finance teacher and staff workforce housing, and the taxpayers associations are increasingly focusing on that expected use of proceeds and I think formulating challenges So far, we've only seen those challenges be articulated in the arguments submitted against measures. We haven't seen a formal legal challenge brought in court, but I think the way that the arguments against are phrased gives us an idea of the way that they're formulating the legal arguments that could form a suit in the future.



Adam S. Bauer (12:09):

To put some of this in perspective, changing that language has decreased the survey results by about eight percentage points. Typically, these are passing somewhere between the 55 that you need and 62%. So when you knock out 8%, you see how that starts to limit things.



Todd Tomich (12:27):

Adam, I want to go back to what's driving the need in terms of facilities versus cost escalation. What observations do you have from your clients?



Adam S. Bauer (12:35):

Yeah, so I suspect a lot of you have heard about declining enrollment throughout the state. So why are we all talking about so much in school bonds? Well, one is the schools are old in a lot of cases, and two, to build an elementary school, it costs about 65 million to a good portion of our state. There's Central Valley and things like that. They've been able to get it done a bit less. Their land values are a bit lower, but it's very expensive to build schools. And one major reason for that is our high construction standards for school. If you have an emergency in near your neighborhood and you need a place to go, go to that school, it is the safest building anywhere near you. And what that does is it's a great thing. We have great safe schools for our children, but we've limited the labor pool that can provide that. And so as you shrink down the supply and you still have the demand, you drive up the cost. So in the last 20 years, we've only had one year where the index tracks school construction declined, so we had negative CPIs even zero, but when it comes to school construction, just one year of a decline.



Todd Tomich (13:43):

Frank, I want to turn to another part of the ballot this year. Prop five, I believe that is contemplating lowering the voter threshold for infrastructure for general governments. I'm curious to know your thoughts on how that might impact the school bond sector.



Frank Vega (14:01):

Yeah, it'll be interesting. I think we'll have different opinions up here at the table. I do think it does create, and Adam touched on this a little bit, but one of the other factors you have to understand is we're really now in sort of the mature stage of the normal life cycle of a business, and that's prop 39. I don't mean to make it so cut and dry, but yeah, I mean prop 39, when the first threshold was lowered for local school bonds created this incredibly robust industry. We're 25 years or almost 25 years into that now a lot of schools are on bond number three and four. And so while I agree with a lot of Adam is saying, and he's right, the other factor though is voter fatigue is real tax rate, apathy is real. What I believe you'll see in some communities, I mean there's some places where sort of the running joke in the industry is you just put the bond on the ballot, it's going to get 70% just because of the demographics and the voter profile.



(15:01):

But there are a lot of communities now that you're now going to have to, you're going to put them in a position to choose, and I don't think it's going to be so obvious is you're choosing between public safety and schools. But if there is a public safety bond on the ballot, for example, and your local school district is now on bond number five, it just becomes a lot harder to justify that additional whatever your tax rate is. I mean, we're kind of getting to a point now where I do think, and I see it in my community, you do get to a point where people ask, well, where's all that money going? We've already passed multiple bonds. So I do think you're forcing folks to choose. I do think that that's a real concern in a lot of parts of the state. And yeah, I don't think it's,



Todd Tomich (15:45):

Adam, do you have a counterpoint to that?



Adam S. Bauer (15:46):

I think people like it when panelists disagree a little bit. I think that it's actually a positive to have all different governmental entities having to put measures on the ballot and knowing they can be successful. So I believe that over time you're going to have the city do a police and fire for the fire station. You have your schools do their geo bonds, and if they all have that 55% voter approval threshold, it'll become more the norm that you're always expecting entities to have something on. I think one of the things that Frank and I have talked about, we both drew up, it is a negative when you have an elementary district, high school district and a community college district. So I'm not saying we should have three education bonds on the ballot, but if you have a city bond and a school should bond on the ballot, I actually think there could be some synergies over time as the public begins to see that as a norm.



Todd Tomich (16:34):

Thank you. Lauren?



Lauren Herrera (16:36):

Yeah, I actually had some thoughts about the point about voter fatigue as well. And so as Frank was mentioning, there's school districts that have three to five tax levies, election authorizations going for various different construction modernization projects within the district. I think some districts have implemented measures of discipline in their debt service repayment program that have kept taxpayers feeling like it continues to be worth it to authorize election authorization. So if you have something like a rolling levee as an older measure gets repaid or you use a refunding to decrease the amount of time that you're going to be repaying those bonds and you replace that tax levy with a new measure to be issued. And so the taxpayers within the district are not experiencing any increase in their property tax bill, what they're seeing is a levy amount, just the old measure being replaced by the new measure on their property tax bill, a fairly steady amount. I think that can show a level of discipline that is rewarded by constituents.



Todd Tomich (17:43):

Thanks. I'm going to pivot a little bit with you, Lauren. As we enter a period of perhaps some credit deterioration, there are a number of factors that are sensitive for the buy-side and for the insurers. For example, one of those things is enrollment ADA. I know you had some thoughts on some potential changes there.



Lauren Herrera (18:06):

Yeah, I think we are seeing a lot of budgetary pressure among school districts as they see the covid relief funding dry up and end and additionally declining enrollment and a a figures making it tighter and harder to make those dollars go to work. I also think the relatively low cost of living adjustment this year made it difficult for districts to adjust their budget downwards to account for that. That said, and this is kind of a future solution if any, but there was recent legislation passed Senate Bill 98, just past last month. It authorizes the legislative analyst office to undertake a study about perhaps shifting the funding model under the local control funding formula from being ADA based to enrollment based. And so rather than taking the A calculation twice a year in February and July, just at the outset of the year, you would look at enrollment at that point. And so the study is supposed to be completed by January, 2026. Whether that study will lead to an ultimate change in the way that the state funds school districts is hard to predict. I guess it's worth noting that most states within the United States 44 and DC are all currently use an enrollment based approach rather than an A based approach. And so perhaps I think that's driving a lot of California's the governor's interest and exploring an alternative option.



Todd Tomich (19:40):

Frank, from your perspective, you're selling a lot of bonds in these markets. Your desk in San Francisco and Los Angeles does a terrific job. What are they saying about what investors are thinking on school district credit in California?



Frank Vega (19:58):

No, I agree with everything Lauren said. I mean, declining enrollment is a real concern. Operations are a concern. I think in a good situation, most school districts are spending 85 cents at every dollar on salaries and benefits. In some districts, it can be a little bit higher. I heard a great expression, I won't name the school district, I don't want to get them in trouble, but the sort of point of view they had from their bargaining units were the bargaining units believe if we can't negotiate, we'll legislate, there's a lot of pressure on school districts, and you talk about just the operations of the school district. We haven't even talked about the management. We haven't talked about new board members and we haven't talked about ideologies that now seem to be in conflict with one another at the local level as far as school districts are concerned, there are huge liabilities, and I know Lauren and her firm are addressing some of those as well.



(20:56):

So yeah, to an investor, there's, on a given day, there could be four or five California school bonds to choose from. And the letters that we always say to our clients, the letters on the POS is that's just a starting point that just gets you in the door. But once they look under the hood, all this stuff matters. And yeah, I do think, again, it's not dire. I mean, there's still a lot of great work that's being done, but if you're trying to differentiate, and school district X has a lot going on in school district Y doesn't, the reality is school District X is probably going to have to concede a little bit on spread to try and get a clearing level, and that's just the reality of it.



Todd Tomich (21:38):

Adam, what alternatives to a geo bond do school districts have if their bonds don't pass at the election, where do you recommend they pivot to?



Adam S. Bauer (21:51):

The short answer is not many, but we'll try to work with what we have here. So if you're in Northern California, you have a much higher chance to be able to pass a parcel tax that can help you with your operations, which can free up other money for facilities if you're in Southern California. And a little bit more so now than historically. Southern California is a lot more community facilities, districts, they help augment a geo bond type program, and that can also be helpful as well. So the combination of those types of things, but the bake sales is not going to do it. You really need, in order to have a viable program, you need the state selling their bonds, and you also need school district having their geo bond program to match it.



Todd Tomich (22:28):

Great, thanks. I'm going to change gears a little bit to hazard risk. Some of the disclosures that we've seen in the last couple of years and the sensitivity that investors have to hazard risk. Lauren, I was wondering if you could talk about the increased disclosure that you're recommended for your clients?



Lauren Herrera (22:47):

Yeah, so the disclosure document, preliminary official statement that's put together for school district general obligation offerings spends a lot of time talking about the property tax base within the district. Since the collection of ad valorem property taxes is used for the repayment of those bonds, there's a lot of demographic information that's provided with respect to the historical av, the largest taxpayers within the district, all of that. There's also increasingly robust disclosure provided about the risks to the property tax base. And so we're seeing a lot of weather and climate related events, which have found their way into the disclosure document Recently, earthquakes have always kind of been a part of that on a regional basis, but now we're seeing the last couple of years we had very severe winter storms that delayed the ability of California taxpayers to file both federal and state taxes, huge impact on the state budget there. We also saw sea level rise and flooding. In some instances, wildfires going from four or five years ago, burning thousands of acres to now millions of acres in some years. And so all of that makes its way into the disclosure as possible risks to the property tax base, and then if the district has experienced a particular event, a fire within its boundaries, for example, even more disclosure on that specific event.



(24:19):

And I think additionally, we're seeing that these climate events are impacting the ability of homeowners to get certain kinds of property insurance. And so as that kind of comes to a head, I think we're also including that as a potential impact down the line to AV over time.



Todd Tomich (24:38):

Frank, how discerning our investors on this topic, do you field questions regularly about the potential for hazard risk on some of these securities?



Frank Vega (24:50):

I think when there's something that's notable, again, if you're in a high fire zone, for example, if in Calusa County, if you're in Lake County, if you're in an area that has had recently a pretty bad fire, obviously, and again, I agree with everything Lauren said, if you have your proper disclosure, a lot of this stuff is publicly available, but again, the investors are looking under the hood. If there is a notable event, yeah, I mean it is going to have an effect on potential buyers. We always talk about, and it's not just we Stifel, but I think we, in the industry, when we talk to clients, we talk about the buyer base and we're going to sell your bonds to buy and hold investors. These are the kind of investors that you want purchasing your bonds. Well, that's true, but by the same token, you want to sell bonds to the kind of investors that want to hold them. So yeah, and when you start to have real serious fire concerns, and it's not just on the surface, I think the, not just from fire, but just general environmental water, sea levels concerns a lot that if you're going to, again, if you're going to ask an investor to choose on a given day between one to five different bonds, they're more than likely going to gravitate to those that don't have those long-term concerns because again, in theory, we want them to buy and hold those investments.



Todd Tomich (26:16):

Adam, one of the areas of your expertise on the land secured side, BAM ensures a lot of land secured bonds in the state. We run a number of proprietary models. We rely on external, publicly available databases to assess the hazard risk. We've started to ask you and others questions about what mitigating efforts communities have made around new developments with respect to wildfire, for example. Is that something that you're regularly talking to your clients about those efforts? Is that something that you're able to share or the districts are sharing with investors, the community, et cetera? We find it very useful to receive that type of information about what the local plants or what the local building codes have required. So I'm curious of your thoughts.



Adam S. Bauer (27:12):

We've always tried to have the disclosure that we've talked about here, and I think more recently, I think BAM has dug in deeper and found more fire hazardous and things like that. And so now that is much more on the forefront of our mind, whereas before we might think, oh, we'll talk about that when we submit it now, I think we think a little bit differently at that. And what's really drove that home is we recently had a credit that if you just looked at taxpayer payment history and things like that, it probably would've been the best deal in California. That's not a refunding to do, but when we found out about a little deeper about the fire risk, which we had disclosed, it just didn't quite absorb kind of how risky it was. That was really, I think, helpful and now it is something that we would look at earlier in the process.



Todd Tomich (28:01):

Great. I want to change gears a little bit to an issue that's been around for a little bit, but we haven't seen much activity, and I'm curious the panel's thoughts coming out of AB 218, we have expected to see some larger liabilities and districts dealing with those. Adam, can you talk a little bit about what you're seeing with your clients or in the market broadly?



Adam S. Bauer (28:31):

I'm not sure if everyone's familiar with AB 218 and Lauren can maybe start. Would you want to explain that first?



Lauren Herrera (28:38):

Sure. Yeah. So AB 218 is state legislation that removes statute of limitation requirements for the filing of certain sexual assault claims for public agencies in particular.



Adam S. Bauer (28:51):

And these go back far enough that there's a good chance that the person that did the assault may not be alive and the people who were potentially assaulted are adults in their late forties or fifties. And so the documentation to figure out what happened is really poor, and even figuring out if you were insured or who that insure is or what they turned into over the last 40 to 50 years has been nearly impossible. There's actually a consulting field now that specializes in tracking this sort of thing down, but it just cripples a district when they have something like this. And the other thing that makes this really, the numbers are huge. Another thing that makes it so bad is how unfortunate is when there's one, there's oftentimes many. And so what turns into a number that you can barely even fathom very quickly turns into something much more than that. And so looking at things like judgment obligation, bonds when that comes into play, but really for what happened in the late seventies or early eighties might impact education until about 2070. That's how big these numbers are.



Todd Tomich (29:59):

Frank, what are the financing options there? Judgment, obligation bonds.



Frank Vega (30:05):

Thanks Todd. Thanks Adam for setting that up. It is a great question. I'm not avoiding it. So Lauren, and I'm certainly not trying to deflect either. Lauren will take this one. As far as the judgment obligation bond is concerned, I know her company and in particular one of her colleagues have had much more experience in discussing this and getting into the specifics with clients. I can just say from a financing standpoint though, there are instances across the country where large institutions have financed their liabilities that dealt with topics like this. I have thankfully not been involved in any of those, so I can't tell you from firsthand experience what the marketplace response to that was. But big picture, it is an important topic because these are liabilities, and as Adam pointed out, some of them are almost impossible to know at this point. And we're at a stage right now where I think I'll pick and choose my words carefully. You can still put in the document, in the offering document generic language that says the district is subject from time to time, and you can list a few things. And a lot of these instances, the actual dollar amount and the liability is unknown. In some instances, the school district is lucky it'll fall under insurance, but in most cases it's not. So this is very much an enormous red flag that's on the horizon, but that's why Lauren's here, the lawyer, to talk about all that.



Lauren Herrera (31:46):

Yeah, so there provisions under the government code that allow public agencies to extend the time that they repay liabilities that are considered hardship liabilities, ones with very high price tags. And so we're seeing general obligation bonds are, I think the primary vehicle that are likely to be utilized to extend the repayment time and allow the general fund liability to be spread across multiple years so as not to unduly cripple the district's operations and finances and the immediate term. It's interesting. We talked about insurance is a possibility to cover some of these claims. One thing that makes that difficult though is that a lot of districts use a JPA to have a pool to provide insurance coverage. And so we're seeing that JPA can assess additional supplemental premium costs to districts based on prior year settlements. And so we're seeing sometimes that school districts are getting very large supplemental premium bills a year or two after once these settlements have come through, and it affects all of the districts within the pool. And so you personally, as an issuer might not have any claims pending against you, or you might've had all of those settle favorably for a very low or no dollar amount, but if you have neighboring districts that you are pooling your insurance liabilities with, that might still have an impact on the premiums that you're paying.



Todd Tomich (33:20):

Lauren, were there's been settlements, what type of public disclosures available for all the analysts in the room? Are these things disclosed in audited financial statements?



Lauren Herrera (33:34):

Yeah, that's a good question. I'm not sure whether I've seen it work its way into audits yet. I know that we are very careful in the disclosure process. Of course, the disclosure document needs to include all material operational and financial information. And so part of the question that we ask when we're having a conversation about any current AB two 18 claims is what is the amount at issue? And usually we use a threshold of 3% of a district's revenues in a current fiscal year as a guideline for whether something is material or not. So if you're looking at a potential settlement that exceeds that 3% threshold, that's material and it's something that we want to provide disclosure for in the document. I think there are a lot of issuers, a lot of school districts that have significant financial liabilities and Frank and other underwriters are able to find a market. Now, there might be an increased price when you have additional financial liabilities, but I think that pales in comparison to the price you might pay if it's found that your disclosure policies, your disclosure practices have not always included material information.



Frank Vega (34:50):

Todd, I would just very quickly add, remember the provisions of the bill were all governmental agencies, so this is cities, counties, this is school districts, unfortunately tend to be, it's sort of the worst of the worst involving children, but this is potentially an enormous tidal wave. Again, you hear examples of some guy, I hope no one in here, his name is Joe, some guy named Joe did X, Y, and Z 30 years ago. There's just no way to prove that, as Adam said. So the future liability can be unknown, it's statewide, and to think that there'd be a marketplace specific to this, or at least viable enough where a financing solution could be available to a lot of school districts, I think that remains to be seen.



Adam S. Bauer (35:33):

Once again, I think it's important to put some of this in perspective. Frank's already told you about 85% of a school district's budget is going to be payroll. We've had settlements with just one settlement. It's 25% of a district's budget. And so once again, usually when there's one, you have more than that. So that just kind of why you need to look at financing.



Todd Tomich (35:55):

Our discussion so far has been primarily focused on K 12. Frank, I know that you're an expert on the community college side. Do you have any sort of observations or opportunities to share from what you're seeing?



Frank Vega (36:07):

Well, experts these days has a different meaning. I think volume's down like 70% the last three years, so I still have community college clients. Let's start there. It's an interesting dynamic. It's what I really love what I do, and having the chance to work with community colleges and schools, you see a lot of different things. The thing about community colleges and the challenges that they face is just simply the entire academic dynamic changed in covid community college funding, unless you're incredibly lucky in your tell us old timers, basic aid community college districts, I think they're now called community funded districts. Unless your basic aid, your funding is tied to your FTES and the state. Since I've been doing community college finance, I think we're on funding formula number four where your base funding is tied to various outputs. Now, the new drive is not just matriculation and transfer rates, but it's career tech.



(37:07):

So the mission of the colleges has to evolve, but you now have not just because the state created its online academy. You have a lot of students that are taking, they may live in District X, but they're taking online courses in district A, B, and W. And so it's very difficult for the colleges to get students back to class just like it's difficult to get the workforce back to the office. And so we use the expression arms race, but this really is how colleges are trying to reinvent themselves. They're trying to create learning spaces. They're trying to create a different type of environment where students want to come back to campus, make it feel more like a university, and as Adam said, if a elementary school is costing 60 million and try building a community college building that accomplishes those things. So the demand is very real. They have significant challenges, but the fact that they do get to charge tuition and do have some flexibility a little bit more so than schools, I do think that that industry, or at least that sector tends to have higher ratings, and that's a big part of it.



Adam S. Bauer (38:16):

And Frank, not only higher ratings, even with the same ratings, they oftentimes price a little bit better than K 12. You agree with that?



Frank Vega (38:22):

Well, it depends. If there's a school districts in the room, I'm going to say no, they price the same.



Adam S. Bauer (38:27):

What do the facts say?



Frank Vega (38:28):

The facts? No, generally speaking, the expression that my colleague at TI uses size opens eyes. I mean, the community colleges are big, and so a $200 million bond is generally going to get more attention than a 10 million bond. Not deliberately, but that's just how sort of the marketplace views on a given day, right? There's more liquidity. So yes, Adam, you're absolutely right. Not only do the ratings tend to be higher, but just generally investor receptive and overall, I think results tend to favor the colleges.



Todd Tomich (39:02):

Lauren, Frank, Adam, I've really enjoyed hearing your comments today. Do you have time for questions? If someone's got a question? Does anybody have any questions for the panelists? Karen,



Audience Member Karen (39:16):

Are you aware outside, outside of new sales disclosing through 15 C 212 if they're subject to litigation?



Lauren Herrera (39:30):

Yeah, I haven't seen any disclosure outside of new sales.



Adam S. Bauer (39:36):

And I think the other thing to take consideration here is they're not really wrapped up yet. So you have an initial settlement and then the case shift keeps getting modified and modified and modified. So I think that in a year or two you will, but right now, no.



Frank Vega (39:49):

Adam and I coincidentally worked on a school district transaction where the client did have enough information where the decision was to identify under two 18 that there were claims. I think that's the most detailed I've seen. A dollar figure wasn't identified, nor were future liabilities identified, but they did we all agree the fact of the claim to identify that a claim had been paid under two 18 and that it was not material but material enough to put in the book.



Audience Member Karen (40:18):

But that was the sale, not with,



Frank Vega (40:21):

That was not in an annual continued disclosure report. No.



Lauren Herrera (40:24):

Yeah, I don't think it fits neatly in any of the required event notices, which isn't to say that you won't see a shift. I think the new rules include incurrence of a financial obligation, and so if you have privately placed debt that's supposed to help you pay down a settlement, then perhaps that's something that gets disclosed.



Todd Tomich (40:45):

Any other questions?



Audience Member 2 (40:53):

I wanted to go back to something Frank, I think you said about governance challenges and new board members and conflicting ideologies and sort of what are you seeing for any of you, are you seeing in terms of themes and recent developments in terms of governance challenges and management challenges for school districts?



Frank Vega (41:14):

Yeah, I'm carefully maneuvering the minefield of the different topics that school districts are dealing with. Just think of it from an operation standpoint and from a stability standpoint, there is absolutely, I don't think this is a political statement. There is absolutely at the local board level, a general sort of approach that school board members now are going to shape policy, not just help administer the school district. Well, that has effects when it comes time to voting on a budget, if there's disagreements about what we should be teaching, then you can imagine a good way to, and again, we talked about my experience before getting into public finance. I worked in the state legislature, so believe me, I understand the power of not voting what that can do to a particular item. You can have essentially now budgets being held up. You can have real firm disagreements on the superintendent.



(42:13):

I know a client that one of us here at the podium works with in a very, very public and ugly way, fired its superintendent for absolutely no reason. Well, I shouldn't say that. Let me strike that from the record. If there is a record fired the superintendent quite unexpectedly at a really odd time of the year, I want to say it was right before, right after Christmas, and the public and the local paper very much identified this as a disagreement in ideology. So again, not just talking about public education, think about that school district when it comes time to selling bonds, right? Again, we're talking about 25 years out and look at retail, right? We have the privilege of selling a lot of bonds to our retail network. How does a sales person with a clear conscious convince a retail investor, this is a great buy because they've shown a history of stability, a history of five oh votes. No, that's not happening. So yeah, I mean, that's a lot of anecdotal evidence, but I think it is starting to show. Absolutely. In my opinion.



Todd Tomich (43:17):

Please join me and thank you, the panelists.