Live Market Survey

Attendees of The Bond Buyer California Public Finance Conference 2024 will have the opportunity to vote in a live market survey at the San Francisco Marriott Marquis on October 24, 2024. Topics will include: current market conditions and market projections, issuance status and projections, municipal credit, evolving investor base, transit challenges, among others.


Transcription:

Arlene Bohner (00:11):

Okay, welcome back everyone and welcome to the most fun panel of the day and maybe even the whole conference, The Live Market Survey. I am Arlene Bohner and I lead the US Public Finance team at Fitch Ratings and I am very happy to be joined by a very impressive team of muni market experts who are going to share their insights with us this afternoon. But the real stars of this panel are you all the audience. So normally we ask you to put your phones away during panels, but at this panel we ask you to take your phone out and open up your camera app so you can scan the QR code and vote on our questions.

(01:06):

Before we begin, I just want to introduce our panel. They are super accomplished bunch here and I do encourage you to look through their bios on the conference page, but just very briefly to my left is Derek Hansel. He is the CFO of the Metropolitan Transportation Commission and its affiliated agencies including the Bay Area Toll Authority. Next we have Julie Burger, who is Co-Head of Public Finance at Wells Fargo. And last but not least is Collin Teague. He is a Managing Director and Head of Surface Transportation at Siebert Williams Shank. So with that aside, let's dive into our questions. So our first question, oh, okay, we have it up there. So what is the most pressing challenge facing state and local government credit? I'm told we have jazzy music to play.

(02:29):

There we go.

(03:03):

Get those last votes in. Okay. Oh, a tie, love a tie, pension liabilities and affordable housing followed by climate change, weather events and cybersecurity threats. Derek, what are your thoughts on this?

Derek Hansel (03:26):

Yeah, it's hard for me to maybe address all of it. I'd say if we look at state and local government generally I think probably agree with the audience at the Bay Area toll authority, it's probably cybersecurity amazingly enough just because we really don't have significant exposure to the pension side or certainly the other issues. We're very fortunate with our bridges. We've got some places in the lowest areas of our approaches where we might have some amount of risk. Frankly, our biggest isn't even one of these, which is seismic risk, and so that's something we do worry a lot about. We maintain a lot of liquidity to address that, but so it's probably the one that doesn't show up here.

Arlene Bohner (04:14):

Oh, that's great insight.

Julie Burger (04:17):

The other one that's not on here that maybe I should have had added, if we could do more than four, is probably labor, right? You hear from a lot of clients that finding employees has been tough in a very hot labor market, so I'm guessing may not beat out affordable housing and pension liabilities, but another one you hear quite a bit I think from clients especially in California.

Collin Teague (04:36):

And I would just add that I know the question says the most pressing and it's a relative question, but I mean all these are interrelated, right? Labor as well. The panel forest us where they were talking about obviously the insurance crisis and as it relates to affordable housing and building housing units and that sort of thing, and pension is always the unfunded liabilities that are kind of the soft liabilities associated with a lot of credit analysis for investors and that sort of thing. So it's all interrelated and relate to each other.

Arlene Bohner (05:06):

Yeah, that's a really great point, Collin. We published a piece earlier this week that talked about how the competition for labor has led some governments to kind of walk back some of the steps that they've made to strengthen their pensions and the past couple of years they're starting to lower the threshold for Colas changing the number of years that you have to serve to vest, also changing the requirements for how they calculate the final salary requirements. So all of that is something to keep an eye on for sure. Okay, let's move on to our next question. Climate risk is not currently priced into the municipal bond market. How do market participants view that development? Please vote.

Audience Member 1 (06:30):

Sorry, can I ask a clarifying question? When we say climate risk is not currently priced into the muni bomb market and it's like it's taking place, is the climate and then not enough is being done about it and it is already laid, is it the climate risk? Thank you.

Arlene Bohner (06:46):

The pricing into the market. Is that already to do you disagree? It's already properly priced into the market would be the first option.

Julie Burger (07:01):

Can we start the music again? Yeah.

Arlene Bohner (07:20):

Okay. So it seems like a slim plurality thinks we can't tell the real impact on the muni market at this time followed closely by not enough is being done about it and it's already late and 29% of people think it's already taking place. So Collin, what are your thoughts on this one?

Collin Teague (07:47):

It's an interesting topic and it's a lot of my views have been molded by the fact there's been two other panels dedicated to this entire issue and they had a lot of good information. Daniel slides the presentation before, talked a lot about this and how yes, climate risk is not currently pricing the municipal bond market as far as we know, and I'll look at it a little bit from an investor side of things. When we as an underwriter and a broker dealer, we talk with investors on every deal and are constant communication and I would say that it's the investors view that there's no real direct pricing premium or credit analysis that is associated with climate risk. Investors are not buying or buying based on any sort of climate risk as part of their credit analysis. Where we are seeing more curiosity on the investor side is as it relates to disclosure, and that's not necessarily specific disclosure as it relates to use of proceeds at lead certified building, et cetera.

(09:03):

It's more of does this borrower have the proper risk factors? Are they thinking about a long scale plan, a long-term plan of resiliency and sustainability and how are they going about that process? I think the biggest thing is, as I said, there's no specific, I need two extra basis points because of a wildfire in California. It's more of like, okay, I'm invested in this credit and I'm going to buy this credit, but I do want to know they have a long-term plan. I think that not only speaks to obviously the climate portion of that, but also kind of the management and government part of the credit analysis of a borrower in terms of like, hey, the key stakeholders, board members, key decision makers, staff, constituents, they all know the risks associated with their business and their enterprise system or their government. And so having a plan in place is a credit positive and disclosing that plan and the feasibility of that plan and the implementation of that plan is all credit positive in that regard.

Arlene Bohner (10:08):

Okay. Question number three. Many transit agencies across the US continue to face fiscal cliffs due to underfunding reduced ridership and drying up of COVID relief. At this point, do you think they will pull through? Please vote. Okay. 41% of you think they have to pull through any way possible because there is no alternative and some of you think only if they rethink the business model for mass transit and 27% of you think transit agencies are slow to adjust to changes in ridership patterns and it will take years for them to adjust. Derek as our resident transit expert, what are your thoughts on this one?

Derek Hansel (11:43):

Well, I don't know that I'm an expert. I've ridden on a train once or twice, so it's kind of like staying in a Holiday Inn that may make me an expert. I agree vigorously with the idea that they've got to pull through, particularly as we look at the Bay area, but we see this across the country. Work from home is real. It's going to continue to be real. The problem is the drop in ridership on transit is decidedly lumpy. It's not as if ridership is down 40% Monday through Friday, right? It's down a little bit Tuesday, Wednesday, Thursday and Monday and Friday suck.

(12:31):

From that perspective, if you're writing it's great, you get a guaranteed seat, so they really do have to pull through. We've got to find ways to make 'em pull through because otherwise the congestion impacts are going to be a nightmare. So we really do need to figure out a way on that, but it's also not just the congestion impacts. It is a real equity issue. We've got so many people who are transit dependent, again, certainly in the Bay area, I'm on the train every day that I come into the office and driving. It stinks. I do it every once in a while. It's lousy, so we need it.

Julie Burger (13:15):

Yeah, I mean I actually think as rereading these, all of these are actually true in one way or another. I do think the pandemic showed that transit is an essential service, so I do think you're seeing governments realize they need to step up. Most transit agencies frankly, were not very fair dependent pre pandemic, and so most transit agencies sort of already had that model. Clearly the Barts of the world, the CTAs, the MTAs are having to rethink what the funding model looks like. But I'm actually encouraged because you see local governments, state government trying to figure out a solution. So whether it's California giving a one-time amount, obviously there's talk in the bay area of a new measure, whether it's Chicago rethinking what's going to fund transit in New York, congestion pricing, although it's dead for the time being, I could certainly see that reappear at some point. So I do think there will have to be a new model in some places, but as it says there, we need transit if it is an essential service.

Derek Hansel (14:14):

I just want to piggyback on your point as former CFO of an agency that was fair dependent. Watching 93% of your fair passengers leave in two weeks is miserable.

Arlene Bohner (14:31):

I can imagine. Okay, let's move on to our next question. What if anything is being seen across the US by way of mitigating commercial real estate troubles in major cities? Please vote. Okay, we have a clear winner here. This one, 71% of you think cities are seeing some rebounding, but conversion of commercial real estate space will be the key going forward and 30% of you think cities are severely impacted and are unlikely to regain full commercial capacity. Julie, what are your thoughts on this one?

Julie Burger (15:54):

I'm happy the audience answered it that way since I prepared my notes assuming that answer. So thank you to the audience. Actually, I have a little bit of a silver lining as it relates to commercial real estate. I guess a couple of points. So one is we're moving into a lower rate environment. Lower rates are actually going to be a big help to the commercial real estate sector. One is you have refinancings come up, tenant improvements become more cost effective. So I actually think the Fed lowering rates will be a real help to the commercial real estate market, which will help cities that have big vacancies and it's not a secret that vacancy rates are high. Derek said at work from home is real. I think CBRE said roughly 20% of offices are vacant right now, which compares to more like five to 10% pre pandemic.

(16:42):

So it's certainly a real issue. Most cities though, although property taxes are important, most of them have very diverse revenue sources. San Francisco is a great example, although obviously vacancy rates are up in the city, property taxes from commercial properties really account for less than 30% of the city's general fund revenue. So there is diversification, which I know is key to ratings with the labor market and economy being as strong as it's been, that's also been somewhat helpful. So more jobs mean even if people are working from home, there's more positions that need office space. And then I do think there's a bit of a trend more toward return to office as unpopular as that is for most folks, including at banks and everywhere else. With Amazon going back to five days, I do think you're starting to see a trend a little bit more toward people coming back into the office. And so I think all of that is positive for cities as they think about this. The other point is the federal government does seem focused on this, so the Build America Bureau has expanded TIFIA and RIFF to now include transit oriented development. A lot of those projects are actually conversions of office space into residential. So really trying to find ways to subsidize some of the financing. So certainly it's an issue, but I'm actually a little more optimistic than maybe some other folks on this topic.

Collin Teague (18:10):

I'll just add in as well with that, I'm also optimistic and kind of bullish on the resiliency of cities and local areas to be able to get through this issue because as Derek pointed out the previous question, it's not a 40% drop. Mondays and Fridays are bad and Tuesday, Wednesday, Thursdays are stronger. And so you have the same issue when it relates to office space. And so I think there's a lot of smart people out there that are doing the work on the federal side, on the local side that are going to right size and make sure that if there's flexible office times and that sort of thing and sharing office space and that sort of thing, I think people will come to the right mix and figure out the right solution to be able to where there is the rebounding that's needed for these. And it all ties in back in with transit too, mobility, accessibility and that leads to economic growth and equity.

Arlene Bohner (19:01):

So great point. Okay, let's move on to our next question. How have AI and machine learning impacted the muni market thus far? Please vote. Okay. 45% don't see large scale impact yet. 36% see some efficiencies and expect that to increase in the near future. And 18% of you think we are far off from significant impact. Collin, what are your thoughts on this one?

Collin Teague (20:09):

It's another one where I think all the answers are correct and so where, I mean you could argue anyway, and it's another one where I'm looking at it from a couple different views and I think the first part is thinking about it again from the investor side, like we talked about climate risk and investors, how investors are thinking about AI and incorporating ai. As of right now, we've seen definitely more investment in predictive pricing models and technology and potentially that being a factor down the road in terms of pricing. However, at this point right now we're not seeing any sort of impact as it relates to investor decision making, whether it's buy or sell, where along the yield curve, et cetera, they might have AI helping them with data organization and compilation and helping. They are developing tools to help them make investment decisions, but they are still the ones making the investment decisions and there's not any sort of AI impact on any sort of credit strategies or investment strategies.

(21:15):

So I think that's from the investor side of things, that's how we've kind of seen in the market. The other point about that is really what is ai? We're seeing some efficiencies expect that to increase in the near future. I think that's true because going back to what AI is being used for right now, and that is data organizing, data manipulating data, interpreting data, and that allows people to make decisions based on that data. So it's more of like it's a tool to gather more information and data and not necessarily a tool to inspire any sort of strategy or business model.

Julie Burger (21:55):

I think there's a lot of AI happening that people just don't see. So as an example, underwriters who have to do continuing disclosure reviews and look to make sure an issuers disclosed everything for five years, a lot of banks are looking at frankly using AI to do that kind of work and that kind of diligence. So I had an analyst once show me how you could write into AI, write a refunding RFP response and it gave a pretty incredible answer that. So maybe some issuers want to check their RFP responses with what I,

Derek Hansel (22:25):

I'm sure I won't be seeing that on Monday.

Julie Burger (22:29):

But I do think you're seeing it but you're not seeing it as front forward, but it's happening a lot in the background. And to Collin's point, I think it'll start to become more apparent, especially in a lot of the diligence requirements that underwriters have and perhaps even on the issuer side as you think about record keeping and things like that.

Arlene Bohner (22:48):

And I like your point, Collin, I agree with it that you have to be the human in the loop and it can be a tool, it can be a help. You can think of it as a grad intern or something doing some work for you, but ultimately there's no substitute for the judgment that comes from years of experience. Okay, let's move on to our next question. What is a healthy level of unhedged variable rate debt issuers should target in their overall debt portfolios? Okay, so it looks like three quarters of you about think between zero and 20% is the right amount, a quarter or so of you think that it should be none and 4% of you are contrarians and think greater than 20%. Derek as an issuer, what's your perspective on that?

Derek Hansel (24:25):

Define hedge. We've got certainly a large, what I'll call short-term portfolio. So we've got a combination of VRDBs, index floaters, reasonably short term put bonds. That's a little under 30% of our portfolio, about half of that's hedge, so we're probably around the 14, 15% camp, which is fine except we maintain about 2.8 billion in investible assets versus about 1.4 of unhedged debt. So certainly I'd be comfortable kind of pushing that number higher from an interest rate perspective. Again, I mentioned my concern about seismic risk, which is something we should be concerned about. And so market access, what could get put back to us? I think we're probably in a little bit of a different camp on that, but I'd be interested in pushing us higher to probably close to the 20% range.

Arlene Bohner (25:31):

I think most issuers probably are not in your position.

Derek Hansel (25:35):

True.

Arlene Bohner (25:35):

Enviable position. You guys have anything to add?

Collin Teague (25:39):

Yeah, I was just going to add that it's very issuer and credit dependent. A lot of times I think what you guys have in terms of your portfolio is perfect for what you need, especially because you're along the yield curve like with weekly and daily VRDBs, but also three and five year medium term notes. And so that's a nice balance and matches up with what you guys want to do. But if you have, I would be the zero 22% where along the zero between zero and 20, it depends kind of what not only what the market is but also what flexibility you need with your debt portfolio. And on top of that, going back to the asset liability match, if you have a lot of cash on hand, it makes sense to have a little bit more variable rate to offset that. And so this is a question that's obviously extremely credit and an issuer dependent and I think there's no wrong answer in terms of how they look at it.

Julie Burger (26:37):

It's interesting that 72% said between zero and 20%, and I would guess the vast majority of issuers in this room have zero or close to zero. I think people sort of try and wait for the absolute right moment to put on variable rate debt. And the reality is sometimes if you do that you never end up putting it on. So it does show you right there is a healthy amount of variable rate debt and it's finding the right balance as Derek and Collin both said.

Derek Hansel (27:00):

Yeah, for me the most interesting number there is basically a quarter of the folks in the room who think it's too risky at all. That's kind of fascinating frankly.

Arlene Bohner (27:15):

Okay, let's move on to our next question. What is the biggest challenge issuers face with respect to infrastructure investment? Please vote. Okay, 57% insufficient revenue sources to support debt and about 27% interest rates and cost of capital and 15% sources of capital. So Derek, what do you think?

Derek Hansel (28:18):

I vigorously agree with the folks out there. If I've got sufficient revenue sources, I'm reasonably certain we'll get the sources of capital and we'll get a reasonable cost of capital averaged out over a period of time. But coming up with revenue sources is always tough I think for any issuer.

Julie Burger (28:40):

As an underwriter, I'm disappointed that 15% think it's sources of capital since I feel like we have lots of sources of capital in this room, but couldn't agree with Derek Moore, right? It's all about revenue. When we saw this question when we were talking pre-panel, if the market could bear it, there would be billions of issuance. It's really about the revenue to support that. So couldn't agree more with the audience as well as Derek.

Collin Teague (29:06):

And I just reinforce that as an underwriter like Julie, I'm right there in that and understanding when we run capacity analysis for our clients, we will see hey, how much they're constantly asking, how much can we raise, how much can we raise? And oftentimes, especially with inflation, with project costs going up, it's like, okay, well let's see if we can do this now to be able to pay for the entire project and if we have the capacity and if not, where else do we go? And so that is the number one kind of issue that I'm seeing when I talk to clients out there.

Arlene Bohner (29:38):

Well, that's a great segue to our next question, which is how much annual issuance do you think is actually needed to fund current infrastructure needs? Okay, about 40% of you ish think 750 billion annually. That's amazing. 36% think 1 trillion annually and 23% of you think 500 billion annually, which we're used to thinking of is a big issuance year and 3% think about 450 billion. So Julie, what do you think?

Julie Burger (30:52):

Yeah, it is funny that 2% said 450 billion, which would be a big year of issuance and what we're on track for this year. So it just goes to show you that the needs are far more significant than what's actually borrowed for. I actually tried to actually put a little bit of a fact check on this one. So the American Society of Civil Engineers every four years does their infrastructure report card. So last one they did was actually 21, so they'll be doing another one next year, which I'm sure will garner some headlines. And they had for the next decade, roughly 2.5 trillion. So the 1 trillion annually is probably not way off. I also, when you look at other countries, although we have an infrastructure bill and we've definitely seen some investment, China spends something like 10 times the amount that we spend on infrastructure. So we're certainly behind, and as we just said, sources of capital is not really the constraint. I think when we talk pre-panel, we all felt like the market could bear 1 trillion, might be a lot, but close to 1 trillion annually, but it's really about revenue and so it's really more about funding than financing when you think about this question.

Arlene Bohner (32:06):

Okay. Alright, moving on. What impact, if any, do you anticipate the presidential election will have on muni priorities? Please. Okay. 40, 41, 42% of you think hard to tell, 30% minimal to none. 28% of you are keeping your fingers crossed and expecting considerable changes. Collin, what do you think?

Collin Teague (33:08):

I agree. It's hard to tell. I think it's going to be, obviously we don't even know who's going to win the election. And so having that as a basis for anything to understand what could potentially happen I think is a big part of it. But I think from a micro market perspective, towards the end of the year after the election in 2016, we saw a lot of illiquidity in the market because no one knew what a Trump administration would be about and no one understood the priorities for his administration. And so there was a lot of unknowns, a lot of illiquidity at that time. I think after this election, regardless of who wins or if we don't even know who's going to win still the weeks passing, I think the market will still be relatively stable because the market has seen a Trump presidency and understands that Kamala is probably going to be kind of in line with what the Biden administration was.

(34:07):

And so there's not going to be too many changes regardless or illiquidity or volatility in the market. There's obviously always volatility day-to-day on a macro perspective in the marketplace, but we don't think the election's going to shake anything out in that regard as it relates to long-term tax reform. Again, it's hard to tell because who knows what actual policies not only are each candidate in favor of, but also can they actually get what they want passed. If you have a divided Congress, you never know how everything's going to shake out. And I look back to 2017 when Trump passed the tax cut and jobs act where for our business, it wasn't all of a sudden, but we heard whisperings, but it was like they needed to get it to be budget neutral and so to get the votes to make sure it was just a majority vote. And so they threw in getting rid of tax exempt demands for fundings kind of at the last minute and it was just a line item for them to get it to budget neutral. And so you think about that, there's little things like that that are just kind of things thrown in for them, but they can affect our market and can kind of come out of nowhere. So I think it is hard to tell because we don't know where the priorities will go and we don't know how they'll accomplish those priorities.

Arlene Bohner (35:30):

It's a good point. It's a big dollar amount, the tax exemption and attractive target when it comes to Congress. But Emily Brock is fighting the good fight, GFOA. Anyone else want to comment on that one? No. Okay. Alright. Let's move on to our next question. What will have the biggest impact on the public finance industry heading into the new year? Please vote. Hey, 35, 30 4% of you think interest rates or cost of capital will be the big impact. Slightly less of you think expected changes in tax policy, although you're now tied run closely followed by increasing costs overall for capital and operational costs, and only 7% of you think geopolitical tensions will have the biggest impact on the public finance industry. Julie, what are your thoughts on this one?

Julie Burger (37:16):

Yeah, these would've been my top two as well. I mean, Collin alluded to it, but the tax cuts and jobs acts expires in 2025, so something is going to have to happen. And so inevitably there's going to be some change to tax policy and it's pretty far reaching, right? Individual income taxes, the salt deduction, which obviously is a big topic in California AMT and who's subject to AMT, which frankly for airports could have a really large impact as to whether that's extended. So I don't think you can deny that tax policy is going to be a big discussion next year regardless of what happens in the election because we're going to need to figure out what happens with the American Tax Cut and Jobs Act, cost of capital interest rates. Clearly the Fed is on a path lower, so I do think you're going to see lower rates and that creates opportunities. Refinancings, maybe projects that didn't pencil. Now pencil, I talked about maybe what it could mean for commercial real estate. So I agree with these two, although certainly I think all of these have some applicability. I'd be curious what Derek has to say as he thinks about that. And MTC?

Derek Hansel (38:22):

Yeah, I certainly, I agree. If we just look at the next year, it's probably tax policy. As I look out longer, we're trying to get a pretty large toll increase put through for us. Just hit the wires yesterday though. We've been talking about it for a few months. And a big part of that is just the cost of our capital projects. We are seeing construction costs up somewhere between 30 and 40% just since the start of the pandemic, and that's not getting better. Meanwhile, our bridges are not getting newer, and so they will require significant expenditure for maintenance and rehabilitation, which is crazy expensive and certainly big impacts. On the other hand, it's going to be orders of magnitude less expensive than trying to replace. So I think for all of us in the infrastructure business, that's a big deal, certainly as we look not just beyond next year, but over the next 10 to 20 years.

Collin Teague (39:33):

And I would just add, the good thing I think about everyone in this room and our market in general, the public finance business in general, is the fact that even when there are changes to tax policy, I think we've been fairly resilient in terms of finding solutions that can mitigate against some of those changes, whether that's So no tax exempt advance for fundings, but tenders are popular. And in 2020 and 2021, a lot of issuers were able to refinance on a taxable basis for a good savings. And all those deals are being reworked with tenders, et cetera. And so I think we as a business are very good about being resilient in terms of finding those next steps, whatever policies they throw at us in terms of managing debt portfolios and construction and cost needs.

Arlene Bohner (40:24):

Yes, we're creative and innovative industry. All right. Okay. Well, we are going to take some questions, but we have the most important question of all before we get to that. Who will win the World Series?

Collin Teague (40:42):

This needs to be updated. Yeah.

Arlene Bohner (40:46):

Yeah, had to be finalized before some important things happened. My diehard Mets fans are still in the house. All right. Dodgers, 56%. I guess that's to be expected given the location and 32% Yankees and only 2% for the poor guardians. Okay. Well, anybody have any comments on that one?

Collin Teague (41:35):

I do not.

Derek Hansel (41:36):

As a Phillies fan, I just want it to get canceled.

Arlene Bohner (41:43):

All right. Any questions from the audience for this esteemed panel? I don't see any. And I think we are the only thing standing between you and lunch, so maybe we'll just let you go a couple minutes early. So thank you very much to our panel and thank you all for participating.