Our panel of experts will provide an overview of the most pertinent legislative and regulatory developments impacting the Texas' muni industry. Additionally, they will identify what the pressure points are as well as legislative priorities for the state and their impact on Texas public finance in the upcoming year.
Transcripts:
Michael Scarchilli (
00:09):
All right. Good afternoon everybody. Welcome to our Texas Public Finance Conference. We are excited to be back here for another year. We have got a great program over the next couple of days and We are going to start it off here with really more of a 30,000 foot look at the market and where we have been and where we are going. We have got a great panel here representing a great cross-section of the business. Like to ask you all to just briefly introduce yourselves really quickly, we will go down the line and then we will get into the program. So Lee, you want to!
Lee Deviney (
00:49):
I guess I am first up Lee Deviney, executive director of the Texas Public Finance Authority here in Austin.
Rob Dailey (
00:58):
Rob Dailey. I run public finance at PNC.
Jill Jaworski (
01:02):
Jill Jaworski. I am a managing director at PFM Financial Advisors.
Michael Scarchilli (
01:08):
All right, so I will just kind of take this a question at a time. We will go into these kind of big topics and then we will just sort of go down the line and you know, can each answer the questions as much or as little as you want. And then we will move on to the next topic. So We will start here, which is the position that the municipal market finds itself in right now seems to be in a less advantageous position, at least on the service than it has been over the last couple years, particularly in terms of the steadily rising rates that have dramatically driven down refunding issuance. What have been the effects of the resultant market volatility, not just the overall market, but on market participants from various disciplines across the market?
Lee Deviney (
01:57):
Well, from my perspective, where I am feeling it most is on the short term end. We are a statewide issuer and we currently have three commercial paper programs. We finally closed one out, and so when we are trading CP in an inverted yield curve, I get very annoyed when the analysts come in and show me 5% on taxable paper and we just closed a 15 year taxable deal at a lower rate. It is a little bit, I would like to see it end, but I would like to see the yield curve return to normal, kind of get back in my comfort zone. But as far as, We have got a couple of transactions coming up that will be longer term fixed rate deals and I am a little bit less concerned about them. Could have got done cheaper a few years ago, but We will put a call feature on them and it will all work out in the long run. I think.
Rob Dailey (
03:08):
I guess I would say that the way I look at our current market environment, it is really a reset from the conditions we have had the past 15 years. We have had effectively zero interest rates, a lot of stimulus the last several years, a lot of liquidity, and we are kind of in the other direction on all of those. So it is really adjusting to the new environment and I think it is going to take some time and there is a process that we are going through now to adjust to the new environment. There will be new opportunities, there are new opportunities We have got now the relevance of floating rate debt, for instance, in the capital structure is something that is relatively new, right? Has not been really true in the last 15 years that you got any benefit out of floating rate bonds. So I think what you are going to see is that issuing debt, managing debt portfolios is going to involve a lot more complex look at multiple variables that we have not had to pay attention to for a long time.
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04:09)So there is going to be a lot more value in making decisions around how do you optimize asset liability management now is important in a way that it has not been for years. Higher short rates create opportunities both in the debt products and asset products with an inverted yield curve in possibly over time a return to a more normal yield curve. As Lee describes, you are going to see a big savings in being able to finance in the short end of the yield curve, whether that is floating rate dead or put bonds or simply taking advantage of a serial type of amortization. On the asset side, there is a lot more value to optimizing investment of operating cash, strategic cash reserve cash, and then long-term reserves. So this is where now the difference between what we used to count on being able to earn and what we are earning now is real money.
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05:13)And that has not been true for a long time. I do think We are going to see more project financing. There will be structured financings to exploit market discontinuities. I think We are going to see a trend, a continued trend of ESG issuance. I think in the case of investors, the higher rates make bonds relatively more attractive in relation to other asset classes when bonds are returning four or 5% and the stock market is kind of treading water, it just is a totally different story than what we have been used to. Last year was such an awful year, worse than probably 40 years this year can be expected I think to be better. Just a couple thoughts on market volatility. So issuance this year is already down 20%, 26% versus last year that's about 37% lower than 2021. And a lot of this, as you say, Mike, was due to lower volume of refund refinancing refundings.
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06:22)We have now had fund flows turn positive after record outflows last year. So that is going to, I think make for a relatively buoyant year. On the investor side, I think there are buyers for paper, but you are going to have to probably work a little bit harder to differentiate what you are selling. You are going to have to do more work to make sure that you are communicating clearly with the market and really focus on the quality of execution when it comes to getting bond deals done. Rates and pricing have been volatile. We have had 50 basis point moves almost every week in SMA and in some bond pricings we are looking at not adjusting by two or three basis points, but it is five 10, sometimes 25 to really find the market a lot of price discovery. So I think you will find that the cleanest stories are the ones that are going to be easiest to get done and I think over the course of the year we will see an increasing focus on credit differentiation and credit stories.
Jill Jaworski (
07:24):
So I have a few comments on what We are seeing, but first off, one of the interesting things, We have seen so much volatility in the market this year. We saw rates really run up and then with the Silicon Valley bank developments real fear from the market, could we be seeing the start of a banking crisis? And We have seen a lot of firming up since then. So we have kind of been all over the place this year. We as a group talked about these questions, I want to say maybe a week and a half, two weeks ago. And I feel like the market is significantly different already than where it was yesterday. I was spending some time talking to one of the people in our pricing group about the market, and one of the things we were talking about is We are waiting to see today's CPI number and you know what that was going to say and what that was going to pretend for the year ahead.
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08:21)And it is probably that almost everyone in this room probably looked that up first thing this morning or heard it on the news. CPIs 5% month, year over year for March from last year and significantly higher than the 2% target, but down from 6%. And We are seeing some real improvement in lowering inflation, a lot of projections that now the Fed's probably only going to do another 25 basis points before they take a rest for a while, possibly start seeing rates coming down at the end of the year. We were sort of expecting we were going to see a softer number, but I think this really confirms what a lot of investors were hoping and looking for. So where we saw last year investors being holding back, obviously a lot of fund outflows, but also just not a lot of desire to invest when you are looking at losing value in a rising rate environment.
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09:18)We are finding that investors are feeling a lot more comfortable right now feeling they have more certainty in the market environment and have a lot more interest. We have seen some spreads to come back in from where they had widened out last year, which is really great. It is hard when you are a municipal issuer to sort of measure success and with rates going up and down. And so most issuers look at spreads. That is your kind of way to say, deal to deal I do. Was my pricing successful? And when spreads really blew out last year, I think it was hard for a lot of issuers and their advisors around them to say, how good do we feel about this Pricing and pricing could have done really, really well, but when you see spreads wider than you have seen in years, it is hard to feel great about it. So seeing those come in I think is really good sign for the market.
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10:10)And like I said, investor tone seems to really be affirming more interest and that I think it is going to be really positive for the year going forward. So that's kind of what we see going on right now, but long term rates are higher, so it is a big shift for issuers. Most of my clients, when we help them with their long-term financial planning, We are always assuming a higher borrowing rate than current. And some of those plans we are getting kind of close to those assumptions that always seem so far away and year in and year out, your actual results would be better than what was up in the plan. And now We are not seeing so much of that difference. So that kind of automatic pickup is not happening. When we look at refundings, the days of 15% savings are slipping behind us. So some of those exciting deals we have all worked on are, really, that's changed a lot.
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11:15)I have been in this business for about 25 years in my entire career up until last year was in a bull market for bonds my whole career. A lot of you in the room, it is the same thing. And so it is a real shift to going back to this rising interest rate environment and frankly pulling strategies out of the toolbox that haven't been used since the two thousands. A lot of the things We are looking at though are getting to what you know guys have talked about already. Higher interest rates on the short end provide a lot of opportunity for investments. So we see strategies like cash optimization. We started seeing these come out of the woodwork a few months ago and talking to our clients about them. And now I have particularly one particular Texas client who I think is getting inundated with proposals for a cash optimization transaction.
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12:06)But if you have got old bonds outstanding, say non horrible bonds, you can now defeat those bonds. Take money that you were going to use for pay as you go. And instead of doing pay as you go, put that money into an escrow and use that to diffuse those prior bonds and then go ahead and issue new money bonds for those projects. So you are doing a swap, you were going to pay go now you do bonds, but your cash defeats all debt. So you end up with the same amount of debt outstanding and you can even match maturities if you want to really measure the success of your strategy. But those interest rates that you are going to borrow at today are lower than what you are going to be doing on the investment side. And We are seeing a lot of benefit to doing these kinds of strategies even when you are yield restricted for the bonds.
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12:59)We are seeing lots of opinions from tax council on yield restriction and things like that. So every one of these deals is new and interesting and exciting as we work through all the issues, but those are really interesting opportunities to think about how do I deploy my cash? And so the treasury investment side is where there is a lot of activity that's driving some new strategies. I think the other thing I want to mention before getting some feedback or moving onto the other question is all the things that we are seeing now that have come out of the increased use of taxable bonds for taxable advance funding. So with all the taxable advance funding bonds that have been issued, a lot of them have now got to the point where the original bonds that they advanced refunded had come to their call dates. So those bonds that were getting paid out of the escrow, they have been paid off, they are gone.
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13:55)And now there is an opportunity to think about what to do with those taxable bonds. And so of course a lot of taxable bonds are issued without a call, they hold bonds, but so how do you get those bonds out of the market? They could be tax exempt if you could get them out of the market. And a lot of our clients are starting to do tenders. That's a real area that's really expanded since last year used to be that when clients would talk about doing a tender, the first thing we said is really hard to do, don't get your hopes up. Now We are like, it is great. Let me show you the analysis. But We are seeing people issue tax exempt bonds to fund tenders for those taxable bonds. So they go out in the market, buy those taxable bonds out of the market and replace them with tax because they have bonds they refunded, got to the call date, they do not have to be taxable anymore.
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14:44)So there is a lot of neat things going on in the market, new strategies. And so while We are not just going out and saying, I am going to issue refunding bonds to get 15% savings, the investment banking community, the financial advisory community has really been, I think digging in and looking hard at how are ways that we can still find new value in this market for our clients. Now that does not change the fact that your long-term borrowing weights are not where they were a year ago. I mean they are definitely higher, but there is still a lot of value to be extracted and it is kind of exciting to see all the innovation going on in the market that We have been seeing over the last six months or so.
Michael Scarchilli (
15:20):
All right, thanks. So getting into the next question here, which we kind of got into a little bit, but going to focus on the issuer perspective right now, really just how do the current market factors and economic conditions change the calculus for an issue where We are planning in timing capital projects and how do you deal with that?
Lee Deviney (
15:41):
Well, before I jump into that, I am listening to the discussion over here and I remind myself that I am in a room full of public finance experts and I am merely a manager and I was kind of absorbing what is coming and jogging my memory. Just a couple of things that I do want to add on to what was said down here that I did not mention before with the change in, with the rising interest rates and the other conditions We have faced in the last couple years, a couple of things kind of came back to light for me as an issuer that I had not paid much attention to for a long time. What is the weighted average life? That was something that was like I did not worry about. We were refunding the heck out of everything and getting 2% ticks on 17 year paper and everything and life is good and then we get hit with the transaction, We are in a different interest rate environment and all of a sudden it is like, okay, how can we maximize or rather reduce the cost?
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16:42)And fortunately we had really smart financial advisors that were able to help us work through that. And so that is something that now We are going to be paying more attention to at least in the current environment. And going on to your next question, I gave a little bit of thought to this from two perspectives. One is I work for, we are basically a conduit, we are a statewide issuer. And so the timing of capital projects is not something that we decide. We decide when we want to refund debt. A lot of times that is within our discretion, we decide how we are going to fund projects. But the win is really that it is here to meet the client's needs. And our clients are universities, state agencies and other entities that the legislature has directed us to issue debt force. So we do not have complete control over the timing. And then from the other perspective I live in, actually, I am not a resident of the city of Austin.
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17:46)I live in an incorporated town four miles from here, completely surrounded by Austin. And I have been involved, I have been on the planning and zoning commission, I have been on the utility commission, I have been to city council meetings and stuff. And in that environment, your budget, your planning, whether you are going to issue debt, whether you are going to pay cash, pay go, all that stuff is all contained. You have one entity that controls all of that. And when you are at the state level in a big state like this, we do not have complete control of, well, obviously we do not control the policy side and the timing is not totally up to us. But what we can do is try to work with our client agencies that We are issuing for to see if we can help them get the funding they need when they need it and do it in a cost effective way. And a lot of times for us, that is, I mentioned that we have commercial paper programs. A lot of times that's the way to do it. We just issue commercial papers. We don't incur any more debt than we need to fund their current needs. And then we take it out when either at an appropriate time, either due to liquidity constraints or to take advantage of market conditions and that is how we manage it.
Rob Dailey (
19:03):
Thanks. I think in terms of accessing markets, so first I would have to say rates are a lot higher than they were, but they are not bad. Still relatively low by historical standards, not at a hundred year lows, but not awful. So no reason to avoid the market. I think it really, the emphasis has to be on the quality of execution and the offering, making sure that you've cleaned the offering up to the extent you can, doing a lot of advanced work with investors, sending clear messages to the market, presenting the deal cleanly with enough time to come to market in a regular way. I have always thought that any deal has room for one wrinkle and in a tough market that one wrinkle can't be very big, but in a tough market there is almost no room for deals with two wrinkles. So you have to just make sure that you smooth it out as much as possible.
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20:12)Having said that, I think we are going to continue to see volatility through the balance of the year, and We are seeing rates move in relatively large increments that kind of come and go, you are not going to be able to predict that. It is more about coming to market and getting the best execution you can get at the time that you get that come to market. The one thing I think that we all keep in mind is We are living in a market where all of us are facing concerns every day about a sudden change in news or information flow about inflation rate hikes, rate cuts, recession, credit quality, liquidity, geopolitical events in a bunch of different places around the globe. Maybe a problem in the US economy, we saw what happened in the banking industry. So there is a lot to worry about and all of that can move the market relatively quickly and it can come fairly suddenly. It will settle down over the course of the year, but it is going to take, I think months. And again, it just comes back to this quality, just make sure that you are doing everything as well as you can, communicating clearly with the market, presenting a deal as cleanly, as cleanly as you can.
Jill Jaworski (
21:32):
Yeah, I mean I really agree with all the comments here. It might get a real challenge when you think about accessing the market. If you have concerns about rates increasing, do you borrow more? If you think rates are going to turn, do you wait? There is no way to forecast truly what is going to happen if I would not be sitting up here at this panel, I would be on a beach. So those are real challenges and I think a lot of issuers try to just be disciplined and we go to the market when we hit so much money on our commercial paper or different sort of check marks that now is the time that we need to borrow, repair ourselves for the work We have been doing, that type of thing.
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22:23)I agree that the cleaner your deal is the easier it is going to be to market. But I work on a lot of those deals that have more than one wrinkle. Some of mine are hills and valleys and you always still get done. So you know, I always want to have, I think a deal that is as marketable as possible, but if you do not, you are still going to have market access. I mean, I think one of the important things about our market is that there are investors for every range of transactions and I have worked on from AAA to sub investment grade and there are buyers for all of it. And the communication you do with investors, particularly the more challenging your credit is just really important. I think disclosure has evolved a lot over the last decade, and particularly if there are any challenges at all, more disclosure is better.
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23:24)We saw a lot of clients really up their disclosure after the pandemic because they wanted to show how we are doing month to month now that things are just really different. Pretty much everyone is rolling that back now. Tax revenues have been great. Nobody feels they need to have that kind of detailed level of cash flow information anymore, but disclosure's always better and the rating agencies are out there to keep everyone honest as well. And one of the eternal debates is what do you show the rating agencies and what do you show the investing public? And I have always been on the side with my clients that if you are showing it to the rating agency, unless there is a real strong reason why it can not be public, put it in your disclosure document. All the investors deserve to see the same things the rating agencies are seeing and it gives them more confidence when they do. And they are not having to rely so much on reading. That external report is relying on information they do not have. So I think those things are really important to accessing the market. Really good disclosure and if you can keep your deal as simple as possible, that is great, and if you can't, you are going to spend a little more time marketing a little more one-on-one with investors, but you are still going to get your deal done. Our market is very robust and the investor community is looking for opportunities at all different rating levels.
Michael Scarchilli (
24:52):
Thank you. All right, let us move on to a different topic here. We have recently seen some disruption in the banking industry. The acute impacts of this on the muni market seem to have been fairly muted so far. Let us look a bit longer term. Do you guys think that there could be more of an ultimate, like a disruption on this market ultimately? And if so, how in the long run?
Lee Deviney (
25:20):
So one thing that I guess is an issuer I am, I should be grateful for, although sometimes it is overwhelming and that is the fact that there is such a robust and large banking industry to serve issuers like us. It means I get to visit with a lot of you all pretty frequently, but I am glad you are there and I am glad there are a lot of you because when there is disruption, We have always got a large pool that we can rely on to get the transactions done. It is everything from the very largest Wall Street banks down to the regionals and even some of the smaller firms. I mean we work with a wide swath of the industry. I think it is a really good thing as an issuer. And I guess because We are a fairly large and fairly frequent issuer, remember perhaps we have better access than maybe some other issuers do. But yeah, whenever there is a disruption, it is kind of, oh darn, here is something to deal with. But there is always, the industry is always there for us and I feel good and confident about that. And even if we had a situation like I heard some big bank in California blew up, even if something like that happened here, I don't think it would impair our ability to get our work done.
Rob Dailey (
26:57):
A couple comments maybe just on the banking industry generally. I think rising rates created a significant challenge and what we saw was as described by regulators, textbook mismanagement, these things happen in the banking industry, but I think generally the industry is in very good shape, very healthy. And so I do not have any particular concerns that We are going to see major further disruption, but I think the existing stress is there, the effect on securities holdings, all the maturity portfolios still has to be reconciled. We will see whether or not the fed window helps banks manage out of that. I think it is in the near term. And then the question is what does it take to get to a steady state, stronger environment generally, I think this kind of market move over the past year has forced a little bit tougher consideration, more scrutiny of operations margins.
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28:14)We have seen a bunch of banks look at their positioning in the public finance space and reposition. Most of that seems to have happened, but We are going to see the fallout from that over the course of the next several weeks and months. We have bank earnings starting Friday, it will go into next week. We will see all the bank reports at that point. We will know a lot more about the health of the balance sheet, about their funding, about the outlook for bank lending. But in the meantime, I think we will see continued emphasis or increasing emphasis on liquidity, increasing focus on credit quality. You could see some bank CIO's who have been significant buyers sell because munis are relatively high quality liquid assets in relation to some other asset classes. I do think We will see some degree of consolidation in the industry so that we have a fair amount of M&A activity this year.
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29:15)In the public finance space specifically, the bank market is still going fairly strong. We have seen it has been off a little bit this year. Fewer deals, fewer banks bidding in some situations or participating. We have seen banks do less of the bond type structures that would include long maturities and generous call features, credit spreads, bank pricing have widened out some in line with the higher cost of funds for banks, but activity in pricing levels are different from region to region. And We are seeing name by name region to region, different kinds of the activity playing out differently. One thing that we have noticed is a much greater emphasis on the value of or attention paid to the value of a bank relationship so that issuers know that they have got a few banks that they can work with and can always count on being there regardless of what else is going on. And so that I think is going to be a trend that continues as well.
Jill Jaworski (
30:30):
Yeah, so one of the things about the muni market is, as we all well know, the muni market is not an isolated market. It is affected by everything that goes on in the financial markets and we tend to tag along with treasuries, things like that. But what goes on in the bank sector can certainly affect munis as well. And I think I am really pleased to see it does not look like these issues are a start of a contagion. Certainly as mentioned a Silicon Valley bank, like you said, textbook poor management. I feel like even if there was a kid out of college on that treasury team, they would have said, you know, can not go long on everything. You have got price risk.
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31:17)But obviously that is sort of the size of the bank. We saw the regulations get pulled back a little bit, not being as closely monitored, not subject to the stress test of say, APNC. And so some weakness in that sector if that were to continue. A lot of banks have very significant muni holdings and banks start having to dump their holdings into the market. We could see a lot of paper and that would affect pricing, just like we saw when rates started to go up and we saw huge unwinding of portfolios as people were pulling money out of funds a year ago that had a huge impact on the market. So it does not look like it is going to happen. We will continue to watch that, but certainly if it does, there could be, we would feel it in our market. I think on the positive side, when we think about municipal issuers, most mean issuers are very conservative in their investments.
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32:21)And one of the key things is that usually most funds are not in cash. They are usually invested in securities, which provides really significant protection. And if they are not directly insecurities, they usually are, maybe a treasury fund or a local government investment pool got securities as part of it. And so that sort of risk of having large cash balances in a bank that could fail, despite what Yellen has said, that risk is one that most media issuers do not have a lot of exposure to. And I think that is a really positive thing for issuers is having those policies that keep you invested in securities, really it isolates the risk quite a bit or insulates from the risk.
Michael Scarchilli (
33:18):
Yeah. All right. Thanks. So let us turn the focus a little bit now to infrastructure. Covid stimulus funds are on state balance sheets for maybe another year, but they are rolling off construction costs arising. How does that all impact the state of infrastructure funding?
Lee Deviney (
33:38):
I was actually thinking about that, but from a very different perspective, not so much infrastructure funding, just more of a management question. Sure. How to manage. So can I take that? Yeah, sure. Okay.
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33:52)A long time ago when I was in MBA school, I do not think anybody talked about work from home. I do not remember that being part of the curriculum. And then later on I went to the governor's executive development program, which is a program we have here in Texas for three weeks. Well, it is a program that goes on over three long weekends and three weeks and I do not recall. We talked about it there either. And so before the great Covid thing happened, I had headed in my head that I am a really lucky guy. It takes me 15 minutes to get to work on a bad day, but most of my employees that live in this growing metropolis are commuting an hour more each way to work. And that's time away from their family. It is bound to affect their attitude and stuff. If they got to meet the plumber, it is a problem.
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34:54)And I was actually kind of thinking about dipping my toes in the water on remote work and then covid happened, and then we found out that we could work remotely. In fact, we were very well positioned to do it. I credit my deputy director and my IT guy for that. I mean, they had everything. So they did not know what was coming, but we were ready for it. I mean, boom, just flip a switch. We are managing bond proceeds, We are paying debt service, We are issuing bonds, We are doing it all. Did not miss a beat. We just moved on. And now that We are kind of past that, now We are getting into the new normal. And I am now, I am in my office five days a week. I may not be there eight hours every day. I may spend a portion of the day managing my kitchen table in the morning over a cup of coffee.
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35:47)But I have, I am allowing employees to work remotely and We are trying to adjust to that. And what I am finding is that collaboratively, the more you get people together in one place, it is still better. It is still school. That does not mean I am going to change, I am going to switch things back. But yes, We have learned to use all the new tools. We have priced bonds over Zoom and WebEx and teams. We have meetings that way. And a lot of times it is really convenient. But actually We are getting people to work together, whether it is our staff or with our advisors. Face-to-face is still the best, most effective way to get things done.
Rob Dailey (
36:30):
I think We are pretty much in the same place. We are by and large, I think four days in the office. But what we found is that as things heated up, as things have heated up from moment to moment, the last few weeks have been pretty busy. For example, people came back to the office and the energy levels there, the vibe is there and it has its own way of creating momentum that brings people back into the office a little bit more. So I feel like We are hit a good balance of work in the office and then allowing people some kind of personal flexibility.
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37:12)We are all over the country, so we end up spending a fair amount of time on calls anyway, but it is all with video. And We have made a point of doing in-person meetings. We had an offsite for 120 people a couple weeks ago, and that was incredibly empowering and energizing. People just loved it. So I think that's all kind of coming back. One thing I would say in this new environment that's come on more is just the greater presence of the work life balance issues, social engagement, giving people opportunities to talk with each other in a way that they did not maybe pre covid. We spent a lot of time on DEI and I do not think that is going away. That feels like people get more out of their job when you give them those opportunities. So that is been kind of an interesting development that is made the workplace a little bit different, which is sort of fun, which I do find interesting, not in Texas, but in some states we are seeing clients just are not going back to the office. And so definitely you see pockets where there is some further advancement or behind ahead of or behind where we are.
Jill Jaworski (
38:32):
I mean, I think it has been really interesting seeing the impact on the business of remote work and hybrid schedules. One of the things that We are really focused on at PFM is trying to think about how it impacts our youngest employees. And we hire a lot of really talented young people out of college every year. Really similar to how a lot of the investment banks do. We hire a large group and train, and we have a class every year. And a lot of the younger people coming into the business, they really want the flexibility of remote work. It is a high value item. When you survey them, they talk about it a lot. They want to be able to work from home. But on the other hand, when they work from home a lot, they do not really feel engaged and they do not get as kind of invested in the work and in the industry.
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39:31)They are not getting to know our clients, which is a really important means for so many of us. How we really got into the industry was when we were young and we sat down and got to meet with clients, and you really start to understand the client's problems in a different way. When you are sitting across the table face to face and you show, you know, do your presentation, but then you move to talk about what's really going on, what are your concerns, what are you worried about? And those interactions are what makes this business so interesting. When you walk out of a meeting and you think, let's try to figure out how we can help them. And some of that can happen on a video conference, but less of it. And if everybody's remote, again, you are not all going back to the same office and gathering around and talking about it afterwards.
(
40:24)So We are trying to figure out what's the right balance. We want those of us who brown around while We are engaged. It does not matter if I sit at my kitchen table or not. I am engaged in my client's issues. But when I am talking about someone who is 23 and I am worried about how we keep them in the muni business, how do we show that this business is interesting, exciting, that being involved in finance and good government is a great combination. One of my colleagues always calls this feel good finance and it really is. But we got to get those young people really engaged and involved than when they are remote all the time. It is hard to do. So We are really trying to figure that part out. We do want to be remote sometimes. Everybody likes that flexibility, but we want to grow that next generation of people in the business, the next talented group. We want to keep in and not be disaffected and uninterested. So I think that the biggest challenge for us when we think about those work changes We have seen in the industry is getting that next generation really excited and committed to our industry. It is hard when they are not around in the office all the time.
Michael Scarchilli (
41:49):
Interesting stuff for sure. I think I want to leave a little bit of time in case there are questions from the audience and We are kind of coming up on time. So does anybody have questions for our panelists here?
Jill Jaworski (
42:13):
Not all at once. If there are no questions, maybe we could go back to that infrastructure.
Michael Scarchilli (
42:22):
Yeah, so let's do that question. I think we kind of detour.
Jill Jaworski (
42:24):
Detoured from that.
Michael Scarchilli (
42:25):
Sure. So yeah, who wants to take the infrastructure question? it is essentially where do we think the state of infrastructure funding is now and given current conditions and where do we think it goes in the near term?
Lee Deviney (
42:42):
So who was asking the question? Who was asking the question?
Michael Scarchilli (
42:46):
Oh, nobody, there is just moving on because nobody's asking. Okay.
Lee Deviney (
42:49):
Okay. All right. I am confused. I heard a voice and I see a bright light staring at me. I am like, yeah!
Michael Scarchilli (
42:55):
It is a blinding light. I know.
Lee Deviney (
42:57):
It is not the wards.
Michael Scarchilli (
42:58):
Yeah.
Jill Jaworski (
42:59):
Yeah, I am happy to jump in to start on that here,
Michael Scarchilli (
43:03):
Jim.
Jill Jaworski (
43:04):
So the clients that I work with are almost all transit agencies and transit is an infrastructure heavy investment area of government. And so I think a lot about infrastructure funding. How do we manage through this environment? What are things going to look like for the next few years? And We are in a kind of an interesting situation where inflation has been a huge impact on infrastructure costs. It is really driving up project costs. It is forcing a lot of my clients and many other public sector clients to go back to the drawing board and think about how do I redo my project? The costs have gotten outside my budget and do I phase it? Do I cut elements out? Do I go to a different type of project entirely? So in transit, one of the things you hear is do you do bus rapid transit instead of light rail?
(
44:05)That is a common thing. Do you do rail and phases? How do you get a grant if you are not doing the entire project? These are big issues. And so the construction inflation has been higher than consumer inflation. So it has really been even more impactful on big infrastructure projects. And then I think the other piece that is really driving, going to continue to drive construction inflation is the amount of money that is going into infrastructure. So the huge amount of stimulus funds that came out of IJA and all the other federal programs has been really great as far as being able to get more grants, start more projects. But that means that in addition to the growth that is going on in Texas, which is always driving construction demand and the natural evolution of infrastructure projects, you have also got more money coming in and grants to get even more projects done.
(
45:07)And that's just going to keep the demand really high. So I think construction inflation, because labor costs are high, materials are scarce, that's going to keep impacting these projects for I think years after we see consumer inflation start to come down. So I think to me, that is a huge challenge we have in the market right now. How do we fund these projects? How do we get costs under control? What are the strategies We are using? Because you want to use the grant money that is available to build projects that benefit all the citizens, but it is really costly and We have got competing projects. So just kind of figuring out what that is going to look like with high construction cost inflation, but a lot of money to deploy is I think going to be a really interesting challenge that We are going to be managing through I think for a few years to come.
Michael Scarchilli (
46:05):
Alright, thanks Joel. Rob, you want to take
Rob Dailey (
46:09):
Just I agree a hundred percent. I think this is a 2, 3, 4 year trend that we are at the beginning of where we still see money coming off of state budgets from the feds that are getting projects going. And those projects are going to lead to other projects and they will either be related projects or projects that need to follow the initially federally funded project. And that is where I think the rubber's going to hit the road because it will have to get funded in the bond market probably at that 0.2, three years out, We are looking at state coffers are going to be, they will be thinner. The federal money will have been spent. And at that point you begin to see, I think some differentiation between the borrowers that have the funds and have the resources to continue these projects. And those that just do not have the same control or success or performance in their budgets.
Lee Deviney (
47:17):
About a mile north of here for the next six, seven weeks, there are going to be a lot of decisions made on funding infrastructure, and I am following what's in the state budget and various legislation, and I do not know what the outcome will be. I know there is a lot there. There are a lot of things that we are keeping our eye on. I am on the operations end, so our role is to be available if we can assist decision makers at their request, at their discretion on how to fund the many things that the state needs and the legislatures giving consideration to. But we have the, as an agency and within the constraints of statute, I mean, We have got a lot of tools in our toolbox and we have got a pretty robust industry to support a lot of infrastructure that is going to be coming. Even though I have lived in Texas all my life, I am still shocked at the growth and the expansion and I wonder where is water coming from and where, who is going to build the roads to support everything that is happening? And that will happen in the coming years.
Michael Scarchilli (
48:47):
All right. So that is going to put us in time. If there is a question, we could probably take one before we wrap up. We will give a few seconds in case there is one. Yes, Noe.
Audience 1 (
49:02):
Rob, this question for you. Any concerns for the facts? We have already been willing to occupy and given up developers recently.
Audience 2 (
49:18):
Recently, I said about a year ago, refinanced, their commercial loans, anything that we need to be concerned with as far as how liquidity could be affected in our space by virtue of the fact that maybe there is another shoe that may fall with commercial real estate?
Rob Dailey (
49:34):
It is an excellent question. I think that stress is going to become more and more prominent over the course of the next several months. And that's going to be one of the things that all the banks will be evaluated by as we look at earnings as we look at credit quality. So I am, my sense is that you are going to see a little shakeout here and that will have a modest, marginal impact on the provider's credit in public finance, but I do not think it is going to take a big chunk out of our capacity as an industry. So I think it definitely is an issue and you can see it, people are talking about it, especially in the kind of Class B, class C commercial real estate. We have not quite seen that all come to a head yet, but We are going to. Thanks.
Michael Scarchilli (
50:27):
All right. Well that is going to wrap us up. Thank you so much to Lee Deveni, to Rob Daley, Jill Jaworski for their expertise and a real interesting panel. And that will bring us now to our networking break, which will be right next door.
