The Credit Landscape

During our credit overview discussion, we will take a look at the implications of  Federal Reserve monetary policy decisions and macroeconomic conditions on state and local government finances.

Transcription:

Juliet Stiehl (00:07):

Hi everyone. I am Juliet Stiehl. I am the head of Public Finance East Region at Build America Mutual. Thanks for joining our panel today with more than 50,000 individual borrowers in our market credit strength, it's a constant issue and in this panel we've assembled a group of speakers who will help us illustrate how credit considerations influence decisions in the market, not just when selecting investments and making rating decisions, but also in planning and executing plans. We'll highlight the last point with our two issuer representatives on this panel. Kathleen Sharman is the CFO for the Greater Orlando Aviation Authority, where she manages an 830 million annual operating budget and a 5 billion capital plan. She has over 30 years of senior financial leadership experience across multiple transportation modes. Prior to joining GOA, Kathleen served in CFO and Treasurer positions at New Jersey Transit Corp, Georgia's State Road and Tollway Authority and South Jersey's Transportation Authority.

(01:20)

Troy Clarkson at the end is the CFO for the city of Brockton, Massachusetts and is a veteran of local government across the state in both professional finance and town manager positions. He has served as town manager for the towns of Hanover and Bridgewater and as county administrator for Plymouth County and of course the industry perspective. Karen Daley is the current head of public finance and financial guarantee ratings at KBRA and has more than 30 years of credit research and risk management experience at both rating agencies and in the bond insurance industry. Karen has been recognized by the industry including the NMAs Career Achievement Award, the Women in Public Finances Lifetime Achievement Award and the Bomb Buyer, Northeast Women in Public Finances Trailblazer Award. And last but not least, Emily Raimes is an associate managing director at Moody's Investor Service leading the global higher education and nonprofit teams, which rates more than 700 colleges, universities, and nonprofit institutions nationwide.

(02:26)

For some of us, we forget that there was a covid recession because Muni credit weathered the storm pretty well, in part because of internal factors such as strong liquidity, strong reserve funds, and in part because of unprecedented federal aid. That's why that's part of why only 10% of respondents to a bond buyer survey said that Muni credit is a challenge that they're actually concerned about in the incoming year, but are they too complacent? Let's start by talking about some of the trends directly related to the economy emerging from the pandemic. Karen, states, cities and counties received massive federal aid often in excess of their revenue losses or direct costs. Now that the checks are no longer coming, where do we stand in terms of credit quality and what are you watching for in the upcoming budget session season?

Karen Daly (03:22):

Thanks, Juliet. Good morning everyone. By and large, I would say that issuers are in pretty good shape at the moment and current macroeconomic conditions are supportive of financial stability, but there are some headwinds out there. Some of these recovery funds that we just mentioned got baked into programs that were ongoing without replacement sources of revenue, and I will say that transparency around this issue varied widely across credits. Next, we should think about consumer sentiment. Despite recent improvement, consumer sentiment is still below where it was in the years preceding the pandemic that could catch up to economically sensitive tax collections. Speaking of which, we have noticed that sales tax collections are trailing inflation in nine of the 11 states that we are tracking. And while there are still pandemic error savings, those funds are rapidly dwindling. What really complicates the picture are two subjects that we don't typically talk about in industry events when it comes to public finance that is commercial real estate and in migration and asylum seekers. So let's take commercial real estate first. We've been watching this for a while. Older properties are struggling to retain and attract tenants. The precise impact on budgets will depend on the property tax assessment cycle, relevant tax limitations, and those work differently in different states across the United States, the reliance on commercial real estate taxes and then thinking about that in terms of those factors interacting with other countervailing credit considerations.

(05:48)

Most importantly, how are issuers budgeting for commercial real estate weakness? There were articles as late as last evening posted on this very subject in national newspapers. We all know that there's a lagged impact on property taxes. The length of time between lease non-renewals and how long that takes to be reflected on the property tax roll takes several years. So property taxes, which we never talk about in industry events were once very stable and predictable have become a little bit of a question mark. According to KBRA'S CMBS team, the delinquency rate among KBRA rated US commercial mortgage backed securities in January, climbed from December almost 10% to 4.61%.

(06:57)

Now let's talk a little bit about what is happening with in migration and asylum seekers and how that's affecting localities across the country. This broad topic is posing a challenge for cities and states in migration has been and continues to be driven by country economics, crime, corruption, climate change, and human rights violations. This particular linkage between global conditions and the direct impact on public finance issuer budgets was very hard to call. Many cities are struggling to meet the cost of housing migrants, and this is also having an impact on state budgets. This is not simply an issue of housing, but affects the cost of education and healthcare. We know that nine governors are pushing Washington for a solution to global migration, and we'll see where that goes given the current situation on the ground in Washington. But I'm going to stop now. Back to you, Juliet.

Juliet Stiehl (08:18):

Thanks so much. I definitely agree with a lot of your insights. One of the things at BAM we definitely take a look at is with ARPA funding, how much of that goes into the annual budget and is used for operating costs and whether or not they have plans for recovering that revenue if they use it in their just actual annual budget. Kathleen, one of the major economic trends coming out of the pandemic was widespread inflation, particularly in the construction industry. How has that impacted your planning for the airport's major capital plan?

Kathleen Sharman (08:58):

Thank you, and thank you very much for having me here. So our CIP as most airports, CIP is modular and demand driven. And so during covid, there was not a lot of demand. I think I mentioned this the last time I was up here in April, there was like 1500 people through our checkpoint last Tuesday, there were 88,000. Okay, so demand driven. I mean when we were looking at COVID, there was who knew, right? Nobody knew it was unprecedented, right? So we didn't know where the demand was going to be. So our CIP, what did we do? We took a look at it and we go, what can we value engineer out? That makes sense. We were in the middle of a three at the time it was 3.5, but a $3 billion new terminal construction, and we were pretty far along, so we really didn't think we could stop, but we looked at, well, what could we shape out of there to defer some of those projects or pieces of that in a logical way?

(10:08)

But then the other problem was as many of you know, airports have access as one of our funding sources, passenger facility charges, right? And I just told you 1500, 1,500. So if there's, and our terminal C was nearly 50% funded with passenger facility charges. So no Ps, no FCs, it was not. We had to do something, right? So what did we do once we right-sized for the demand? We also looked at our debt profile and as you mentioned earlier, a lot of authorities and cities and towns got huge amounts of covid relief funds. We got about $383 million and that, by the way, is less than 50% of our budget. But what did we do with that? We took that money and I think Natasha talked about it earlier. Some people just said, I'm not going to issue debt. I'm going to use that money for current needs or whatever.

(11:07)

Well, we took that money and actually repaid debt and then deed and got about $32 million in additional debt service savings because, and preserving our debt service metric capacity in the future, we knew the demand was going to come back. We just didn't know when. So we thought, okay, let's take the savings now while we're riding out this storm. So we'll be in the market here later on this year. I'll be happy to know because the traffic is is back. We are well above, I think we're like 116% of our 2019 numbers. We are on an annual rolling 12 month basis. We had nearly 58 million passengers through our terminal and back in pre covid it was 49 million. So really, really back. So we talked about the right sizing of our, what did we do with the covid relief funds, right sizing our debt. Another tool in our toolbox is the bipartisan infrastructure legislation funds that really are helping airports and transits and cities and towns.

(12:21)

And we've been very successful in probably the most, we've received the most a ATT airport terminal funds in the country for our projects that were, when I just told you about what we deferred some of those projects well because they were pretty shovel ready because we were halfway done building the terminal. They were really great candidates for this a ATT money. So those are a few things. The last thing that's the tool to deal with inflation is throughput. We really believe strongly that we need to sweat the asset of the airport as much as possible, and we have a lot of interesting, it would be a whole eight hour presentation to tell you how we do it, but of the way our rate regime works, it encourages throughput. So I'll stop there.

Juliet Stiehl (13:08):

Thanks so much, Kathleen. Troy, the other big post covid trend that followed on inflation were higher interest rates. How are those market dynamics influencing your planning for major projects?

Troy Clarkson (13:24):

Thank you Juliet, and good morning to everyone. Before I answer the specific question, I do want to make a plug to all of you in this room for investment in public infrastructure. Mayor and I flew in from Boston this morning and it took us less time to fly from Boston to LaGuardia than it did to get from LaGuardia to here. So that's a plug for investment in public infrastructure. But when we look at investing in infrastructure, the interest rates obviously are a major factor. The impacts of covid funding and federal covid relief also had a major impact on how we would invest. Let me give you a little background about the city of Brockton. Anyone here in the room ever heard of the city of Brockton, Massachusetts? Wow, look at that. All right. This was the mayor's que to stand up and be a cheerleader there.

(14:29)

Anyone heard of Rocky Marciano? Marvin Haggler, both Rocky and Marvin Haggler boxing champions were from Brockton, Massachusetts. It's called the City of Champions. It's got a very proud history. During World War ii, most of the boots and shoes that were used by men and women in service were made in Brockton, Massachusetts. It was the shoe capital of the world, but like many gateway cities in the northeast, when those factories shut down or went elsewhere, the city struggled and in many ways continues that struggle. But when Mayor Sullivan took office, he wanted to find ways to get beyond that, and the city's actually undergoing a renaissance right now. There's about 500 units of market rate housing being built in the downtown, but something very good, and that was not the mayor clapping, so we're starting to resonate here. But for a generation, literally a generation, the city wanted to build a new public safety building and one of the fire stations that's in use was wired by Thomas Edison.

(15:43)

That's true. So the city needed to invest, but four or five mayors tried and failed because of the overwhelming cost of that sort of investment. Right now we are in the ground constructing a $98 million public safety building on the site of the old high school. We happened to undertake that right in the middle of Covid. It's a $98 million undertaking in Massachusetts. Many of you I'm sure know we have a challenge called Proposition two and a half that's been in place since the early eighties, and municipalities can only raise property taxes by no more than two and a half percent each year unless they get permission from the voters in three different ways to exclude that. One of them is a debt exclusion. So we can go to the voters and say, we want to build a $98 million public safety complex. Would you raise taxes for 15, 20 or 30 years until the project is done and then they'll come back down.

(16:50)

But that because of both, I think the financial struggles that Brockton has had over the decades and its fierce independence that's built into its city's DNA, that hasn't been an option. So we had to find a way to fund a $98 million public safety complex without asking the taxpayers for more money. I'll talk about this in our next round of questions, but the way we were able to do that is actually by borrowing $300 million. So we issued $300 million in pension obligation debt, and with the savings that we were able to achieve from that, we're then able to borrow the 98 million for the public safety complex, but understanding the inflationary and interest rate pressures that were coming normally the way the boots on the ground public administrator like me would borrow, as you all know, would be incremental as the project progressed, we would go to market as we needed the cash, but the mayor and I discussed those dynamics with our friends from Stifel and from Hilltop, the Hilltop folks here, thank you, we appreciate you.

(18:00)

And we decided actually to borrow all of the $98 million at once before the construction commenced unconventional. But we made a calculated decision that any potential arbitrage costs would be outweighed by what we saw as rising interest rates. They say it's better to be lucky than good. I think we're a little of both. So we were able to borrow the $98 million at a ticket, a true interest cost of less than 3%. And when you look at where rates are today in Massachusetts, if we went to market for that debt right now, we'd be paying somewhere probably in the mid fives. So I share that and it's totality because I think it's important for us again, is the people who are on the ground building things and borrowing money to build those things. The input and the collaboration of the people in this room is invaluable. We spent a year planning for that pension obligation bond and wound up borrowing that money too at less than 3%, actually about 2.5, but it was only because we brought together industry experts like all of you, and we met once a week for over a year to plan it that we were able to put that whole jigsaw puzzle of financing together to be able to build a hundred million dollars public safety complex.

(19:25)

And when we're talking in the billions, of course, with some of the folks in this room for large states and large public entities, a hundred million is not a lot. In fact, Brockton by Massachusetts standards is a large city with a third or fourth largest in the commonwealth of Massachusetts at about 106,000. But New York City is the size of the commonwealth of Massachusetts. So we understand that we have to scale our planning and our expectations, but for a big city by Massachusetts standards, a blip on the screen by New York standards, having that ability to plan and collaborate and anticipate those inflationary pressures is critical. And so the message that I'll convey is something that I say to my team, to our mayor, to our city counselors every day. It's all about relationships. And so the people in this room, we rely on your expertise and your guidance to really create the path that leads us to good decisions. And so I'm very grateful to be here to share that story with all of you.

Juliet Stiehl (20:40):

That's great. Every sector in the market was impacted by Covid, but operationally higher ed saw more disruptions than most Emily Moody's outlook for the sector as a whole is stable. Does that mean it's back to business as usual or what trends are you watching for what brings you concern?

Emily Raimes (21:04):

Yeah, thanks Juliet, and thanks everyone for having me here. It's great to be here. Just on the comment of higher ed seeing more disruptions than most, I was listening to Troy talk about difficulties getting here from LaGuardia and thinking about some similarities between higher ed and public mass transit going into the pandemic that both we're seeing a shift away from their main source of revenue being their customers and some struggles getting customers in the door or in the sliding doors. And both saw this immense disruption coming into the pandemic where higher ed had to pivot to remote virtual hybrid kids going to class from school or from their dorm rooms or from home, whereas public mass transit couldn't do that. You can't get people to virtually ride the buses. So they both were already in an environment where they were thinking about we need to focus on getting people in and how we're going to increase that and get people in.

(22:15)

And then they had this massive disruption and had to completely readjust, and both are in a time now of this new normal and figuring it out. So a little bit of a digression, but I think it's kind of an interesting comparison. So thinking about higher ed and where higher ed is now, as Juliette mentioned, we changed our outlook for the sector from negative to stable, and that's not because we think everything is good and everything is sort of smooth sailing now on. There are many challenges ahead and particularly for some sort of pieces of this sector. So what are we looking at and what are we thinking about? What are we seeing? I think one of the big things is the what's called the demographic cliff, and this is the expectation that starting in 2025, the number of high school graduates will decline every year for a couple of decades.

(23:10)

That is a huge change and will be a huge challenge for higher education. So they are thinking now about how they're going to tackle this, how they're going to handle it. If you're thinking about the Ivy Leagues and the top tiers, they're not going to have a problem. It's not them we're talking about. It's a lot of the other smaller privates. They are going to see declining admissions enrollments, and so they're thinking now about how they're going to tackle it. One of the things they're doing is based on this pandemic experience, some shift or addition or build out to some online or hybrid, right? Students liked that in the pandemic and they're actually starting to expect it and demand it to some extent. So I think for many it's become not just a nice to have, but a must have. So schools are thinking about that kind of investment.

(24:05)

I guess one of the issues is that it's an investment. It can be expensive. You need to not just be spending money on your physical campus and your physical classrooms, but in addition technological investment thinking about how to manage that. And then I think they're finding that there's investment in additional and special support services to make sure that the remote and hybrid students graduate with success or you need support services. You need to be marketing, increasing sort of marketing, getting the word out and making people aware. All of that is additional cost and it's not really clear what the kind of return on that will be. So that's one of the things that we are seeing. Other ways that schools are thinking about how to see this demographic challenge and kind of fit into it is looking at what the programs are that they can offer maybe switch to build out that will bring in more students.

(25:05)

We're seeing a lot of nursing schools being started being expanded, right? Because there's a big demand for nurses. It's a good job. There are lots of jobs out there. So we're seeing a lot of nursing schools coming up, a lot of new certificate programs for the kids who think maybe I don't need to spend a lot of money for the four year. Maybe I just can get some kind of a certificate that can get me a good paid job quicker at lower cost. So we're seeing these types of switches and investments in preparation for this. So that's one of the things that we're kind of looking at. I guess the second big thing is less of sort of a program thing and more of just the financial landscape. We expect to see some stabilization in this year and in next year, 2023 was a rough year for school.

(25:56)

Revenues were down because of that loss of all of the federal pandemic aid that came in. Expenses were up due to very high labor costs and the high inflation that Kathleen was talking about. So the costs were up, the revenues were down. We expect things to stabilize a little bit. In 2024, we think revenues are going to grow about 4%, expenses about 6%. So still a deficit, but a narrowing deficit. So in terms of sort of the overall operating climate for higher ed, we think it's kind of bottomed out, it's troughed out and starting to stabilize state support we think will continue to be strong. As talked about by Karen and by the last panel, state reserves are still strong. Their fiscal position is still good. So we expect that state to support to remain strong. But a gift revenue continues to be strong, but that can be very volatile.

(26:55)

So changes in investment performance can really make that very volatile. So that's on the financial side. I think another thing we're seeing is some changes in digital advancement. In January, the Arizona State University announced a partnership with Open AI that will give all of the professors and faculty access to chat GPT for teaching and research tools. And this I just think is an interesting point because AI and Chat, GPT is really thought of as a huge risk, downside risk for higher ed because of academic integrity issues. Students can just use it to write papers. It is, I think it's generally thought of as a potential big problem, but I think what we're also seeing is that it can potentially be a real benefit a plus to those who use it properly and embrace it. So I think we're going to see some of that too, some higher education entities that move forward with it and look for ways to really use it well that help them provide efficiencies, innovations, that kind of thing. So that's a little bit on the landscape that we're seeing for higher ed.

Juliet Stiehl (28:07):

Thanks so much, Emily. Karen, there were a couple of other sectors that had major operational disruptions, both Emily and Kathleen mentioned it, mass transit airports. Can you share your thoughts on their performance?

Karen Daly (28:22):

Sure, happy to. So let's talk about mass transit first and what's going on. There's a nationwide problem with large looming deficits in mass transit systems. Federal stimulus monies are being depleted. Work from home is entrenched. That is a sea change for our society. The rate of recovery of ridership relative to pre pandemic levels varies widely in our portfolio. It ranges from 40 ish to 70 ish. The issue is that security frameworks were established at a time when current day issues weren't on the horizon. FAIRBOX credits are particularly impacted, so now transit systems are turning to states for assistance. So sometimes there's a receptive audience, sometimes not so much what has been done. Some of these issues have been addressed by the implementation of additional revenues In Massachusetts, there was an implementation of the millionaires tax that ranges from that will basically address part of these deficits, but not them in its entirety.

(30:02)

There's also issues of service cuts that could range from closing stations to shortening the number of cars on cranes revenue bond structures vary, but it's going to be really difficult to raise fares sufficiently to close budgetary gaps given the public purpose. Nature of transit systems and affordability concerns. If there are cuts in service, will that drive commuters out of the system? Will more cities be motivated to push commuters onto mass transit via congestion pricing? Everybody's watching New York City to see what happens. Resolution of these problems are going to take a while and it's going to be played out across the country over the next year or two. Airports, different story. We believe that the airport sector has really weathered the pandemic very successfully. As we know, and this is really important, the airports entered the pandemic with very robust balance sheets and that made a big difference.

(31:28)

That combined with federal recovery payments, expenditure reductions as well as support of airlines and concessionaires really contributed to financial stability. We talked a little bit about financial aid, federal aid that was around 18 and a half billion that was provided to airport operators as economic assistance and providing an offset to the loss of revenues back in 2020. I have a clear recollection of conversations with investors when airports were going through the difficulties that they were experiencing the pandemic and there was to a person a focus on liquidity. Airports on their side also focused on liquidity. They took action to basically preserve and prioritize cash liquidity and debt service coverage while implementing financial relief for airlines through temporary deferrals and reductions of landing fees and terminal related rents. Mitigation efforts also included deferred maintenance hiring freezes, temporary closures of underutilized facilities like distant parking lots and suspension of non-mission critical projects As recovery took hold, airport operations and ONM have risen sharply and deferred capital programs have resumed passenger activity, which everybody looks at, has approached and in many instances exceeded pre pandemic volumes. Although I will observe that recovery is uneven across airports.

Juliet Stiehl (33:40):

Great. Thanks so much. We're going to shift gears a little bit and talk a little bit about new investment. Kathleen, you mentioned coming to the markets this year as well as having been in the middle of large capital improvement plan. Can you just give us an overview of the work that you're doing at the airport and are these projects that you think are indicative of trends that we should expect to see at other airports nationwide?

Kathleen Sharman (34:08):

Absolutely. And if we have time at the end, I'd love to just have a conversation with Karen about her remarks with respect to the unevenness and sort of the credit worthiness of the new dynamics. We talk about Bleisure and the whole workforce thing. But I will answer your question now with respect to the capital plan. First of all, nationwide, why have airports not abandoned their capital plan? We have aging infrastructure and everybody built their terminal all around the same time, so we have to keep going. And there is that pent up demand that Karen was mentioning and that's returning from covid. So people need to get their infrastructure in a place where they can accommodate the demand, the customer, we talked about some of the beautiful new terminals here in New York and really all around the country that have been opening customers demanding a better experience.

(35:08)

And so if your airport is not providing it, I mean passengers in a lot of major metropolitan regions do have choices. So I think the customer demanding a good experience is also part of it, generational preferences in terms of people just wanting an experience versus a thing, a material thing. As the younger generation, people just want to travel. So that's also contributing I think, to the increase in passengers nationwide and airports really are an essential service. I mean, we are all in order to do our business. I mean they're over 1.4 trillion contribution to US, GDP. With respect to Orlando in particular, we opened our terminal C in September of 2022, 3 billion, and we sort of have been building that since 2017. So we're like the dog that caught the car because the whole entity was just singularly focused on delivering that project and it added 20 narrow body equivalent gates.

(36:26)

It was a significant addition and the whole place could not grow if we did not open that successfully. So we did it. But now what do we do? We are just like all the other airports, our terminal in the north, our 93 gates where still most of our passengers traverse, they're old, some of them over 40 years old. And we're all about efficiency. I talked about throughput. So how do we modernize and renovate those terminals and which one do we do in order to, because finances are as well as we're doing. They're not unlimited. So we have to figure out how to do that and how to prioritize. One of the things we're also doing is in Orlando, the customer experience with respect to rental cars we have, you always could just go right across the access road and rent your car. So that means we have three rack facilities.

(37:26)

Basically we're looking at consolidating them into one now that we have. We think that's going to somewhat definitely improve the customer experience. It's going to help the rental cars operate more efficiently and it's going to free up about 5,000 parking spaces. So parking, I think we're not the only airport that's having challenges with parking, and I think that's two reasons. That's one because people deferred projects during the pandemic and now the passengers are back in some areas, not all, or some regions of the country, not all. But also something, the AI, the electronic vehicles. A couple years ago, it was a whole thing where people were going to drive your car and you wouldn't need parking lots, and the industry kind of listened to that. So there were people that slowed down on their parking garages, and so now we're kind of paying for that. I don't think that particular industry has developed as fast as we originally thought, but because the pandemic happened, we kind of didn't see it coming fast enough. I'll speak for myself, but I think that's generally true for the industry. So I think that's another reason. So those are some of the things that we've got going on in Orlando though.

Juliet Stiehl (38:52):

That's a really good point, and the fact that you hone in on the fact that people now want an experience, and that drives a lot of the travel, which explains a lot also why rental cars haven't necessarily dropped in the way that we thought because people are more inclined to rent cars when they're doing it for leisure than in a work setting. When you're bopping into Chicago for a day, you Uber, but maybe not to Orlando, and you get to do the great Disney or universal tour.

Kathleen Sharman (39:22):

And I could add on that in Orlando, the demographic mix versus originating versus destination is changing also. I mean, we benefited not only by visitors wanting to come here, we were one of the only states that were open during the pandemic, so we fell harder, but we came back faster than many regions in the country. But also that the area is just growing in terms of residents, so that's affecting the mix and propensity to rent cars because we have more passengers that live here, and that's actually exacerbating the parking situation. But we've got a plan. We're still formulating it, so we don't have an official capital plan, but that should be coming out in a few months.

Juliet Stiehl (40:12):

That's great.Thanks. Emily, what are you seeing? You addressed this a little bit in terms about not focusing just on the capital actual structures, but what are you seeing in the landscape for capital investment by colleges and universities and how are they financing, I guess, these projects?

Emily Raimes (40:34):

Yeah, in the sector, we are seeing rising levels of deferred maintenance. We're seeing aging campus infrastructure, and we're seeing really a need for updated facilities for these schools to stay competitive in the environment that we're in. I think in recent years we saw a lot of schools kind of pulling back on the debt that they were issuing. We saw the metric that we look at age of plant. We're seeing age of plant really creeping up at a lot of these schools. There's definitely a pent up need for some investment and maintenance. I think that some of the choices to be made reflect a lot of what Kathleen said, that there is a customer expectation of a good experience. And so schools will be having to choose between some of that deferred maintenance to just keep things running and keep things up to date, and providing that sort of higher standard for the customer.

(41:37)

When kids and parents are going visiting colleges, if parents are thinking with that very high tuition bill, why are these dorms cinder block dorms with no ac, right? They expect to see something better. The kids go and they look at the gyms with the climbing walls. It's like all of the colleges have climbing walls in the gyms now, and they're sort of expecting to see that in fancy dining halls and all of that. So there's a little bit of a choice to be made for these schools by are we going to be just working on getting the heating system running smoothly or doing the sexy new project that we're going to hope is going to bring more kids in? So that's going to be a tough issue and project. We think that there are going to be some as well in this challenging environment. There are going to be some that might be spending some money to actually downsize.

(42:30)

There are some colleges where looking forward, they don't need all of the buildings. Some of these buildings might be hard to maintain, they're expensive to maintain, and it's going to be more worth it to spend the money to downsize, get rid of it, do some demolition than keep paying to do this maintenance. So we might see some of that as well. In terms of just sort of overall debt levels, kind of like they spoke at in the last panel, we see probably a small increase this year, not huge increases. Many of the larger institutions that issued bonds over the last few years are still kind of spending that down. Smaller colleges that need to do it might have limited debt capacity, so we might not see the amount that they really need. And so I think that we will continue to see that deferred maintenance creep up, and we do see that really as a partially hidden liability, right? Because this is something that will become a liability. So it's a little bit of a credit issue and a partially hidden liability across the sector.

Juliet Stiehl (43:34):

Thanks so much, Troy. You sort of answered the next question where we were going to talk about your 300 million POB issuance. I guess, do you have any additional color you want to provide on the public safety project? Do you have any plans that you'd like to share or even have heard of neighboring capital investments or projects that you think we should be aware of or that are interesting?

Troy Clarkson (44:00):

Absolutely. Thank you, Juliet. As I sit here and absorb the information shared by my colleagues, I've been involved in local government in Massachusetts since the mid nineties, about 30 years. And when you think about it, most of the infrastructure we deal with, whether it's airports or public universities or roads or sewer plants, most of those things were built in the second half of the 20th century, right post World War ii. And so virtually all of those things that we built are at or past their end of life cycle. So now we are faced with the results of deferred maintenance because in my experience, government does a really good job of building things, not the best job of maintaining them. So we're faced with even in a city like Brockton, tens of millions, maybe hundreds of millions of dollars of infrastructure needs without the ability to necessarily fund them.

(45:04)

So the pension obligation bond was one of those ways, and we didn't invent the pension obligation bond. I get that. But we strove to be a little creative to give us some financial flexibility. So because of some of the factors I talked about earlier, Brockton has struggled financially over the last several decades. One of the things we did with that program that at least according to our friends at Stifel, made us stand out, as I'm sure many of it's typical for municipalities or pension systems. And by the way, Brockton has its own pension system. So it's self-contained just city employees and a few small public agencies that are in the city. But our annual budget was around 25 million that we were spending out of the operating budget paying to the retirement board. When we decided to issue the pension obligation debt, we went to the retirement board and said, we're going to cut you a really big check in a few months.

(46:06)

Why don't you relieve us of our responsibility to pay you this year's payment? And they actually said yes. So we took that $20 million and put it into a pension stabilization fund. So rather than borrowing extra to have funds on hand to guard against market fluctuations, we were able to use cash to do that. And now the city, even though it's segregated for the pension stabilization fund, the city has more money in reserves than ever before in its history. And so I'll go back to my previous statement about innovation and using these challenges to try to think of different ways out of the challenges that all of us face with this aging, deteriorating, crumbling infrastructure.

(46:54)

Because we were able to do some of those flexible things with our bonded indebtedness, we then chose to use under the leadership of the mayor, virtually all of our American Rescue Plan Act and covid relief money on investment in infrastructure. Here's an example. We have a baseball stadium. City of Brockton now is the proud home of the New England knockouts and MLB affiliated team. So if you're in the area this summer, please come see us. But we were able to stand up a portion of the stadium that has a conference center as a testing and vaccination center, and legitimately use covid relief money to make improvements that had needed to be made for two decades.

(47:39)

And that's all related, as I said, to that jigsaw puzzle of financing that we're looking at. And I think that's the importance of looking at investment in infrastructure as that total picture. We were just sitting at the table before I came up to the panel and talking about, I will tell you that the treasurer, if you're still here, you inspired me to think differently about baby bonds. And in Massachusetts in Brockton, we have about $15 million coming to the city for the opioid settlement over the next 15 years. So I'm sitting there thinking, well, why not use that predictable source of revenue to maybe bond out some money and invest in the loved ones of people who have perished from the disease of addiction? Now, that's not at all related to a pension obligation bond, but because we have that approach where we can think about this in its totality, maybe we can, because of the money that's freed up from some of the other things we've done, we can actually use money to impact the lives of young kids who have had the tragic loss of their parent through the disease of addiction. So I try to look at it in that large picture and always say, we're only limited by our imagination. So I think we need to take from a session like this, a real charge to be creative in a way to solve these not only the infrastructure problems, but the human infrastructure problems that we have the opportunity to address through our bonded indebtedness.

Juliet Stiehl (49:25):

Thanks. We are all out of time, I believe. Should we wrap it up question? I did want to shoot one question, which I thought was really interesting. So I'm stealing the question from you guys. I'm sorry about that. I've had nothing but time to ask questions, but I think this is something that we would all find a little bit curious. Emily, there's a ton of headlines right now about all the conflicts on campus sparked by what happened over in Gaza. It started with all these protests, and to some extent there has been management turnover as a result. Is there a point where this becomes a credit concern in the sector?

Emily Raimes (50:11):

Yeah, great question, and we're getting that question a lot. I think management turnover in general, in higher ed, we're seeing shorter presidential terms, shorter overall, sort of higher ed management terms. Higher ed presidents in 2006 stayed around for at least eight years. Now it's less than six years, so it's not a right now thing. This is kind of a trend. There was a recent survey of employees at higher education, so not just the presidents, but everyone, and over 30% said they planned to look for a new job in the next 12 months. So this is a sector where you're seeing a lot of this turnover, and we get the question, is this bad or is this good? I think that you can bring in fresh blood, fresh perspective, fresh strategies, and it can be great. When it can be a credit negative is when it becomes this sort of cycle.

(51:05)

When you see schools with four presidents in seven years, when they can't get someone who fits with the mission, who fits with the idea and can move things forward and stay, that's when it becomes a credit issue. To expand out a little bit beyond just kind of presidential turnover, I think we're seeing a lot of the unrest. We're also seeing a lot in the news, congressional inquiries and donor pullback, right? A lot of big donor, a few big donors saying that they're going to pull back and is this really negative for these colleges and universities? And I think the important thing to remember is that the colleges that we're talking about are fine. Even if the donors who are saying they're going to completely pull back, do these endowments are so huge, they will be fine.

(51:59)

Where the threat lies, where the potential credit impact lies, I think is to the sort of overarching view of the value proposition of higher education. As people are starting to think more, do I really need to do this four year private education with all of this, with all of these expenses when the job market is great, I can get a good job maybe with a two year community college. So you have some of the smaller four year private colleges where this idea of the value proposition of higher education is creating a bit of a struggle and a challenge for them. And this environment of congressional inquiry and kind of attacks on the colleges and campus protests and upset and donor pullback, all that doesn't help that, right? It just kind of adds to that feeling. So I think that's where the challenge, even though the schools that are being talked about are those IVs in the top tier, the impact is going to be felt at some of the others, the smaller, less selective ones down the chain.