Examining the Road Ahead for Muni Industry

In light of the market turmoil causing considerable shifts in the muni space for the past 2 years, how do market participants expect the public finance industry to evolve moving forward?

Transcription:

Virginia Wong (00:08):

I am Virginia Wong, and I am the Head of the Project Finance and Public Finance Group at Nixon Peabody. Normally I would dread being on the last panel before the bar opens, but not this time because I have a great panel and I'm very excited. Each of the people on the panel has a unique and important perspective about our market and about the outlook for 2024. And so we are just going to dive right in. Let's start our discussion today by talking about some of the challenges for our market. So Michael, I'll start with you. What do you see as the number one challenge for state and local governments for 2024, 2025? And I'm sorry, you should introduce yourself too. Sorry. Why not?

Michael Rinaldi (01:01):

I'm Michael Rinaldi and I am the Head of Fitch's, US local government rating group. And with that introduction, I'll say right off the top that Fitch expects fairly stable credit quality across the sector for 2024, which is not to say that there are not potential challenges and pitfalls out there. I think we will discuss some of those challenges over the course of this panel. I think one thing that I am really interested in seeing is how issuers respond, and particularly with respect to 25 fiscal budgets, how they respond to an expected slowdown in economic and revenue growth, really stepping down and away from fairly frothy revenue trends at the last few years. And then you throw into the mix federal stimulus and there was a lot of budget flexibility that issuers benefited from and that trickled down to bottom line results. We saw really large surpluses and an accumulation of reserves in many cases, not only well beyond pre pandemic level, but also in some cases like record highs for local governments, right?

(02:12)

So I mean, clearly that's not sustainable. And while cash having more cash is good, it doesn't necessarily in and of itself translate to a fundamental improvement in credit quality. And our approach is to rate through the cycle. You see that phrase sprinkled throughout our rating criteria. And so while trends were quite favorable, there was no stampede of upgrades, credit conditions going forward and budget discussions I think will certainly be a little more challenging. And with that, I think we're interested, again, how issuers react with respect to revenue forecasting, whether they're dialing back expectations and also the idea that well, with these pressures on the horizon, do we anticipate negative rating actions? As I mentioned earlier, we do anticipate stable credit quality and overall issuers have a fairly broad set of budgetary tools at their disposal. And I mentioned the buildup reserves, which tapping rainy day reserves not the worst thing in the world. So long as there is a plausible plan in back of that use of reserves to kind of get things back on course right away should the revenue environment remain a little tougher for a slightly lengthy period of time that most folks are anticipating.

Virginia Wong (03:38):

Great, thank you very much. So Chris Hollins, who is the newly minted Controller of the City of Houston, he's been on the job for about a month now, right? Six weeks maybe. How are you thinking about the budgetary challenges that Michael just outlined?

Chris Hollins (03:58):

Yeah, I mean, well obviously we're thinking about it from the operational level because we have to ensure that our city can continue to fund critical services for two and a half million people in the fourth largest city in the country. As you mentioned, got elected in December. I've been on a job for just over a month now. So clearly I have all the answers and the problems have been solved. But coming out of the Pandemic with Cares Act money ARPA funds, we actually have a historically high fund balance of just north of $300 million. That having been said, we definitely benefited from that one-time cash infusion, and we made some policy choices that now leave us with a structural hole in our budget to the tune of what's looking like at least $200 million annually with that much more recurring cost as opposed to recurring revenue. And so look, to solve that plain and simple, you either have to increase revenue or decreased cost or some combination of the two.

(05:11)

And when you look at the cost side, you either have to discontinue critical services, which is not an option. People need their trash picked up, people need public safety, or you have to figure out how to make those services more efficient. And if it was easy to do that, then it would've been done already. And so the challenges that lie ahead are ones that are going to force us to be innovative, to dig under every rock. And we're not going to find $200 million in one fell swoop, we're going to find a million dollars here, 5 million there, 10 there, but we have to just start eating that elephant one bite at a time.

Virginia Wong (05:48):

Great. Thank you very much, Megan. You've been biting that elephant one bite at a time, at that elephant, right? You had challenges doing budgeting during the pandemic and that was a unique set of challenges, but now post pandemic, it's a whole new set of challenges. So how are you thinking about that in terms of this calendar year and going forward?

Megan Kilgore (06:11):

And I think there's going to be possibly a recurring theme of getting to know Chris. I don't believe there's ever been a time when the quality of management can be this quantifiable and you just heard him outline some opportunities before their city that can make monumental opportunities for their residents, for their businesses. And I think that's what I see across a lot of our peer large cities. And I say that mean the top 25 largest never before. And many of my predecessor who was elected for 50 years, I asked him, there was really never a time and he could remember when there were this many countervailing forces. And what I mean by that is going back just a few years, you have incredible job loss and then all that wage inflation. So our income tax numbers looked through the roof. We also had many businesses close, certainly some still are as they navigate kind of cashflow issues, but we also had two and a half billion dollars alone in PPP in our city.

(07:18)

Just think about that. That's an economic event. And so for some of us who are on the executive branch trying to unpack the real revenues, the new normal versus still what is kind of artificially left in our economy or still inspiring a lot of growth is really, it's a daily activity. And I think that it gets back to our ability to work creatively and to be very thoughtful about ranges. And that's something we're much more, I think we are using much more frequently than certainly what we used to. We kind of have the small, medium and large T-shirt sizes, but that gives us a really good plan to also illustrate to our investors, to our corporate partners, to rating agencies, to anyone that you know what, no matter where we end up, we have a plan for each of these scenarios.

Virginia Wong (08:13):

Thanks, Megan. Pat, you're responsible for overseeing the funding of the largest infrastructure project in the country right now. And given what we've heard about strain budgets and competition for dollars, how is Gateway thinking about this? How is it coordinating its efforts on this process? And I think you have some slides, right? Right. Okay. If we could put those up.

Pat McCoy (08:39):

Okay.

Virginia Wong (08:39):

Thank you.

Pat McCoy (08:40):

Thanks. Thanks Virginia for the question. So my name is Pat McCoy and I'm the acting CFO of the Gateway Development Commission. And I just wanted to spend a few minutes just to kind of break down what is the Gateway Commission and what are we doing earlier? It was great to hear Secretary Cisneros mentioned Gateway as a really critical infrastructure for this region. So the Gateway Commission is a Bi-State agency that was created by legislation passed by New York State and New Jersey at the same time in 2019. Fast forward to the last year. Last year was our first full year of operations as an independent organization. And what you see here is kind of in one graphic, if you will, how the Gateway Project is going to be funded. The Gateway Project is a two tube rail tunnel that will be built under the Hudson River connecting Penn Station, New York with the rest of the northeast corridor on the New Jersey side. The existing tunnels were built in 1910 by the former Pennsylvania Railroad Corporation. They were severely damaged by Hurricane Sandy and Superstorm Sandy in 2012.

(10:00)

And so we are building new tunnels and the existing tunnels will be rehabilitated as part of this process. So how does this work? The largest dollars from an infrastructure perspective are committed to this. Over 70% will come in the form of grants from the federal government. We have had announcements of the biggest of those, the what's called the SIG grant or the Capital Investment Grant, also known as the full funding grant agreement that will provide 6.88 billion. Most recently the Federal State Partnership grant, which is managed by the Federal Railroad Administration, announced a 3.8 billion commitment to the project. There's also what's called a mega grant, which is helping to fund work in Manhattan and a raise grant, which will assist us on the New Jersey side. We have begun work in New Jersey at Nelly Avenue, which is where the portal will open on the New Jersey side. And we've also begun work at Hudson Yards, what's called the concrete casing.

(11:12)

There's a portion of the alignment of the tunnel that will come under a portion of the Hudson rail yards. And so when we say concrete casing, we're effectively building a concrete box under the Hudson Yards so that as the trains come into the Manhattan bulkhead near 30th Street, they can move right on in to Penn Station New York. This is a very complex structure as you can see here in the middle of the graphic, GDC sits in the middle. If Amtrak is a partner, USDOT FTA FRA and the office of the secretary, they are responsible for the grant side of the funding picture. And then on the right, you see the USDOT Build America Bureau, all the local shares for this project. The plan is to pursue RIF loans, railroad rehabilitation and improvement financing loans from the Build America Bureau. And that rounds out the local funding. And as you can see on the vertical bar on the left with the circles, New York, New Jersey and the Port Authority of New York and New Jersey will provide that local funding for the project.

(12:20)

So you're talking about roughly about $11 billion in federal grants, and then a little over 4 billion in local shares that will come by way of those RIF loans secured by the partners funding support of the Gateway Commission. And then as you note here at the bottom working capital, the Gateway Commission will be seeking credit facilities or strategies to enable us to pay the work out of our own funds first because the grants are by their nature, they're reimbursement based. So we've got to lay out our money first and get the money back from the grants. That's in a nutshell how the gateway is constructed. When you think about that legislation that created the gateway, it was just the beginning In the ensuing period, the partners and really the states of New York and New Jersey and Amtrak created a constitutional document called the Project Development Agreement that governs this project from beginning to end and deals with every possible scenario that could be encountered by this project.

(13:40)

And there are a lot. And that constitution, if you will, that project development agreement is the basis by which we will move forward collectively. So I feel a little out of place in this crowd because we're not going to be coming to market with bonds. We don't envision a large bonding component to the program at this time. But as you can see, there's a lot of different players here involved. And I think the exciting part of this is that everybody is unified in their desire for the project, and we're working really hard together to deliver this. And I think it's encouraging that you can have two big complex states like New York and New Jersey come together to really deliver essential infrastructure for the region. So that's gateway.

Virginia Wong (14:35):

Thanks, Pat. Sure. So speaking of working together and getting everybody on the same page, we've heard a lot today about the Financial Data Transparency Act, right? And so Mary, would you mind introducing yourself and talking a little bit about the background of the ACT and the benefits and challenges that you've seen in implementing it so far?

Mary Simpkins (14:57):

Well, thank you. I'm Mary Simpkins from the Office of Municipal Securities at the Securities and Exchange Commission, and I'm required to inform you that my comments are provided in my official capacity as a member of the Commission's Office of Municipal Securities and do not necessarily reflect the views of the commission, the commissioners, or other members of the staff. So the FDTA was enacted in 2012 as part of the National Defense Authorization Act. So we're already over a year into this process. The ACT requires the Commission to adopt data standards for information submitted to the MSRB that is fully searchable and machine readable and non-proprietary or made available under an open license. And this is not limited to financial statements. The data standards must include common non-proprietary legal entity identifiers that are available under an open license and must adhere to technical specifications, access standards, standards, body specifications, and other requirements to the extent practicable.

(16:10)

So there are eight financial regulators working together on this project right now. It's really a two phase process. The first phase is that there are going to be joint standards issued by the eight financial regulators. Those are supposed to be finalized by the end of this year by 2024. So look for this summer, there should be some proposed standards and we hope that you will all comment on those then within two years after that. So that would be about December of 2026. We're supposed to complete specific standards. And with respect to the muni market, there will be standards specific to the muni market that have to be compatible with the joint financial standards that all of these eight covered agencies are issuing for everybody who files with them. So it's a big project, it's going to be a long process. You're going to have two formal opportunities to comment.

(17:19)

We also accept informal comments at any time as far as the benefits and challenges, and I know we heard some about that on the panel earlier today. As mentioned, this is not a new thing for the commission. Public companies have been filing with structured data since 2009. There've been studies on this and actually under the FDTA, the commission has to report to Congress about what's going on with public companies. There's actually a name of it here. It's called Semi-Annual Report to Congress regarding public and internal use of machine readable data for corporate disclosures. And in that report, and there've been two issued already, it talks about what the commission has found as the benefits and costs in the corporate arena, and some of that may occur in the municipal market. We don't know yet, but some of the advantages that they've found is that machine readable corporate disclosures reduce information processing costs, making stock prices more informative, IE more reflective of firm specific information and reducing market inefficiencies. So perhaps the same thing would be true in the muni market where you would have more prices, might more reflect issuer and issue specific information The machine readability has reduced, has enhanced market competition by reducing local investor advantages.

(19:09)

It's heightened monitoring of issuers by investors and other external parties, financial analysts. The press issuers have experienced additional benefits associated with machine readable disclosures, including higher liquidity and lower cost of capital. But issuers do incur compliance costs to apply machine readable tags to their disclosures or pay a third party tagging service provider to do so. Compliance costs for new tagging requirements tend to be higher, but generally decline as issuers and service providers adapt to the requirements. So looking more specifically at the muni market, what might be some of the benefits and challenges? It's going to be easier to compare offerings. We think it's estimated there are about a million different QIPs out there, a million different securities. So think about it just seems logical to me if you've got a machine looking at all this, that's going to be helpful. But we do have, well, let's continue with the benefits.

(20:31)

We have heard that this may help smaller issuers, it may be harder for them, but we've heard from some analysts that a lot of big buyers don't want to look at small offerings because it's too much work relative to the amount that they can buy. So if the data is structured, they might be more likely to buy these smaller offerings. And also issuers might have some advantages in that the data could be usable for multiple purposes, not just for reporting to us, but for other purposes that the issuer to keep track of things and for other reports that they have to do. But of course, the challenges are, as I'm sure you're aware, we have many diverse issuers, many types of financings with different data. Some issuers do not follow generally accepted accounting principles as established by GASB. We want to ensure that data standards do not preclude other innovative approaches, and we want to scale the standards in order to reduce any unjustified burdens to smaller entities and minimize disruptive changes. But keep in mind, this is not an optional process for us. Congress directed us to implement this. So we do have discretion in how it's implemented, but this is a congressional mandate. So we hope that you all will comment. I understand a lot of issuers already use some digital data would be helpful for us. What are you using now? What would be best for you? So when we go through these comment processes, we hope you all will comment.

Virginia Wong (22:15):

Well, this is perfect, Megan, because Megan has already done some preliminary work with FDTA. So what's your experience been so far?

Megan Kilgore (22:24):

Well, I'd love to know a show of hands, how many of you have actually seen, and I'll use XBRL because it's most frequently talked about right now. How many of you have seen XBRL in real life? Yeah, this is awesome because this is exactly why this conversation. So those letters I had never honestly heard about several years ago. But I will tell you, I should give you a little bit of context very proudly. We have a really well run machine of financial reporting. It's one of the things Columbus is known for, but we get our act for out within 90 days, and it's a machine that operates this. And so just contextually, we like technology, we like process. And I really want to separate those because I think, Greg, during your comments, Greg, from SOLVE, I loved how you said something in a way that really reminded me.

(23:27)

I am so passionate right now about actually looking at our systems. It's not just buying new technology and just putting them in place. I love the length of some of these names of these different kind of purposes and so forth. What are we trying to solve for today? Because our needs might be quite a bit different. So before in the city of Columbus, we've done three major, major, major technology system implementations in five years. And I feel like I could write a book now and how you have to reimagine your systems before you actually put the technology in place. And that's kind of how I feel about FDTA, very broadly speaking. A lot of the comments that I've heard from my issuers and peers in the media was around the topic of fear. And there are a hundred reasons that of course this is challenging, but when you kind of put everything in a bucket, I'm a very visual person.

(24:21)

Some of them are going to be really easy to remedy. Some of them like the taxonomy and trying to get everyone apples to apples will of course be quite a bit harder and more challenging. But things like cost or fear of a system implementation or how it will actually work, those are things that are very achievable. And so our motivation in trying this ourselves was to be a better advocate for our issuer friends, our colleagues, and to be able to help our friends at GASB or SEC or GFOA have some real life examples. And so yeah, as part of our most recent act for kind of update, we worked with our partners at IGM, gravity is our tool to build it out in XBRL. And not only was it a pretty painless experience, it's really awesome because internally, even with my own financial documents, I don't have to extract from PDF and manually employ again.

(25:20)

And so what I'm genuinely super, super motivated. So many of you represent amazing private sector companies who can help government be better. And by having faster and more accurate access to our information is a really good thing. The products you are going to pitch us will be better. And so over time, this is a big task, but I'm really excited about the democratization of that data and the opportunities that it'll bring. And if anyone would like to see XBRL in real life afterward, I don't have my PowerPoint machine like with me, but just we'll do a webinar and I'd be delighted to show you.

Virginia Wong (25:58):

Thanks Megan. Chris, have you had a chance to examine this yet for the city?

Chris Hollins (26:02):

We've taken an early look, but look, I campaigned on transparency along with accountability and innovation, and my office remains committed to those principles. We want investors, we want regulators, but more so we want local policymakers and regular Houstonians to be able to see what's happening with the investment that they're making in our city. But it's not lost on me that we find ourselves in the same position as other localities, that there are rules coming down the pike that we're going to be mandated to implement and there's no dollars attached to them. And we have dated IT systems, and I think that's probably even more of an issue with smaller bodies of government. Now, we've already taken, regardless of FDTA steps around this, we've implemented some software that allows us to push out our after in ways that can be coded and exported by anyone who's interested in machine readable formats. And so we're proud of that, but we know again, that smaller local governments are going to have a bigger issue here. But we know the intent of this, which is to make government data more accessible, to make it more searchable, to make it more open. And that's a critical goal that we all need to champion. And so we're just going to be waiting with bated breath for the final rules to come out into this year, and then we're going to put ourselves in the best position to meet those rules and obligations by 2026.

Virginia Wong (27:35):

Michael, what about you? How is Fitch looking at the FDTA and how is it going to impact, how do you expect it's going to impact how you analyze credits?

Michael Rinaldi (27:44):

Yeah, I mean, I think time will ultimately tell, at Fitch, I'll speak for, we're data geeks, we're information geeks, right? We've certainly made tremendous strides in putting more technology and information in the hands of rating analysts and rating committees. And so we're fully appreciative of having data that's timely, consistent, transparent. It's really critical to making informed rating calls and decisions in a sector that is so diverse. And you think about the thousands of local governments each with a unique governance structure. And so it's really important to have consistent data that we could rely upon In terms of our rating work, I will, and this is a bit of a shameless plug, but we did double down in the fall with the publication of an exposure draft of our local government rating criteria that introduces the use of a model and in the rating approach for us local governments, first time that we're using a rating model within the US Public Finance Group. And so that was just, like I said, sort of doubling down on what we already recognizes, a really important and critical part of the rating process. This is out of my own curiosity. There have been even I think since the enactment of the act, tremendous strides with respect to AI tools and curious to see how AI either compliments the objectives of FDTA or maybe in some respects supersedes the objective of putting, having readily available, readily readable data in the hands of credit analysts.

Virginia Wong (29:28):

I agree that change in technology could have a real impact into how this actually gets implemented eventually. Right. Switching gears back to the funding issues that each of you is looking at. Why don't we talk about the Inflation Reduction Act and some of the other tools in the toolbox. So Chris, do you want to talk about how you're thinking about implementing those tools and utilizing them?

Chris Hollins (29:56):

Yeah, absolutely. I mean, first of all, I'm a huge fan of the Inflation Reduction Act. I mean, it's doing what it's set out to achieve, which is to bring inflation down while also reducing costs for working families. That includes things like capping the cost of insulin and other lifesaving drugs for seniors. It includes bringing back a manufacturing boom in the United States for the first time in a long time. And for a city like Houston, I'm incredibly proud that we were recently tagged by the Department of Energy as one of the national hydrogen hubs that's going to come with an investment of up to 1.2 billion to build out our hydrogen infrastructure. And it's going to help our economy by allowing us to maintain our title as the energy capital of the world as we move forward into a carbon neutral future. So I'm really, really excited by this.

(30:50)

Looking more broadly at the state of Texas, we're anticipating upwards of 60 billion in investment in clean energy by the year 2030. And so again, this is huge for our entire state. And I guess one of the things that I'm most particularly interested in is the direct pay concept. So this allows us to implement Clean Energy concepts as a tax exempt entity, and instead of getting a tax credit, which of course we don't need, we can get paid directly. And so that gives us direct incentive to invest in things like electric vehicles, for example. And with being a city with a huge geographical footprint over 660 square miles, investing in EVs for our city is a pretty good deal.

Virginia Wong (31:40):

Megan, you recently testified before Congress about the tools in the toolbox, the IRA and some of the other tools, WIFIA and TIFIA. And my recollection is that part of your testimony focused on not just the value, but sort of the accessibility issues for local governments and getting access to those funds and being able to utilize them effectively. So do you want to expound on that a little bit? Yeah,

Megan Kilgore (32:06):

IRA is, in my opinion, one of the most complex and nebulous pieces of legislation that we've had before us. And it's a gargantuan opportunity if you're able to muddle through and to really understand how it works and how to take advantage of it. And we were struggling and we're a triple, triple with a deep bench of both internal and external resources. And the thought was, what can we do to help fast track if we really want to create transformation? And the IRA is more challenging than things like Build America Bonds or other programs because it also changes behaviors. And that's something that is quite difficult sometimes in government. And so I was talking to a lot of colleagues and they kept saying, if only we had a little bit more simplistic or better timing or the opportunity to kind of make sense of a lot of different things.

(33:06)

It was Don and Oma that there are some key areas that if we could work through with our federal partners that we might even have more success across the entire country. So I said yes, to be able to present that. That led to an incredible opportunity with and some great pipelines with Podesta's office, with members of the White House to be able to take some solutions. And I'll give you an example. Perhaps some of you as individuals have looked at the website, rewiring America. That is a simplification using technology. You put in, for example, Alice is in the front row and Alice, here's what I make. Here's my home, this is where I live, and it algorithmically spits out. These are the tax incentives, the tax credits, and the opportunities within the IRA down to a level of appliance that works for that census tract, works for that income level and works for that type of home.

(33:59)

And what a dream that would be to have for governments. The bread and butter, it's not the city of Columbus. I'm talking about our regional rural areas, our counties, our school districts. That's why I was, I was going to say stupid enough, but maybe motivated enough to say yes to this opportunity to present. And one of the greatest outcomes was that I think we're actually making some pretty cool steps forward. You can't help but look at things like what's holding us back, staffing, we're at all time low right now. The fact that these big conversations, you have 600 square miles, all the cities around, let's say the Great Lakes, you require almost a regionalization sometimes to talk about these big projects, but that's not handed to us as part of this act. So that's one of the examples of these are, it's like building out the operations too to make it successful. And we're working, we're making some incremental change, but it's been a really positive experience thus far.

Virginia Wong (34:57):

That's great. Michael, on the last panel, we heard quite a bit about ESG or not ESG and the funding of resiliency projects, right? Being front of mind and in light of the tools available. How do you look at that from a credit perspective when you're looking at an issuer and their ability to effectively utilize these tools?

Michael Rinaldi (35:22):

So long-term liabilities is a central component of our rating analysis. And so direct debt pretty critical. And by extension, so is the management of capital plans and initiatives. At the issuer level, capital plans often represent an assessment of an issuer's own risk and opportunities, and we don't necessarily opine or pass judgment on the projects that an issuer pursues. And what we're more or less focused on is the affordability of the obligations incurred. And so for some credits, resilience may be at the top of the list, elevating roadways, desalination plants, sea walls, that might be the most critical set of projects for any given issuer. And for another issuer, their focus may be on pretty basic school construction bridge repairs. What matters to them is not necessarily what we're best at weighing in on, because our view of essentiality is from a different level, a different perspective, than the folks who have their boots on the ground and have to deal with constituents and taxpayers and elected officials on a day in day out. So our focus is mostly on the affordability of the projects and the ability to repay the debt obligations. Although we do want to understand holistically what drives decisions around capital investment, how does an issuer define what's essential to them, or a project that may be defer for an extended period of time. So that's our general position. Without diving into, because I don't want to get myself in trouble, my boss is here. So as far as diving too deep into ESG matters, I'll stop right there.

Virginia Wong (37:22):

Thanks. But one of the things that you focused on in that discussion, right, is how is the issuer able to sort of articulate what their plan is? And we heard in the previous panel as well, sort of the importance of the quality and consistency of management. And so we're really lucky on this panel to have Megan, Chris, and Pat, each of whom had successful careers in the private sector and then transitioned into government service. And so I was hoping each of you could talk a little bit about what drew you to this work and the challenges. Megan and I have talked previously about some of the challenges and sort of attracting talent and retaining talent in the private sector, public sector rather. You want to talk about that? Pat, do you want to start us off?

Pat McCoy (38:11):

Sure. Yeah. I began my career in 1990 working for the New York City Mayor's Office of Management and Budget. And that led me 10 years later to the MTA where I spent 20 years and now I'm really honored to be at the Gateway Commission, public services at the heart of, I think who I am and what motivates me. And public finance in particular, I think is sort of the nexus of a lot of worlds, whether it's construction, planning, evaluating, analyzing the quality of infrastructure in our communities. And I find it invigorating and immensely rewarding personally. And I think that's just my own perspective on it.

Virginia Wong (39:01):

Thanks, Pat. Chris, what about you?

Chris Hollins (39:05):

My parents were public servants and neither of them had a college degree, but my dad put on a uniform and served Houston as a Police Officer. And my mom was an administrative assistant by day, but her true passion was children. And so together with my father, she not only raised me and my two sisters, but she also opened up the doors of our home to more than 20 foster kids. And so that was the example that was set for me. And even though they didn't go to college, they pushed hard and encouraged us, and my sisters and I all graduated from college, got some more fancy degrees on top of that. And before entering public service, I spent most of my career as a consultant with McKinsey and Company, and I focused on the public sector helping government agencies to transform the way that they operated to better achieve their missions and to achieve better outcomes for those that they serve, which obviously is us. And so I've tried to bring that same approach, and I'm truly inspired to serve the city that I grew up in, that I was born in, and now I'm raising my two kids in. It is a real honor. And on top of that, they pay me way less than I got paid in McKenzie, which really is the cherry on top.

(40:21)

But in the olden days, our most talented Americans used to run towards opportunity for service, whether that was in the armed services or whether that was in local government or government at the highest levels. And what we've seen in the nearer term is the opposite trend, that folks who are talented, who could be doing anything else in the world, are doing everything else in the world and totally avoiding this type of service because politics is so ugly, government is so stalled in its processes. And then so we see the results of that, which at the federal level is a clown show. I mean, just being totally frank. And then that reinforces the narrative. And then talented people continue to stay away from service. And so number one, there's a need, right? There is a real gap in the level of talent that's available in government right now.

(41:18)

And so people have to raise their hand to be a part of that. And I felt called to do so, but number two, I'm hoping that by setting an example for the kind of impact that you can make through government service and in public service, that again, folks in my generation will see that and see a model that says, Hey, we can do that and it'll be meaningful, and then have an opportunity to sign up and reverse that trend. And so again, really hoping that, well, one, I know from previous service that we can have that kind of impact, hoping to bring others into the fold, and then maybe we can save America in the process.

Virginia Wong (42:00):

Megan, similarly, right?

Megan Kilgore (42:08):

Every day there's a new challenge that I didn't expect, and a lot of it has to do with things that I can put in a very large bucket called politicalization. And I never expected to quite have to deal with the things that we've had to deal with, all of which carry a financial or economic consequence on either side. And it is been really an incredible reminder of the need for more. And to your point, Chris, excellent up and coming leaders in this space. In fact, right now that's happening on my laptop and I'm not behind it. I teach at the John Glenn College at Ohio State on Thursday evenings, and I had to have a guest speaker tonight. I kicked off the class and then came in here. But I do it because every single week I get reminded that there are some amazing folks that if we continue to open the doors for, we'll do great things in the years to come.

Virginia Wong (43:10):

Absolutely. Thanks Megan. Also a hand clap. So Michael, when we were preparing for this panel, one of the things that you said that really struck me was that from your perspective, the quality and consistency of management is as important, if not more important than annualized revenue. So can you talk a little bit more about that?

Michael Rinaldi (43:36):

Sure. I think it's one of the interesting questions that we get at Fitch, our rating criteria does not have a specific assessment of management. And so we often get, well, you guys don't care about management. And I think the exact opposite is true. Rather what we say is that the fingerprints of management are all over every aspect of the organization from its financial results to investments in the community, the way it attracts private sector investment, pension liabilities, debt. I mean, it's all there, right? You can't separate the factors or think about management as sort of like in a standalone basis. And so I think the quality of management, where in my opinion it's most evident, is really through how they operate and deal with stress situations and economic downturns where you see an experienced management team able to act nimbly, decisively, where those actions really preserve the fiscal health of a local government entity, whereas perhaps lesser experienced teams may stub their toe, they'll survive, but it's a little riskier.

(44:59)

There's a level of assurance that you get as a rating analyst, whether you're meeting with the management team in person or over a zoom call, that it's important in the rating committee process. Our forward looks are as good as anyone else's, quite frankly, but we have access to management. And when you're dealing with a management team that can clearly articulate a plan as well as contingencies that they understand and appreciate the risks that they face in their respective operating environment, that's a really important piece of information to the rating committee that is just difficult to quantify. So I would say, again, management is critically important in everything we do, regardless of whether or not we have a management assessment or not, it's all baked into the rating process.

Virginia Wong (45:41):

Thanks, Michael. We're running out of time, but I've asked each of you to sort of give us your priorities for 2024. So Mary, can I start with you? What are some of your priorities for 2024?

Mary Simpkins (45:54):

Well, I just wanted to point out a few of the things we did in the last year and what we're looking at now. The commission adopted a cybersecurity rule for public companies. Those rules just became effective on December 18th, and although they're not effective in the municipal market, there's a lot of helpful guidance in there. The commission also adopted a rule under Dodd-Frank, with respect to asset backed securities and participants who have conflicts. That rule does apply to the municipal market. It probably won't have wide application. I think it's a new rule 192, and I think for 2022, it was estimated that there were about 74 billion municipal ABS. That's a relatively small part of the market. And you also have to be engaged in some sort of conflict with respect to the ABS, such as selling it short, buying a credit default swap. It doesn't actually, the compliance date is not until 18 months is not until June of next year.

(47:00)

So if you have questions about that, you've got time to seek guidance. And then one of our priorities right now is looking at unregistered municipal advisor activity. I know a lot of you are issuers. Please make sure that your municipal advisors are properly registered. We've looked at unregistered MA activity in the P three space and charter schools, attorneys, non-bank participants in lease financing special tax consultants. And I'll point out, if you are aware of unregistered activity, you can report it on our website. We have, it's called our TCR system. You can go right on our website and report anything, and you can do that anonymously.

Virginia Wong (47:50):

Thanks, Mary Pat.

Pat McCoy (47:52):

Sure. So the Gateway Commission has no other objective than to get to a financial close this summer, and we are singularly focused on that and with great determination, a lot of hard work. We're working very closely with USDOT, the Federal Transit Administration, federal Railroad Administration, and our goal is to achieve a financial closing this summer by hook or by crook. We will get it done, and we've already begun construction on both sides of the river. Once we have full closing, it's full steam ahead and this project will be delivered by 2035. The old tunnels will be rehabilitated by 2038, and that's our mission. That's what we're going to do.

Virginia Wong (48:40):

We'll send everybody Pat's email so you can check in with him. 2035. Thanks, Pat. Okay, Michael, how about you?

Michael Rinaldi (48:49):

Yeah, I mentioned earlier this little thing called new local government rating criteria, which will really be at the forefront of everything the team does this year. We got some really excited about the feedback that we received from market participants after the exposure draft was published in September. I think I mentioned we plan on that being finalized, the criteria that is later this quarter. We went to great lengths to reach out to users of the criteria. We understand that there's criteria fatigue, that there's apprehension, and we want to do everything that we can to make those concerns go away. We really do think that we've got a pretty interesting criteria and model to share, and that's what we're looking forward to.

Virginia Wong (49:38):

Thanks, Michael. Chris, how about you? What's your plan now that you're in office? What does 2024 look like for you?

Chris Hollins (49:46):

Sure. So instead of talking about my priorities, I'll talk about y'all's priorities, which is the 2024 Arizent for bond issuances in the city of Houston. And before I do that, I do have to flag for those who are unaware that Senate Bills 13 and 19 in Texas, speaking of clown show, might disqualify some of y'all from doing business in our great state. If you've ever said anything public about caring about common sense gun safety or the environment, but that leaves many of you that we can do business with. And for those of you who are interested, our combined utility system has a four to $500 bond deal coming up that's going to help our water system to comply with an EPA consent decree. We also have a three to $400 general obligation fund bond that we anticipate, which will help us to fund some critical infrastructure.

(50:42)

We may or may not be tacking on a judgment bond. We're currently negotiating with our firefighters union and there may be some money necessary to meet some of those needs and obligations. And then finally, we're in conversations with United on a $2 billion expansion of Terminal B at IAH airport in Houston. We're in the diligence phase there. Of course, we're excited that United has continued to serve as a partner in expanding Houston's footprint on the global stage, but as soon as we get comfortable with the details and the fact that we're going to be benefiting Houstonians as much as we can with that deal, then we'll be moving forward. So stay tuned. And I've had the pleasure of meeting a number of you individually over the course of the last couple of days. For those of you who I haven't gotten to say hello to, please come say hi and look forward to getting to know you. Thanks so much.

Virginia Wong (51:35):

Thanks, Chris. Last but not least, Megan.

Megan Kilgore (51:39):

I'm going to try and do them in five R's. Okay. My first one will be rural. These are bigger. These are like us kind of more macro picture, but rural, not in the sense of remote work, but in the sense that as Mr. Cisneros correctly stated, so many of our mega urban areas are creating major economic development projects. A lot of which, as I see are outside of the core cities. So a lot of big utility, a lot of big infrastructure, but still being born by that core city. And that's a little bit of an inequitable infrastructure mismatch. So I'm personally watching that right now. Second one is reach, Chris hit on this beautiful US cities are dealing with, I'll call it preemptive legislation, but ultimately seeking whether it's reproductive healthcare, L-G-B-T-Q, minimum wage, sanctuary, cities, gun rights, what have you, to a road home rule.

(52:30)

And it's expensive and it's really a challenging every aspect of our basic daily business. Third one is reimagination. Who has this best reimagination will carry good cities to great cities from rebuilding systems to reimagining downtowns. Fourth is resiliency, and we know a lot about that, planning for our future. The fifth one to build upon, again, Henry's comments, railroads, but railroads for me more than just moving people. We're watching them, especially across the Midwest, for how they are going to affect things like housing, bringing that next maybe 30 miles as a quote, new suburb. So there you go.

Virginia Wong (53:11):

Thanks, Megan. That was very good. Quick, so we've run over a little bit, so we can take questions or you can find them at the bar and ask them questions.

Megan Kilgore (53:21):

That's the bar, our six one's, red wine. Maybe that's the answer, right?

Virginia Wong (53:23):

Okay. Thanks everybody. Thanks very much.