- As the stimulus funding wanes, are state and local governments equipped to fill the gap?
- What are the long-term challenges/pressures to be cognizant of and their potential impact on municipal credit strength?
- Public pensions, OPEBs (other post-employment benefits)
- Which sectors will be impacted the most by a potential recession (e.g., healthcare, higher ed, transit)?
- How are investors responding to rising interest rates and the credit landscape?
Announcer (00:09):
Okay. Hey everybody, let's if you wouldn't mind taking your seat, I would appreciate it. All right, let's simmer down and find our seats. And in the interim I would like to thank Moody's Investor Services for these very helpful LED pucks that help us light the platform here in a pinch. Okay, great. We are at our 10 20 panel. This is the credit landscape panel and I'm going to turn it over to Juliet Stiehl, who is the moderator here to introduce the panelist. Thank you.
Juliet Stiehl (00:38):
Thanks everyone. As he said, I'm Juliet Stiehl, I'm the head of public finance Eastern region at Build America Mutual. I'm proud to say we celebrated our 10 year anniversary this past July, and we have insured over 120 billion of par for nearly 5,000 issuers. So yay. I'm excited to be here today to serve as moderator for my esteemed panelists who I will now introduce. I'll start at the far end. Emily Raimes. First a big shout out to Emily. She stepped in last minute to join our panel. Emily is a senior vice president for the states and high profile ratings team at Moody's. Prior to joining Moody's in 2006, Emily spent seven years at the New York City Office of Management and Budget, working primarily in economic analysis. Emily holds a BA degree in government from Wesleyan and a master's in public Administration from NYU. Next up is Brian Luke. Brian Luke has over 20 years of fixed income experience and is currently head of fixed income indices for the America's S and P Dow Jones indices. This group includes the iBox bond indices and s and p municipal bond indices. I'm saying that word a lot, right both of which cover key benchmarks for the fixed income market such as the iBox USD, liquid Investment grade and high yield Index, and the s and p national AMT free Muni Bond index. Brian is a CFA charter holder and a graduate from the University of Washington. Eric, Eric is a senior director in Fitch Ratings Public Finance department and he is the head of the US States Rating Team. He's based in New York and as a member of the tax supported rating groups, he focuses on state and local government credits, but also has worked in the education and nonprofit institutional groups at Fitch. Prior to his time there, he worked with the NYC Taxi and Limousine Commission as well as with the New York City Department of Transportation. He's a graduate of Brown and also earned his, also earned his MPA from NYU's Wagner School of Public Service. And less but not least, Barry Fick. He's currently the Executive Director of the Minnesota Higher Education Facilities Authority, having been with the authority since 2016. Minnesota Hefa is a state agency and the authorized conduit issuer nonprofit institutions of higher education in Minnesota. The authority has served the colleges and universities of Minnesota for over 52 years and continues to provide value added services to its borrowers. As executive director Barry also oversaw the digitization that almost didn't come out of all files, transcripts, and other documentation accumulated over 50 years and has revamped the website to improve authority. Bower Transparency. Barry is a graduate from the University of Minnesota and has a JD from the Mitchell Hamlin School of Law. He is also a cpa and prior to joining the Minnesota Hefa, he served as an executive at Spring Incorporated. All right, ready to start this panel off. So the first question, eight out of 10 respondents in the 2023 bond buyer survey think that credit will be negatively affected in 2023. Talk of recession is in the air as was evidenced by the last panel, but will the effects of slowing economic growth or even a downturn vary across regions and municipal sectors? And are there places where you think there will be substantial downturns or areas that are interestingly meant will be resilient? Eric, I know you wanted to start this off.
Eric Kim (04:23):
Sure. Thank you. Thank you Juliet. And thank you to the Bond Buyer for inviting me here. It's a, it's real pl a pleasure to be here. So I'll start by talking about what we're seeing when we look at states and the economic trends there and we are starting to see a little bit of diversions. One of the things we track really closely or labor market trends. So non-farm payroll growth is a really important piece of that. And when we look over, let's say just the last few months, the last quarter of 2022 we are starting to see different patterns emerge U.S nationally there. There's still growth in jobs. There's about a half percent over that last quarter of the year in 2022. But then you've got some states Texas, Colorado for example, that are growing at more than double that rate in terms of jobs. But then you have states that are moving in the opposite direction Kentucky, West Virginia, Maryland, that are actually contracting in jobs just in over those last few months of the year not just on the job side. And then we look at also the Philadelphia Fed publishes a coincident economic activity index, little broader measure for all the states and similar patterns. You're seeing some real diversions. The US economy obviously continues to grow. We just got the GDP number recently but there are some states that are growing at a much faster rate and then other places that are starting to contract. So there clearly is a divergence that's beginning to emerge and what states are seeing in their economic profiles and that's going to show up in their revenue outlooks and in their budgets and it's going to have potential credit implications. Our view is that's not going to affect state credit quality and local government credit quality this year. And we think they're well positioned to manage that from for those sectors. But we're definitely going to start to see that. And if you look at California, you're starting to see that already the numbers there are in some ways the leading edge of what we might see for other states where there's much lower revenues than had originally been anticipated just six, seven months ago. So that's what we're starting to see across the states.
Juliet Stiehl (06:17):
Emily, did you want to jump in?
Emily Raimes (06:18):
Sure. And thanks for having me everyone. And I'm going to try not to just repeat everything Eric says every time he says it because we have a sort of similar focus and outlook. What he said at the end about California I think is where I would focus so that I'm not just talking about the same thing. We're starting to see a divergence in state revenues and with the sort of negative focus being on the states that rely heavily on personal income taxes, particularly on capital gains taxes what we see is personal income tax revenues in California for the first half of this fiscal year, so this is through December, were down 15.7% while their sales taxes were up 5.3%. So there's kind of this divergence there in those revenue streams. Texas on the other hand, which doesn't have personal income tax, their total tax revenues were up 9% in the first half of the year. So you see that divergence there. California is obviously, we think of it as sort of a leading indicator, which is just what Eric said, but more volatile. They have a more progressive income tax. Historically they have been more volatile in their revenues. We think they've gotten even more so with an sort of additional millionaires tax in recent years. So we expect that even potentially even greater volatility. We're seeing that now with the decline in the revenues that we're not really seeing yet in most other states, but we think it could be a leading indicator when we looked at the top 10 largest states by outstanding debt amounts and the tax revenues they were receiving in the first half of this year, so through December, so pretty up to date nine. And California I think was the only one that had a decline year over year for those first six months on a nominal basis. But if you adjust them for inflation, you're looking at those tax revenues on a real basis nine out of 10 are down. So the big and the ones that are down the most are California, New York, New Jersey, Massachusetts ones with more of a reliance on personal income tax and capital gains. The only one of the 10 that's not down on a real basis is Texas. So I think that's another place that we'll see some real potential divergence over the next year is this volatility decline in capital gains taxes, which is going to lead to declines in personal income taxes and it's going to hit certain states much more than others.
Juliet Stiehl (09:02):
And Barry, curious about your perspective as an issuer and someone who leads this with participants in the higher Ed sector, what your outlook is or opinion.
Barry Fick (09:15):
We are seeing that there are a lot of projects being done by schools that and healthcare organizations as well, which are either being deferred or they're being resized to scale back on what they're looking at. And in part, the divergence is also coming from the schools and entities that are well financed and very large endowments versus those that are not as well financed. Clearly a big issue for health or higher education is the number of students that will be available. There's a so-called demographic cliff in 25 26, which a number of the schools are starting to get worried about. And I think that's going to cause a problem. And that is actually, it varies across the country. So certain areas the East coast are seeing a fairly large decline. The south and the west are doing well in terms of having a continued expansion of their high school graduates. And one thing we're seeing, which is bringing some financial pressures on schools, is the idea that they are actively trying to diversify their enrollment substantially. The populations that are growing are the non-Caucasian, the Bipoc or population. And so a number of schools are looking as to how they can best serve and get those population members onto campus. So we're seeing more and more of that, but that's going to cost a little bit of money in terms of additional work and potentially additional support all for a great cause and a great reason to ensure their long-term longevity. And one thing I would add on a state level, it's interesting, I think diversification will show up. Minnesota surprisingly is one of the very few water sufficient states in the country. And compared to say the Colorado River states that are having a lot of challenges with regard to low water levels on the Colorado River and excess use we even as Minnesota are seeing that there have been proposals made to tap into the abundant aquifer system and then transport hundreds of millions of gallons of water out of Minnesota to a less water sufficient state. So far, Minnesota has resisted all of those treaties, but I think from an overall economic growth perspective across the country, there'll be more of those challenges as water resources become more challenging to find.
Juliet Stiehl (11:35):
Certainly. The next question I'd like to ask of you is sort of related to highlighting California and something that I think we all are curious about and have experienced. What are the credit implications, whether it's regionally or within particular sectors for the slow pace of return to office and the normalization of hybrid work schedules? Are there tools you think impacted that communities and are there tools that certain communities could use adapt to this new environment, especially as it relates to commercial space and people?
Eric Kim (12:14):
Eric? Yeah. Can we pull up the slide? Yep, that's the one. So return to office, this is a topic that comes up a lot in our discussions with investors, with issuers internally as well. We're all living this, right? We're here today, but we may not be here tomorrow. And this is some data, this is one of my favorite indicators when trying to think about this question. This is Castle Systems data. They're building data access provider. I'm sure many of you have seen this data in different forms. This is data going back to just before the pandemic February, 2020 compares access and office occupancy in 10 different metro areas across the US relative to that February, 2020 level. And two things jump out when we look at this data. One, you've got a pretty wide variation across the country. This isn't everywhere, but it's an interesting cross section. And you've got places like New York and San Francisco and DC that still haven't cracked that 50% number in terms of getting back to where they were prior to the pandemic. And then you've got a place like Austin, Texas, which has been leader from almost the beginning of the recovery. And it's been about two thirds occupancy relative to the pre pandemic for about a month from now. And the other thing that jumps out is how far we are from getting back to the levels we saw before. The pandemic and the trajectory does not look great for getting there anytime soon, right? We're kind of stuck at this level in a lot of ways and have been for probably the past year or so. So when we think about what accredited implications are when it comes to cities and the near term, we're not as concerned. We think cities are generally very well positioned, even these cities here to manage through potential effects of having a slower return to office strong reserve levels, all the things you normally hear about when it comes to local governments. But longer term is where we're starting to ask some real questions and we're trying to understand. So the dynamic is clearly changed of who is coming back into the city and when they're coming back and how often they're coming back. That means economic activity expectations have to be different. If you've only got 50% of the people you had before coming into your office spaces, then that means all those retail businesses and service businesses that relied on that activity are going to have to find a different audience or they're going to have to close. And we're seeing a little bit of that. There was an interesting report that the JP Morgan Institute put out yesterday talking about retail establishments in downtown areas versus suburbs and seeing a real shift. There are some places where there are just less retail establishment are open, they've just closed because they don't have the business. And that economic activity obviously drives tax revenues and expectations for economic growth going forward. So it's a really interesting question. Let's think about what happens and how does cities manage through that. We saw New York City and New York City recently. The governor mayor announced a New York plan. Some of you may have seen this announcement of about a month show ago talking about different ways to make New York more attractive. One of the big focuses is making it more of a 24 7 destination, which seems sort of ironic. It's New York the city than ever sleeps. But think of Midtown Manhattan as a truly vibrant 24 7 community as opposed to the largely office space center that it is now. That's the kind of thing that cities are having to think about. Other places are trying to figure out how can I incentivize and speed up conversion of office space into residential? Not so easy if you've been in office buildings, they're not necessarily the easiest and most conducive to being residential condos, but those are the kinds of things that local governments are trying to figure out. So cities are definitely one place where we think there could be some potential credit implications about this return to office. And then if you go to the next slide transit is also the other obvious place we're trans ridership. This is the 10 largest systems their ridership compared to January, 2020. Similar trends in a lot of ways, big divergence. You have BART at 40% in the Bay Area and Jersey Transit, which I actually took to get here today back at about 75%. This is data through November of 2022 from the Federal Transit Administration, monthly data. So there are some transit systems like the MTA that are pretty reliant on fairbox revenues. And looking at this trend, and again, you see the diversions, but you also see there's not exactly a sharply upward sloping line here. The trend does not look like it's going to get back to full recovery anytime soon. So this is an area where transit systems have to rethink what are we going to do to meet our operational and capital needs. And New York state's budget, just yesterday, Cathy released one where she calls for, I think it's 1.3 billion in additional funding for the MTA just to address this very problem. There's a clear gap that needs to be made up. So that's the other, another area where we're trying to understand what is going to happen over the long term. Again, near term, there's a lot of ARPA. Money's still flowing through these transit systems. MTAs got plenty in its budget to help it manage through. So we don't have near term credit concerns, but over the medium and long term that's something that we need to be, we are thinking about and trying to understand.
Emily Raimes (17:33):
And I just to add to that a little bit, I think from the state perspective, to the extent that jobs have become and stay fully remote, optional, there's in the states that have been historically losing people, losing population, the Northeast, California, Illinois, there are all kinds of things that go into those decisions to move or to leave a state and a job is one of them. So to the extent that there are now more opportunities for fully remote work, that's something that could just tip it a little bit further in that direction. The states that have been gaining a lot of people southeast, southwest, if you can go there and you can have keep your job that you had in the Northeast or get a job in the Northeast or California, again, it just might sort of tip that balance a little bit. So, I think remains to be seen and it's unclear, but to the extent that we've seen those sort of population and movement trends, we might see a little bit more of that because of this remote work option.
Juliet Stiehl (18:41):
And it is curious, we spend a lot of time talking about how hybrid work environments may impact credits, but to what extent will the upcoming, if there is slow recession impact, then our ability to hybrid work. So it'll be curious to see how that pans out. Obviously as a mother of two, I am very strongly in one camp, but it will be interesting to see where the trend goes pivoting a little bit. But as was mentioned earlier in the first panel, a lot of recent focus nationally has been on the US hitting its debt ceiling earlier this month and the treasuries use of extraordinary measures to tide us over until a deal is made hopefully. What are some implications of a drawn out political fight and worse, what are the implications of the deals not made? Are there any sectors where you think this could be damaging or will be more impacted than others? I know you had a perspective as an issuer, so I'm very curious to hear what your response is?
Barry Fick (19:43):
My clients and borrowers are always asking me, well, what's going to happen with the debt ceiling? How is that going to affect us? And I keep telling them, well, it's got to wait till June. Nothing is really going to happen until we're up against the proverbial wall. I think the par challenge with now the divided government in Washington is that both parties are trying to stake out a position and ultimately I do believe they will reach a settlement. I the alternative is virtually unthinkable is what would happen. But I do think that there's going to be a lot of posturing and a lot of noise between now and June. So it will be important to reassure these folks that this is not going to be the end of the world, at least until June one interesting thing I noticed that even in as treasury has adopted the extraordinary majors, they did not close the slug window. And in part of course that's because there's not much of a demand for slugs by municipality since nobody's doing any refundings where you would purchase slugs for them. So, that tells you that there's still going to be a downturn and there's in the general economic level and the issuance level on the municipal side, but it doesn't diminish the fact that, but the debt ceiling has to be resolved. And unfortunately, I don't believe it's going to get resolved until June.
Eric Kim (21:02):
Yeah, I know that fitch's baseline expectation is that we do get a resolution and that us continues to pay its bills including obviously debt service and we get a final agreement. I think it's fair what Barry said we fully expect a lot of drawn out fight, a lot of wrangling probably not anything real until May or June unfortunately. And the way this plays out for us in terms of the credit implications and how we're thinking about it, so you have on the one hand the idea of that long drawn out fight and some kind of resolution and if there is a grand bargain some kind of big deal to allow the dead ceiling to be raised or waived or whatever you want to call it. What we're going to be looking for is what does that mean for federal spending long term? And there are some sectors in particular that are particularly reliant on federal money. Healthcare comes to mind in terms of that's a huge piece of what the federal government spends its money on Medicare and Medicaid and those are two obviously important pieces for hospitals and healthcare providers generally. But Medicaid is also pretty big piece of state budgets as well. So that's back in 2011. One of the last times we had a real fight on this issue we did come to or Congress and the president came to a budget control act agreement and there were some plans that theoretically could have led to some pretty significant changes on these entitlement programs. Didn't really happen when you look back and kind of think about what actually happened, there was a se sequestration of course but a lot of the planned cuts did not happen in the way that they were expected to at that time. So we will be watching closely to see how it plays out in terms of any kind of final agreement and what that means for the trajectory of federal spending, particularly on the healthcare side. And then you have that sort of doomsday scenario that Barry talked about it. Yeah, there's actually a default, or probably more likely treasury is forced to not just do their extraordinary measures now, but actually stop paying bills, right? Can't do social security payments, can't do contractor payments in order to make sure that debt service actually gets paid. We have no idea what the markets will do in that situation. Will investors just completely call it cap puts? Will the capital markets take a nose dive? We could definitely see a situation where we're essentially enter into a self-induced recession because of that or make the recession that may be already starting to happen worse just because of that failure to act. And that's not our baseline, that's not what we're building into our ratings. But of course that could happen and all bets are off at that point, unfortunately.
Barry Fick (23:38):
Yeah. I do think also that if there's a possibility that the treasury would not be able to make social payments or other payments to individuals, there'd be a Hue and cry that would be raised by people who would be affected by that. So substantial that it would be amazing. I'm reminded of what happened in Minnesota a few years ago when there was a similar, although obviously much smaller issue in terms of a disagreement and an inability to reach a budget. And in that case, the state made layoffs of a lot of people, including people in the tax department. You might think, well, that's good. People in the tax department are not working and collecting taxes. The problem was this was in the late May or June I should say, and it suddenly became very obvious that right before the 4th of July weekend, they were going to be no beer or alcohol available because they weren't able to collect excise and sales taxes. Amazingly enough, within two days, the budget impasse was resolved just in a time to get alcohol available for the July 4th weekend.
Juliet Stiehl (24:40):
That's hilarious. We all need waste to self-sooth. So no judgment results of the 2023 Bond Buyer survey show that one of the top three challenges for the industry are higher interest rates. This is timely in light of yesterday's fed action, what are the implications of higher interest rates on credit and how are investors positioned differently as a result? Brian, I know you said you take lead on this one.
Brian Luke (25:09):
Sure, and I'll drink to that, Barry for resolution. When you look at the benchmarks, the returns, and that's what we do at S and P Dow Jones is we measure the market. Three things come to mind, 3% returns on year to date muni bonds nationally pretty good start to the year for a month's work 3% yield right now offered in the national index. So broad index is going to give you 3% yield and rolling year over year, we're only down 3%. So after callous year for bonds and stocks being down only three, not so bad. So let's talk about the investors, talk about the households actually. So I want to point to the Fed data that shows households investments of financial assets we're around halfway through the baby boomer retirement period started around 2008, 2010. It's supposed to end around 2030. You would expect to see the increasing share of financial assets shift to bonds. In fact, their allocation grew in stocks 28 to 35% over the last 12 years or so. It shrunk in bonds. So investors are not necessarily attempted by those lower yields we saw in the previous years. Maybe they will be. Now what's interesting and what is a clear demarcation is a shift of how households are buying bonds and buying municipal bonds. And that is they're not buying as much directly from the market, they're buying it through funds. And that shift has now over taken the last 3, 4, 5 years that point to an increasing allocation of funds as access for the bond market. We see that in the Fed data. We also see that in the flows data last year, terrible year for bonds, half a trillion of flows came out of mutual funds. Bond mutual funds half a trillion out, although in ETFs, 200 billion came in. So why was that? Right? I mean they're still buying the same sort of products. One is the ETF side is a little bit more transparent mechanism, slightly more tax efficient. We all love tax efficiency here or else we want to be in the market. That's another propelling case. And a lot of those are tracking index based products. So they're not actively seeking, they're replicating an index. So it's pretty clear that the shift and preference of how investors are accessing the market is changing as we look at the market. So that's also taking place in Munis, right? I'm talking about the broad market in the muni market, we surpassed a hundred billion in municipal bond ETF assets. Flows came in about 30 billion positively last year. Again. So in a bad market, people are fleeing higher rates. We're still seeing flows coming into the way investors are allocating. And that's that I think speaks to the costs, the efficiency. We've got great research that my colleague Jason's here put together that talks about the better improvements of institutional costs versus retail costs. And some years you're going to get 60 basis points in savings by going through an institutional market versus a retail market. I think in households, investors are thinking about that. They're thinking about that now with 3% yields. They're thinking about, wow, I can get income from my fixed income. So that's a big demographic change. I think a big change in philosophy of how investors are looking at it. Despite the concern about rising rates. Earlier this morning we talked about whether the rising rates will stop curtail or not. I prefer to just watch and see what happens but I am cognizant of actual tangible levels of yield that are going to create some return, some benefit for the portfolios for all investors. The last thing is now if bonds are attractive and 3% is helpful and funds are flowing towards that area, how do they do it? Well, you look at treasuries, the iBox Treasury Index gives you about 4% yield better than 3%, but on a tax equivalent basis, not as good. Right? 4.65% is what your tax equivalent yield would be. Not as good as corporates. iBox corporates is around 5%. Of course you're picking up credit risk, which we all know about. That's significant credit. That's corporate credit risk. And you're also picking up actually interest rate risk. A lot of the corporate bond issuers have extended out the curve. So when you're buying those markets, you're seeing more interest rate risk and more credit risk. So 5% versus four and two thirds seems like a great in between for the municipals market. So I think we look at the development, the migration away from how investors are looking at it. We see that as a significant change through we look at the overall returns, the relative returns to treasuries and corporates, and we see where Munis have a pretty strong case to make for investors despite last year's horrific numbers and despite ongoing concerns about inflation and of course credit.
Juliet Stiehl (30:15):
Thanks.
Barry Fick (30:16):
Actually, I would add to that what I'm seeing in the municipal market is we was talked earlier today about the two 10 treasury spread being fairly significant. The municipal yield curve isn't that inverted, and it is slightly inverted, but not that much. And quite frankly, if you look at a chart of where municipal rates are and where they have been for the last 20 to 30 years, they're still barely at or slightly above the midpoint of where they've been historically in that timeframe. So from that perspective, municipals are, I think, a very good deal for purchasers, and I'm telling my borrowers that. And I also am telling them that whatever the rates are today, you're not very likely to have those bonds outstanding for the full 20 to 30 year maturity. At some point, when the yield curve comes back to an upward sloping yield curve, we'll get out far enough that will say, shoot, we can refinance these bonds even if our long-term rates are the same 5% coupon, simply because we'll gain some advantage at the zero to 10 year timeframe with the upward upward sloping yield curve to give us some savings that'll be concentrated in that area. So there are a lot of options even in a market such as this that I'm encouraging my borrowers to look at because sometimes you've got projects that just need to get done you can't defer them. And if you want to stay in the game and competitive with other institutions, you just have to do that.
Brian Luke (31:44):
Yeah, Barry that the sophistication is on both sides. Absolutely. I mean, the sophistication among issuers among the institutional side is there, but now it's also going down to every day's investors' portfolio. You don't just have to buy the broad market. You can buy a short duration product if you're concerned about rising rates, if you're, people are now talking about two tens curves at the table, not just at the board table, right at the dinner table, they're talking about that and they're accessing it through ETFs, they're accessing it through other means to get more granular exposure to whether state you're, you think is you're impacted by it from a tax perspective, you we have an index for that. If there's a short duration one, we have an index for that. It's all available now and it's definitely changing the game for the investor perspective.
Juliet Stiehl (32:30):
But Barry, I wanted to second what you had stated earlier that in terms of rising interest rates, the feedback that a lot of that we are hearing a lot is that there are capital needs and people do have to come to market. And so maybe it does change the size and scope of the project and really whittle down to what is essential, but it won't hold people back from necessarily making their institution or their municipality stay at a certain caliber.
Barry Fick (32:56):
I agree. And in one of my other roles, I am the chair of the advisory commission to the city council of the city. I reside in the suburb, which is the fastest growing city in the state of Minnesota and one of the wealthiest cities in the state of Minnesota. And we are seeing there that we are continuing to move forward with bonding proposals simply because for the projects, there still is a bit of a time lag in terms of some of the items that are needed for construction. And we're talking a 12, the 14 month delay in terms of getting windows for projects, but we can get the steel now steel now. So it's like, okay, we'll go ahead with the financing lock in the rates at this point that we can or consider using a variable rate demand bond for that. And then because we know that by the time we have to get the project completed, we'll finally have that supply. So you're right, it just has to be done. So we're doing it.
Juliet Stiehl (33:51):
Your city council's lucky to have, have you helped them out. Okay. Barry, as an issuer I'm sure you've paid more attention to the impacts of the Financial Transparency Act. What are your thoughts on it and to their credit analysts on this panel while of course having more and timely access to information will benefit credit in the long term, what do you think about the evolution of AI to credit analysis? So this is sort of like a two-part question.
Barry Fick (34:22):
Yeah, I'll focus on the Financial Data Transparency Act and the requirement that municipal issuers will have some sort of machine readable language for the financial statements within two years. Basically, I guess first of all, I would say, or four years, first of all, I would say that that is possibly short time for this market to coalesce around what a standard data process and practice would look like. The SEC is in charge of that. And so one of the things that I've done as my position on the National Health and Ed education committee or organization and with GFOA is to talk to folks at the SEC about getting involved early on in the process as they go through to set their standards at the GFOA meeting, GFOA meeting in Washington's and DC last week, we had XBRL folks there talking about how from their perspective, they have a lot of the protocols put together already. They think it'd be really relatively straightforward. The challenge, I think, however, from the municipal side, not just in higher education, but with municipalities in general, is that a lot of the organizations do not have the bandwidth capability either in personnel or expertise to decide what makes the most sense. Do we want to try to develop something internally? Do we want to buy from a third party vendor? And what all the implications of that is going to be. Combine that with the fact that municipalities, as do colleges, universities and healthcare have widely divergent perspectives and presentations on their financial data so that it makes it much more of a challenge to compare them in a normal situation. And if you have data that's coming in and in some machine readable format to enhance comparability, it'll be very necessary and prudent to make sure that you understand what the distinctions are between one reporting entity and another reporting entity. So there's a lot of upfront work I think that needs to go into this before it becomes ready to be rolled out. And I do think that the municipality and municipal market with the relatively less sophisticated in terms of for many of the smaller communities who may not have anybody available to work on this, is going to be taking a longer timeframe. And I expect there eventually will be a phased in approach for larger entities to be take earlier adoption and smaller entities to either take later adoption or even be able to opt out at some point.
Eric Kim (36:58):
Emily, did you want to take it?
Emily Raimes (37:00):
Sure, I guess from our perspective more consistency is always good and any way that we get there get more automation is good despite some sort of painful growing through it. I guess in terms of the second part of the question about AI replacing analysis, there's all kinds of pieces of analysis and to the extent that AI can replace and do pieces of it, great, I can't do the whole thing. I think that there's a lot of stuff now that's being done by automated processes that didn't used to be but still analysts on my team spend a in order amount of time typing things in that if they didn't have to, that would be great. But there are also pieces of analysis that really can't be done that way. And so I think the shift is ongoing.
Eric Kim (37:59):
The question about AI and its role and analysis is a really interesting one. I've got some friends who are college professors or high school teachers and all they want to talk about, they don't want to talk about, all they are talking about is chat G P T and what it means for the future of homework. And the thing that's evolving out of that and that we're starting to see is that what comes out of those systems now chat GPT being just obviously the most prominent is surface level and it can be potentially a starting point, potentially useful. There could be some opportunities there. I have a colleague who, her partner and her son the other day were just kind of messing around with chat G P T and asked that what would a Fitch analyst say about the credit quality of the state of California and chat GPT had an answer and it was at first read, not an unreasonable place to start. I mean, we obviously publish a lot of things. It's out there, it's public. So it's not surprising that an AI tool was able to gather some basic data and pull that together and come up with some coherent sentences, but the next level analysis wasn't there. And that's where we come in, I think. And our value add is taking the data, taking the information, synthesizing it, and actually making real sense out of it other than just putting the numbers into words. And that's the value that I think we're going to have to continue to provide and make sure that we're doing that. But there are potentially opportunities where, as Emily was saying there are tools, AI, natural language generation, that can take data and help speed up that process, get us two or three steps down the road to be able to focus more on, okay, so what can we take with this information now? What do we do with it? What can we actually say about the outlook for a credit?
Brian Luke (39:47):
And can I just add in a little bit there because I actually try to use chat G P T to write my comments for this discussion. Fortunately, they don't have information that's newer than 2021, so I'm saved for now. I had to come up please my own brand.
Juliet Stiehl (40:02):
You're being authentic is what you're saying.
Brian Luke (40:04):
Well, I don't know. I agree with Eric. They're pretty good, but they're just not quite relevant enough yet. And I think Barry yet is the problem there too, right? Because our investors demand instantaneous access, our clients demand that at s and p data is at the heart of our business. It's the bedrock. We love it and we love easy and consistent and quick access to it to democratize the investing market. So if the issuers don't catch up and some issuers do, those issuers may have a preference from the client like investing community because they want it and we see it and we need to have every single day what's coming into our index and is it right? Is it accurate? 110%? Well, if somebody's keying it in, there's always that keystroke error problem. If we can read it and it's accurate, then it's going to make our job easier and we're going to pass that on to our clients and it's going to make the democratization of the bomb muni bond market that much better.
Barry Fick (41:17):
And I should make clear that I do think financial data transparency is a net positive and definitely it's going to be helpful long term. The challenge is going to be getting there in the timeframe that has been set out in the legislation as it result it sits now and think there's going to be a change there With regard to ai, I think that there's also a distinct possibility there that it will help identify items in a financial statement that would make sense for some subsequent analysis by any one of your firms in the up on this table here with me, what I do think that it is also imperative that we not lose track of the human understanding of, well, this decision has been made, so their trend numbers look worse suddenly, why is that? Well, it may be that they're making some sort of investment that they're going to be beneficial longer term, specifically, as I mentioned earlier, the possibility of enhancing the Bipoc DEI grouping of a particular higher education institution. So both of these things will be great in terms of helping identify issues, but it'll still come down to the specific understanding by the analyst of what that particular borrower is looking at and being able to then articulate that in the report that comes out with the credit rating.
Juliet Stiehl (42:35):
I mean, we all know that in the muni industry, issuers are so idiosyncratic as it relates to sectors and regions, and understanding those nuances is really what provides a fullsome analysis. And so as much as efficiencies are great at the end of the day, that's the part that is going to last and makes a material impact. So great. I think that's it. And there is time for questions if there are any from the audience. Yes, I think there is someone with a mic. Oh, there she is.
Brian Luke (43:09):
She's coming.
Juliet Stiehl (43:10):
She's almost there.
Audience Member 1 (43:13):
Brian, I'm going to point this question to you and hopefully I can make it clear enough. But since you touched on ETFs versus mutual funds, if you could speak on two aspects. One is the relative participation as for primary investment versus secondary there is the mutual fund sector more invested as a primary versus secondary compared to ETFs? And then given that if, is there a potential implication for issuers if the movement is away from mutual funds to ETFs? Are we losing on the demand side and anyone else who might have answers to that?
Brian Luke (44:04):
Sure. So I think one of the misnomers about ETFs and index based investing is that it's just for passive investors but a lot of our research points to adoption by institutions and active management. So in other words, if an active manager gets a client and says, I want to drop up a billion dollars with you, and here you are, we're going to start calculating and checking your performance on day one, they can't put that money to work instantaneously. They'd have to go out and start buy and build out and construct a portfolio, or they can just go with a click, a button, buy, I want broad exposure to treasuries. Let me buy the treasury ETF, let me buy the municipal bond ETF, and boom, then you have a really diversified and represented exposure to the market. They may then lag out of that and then start building their portfolio off of that. So this interaction between active and passive is very much embedded within the ETF wrapper. From the index perspective, we see that as a secondary market observer, but that's how we see other. And then the other I think you were also talking a little bit about the transparent and the effectiveness of that. So you can buy it throughout the day and you can get instant exposure to it, but then also what you can also do is you can trade elements of the ETF amongst each other, so you don't actually have to go and buy and sell the bonds, you just representing that. And then you create a significant amount of efficiency from having to sell and buy shares of an etf which represent a basket of securities rather than having to buy and sell the bonds, which are somewhat cumbersome and have tax consequence on the trade transaction cost.
Audience Member 2 (45:48):
Which feels more investor versus.
Brian Luke (45:52):
From an issuer's perspective, I think if I don't actually, I don't know if what their preference is, I think that having the multiple areas to access their securities is probably ultimately better, and I think it is a bit of cannibalization, right? We talk about 500 billion going out of mutual funds, 200 going into ETFs, right? In a down market. Clearly they're moving away from some funds into ETFs mutual funds and ETFs, but maybe they're moving it from direct holdings into ETFs as well. It's not quite back clear.
Barry Fick (46:27):
I would add from an issuer's perspective, what we are seeing, and part of the reason that we went through our extensive website revision is now that we recognize that there's less of an affinity by, say, graduates of a particular school to want to buy bonds individually of that school, likewise of suburban communities or cities, people are now going, well, I don't necessarily want to constrain myself to just having bonds of city X, but I'd prefer to have a broader idea, broader portfolio and ease of change, which is where the ETF ability to just buy and sell immediately comes in, I think. And so what we've done is tailored our disclosure so that there's more to be disclosed there, recognizing that institutional investors who purchase the bonds for their fund or authorized purchase of the bonds for the fund and the analysts in that fund will be more desirous of getting that information. So we try to put that information out there on our website in the investor section so the investors can access it, rating agents can access it, insurers can access it, and it just makes it a lot more of a single point source for somebody to go to and enhance their efficiency so we can get the bonds hopefully to a broader audience and at strong pricing.
Juliet Stiehl (47:49):
I think there's time for one more question if they're Okay.
Audience Member 3 (48:01):
I guess this is more for Barry, but what do you think about, can you explain the demographic cliff a little more and how you think that's going to affect colleges in the long run, and are we going to see some more consolidation or are we actually going to see some more colleges not exist?
Barry Fick (48:22):
Yes. With regard to the demographic cliff, what it represents is a combination of two factors primarily. One is the declining birth rate of people in the country, and so it used to be 2.7, 2.9 kids per family. Now it's down to 1.8, 1.6, and so on. So there's a lot fewer, just a sheer smaller number of kids being born. In addition, you have the fact that some populations are growing faster than other populations and their traditional college age populations of 19 to 21 year olds is not growing as much because the generation subsequent to the baby boomers just haven't been as large and haven't had as many children. So that's going to be part of it. The second part of it is back in the early mid 2000 there was a recession that caused a lot of people to just like 2007, eight recession said, okay, we're not going to have kids. We just aren't comfortable with bringing a child into the world that is now manifesting itself in 25, 26 with fewer 18 year olds showing up. And that is resulting in schools trying to get everything they can do to get more students. You look also at the fact that there's a changing demographic in terms of what kids are going to college. For the last three, four years, there have been about 55, 60% of the first year students going to colleges have been females. And for the last two to three years, the majority of the BA and BS degrees at undergraduate level, which have been granted, have been to females. So there's a question of where do the guys go? And nobody's quite sure about what is happening there. And there is, part of it, I think, is that the jobs are easier to find, so it's like there's less pressure to go to college. And part of the, and there's some other factors I suspect as well, but from our perspective, we are already seeing schools that are combining, say back office items. I have one set of schools that're both in the same community, a semi-rural area outside of Minneapolis, St. Paul. They now have a combined security force, and they have a combined law or library system. And they actually received a grant a couple years ago of a few million dollars of MCC Kresky Fund Foundation to explore other options to do that. They have another pair of schools, one in all male school, one in all female school that have for the first time just announced that they will have a single president for each school. They've already combined a lot of their departments, their IT department, their security, their admissions departments are the same, even though they still have a separate male and separate female undergraduate work, but they're doing more combinations of that. Fortunately, in Minnesota, all the schools with maybe one or two exceptions are of a size and a financial capacity that they're unlikely to see any diminution in terms of having to close or merge. That's not the case in a lot of other places the east coast and some of the Midwest states in particular, if you have a school that has a less than, say, 600 to 800 and full-time equivalent enrollment you're going to be very challenged to provide sufficient number of faculty that are required to teach out majors. So we're seeing a combination. Some schools dropping majors, some schools switching to become colleges, and universities are switching to become less of a liberal arts education to more of a focused education on business or nursing or healthcare to respond to market demand, which is appropriate, but it's going to change the market fairly substantially over the next 10 to 15 years. In addition, it may result in less need for facilities as you get more people who are comfortable with online learning, especially for the, say, the basic classes that normally when we went to school, most many of us were 800 to a thousand kids in an introductory class. So if you could avoid that, why not?
Juliet Stiehl (52:22):
Thank you everyone, And thanks for listening.