Managing revenue expectations in Texas and across U.S.

During this discussion, we will explore how state and local governments are planning projects and budgeting.

Transcript:

Greg Pacifico (00:09):

All right, so I think we will get started. I am Greg Pacifico, I am with Build America Mutual based here in Austin. Today's panel is titled Managing Revenue Expectations in Texas and across the US. And we really are in an interesting environment right now with respect to municipal budgets where obviously have intense inflation, operating expenses are getting higher, projects are getting more expensive financing, those projects are getting more expensive. So you really have municipalities that need to find ways to maintain their current revenues, but also find ways to increase those revenues. So we have two great panelists and I think after 50 minutes we might have it all figured out, but we will see. So first we have Emily Brock. She is the director of GFOA, its Federal Liaison Center where she leads a coalition and advocacy efforts of the public finance network in Washington DC. And next we have Chris Brown.

(01:16)He was sworn into office as controller for the City of Houston in January, 2016 and reelected in 2019. In his role, he oversees the city's budget investment portfolio and debt portfolio. So with that, we will dive into it, and I think it is important when trying to assess what municipalities re need right now and what their expectations are going forward is to take a step back and kind of understand what happened through the pandemic, specifically ARPA, to kind of understand what the current landscape is for those municipalities. So going into Covid, whether you were an issuer, an investor, the big question was what cash flows are going to be impacted? And then in came the feds and gave out a whole bunch of money, which solved a whole lot of problems, at least temporarily. So with that, Emily, could you walk us through the status of those funds? How were they typically used and really anything related to ARPA in your thoughts?

Emily Brock (02:22):

Sure, Greg. Thank you. And thanks again to the Texas bomb buyer for having me here, Texas Public Finance Conference. You do mention, Greg, that the biggest concern, of course, was knowing where revenues were coming from. I would say many of our biggest concerns are what yoga pants to wear, business on top, casual on the bottom. So figuring out this whole new economy and understanding this whole new economy and how we operate was certainly on top of mind on GFOA members. That is our 23,000 members across the country. And Greg, as you mentioned, swiftly, the federal government kicked in. I think it is important not necessarily to jump into ARPA too quickly because there was CARES just prior to that. And the CARES money was 150 billion, which was distributed to very large local governments and states. And it actually had a significant impact on specifically spending on things that were a result of the COVID 19 pandemic.

(03:27)In fact, the conditions of spending on cares were that you had to spend it on, you had to relate that money back to or that investment back to Covid 19 APAs a little bit more flexible. So in the next administration, the Biden administration passed a 350 billion stimulus APA, which was distributed to not just the states and large local governments, but the state's large local governments and a tremendous amount of small and mid-size issuers. And so we lobbied for that. In fact, we lobbied with our sister organizations, NLC NACO, because what we found with payers is that the money kind of stopped at the big local governments. And we wanted to make sure that smaller mid-size governments had access to money that would allow them to address the needs of COVID 19 in their communities. Now that said, there were four large spending categories that were built into ARPA.

(04:27)It could be that you could spend it on covid 19 or you could spend it on bonuses. Premium pay is technically what the law calls it. The third is that you could spend it on infrastructure, which is water waste, water and broadband infrastructure to highlight the broadband is a part of that. And then the last category, which is an eligible category for ARPA spending is what they called government services. And I almost fell out of my chair when I read that in the law because I thought to myself, what is the government service? Government services are everything that we do, what we knew, what we could not spend it on? You can not spend it on reserves, you can not spend it on pensions and you can not spend it on debt service. So technically it is everything else. And I think what that does, Greg, is it helps to sort of queue up the situation where we find ourselves right now, here we are in April of 2023, the obligation date for ARPA, meaning the date in which all of the prime recipients have to obligate their funds.

(05:39)And for us nerdy accountants in the room, that kind of means encumber your funds. You have to do that by December 31st, 2024. That is not enough time to build a broadband network. That is not enough time to build any kind of substantial infrastructure. So what we are finding is a lot of smaller organizations that our prime recipients of ARPA are kind of finding themselves with a fair amount of ARPA proceeds and trying to figure out how they might be able to spend the last of it. One last thing before I conclude my initial remarks, the Senate, there was motivation in the Senate at the end of the hundred 17th Congress to actually build more flexibility into ARPA because of that, right? If there are any little bits and pieces left over by December 31st, 2024, the Senate wanted to make sure that there were opportunities for those smaller mid-size organizations to spend the rest of their ARPA proceeds and they pass what we call ARPA Flex.

(06:39)I like it sounds like a pro wrestler, but it is not. In fact, what it is, is it allows for prime recipients of American Rescue Plan Act funds to spend on transportation. So That is super helpful for counties and states and large municipalities. And then the other thing that they have allowed for spending on is non-federal match for federal programs. And if you read between the lines, they are talking about CDBG funds. So you can use our PS as your non-federal match for CDBG. Those things are super helpful, but the treasury is not moving very quickly to give us guidance on that. We could use it a lot faster, and we are certainly urging them to release at least an interim final rule that allows for us to better understand how to spend it. But I mean That is kind of Greg, the current state of affairs. We are seeing smaller mid-size issuers not making those spending choices in time to make it so that they spend it by December 31st, 2024, that obligated date in the law.

Greg Pacifico (07:51):

Thanks Emily and Chris, what did ARPA mean to the city of Houston? Do you treat it similar, different to other federal and state funds that are received by the city?

Chris Brown (08:03):

Yeah. Well, first and foremost, thanks for allowing me to be here. Here. I mean, oh, there we go. Thanks for allowing me to be here. We have seen some pretty interesting times over the last several years with Covid. First and foremost, the city of Houston, like every other city throughout the nation, was affected negatively from a financial perspective. When Covid hit, we saw primarily our sales tax numbers drop. I think we would estimated at the time around a 5 to 6% annual increase in sales tax. And when the onset of covid, we were looking at one point, those sales tax numbers were coming in almost 10% down. So sales tax, the second largest source of revenue for us, I think that year in 2020, we had estimated that we would see upwards of 700 million in sales tax revenue. At one point we were tracking around 630 million, so we were looking at a 10% reduction and we were like many of you all looking at making some tough decisions, which included cutting, cutting back services.

(09:15)Unfortunately, we are a service organization that employs 23,000 employees and we were having the discussions about cutting those expenditures and that was including layoffs. Fortunately, the federal government stepped in first with CARES and then ARPA, the city of Houston received in those two programs over a billion dollars and a lot of the other federal programs did the work, did the work that obviously did not happen during the Great Depression, but the economy turned around and it really started to boom. We were luckily with ARPA, we had more flexibility that we could use that for government services. I like that term. So We have been able to bolster our budgets in part with the federal funding, but also We have seen a record as Comptroller Hagar discussed, We have seen a record increase in our revenues and specifically around sales tax. The city of Houston has a voter imposed revenue cap on our property taxes.

(10:28)So we are capped usually no more than four and a half percent, but it is less than that annually increase. But sales taxes increased double digits year over year. So it is put us in a nice position where we have a substantial amount of fund balance. We will be able to obligate all of our ARPA money and we will expend all those funds by 2026 by the deadline. But really the question is what happens next? And what I have been talking about as I go to these different conferences and talk with members of the city council and mayor in Houston, we We have really seen a unprecedented times in that rebound from that 630 million low, say from sales tax to now we are looking at potentially this year bringing in 900 million in sales tax. So a huge rebound. Also, We have got this one time influx of federal money. So the thing that I am really cautioning people about, and as someone that used to work in an investment bank as a trader, it is the concept of mean reversion.

(11:39)And really, when you run a sales tax on average for 15 or 20 years at an average of four to 5%, then all of a sudden you see 15% average over three years, at some point That is going to level off. And interestingly, that timing will also coincide with the expiration of federal funds. So the long and short is that I do not think we would have been able to manage through without CARES and ARPA, but the challenge now is looking forward is how do we prepare for the inevitable leveling off of these increased in sales and property taxes coupled with the expiration of the ARPA funding. So That is a challenge, but overall it has been good for the city. We have used that in part for some of the things that Emily referenced infrastructure and such. But We have also used, unfortunately, some of these expenses that are recurring expenditures with a one-time funding source. So those are going to present a little bit more challenges. And I have talked with other cities across the country and it seems like about a 50-50 split. Some used all this programmatically for reducing unfunded liabilities and investing in infrastructure. Others use that money unfortunately for recurring expenditures in the future, which eventually this money runs out and you've got to find alternative sources. So That is what we are working on and I think That is where we stand with ARPA.

Greg Pacifico (13:13):

Thank you, Chris. And you mentioned property taxes and sales taxes, and I want to dive into those specific revenue streams for a minute. Obviously, property taxes are a critical revenue source for many municipal governments across the country. You can not open a newspaper without seeing all the noise about the headwinds in the real estate market, and obviously that could easily translate to property tax declines. What We have seen, at least in Texas, is that growth far exceeded the 10% homestead cap in Texas, kind of creating a bit of a cushion against property tax to clients. But curious Chris, how much do you incorporate real estate headwinds and kind of the market in general into your expectations moving forward?

Chris Brown (14:05):

Well, so again, we have a voter imposed revenue cap, which essentially says that we can take no more than four and a half percent increase year over year, or a calculation that includes population and inflation. And it is actually whichever is the lesser of the two we are capped at. So it has been an odd thing that nobody likes the revenue cap because of the property tax revenue cap, because it limits us on our largest source of revenue. But it also, again, back to this volatility discussion with sales tax, it smooths out the maximum amount of revenue that we get year over year, and it makes it a little bit easier for us to budget, although overall it is not a good thing. We are looking at headwinds in real estate. When we saw the initial onset of covid, obviously both residential and commercial real estate was affected, and then this divergence happened and residential, the work from home, the yoga pants issue, people started to realize, well, we can work from home and we are going to buy a house.

(15:17)Greg, we were talking about this last night. People said, we are just going to buy a house in the suburbs because I can work remotely. I might be able to just work remotely forever. Well, That is not the case, but a lot of people are still doing a hybrid work schedule. So we are seeing good numbers on residential appraisals and values that are coming in. The commercial is really the problem. And that one worries me because having been an investor in real estate and keeping up with the market from what I read, there is about 1.7 trillion of commercial real estate debt That is coming due in the next three years. And most of that investment in the way these investments work, they are fixed on a five year period. So they have to refinance every five years. And a lot of folks, and I know Houston specifically, have purchased these assets at all time, high prices when rates were at all time lows.

(16:18)So people might have paid up for a building and said, well, I got a 3% mortgage on this building, so it makes sense now, the value of that building has probably dropped 15 or 20%, and the rates have increased a hundred percent, and they are going to be in a position where they are going to have to refinance. So I expect there is going to be some fallout from the commercial side going forward. If somehow the Fed magically reduces rates all the way back down to pre covid levels, it is probably not going to happen. We are going to be a little bit higher than We have been. So the commercial side gives me pause. Overall though, our rev cap calculation takes into effect two things, population growth and C P I inflation. So the one thing saving grace, and We have seen this on the sales tax side, is that We have seen a huge increase, I think in part to inflation, both on our property tax and on our sales tax revenue.

(17:23)Something I did not expect, I thought, and I am going to have to yell at all my college professors, my economics college professors, because they said when prices rise, consumers will reduce their spending. So I thought, okay, that economic principle of elasticity actually applies. It hasn't been the case in Houston. And I think from the previous comptroller Hager in the state of Texas, people are continuing to spend despite the rise in prices. So we will see as inflation cools that could also affect the equation. And I think if we stay in a higher interest rate environment, it is only going to affect our property tax revenue. But we will see. I do not have a crystal ball. I wish I did. I do not even have a snow globe. I do not know. 

Emily Brock (18:06):

Snow Globe.

Greg Pacifico (18:08):

Thank you.

Emily Brock (18:08):

And I would also say that we are used to a regime That is based on property sales and income taxes. Do you have a way members have come to GF A and said, is that the way it is going to be forever? And again, to evoke the comptroller hagars suggestion, maybe there is time for a seismic shift or a once in a lifetime, re-look at what revenues are for local governments in particular because we are feeling the pressures from the state houses as local governments are kind of restricted to these three sources of revenue. So we do have a project ongoing, it is called Rethinking Revenue, and would encourage folks to kind of take a peek at that because what are the alternatives? What is the possibilities beyond the traditional regime?

Greg Pacifico (18:56):

Can you give us some examples? Does anything come to mind?

Emily Brock (18:58):

Well, I mean I think that there is a lot of fees that are imposed in many different ways creatively. However, I think that the restrictions though are still kind of definitely in place at the local level. People are starting to think creatively.

Greg Pacifico (19:13):

Right? Shifting gears a little bit, want to chat about the utility side of the equation? Obviously another critical part for governments across the country, we are in a situation where a lot of these utilities have been in situations where they need to harden their systems for a variety of reasons, whether it is by requirement or just need. And We have also experienced, at least in Texas a couple years ago, incredibly high operational costs that were in many cases ultimately financed with long-term debt. So we are in a situation where there is a need for debt. The OPEX side of the equation for utilities is probably subject to the inflation, everything else as well as facing, again, recessionary pressure. So is there a possibility that needed rate increases on the utility side, whether it is water, sewer, electric, could be faced with some resistance or could it pose some problems for collections and things of that nature? Emily, why do not we start with you?

Emily Brock (20:27):

Well, there is no question that we are in a sort of payer driven kind of environment where anything that does come to referendum or any kind of rate utility increases, there is a lot of skepticism and it actually kind of falls back on trust in government and understanding what that means, sort of both from a municipal utility perspective all the way up to the governance perspective in local governments. But one thing I would say, and I do not mean to jump the gun just a little bit, but the inflation or the in infrastructure investment and jobs actor, That is a 1.2 trillion bill, 560 billion is going to traditional infrastructure through the Fast Act, but there is 560 billion That is dedicated to grants at the local level and at the state level that are kind of a new fresh way of thinking about investments and infrastructure. Now, importantly that most of the monies that are built into IIJA are for build out.

(21:36)It is not for actually, it is for, sorry, it is for refurbishment, not necessarily for build out. So I was in Alaska a couple of months ago talking with folks up there and they said, IIJA really isn't useful because what we need is to extend our utilities. We do not need to refurbish what we already have. And so in states like Texas, for example, where there is build out, it may call the question sort of the usefulness and utility of the federal infusion of money into infrastructure and utilities in general. But I think importantly what we are looking at is the fact that there is 560 billion and it is important to know that it is there before it is over to be able to use it useful so that we do not look at the increase rate increases constantly and the least appetizing options that certainly is on the minds of most utilities across the country right now.

Greg Pacifico (22:36):

Thanks, Emily. Chris, why do not you give us your thoughts on the utility side too and follow up on the IIJA comments and let us know if there is any specific programs that you think are particularly important on your end.

Chris Brown (22:51):

Yeah, so with the city of Houston, our combined utility system, we recently went through the process with the EPA and received a consent decree order that basically says we have to invest 2 billion over the next 10 years. It is a difficult thing in government, in the public sector. As someone that has had a decent amount of time in the private sector before being here, we see this kind of tendency to say, well, we are just going to put this off until next year. Put this off until next year. Put this off until next year. Ultimately, with this consent decree, it is requiring the city to make this investment. It is also mandating that we do rate increases in part to fund it. I know that as the controller, I am getting emails from lots of engaged constituents because the water and sewer rates are increasing, I think 9.3% year over year, which is a huge increase.

(23:49)And again, my theory in looking at governmental budgeting is maybe if we had been able to have more substantial increase percentage wise over the preceding years, we would not have found ourselves in a situation where a system that has a high level of deferred maintenance and needs to get to a situation where we are in a consent decree and having to work out a financing plan, but it is going to be required mean inflation is increasing the cost of everything. Wage in increasing or wage inflation is hitting the city as well. I mean, overall, these projects, what we are seeing for capital projects, the costs are going up substantially. So the unfortunate truth is that That is going to be borne by the taxpayer in part, the IIJA is a fantastic tool for us. At the city, we have 670 square miles. We are a huge city from a land mass area, so we have a lot of infrastructure in the ground and a lot of that is outdated and we need to have dollars to be able to make those investments in refurbishing all those assets.

(25:08)But an important piece of the IIJA is that it is a matching grant. So depending on the program, I think 10 to 20%. So again, going back to my discussion specific to the city of Houston, we know we are in this somewhat, I would not say parabolic, but unusual trend with sales tax. And we know that we have this one time financing source from the federal government. At some point, these things are going to level off. I am thinking in our fiscal year 26, we need to make sure not only that we plan for a soft landing, but also build money into the equation for matching for IIJA so that we can take advantage of it. Because I think the real advantage from all of the federal funding is leveraging it to improve your infrastructure, reduce your long-term unfunded liabilities, really use that money programmatically to strengthen cities.

(26:08)And it is a huge opportunity because again, we get in these discussions, I am the controller, so they say, oh, well, you're just the money man. You do not, do not need to be in this discussion. We are talking about illegal dumping. And I said, okay, and what are you talking about next? Oh, we are talking about flooding. And I said, well, guess what? I have got the solution to both of those problems. And they said, you do? And I said, yeah, what is it? Money? Unfortunately, if we have the funding, we can fix all these problems. If Glenn Hagar was willing to share a large portion of that 30 or 3 billion across all the states, all the cities across the state of Texas, we would solve a lot of these problems. And in seriousness, being able to leverage some of the other federal programs. I mean, this is really the smart way, the government can operate. So I think that IIJA for the city specifically for these larger cities is beneficial, the smaller cities that need to grow and build new infrastructure, it is going to be a challenge of figuring out how they can continue to do that, but the programs are there, we need to utilize them.

Greg Pacifico (27:13):

Thank you. So we obviously can not talk about budgets without talking about the expense side of the equation, and We have obviously alluded to the inflationary pressures several times already. But Emily, from your perspective, I mean, what are you hearing with respect to operating expenses, the inflationary pressures? There was a Bond Buyer headline, I believe last month that many issuers were put on watch because of a lack of audits. And it seems like the cited reason was because of a lack of auditors. So you kind of have hiring pressures and then you also have inflationary pressures. Has that been a topic that you've been discussing? Any thoughts?

Emily Brock (27:56):

Yeah, without question, understanding sort of the resource or the revenue side of the house is important to assess, but you also have to realize that other side, the expenditure side, there are obviously things that we do to provide public services to members of our community, but also there seems to be a relentless amount of unfunded mandates that seem to trickle down from the Washington DC area. One of those things I did want to mention the Financial Data Transparency Act, which has sort of come to the fore very quickly at the end of last year at passed on the National Defense Authorization Act. And I am going to tell you, it is the hardest thing I have ever done in my lobbying career to argue against something that has the word transparency in it. However, I would say if you want local governments to be transparent, we are actually the OG transparent. We have been doing transparency since transparency was cool, and in fact, it creates this sort of abundance of information for all kinds of stakeholders to see all kinds of financial information. For us, the act first is there compiled, I am sure, Chris, I am going to guess 500 pages, maybe 600 pages.

Chris Brown (29:12):

378.

Emily Brock (29:13):

All right, we are getting up there, but give it some time. Gasby has a few more statements coming out.

Chris Brown (29:19):

I am on the Gas Act Advisory Council.

Emily Brock (29:20):

I don't know. So I think that when you see these things that are coming out of Washington and they are saying, oh, okay, so we are our policy objective here is to do something that you already do or is inherently redundant, what it does is it creates a lot of challenges on the expenditure side. And Greg, you referred to the S & P credit watch for 148 credits, and it literally had to do with the timeliness of financial reporting. If there is any way to make financial reporting a little slower to add more federal requirements on top of it or to add more gasby statements on top of it. And so we have a little bit of a challenge, a push and pull right now. We have been working obviously now the Financial Data Transparency Act is law. And importantly, what what's happening right now is the United States Treasury and the SEC are trying to determine a technology and the right kind of data standards that need to come out of that technology.

(30:26)Both of those have financial implications, both from a purchasing of software if it is not open source or if there are consulting costs associated with it is going to put downward pressure of course on local governments. But also the idea of transparency and sort of reconciling a lot of different 12 different sectors in our market into one financial template that might have a tendency to lose transparency. So we are working with the SEC and the Treasury right now in the four year timeframe that we have for implementation, but I think we all need to manage our expectations on what the outcome might be in particular because of our current environment.

Greg Pacifico (31:09):

Chris, any thoughts on the OPEX side and transparency?

Chris Brown (31:12):

Well, I think going back to the OPEX side, we talked about inflation and I mentioned wage inflation. I mean, typically people always complain, well, the city of Houston does not pay as well as the private sector, the government does not pay as well, but the private sector wages have grown quite a bit and we are struggling at the city to keep up with that. Specifically in my department. And we talked about auditors. I mean, we have people that we will interview, we will go through the whole process, we will make an offer, and they literally take that offer and they go shop that around to all the private sector accounting firms. And then they get much hot because they say, wow, the city is willing to pay this. Well, we are going to pay even more. So we are struggling to keep up. And when you think about, again, the city having a huge portion, 67% of our budget is personnel.

(32:04)Not only the cost of raw materials for construction projects and chemicals and electricity and fuel, the wage inflation is kicking in on that. So That is an issue on the financial transparency. We have actually at the city recently launched the open finance portal, which now allows you to see all of our payments online, including payroll and vendor payments. So the transparency thing is a wonderful thing as a controller, and when I was campaigning in 2015, in my first term, I campaigned on this. I said, we need more financial transparency in government, not only because the citizens demand it, but also from the efficiency standpoint. I mean, prior to me being in office, if you wanted to know what a certain department spent on a certain category, you would have to do an open records request and someone would have to go in and pull data. And again, That is time and inefficiencies.

(33:04)Now you can go online to Houston.tx.gov and you can see under the open finance portal all these expenditures drilled down by department and it is a great thing. I do not know, the standard will be probably as high as what we developed. And I think maybe That is one of the things, the unintended consequences, the level that we have aspired to is in line with the state of Texas Transparency Stars program. So we have transparency initiatives on our general fund, on our enterprise funds, on our debt, on our grants, all these different things to try and really bring the city of Houston up into the 21st century. Will others that follow the Transparency Act be held to the same standard? I do not know. That will be a wait and see, but in general, I believe it is a good return on investment. Our program will cost or actually cost us roughly half a million dollars on a 6 billion budget, and now we can track all these expenses.

(34:15)I mean, even from my department, sometimes it is easier to just pull it now from the open finance portal than going and building a widget in SAP and trying to pull these specific data sets. So I think it is a good thing. I think it will continue to increase efficiencies. And again, when you look at all the grant funds and requirements of all these different federal programs, whether it is ARPA, CARES, we have to be able to track all this money because as a city who has frequent hurricanes and gets a lot of federal funding because of these natural disasters, if you do not properly document this and do everything That is required, you can get these funds obligated. So financial transparency, I think, is a key piece of this.

Emily Brock (35:04):

I think that the key point is that the upside or the potential of where we can get with this is limitless. To be able to have an ability to go into Emma or maybe even some other electronic marketplace where you would get this kinds of data, whether it is Edgar, Emma, you know, kind of name it. I think though that in some cases our stomachs are bigger than our mouth and getting there will take longer than four years. If we try to ramrod a federal law into a four year required template, what we are going to end up with is a little bit less transparency than what they had hoped for.

Chris Brown (35:57):

And might add the cost because this is something, as the largest city in Texas, we think about 500,000 on a 6 billion budget. It is the day minimum. But for a smaller city that has a population of say, 10,000 and has a 10 million budget, if they are going to spend half a million dollars implementing a there, there is going to be a cost associated with this too, and it may be disproportionately born on the smaller municipalities.

Greg Pacifico (36:27):

With that, I am going to pause here, see if there are some questions from the group. So I will wait a minute. If not, I have plenty of more to ask. Let us see. Nothing yet. All right. So let us circle back on IIJA for a minute. I think a lot of people in this room probably know that volume's down about, I think it is 27% the last I checked from last year. I think a lot of people wait.

Emily Brock (36:58):

Who is counting? Yeah, know exactly how far down.

Greg Pacifico (37:01):

I think a lot of people felt that IIJA would be the saving grace that has not happened. So can we dissect that a little bit? Emily, why do not we start with you?

Emily Brock (37:11):

Yeah, and when we were had our pre-call for this, I said, I feel like maybe I am going to have to eat crow a little bit because last year at about this time we saw the IIJA pass. We knew that ARPA was upon us and there was a lot of things that were kind of swirling and twirling, and we thought to ourselves, okay, this is a unique opportunity with I a, let us say that a smaller community gets a rail grant or a infrastructure grant to rehab some Amtrak station That is going through their hometown. Well, they are going to rehab not just the rail facility itself, but then they are going to go ahead and do the street corner and then they are going to do the lights, and then they are going to make this nice so that there will be incremental investment in the project That is receiving IIJA funds.

(38:00)Well, that has not quite materialized in particular. I can sort of blame it on the fact that IIJA is still relatively young. We are only in our second year of a six year rollout of IIJA. However, the question is what are the bounds of this, the IIJA funds, what is it that they can go to invest in? And as we are seeing these no-fos come out, the notices of funding opportunity, there are a lot of sort of, not restrictions, but qualifications on eligibility including sustainability metrics and equity metrics and partnering metrics that help for this administration to achieve certain goals. But at the same time, it creates a few hurdles that potential applicants might have to jump through in order to receive the IIJA funds. So of course, we are communicating that back to the Department of Transportation, EPA, among others. What are the reasons why small to midsize governments aren't looking at these IIJA funds with a great clip and then using them to invest even more into their own communities? I think there is some element of ARPA hangover right now where we are in this sort of middle ground between ARPA and I that provides a little bit of discomfort in our market. And so yes, issuance is down, although we had hoped that it would be at least a straight line.

Greg Pacifico (39:37):

Got it. And Chris, any thoughts on that?

Chris Brown (39:40):

Well, I think we are all still in ARPA land and IIJA Land is great, but we have not really figured that game out yet. I think in talking with folks at the city of Houston, because I get calls and people say, oh, well there is this new funding opportunity. It is staying abreast of all these new opportunities and being able to have the resources to go after them. But I think we are still getting our hands around the regulations rules and what we can utilize this for. And I know, again, for the smaller entities, small to midsize municipalities, yeah, they do not have the resources. I mean, there may be one person that does grants and finance in some of these small towns, so they may not have the resources to go out and learn this and figure out and chase these opportunities. And again, the funding match, you know, have to be able to have the money in most cases to be able to take advantage of these opportunities.

Emily Brock (40:37):

And we would be remiss not to also mention the sort of final, I call it stimulus, but really it was reconciliation only. Democrats voted for the bill for the inflation reduction Act, which is kind of a misnomer because it is actually like a, climate slash healthcare bill, which is eventually sort of what the bill contained. Now there are potential opportunities for local governments investing in and or producing renewable energy now, not my PhD. There are a lot smarter people that are working on this whole energy concept and how it might be able to produce benefits through a tax credit or through direct pay. So we are working with the treasury right now. I know there are tax folks in here. We are working with treasury right now to try to craft the rules best as we can to create that direct pay opportunity for communities that are already thinking about this kind of stuff.

(41:40)I know Austin is definitely so a forward thinker. He says forward thinker in energy, in particular as comptroller. Haggar has said, you're looking at all of the different options out there. There is a tremendous amount of upside to that, but there is a finite window to make those investments. So as you know, local governments want to participate in IIJA and IRA. You are asking the federal government to produce workable guidelines and understand how you might be able to apply while the clock is ticking. And so a lot of people are like, well, do I buy this EV or do I not buy this EV? Where to go? That is the status that we are in with the Inflation Reduction Act.

Greg Pacifico (42:26):

Got it. And kind of circling back to budgets more broadly, Chris, curious if there is certain economic indicators that you watch closely. And then Emily, I am curious to hear if you think some of the smaller mid-size municipalities are reviewing the same things and trying to identify what those vulnerabilities are before they become an issue.

Chris Brown (42:56):

Well, so from our standpoint, my wife is the president of a manufacturing company, and I look at that ISM, PMI index, and Houston is a manufacturing city. We see that number now registered below 50, which means contraction I think for the last seven prints. So we are starting to see some of these things even in the sales tax numbers that we are getting. We had numbers that were high double digits, and now we are starting to see some prints that are high single digits. And there is that big R word that everyone keeps talking about recession. And Houston has been a little bit immune just because the price of oil now, from that negative $36, We have seen quite a rebound. Our economy continues to seem to be able to be resilient, but at some point it is coming. I mean, the slowdown is coming and the inverted yield curve, usually that signals a recession, but We have been in that particular situation for an extended period of time.

(44:09)So I think we are starting to see some of the signs. Definitely, as I discussed with the real estate side, on the commercial side, we are seeing some pretty heavy contesting of values and folks that, because these buildings are not occupied anymore, so if they are using a net operating income valuation method, which most of them do, when you had a building that was 95% occupied and now because of remote work, it is 60% occupied, that asset is going to get traded down and That is going to affect ultimately revenue that the city sees. So I think it is their back to the discussion from the previous speaker talking about the crystal ball or the snow globe. I really always say we always plan for the worst and hope for the best. And if you do that, it is a win-win. Because during Covid, I anticipated our sales tax revenue was going to be down 9% and for the first quarter or so, and then it started to slowly trace back up and people said, oh, I bet you feel really stupid.

(45:20)Sales tax came roaring back. And I said, but what if we did not get cares? What if we did not get ARPA? What if they did not pump trillions of dollars into the economy with PPP and some of these other programs? We would have been ready, the controller's office would have been ready, we would have set because we ultimately have to certify the availability of funds. And we were looking at the worst case scenario. So back to my former days, as a trader, the best deals are when heads you in, tails you in. So I think we really have to start preparing the government, even the state government with this 30 plus billion surplus, they need to start looking at what happens when these numbers start to normalize. That means reversion kicks in and we really have to start planning for a future that there is going to be a recession. It is coming. I do not know if it is here now, the numbers are starting to blink that direction. But we will see.

Emily Brock (46:23):

I would say yes. And I think smaller mid-size communities are certainly looking at inflation as sort of a current concern and then recession as an oncoming thing. I would also mention that a lot of, going back to the very beginning of this panel, a lot of smaller local governments are looking at the tail end of their ARPA dollars and they are saying, okay, government services get that. All right, I have got till 2024, how might I be able to utilize the law to create these ARPA federal funds and into operating expenditures? So sort of big shifts of blocks of federal funds that create sort of shifts in fund balances at the state and local government at the small to mid-size local government level. That is what we are probably going to see over the next couple 18 months. Now the last thing I would say is one of the biggest concerns that we hear from GFOA members consistently is talent and the lack of talent at the local level.

(47:32)You guys are probably feeling this at your firms, at your jurisdictions. There is a significant problem on our hands in the municipal market and what GFOA, what we are doing is we are partnering with a public services, human resources organizations and Mission Square research to try to figure out why is it that we are losing middle-aged women at sort of the glass ceiling level? Why are they shifting over into private sector service and how can we fill that void and how can we better understand how we might be able to get talent in from the ground up? Because to be perfectly honest, from an expenditure perspective, we are a human resource function of our economy. If we do not have people, we do not have public services. And That is a huge breakdown in terms of how we might be able to continue to maintain.

Greg Pacifico (48:27):

Thank you. And that just about concludes our time. If there is one question, we could probably field that, but if not, I would like to thank our panelists, Emily and Chris. That was great. Thanks so much for your insights and thanks for the Bond Buyer. Thanks for attending.