Transcription:
Douglas J. Kilcommons (
All right, good afternoon, everyone. first of all, from a housekeeping perspective, we realize we are the last panel prior to lunch. So we will make sure that we keep everybody on time here. And we also are encouraging everyone to be as participative and interactive as possible. So this is a great opportunity to do this with the live market survey. So look forward to lots of interaction and lots of good conversation. And again, promise You will keep keep on time here for the launch and the launch speaker. So for today first of all, my name is Doug Kilcommons, I am a Managing Director at KBRA in the US Public Finance Department. I am joined by several panelists here to my left. actually we are not in the order. I am going to introduce everyone. So let me just make sure I got this here.
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I got Rick Kolman, the Managing Director and Head of Municipal Securities at Academy Securities, next to Rick is Simon Wirecki, Managing Director and Head of the Western Region at Jefferies. Next to Simon is Susan Gaffney, the Executive Director of the National Association of Municipal Advisors, and last but not least Tony Hughes, Managing Director of Barclays Capital. So we are going to all participate in today's live market survey. And again, the way that this is designed to work is to have each of the audience members a vote on a series of questions that you will see on the screens on either side of us. And once we tally the votes each of us will share our perspective on some of the, those questions along with the answers that you all choose. So again, meant to be very interactive and we encourage lots of participation before that. I guess, show of hands is everybody able to download the app and has been able to follow the instructions that, that came with that. So I can read through the QR code if people have not been able to do that, but would rather not waste time if everyone has been able to.
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Okay. Well, hearing no technical issues yet we will jump right into the question. So the first question, let's see if that is up there. Perfect. First question volatility has been the name of the game in 2022 per ice data. The five, the muni five year rate sits at two point 48% and the 30 year sits at 2.8, 7%. What do you expect the muni rate to do by year end? And for this we would ask you to vote. Okay. Well, it looks like overwhelmingly letter a, our choice a seems to have one with rates in the year higher than current levels. It seems like a pretty unanimous unanimous decision there in terms of our vote, but let me turn it over to Rick for some for some commentary on that.
Richard Kolman (
Thanks, Doug.
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Just to kick it off for those that are not aware we have had another day in the long end of our market where the municipal market is underperformed or the treasury market 30 year treasury, actually, despite all the negative news is actually unchanged on the day and the 30 year MMB went up about eight basis points and we will talk more about that in a second. And so when one talks about rates too, in general, it is really about the whole curve. What do you think the short end versus long end, but clearly the long end has been under pressure. And just to spend, I think, a few minutes in terms of what we have gone through this year, and I think it is important to understand the dynamics because we are so different than the, than the treasury market. Obviously it is funny yesterday when I was thinking about, this question and when I was thinking about CPI and based on what various pundits were saying, who most of were wrong, it turns out today the people looking for more of a benign number and given the fact that it was going to be more benign, it was not going to be what the market saw today for those that missed it a few minutes ago were down a thousand on the Dow.
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I was under, I really felt that the long in the market had some opportunity to actually to see rates decline. And the reason why I felt that way is that if you, I like to look a lot of times, not just absolute rates, but the curve, if you wish of the muni treasury ratio. And if you look year to date, you have a major increase in 30 of munies of about 200 basis points prior to today in about 150 for 30 year treasuries. And we have had the opposite in the short end. So when you look at our municipal treasury ratio, the curve, if you wish, and this is also will explain highlights the oddness sometimes of our market. you have a 30, a three year ratio of about 65%, a five year about 69.
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And the five year average has been about 86% and 78%, the 30 year bond. The ratio prior to today was about 101, and which is above the 10 year average. And the five year average is about 95%. But despite the fact that on paper, it looks more obvious to buy a 30 municipal bond. That is not what we have been seeing in the marketplace in terms of support along the curve. And the reason why I was feeling positive about potentially the longer in the market, because if you look at a rated or a double, a 4% coupon municipal bond, look at that actual yield, then you look at the taxable equivalent yield. You are actually picking up almost a hundred basis points from a similar rated corporate bond. And every strategist I know in the market is putting that idea for over a month, but not a lot of takers which we needed in our market, because when we have heard a lot of talk, particularly as relates to ESG about investors, looking for investors, well, I think it was Angela Schmidt yesterday made the comment how our market this year has been crushed by bond outflows.
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last week, year, today was 85 billion, which is about a record. Last year, we had a hundred billion of inflows. So as Angela pointed out those outflows have really killed our marketplace. And I was with a major bond fund a couple of weeks ago. And frankly I am on the older side, a little more experience. And I remember the days we had an investor base that went beyond bond funds. You had Tobs a lot of our accounts, banks, insurance companies. So in today's market, it is all about bond funds. And unfortunately, typically they are all going the same way, either up or down. So, what you have had on market is demand deals are getting done, but the fact is the long in the market, despite how attractive it is been really stressed. And again, a lot of it just really relates to the bond outflows.
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Now the irony is the flip side of a market. If you look out to five years where I have just highlighted, it is the most expensive part of a yield curve versus taxables. That is where we have seen tremendous demand. I mean, you look at the California deal last week, the amount of retail insight, 10 years, or inside five, you look at the tribe deal, all these deals of late retail order periods. All the bonds are selling in the short end and the long run gets done, but it is connected dots. You do not have that outflow of SMAs and direct retail, and share a view that an advisor I know, and I do not mean I muni advisor someone who is a registered broker said, anytime that the equity market has done well, Rick, what I have seen is these guys take some chips on the table and because muni rates are up, they are buying short munies and that is been kind of the game.
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He said, so we are seeing lots of flow on the front end, very poor flow, in the back end. And, again, if you look at what happened today with CPI, you are going to look at a 75 basis point increase next week by the fed. Now everybody is saying 50 in November, in December, that is just going to create more negative headlines. it is going to create, more negative perspectives from your individual retail investor, who reads headlines, who reads enough. And unfortunately the conclusion is I think you are going to continue to see great demand upfront as our rates continue to go up front. But I agree with the survey that if you look at the long end in the market, it is going to be very challenging unless there is a sea change in the treasury market, which does not seem to want to happen. I think it is going to be very difficult for the long and better market to show a declining rates as you go through the balance of the year.
Tony Hughes (
Hey, Rick, let me jump in for a second. That the Calgo deal that came last week, that Carmen Vargas and Jane Lafa and Christine hu and my team put together was an interesting data point. I guess when you look at everybody in this room, thinks rates are going up yet. Yet we had a billion and a half dollars worth of retail presale that went out well beyond five years. I mean, it was beyond 10 years and the institutions did have to come in after that. But it is, I don't know if it is inconsistent that all these people think that rates are going up yet, we had huge demand from retail investors who are obviously putting their money to work for more than just a few years, which you would think in a scenario where everybody is thinking rates were going up, they might be pulling back and just focusing in on five years or less, but interesting conversation,
Richard Kolman (
There was a headline. Yes. I just wanna share if anybody saw it, it was kind of summarize, it says that municipal investors purge holdings, and it really related to the fact of the bond outflows and related to the fact that the individual has basically has been S spooked by the fed was kind of the word that was used. And they are continuing to watch what the fed does, and that is where they make their decisions in terms of what the Fed's going to do. And even though one could try to turn that into a positive clearly that is not what we are seeing on the long end.
Douglas J. Kilcommons (
Great. Well let's move to the second question. So put that up on the screen there. Thank you. So issuance in 2022 has come in 14% lower year to date, largely driven by a drop in taxables. What is the expected effect on the issuance volume to close out 2022? And the choices there are 2022 will end up about the same as 2020 and 2021, approximately 475 billion option B 2022 issuance will rebound and rise above 2020 and 2021 greater than four 75 billion or C 2022 issuance will fall below 2020 and 2021 levels and be lower than fortune 75 billion.
Music (
They're creepy and they're kooky, Mysterious and spooky, They're all together ooky, The Addams family. Their house is a museum, When people come to see 'em, They really are a screaming, The Addams family.
Douglas J. Kilcommons (
All right. Another overwhelming response here for one of our choices and that is better C or number 3 2022 issuance will fall below 2020 and 2021 levels. And for this, we are going to turn to Rick and Simon for their thoughts and views. Rick,
Richard Kolman (
Want me to kick it off?
Douglas J. Kilcommons (
Sure.
Richard Kolman (
Go ahead. first of all, just wanna say the panel had nothing to do with the Adams family's selection as the moves, he just everybody knows it was we, we do not take any any support for that. So on the different topic let's talk about volume and I think again, when you see what happens today with CPI and interest rates, it is probably more of a reason of groups that are feeling as though it is going to be difficult to see a big increase in volume, but I thought it would be worthwhile just to go through a few data points about the market overall, because believe or not, it has not all been dismal, but yeah, volume is down about 12, 13% on the year. And if you go back to the beginning of the year reading various forecasts, there were a number of forecasts between 500,000,000,500 50 billion driven by many thinking that you could see taxable volume of as much as 150 billion.
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But the reason for that, no one expected what we saw in the market this year, the big increase in rates. So clearly as those rates increased, that taxable volume in particular has really dropped. So if you look at taxes and volume year to day, we are kind of on par to be kind of close to last year, were not that far away. But if you look at, taxable, municipal volume this year it is in like the low forties and last year we were, about 115 billion. So clearly we are out on pace to be close to last year. And we fundings this year about 32 billion, again, materially behind last year, which as, a lot of the refunds been done taxable. So those sectors, when you think about it clearly have had a big impact. And if you look at where we are at the end of August, and you just looked at the average per month, it brings you to a number of about 425 billion, assuming you want to go by the average.
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So but one thing I just wanna share in a positive side is that, it is interesting, even though our volumes been down to me, it is actually surprising it was not down more given where the market was and how bad it was. Number two when you add in the California loan last week and the Pennsylvania competitive deal of about a billion, we have had to date 2028 deals that have had size that are in excess of a billion, which is an all time record and it is, which is kind of impressive in a very tough market. So yeah, volumes down. But as I said, trying to find something positive in here, it is impressive that you had issuers who basically, in my opinion, follow the mentality of the investment grade corporate market that I have to be cognizant of expenditures.
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What are my needs for my projects. And I to think of this in the long term perspective and despite an economic environment, or right. Environment is important for me to borrow for the good of my, of my enterprise. So I think Tim is impressive that a lot of issuers thought that way. And as I said, that is common practice in the investment grade corporate market. So there was a positive it is funny coming into this, I talked to a number of friends of mine that work at various major shops to get their opinion last week. And it is funny, there was a consensus that summer's behind us. Volume is going to pick up feeling good about the final quarter, which was nice to see, but they all had a caveat that, but of course it all depends on what happens with the fed over the next couple of weeks. So I am sure if I went back to them all today, they would probably be a little less optimistic about the potential calendar. And it gives you a sense of how much we are correlated to what is going to come out of the fed. So, I think it is hard to fight the group here, but with that, I will turn it over to Simon. Yeah.
Simon Wirecki (
I mean, thanks, Rick. I agree with everything you have said. And I think when you look at, what hass happened this year with the fed, with the volatility and rates and the trend towards higher rates, it is not surprising we are down, as much as we are, and also not surprising the audience, does not think we are going to have some miraculous turnaround, in the final quarter of the year. but as you said, when you unpackage the numbers, while we are fundings are down 50% and a big portion of that is taxable, but an a not insignificant portion are also tax exemp for fundings. New money is up 7% this year, and we are likely to end 20, 22 as the highest year of new money volume sort of in recent history. which you would think with inflation growth, that you would always have a positive trend in new money, but that really has not been the case.
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And when you look at what happened, post the financial crisis, and then the BS era, new money between 2011 and 2017 really stagnated. So it dropped, almost 50% in 2011 and only got it back up to 200 billion in 17. And again, this year will likely to end, 375 plus of new money. I think the interesting question is really what happens next year and what happens in 2023. And then as Rick said the single variable that correlates greatest to project volume is interest rates, but that is largely tied to the refunding side of the equation. And if the new money trend continues. And I think a lot of people think it will, it is possible even as rates trend higher and refundings kind of continue to moderate 2023 could be even stronger as we see, a continued need for new money infrastructure, a lot of deferred maintenance issues, particularly in light of that low volume, we saw for really an extended period. and, and potentially some, green shoots ahead in 2023 in spite of what will be a challenging sort of technical environment and likely to be a challenging rate environment as the fed, navigates the CPI prints and the overall sort of economy,
Tony Hughes (
Hey Simon, do you feel the same way? If we are in a recession, the new money is going to continue to step up?
Simon Wirecki (
I think it depends. If you look at what happened in the last recession, really new money, did the fed fed policy and the governmental approach with Babs did sort of push new money out using the governmental sector as sort of a bridge to help rebuild whether or not that happens, I think remains to be seen, but it wouldn't be surprising. if actually we do see kind of a step up in new money, even if we enter sort of a recessionary period.
Richard Kolman (
Yeah. The one positive. I think Tony, if you go a recession, I was chatting with one strategist this morning, actually just for him down. He said, if we start to go away from inflation discussion and start to focus on recession, he said, all of a sudden rates can come down and whether that means issues, jump in. we will see. But that would be a positive potentially of rates coming down. Sure.
Douglas J. Kilcommons (
Yeah. Great. Well, let's turn to a credit question. So put the next one up on the screen. Okay. So state and local government credit conditions going into 2022 had improved now with volatility in the markets, geopolitical turmoil, inflation, and a potential recession on the horizon. How confident are you in state and local government's ability to weather these challenges?
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Okay, so we have a little more variability with the responses here. looks like state and local government are in a moderately good position as the winner, but there is a slightly smaller camp that thinks are in a good position even smaller camp and a moderately weak position. And it looks like only very few think that they are in a much weaker position. So Susan and I are going to take the response or provide our view on this. I will just start by saying from the rating agency, KBR a perspective one of the things that we have been very conscious of when we have looked across the 2021 and 2022 year to date landscape is to really looking at what component of local government revenues are actually one time in nature. And what component of that is really been driven by the stimulus dollars and looking specifically at how those stimulus funds have been applied, what is yet to be spent have all the moneys been spent, have they been used to replace other revenue sources that were under pressure during the pandemic?
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Have they been applied to pay debt service, really taking a look at what, where those one time revenues are today and thinking about what happens beyond today, what happens when they are now spent to zero and a local government credit is needs to function how that will take place? I will say that, the obviously inflation, we have touched on that in a few few of our panelists commentary this so far this morning that is something clearly when you think about a low government's ability to provide services to its constituency, the inflationary pressures are real, and they trickle down not only to what's going on to provide basic services, but also in the labor front. And I know labor is a topic that is something that all of us focus on, because again, it has real impacts on the budget.
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And then obviously pensions and OPEB, which I know have been touched on at the conference thus far those pressures continue to Mount and they were present even before the environment that we are in today. So those are things that we look at as potential issues or sources of concern on the flip side of that, we do realize that governments and especially very strong, well run governments put in place processes, procedures to deal with some of these challenges as they present themselves. One of the things that we focus on heavily in the K B a approach to our ratings is the quality of management being able to actually hear from management, what they will do if the worst case scenario unfolds, how they will think about at an environment where the budget is under pressure, what they might cut first, where there is the ability to make painful decisions, but how they will approach those.
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that is actually a very real part of our analysis. So our ratings reflect when you look across the portfolio, those governments, even though they are under stress where we feel like they will, they will be able to ride through this period versus those where we have more of an issue. There is certainly a ratings spread there. So I will just, before I turn over to Susan, we will just close by saying, I do agree that the local governments are in a moderately good position. I think it is one that we are going to have to watch. And as we have said in so many different capacities over the course of the pandemic and for so many different sectors, a lot of this is yet to yet to be known what happens now that we are hopefully in a post pandemic operating environment that we do not see virus, variants, surge again. And if cities have to go have to close or whatever the case is, these are unknowns that we are going to have to keep an eye on, but at least for the majority of the law governments that we look at they are entering whatever period we are about to head into with from a position of strength given they had some federal stimulus money to buttress operations. But again it is still unknown where we go from here. So, Susan, I will turn it over to you now for your use.
Susan Gaffney (
Well, Doug, I agree that the fundamentals of the sector are very strong and just like the last crisis of 2008 while it hurt a lot our sector actually did quite well comparatively and expect that to continue. I surveyed many of our members and they agree with what the audience says that everything will end up in a moderately good position, but you mentioned those external factors and there is a whole package of them, right? There is the, whether it is inflation and recession issues. the labor shortage I think is really really a concern in the public sector. And so that is somewhere where it might be felt more than in the private sector. And I think that governments are still dealing with a lot of supply chain problems. I talked to an issuer last week who they are ready to build this new building, they are waiting a year to get the steel. So I think all of that combined with the labor shortages combined with the economic factors are still pressures. But again, because the fundamentals are strong and the foundation is strong within the local governments that they are in a modestly good position to withstand the current economic conditions.
Simon Wirecki (
Great. I would just say, it is an interesting survey result here because from a metrics analytics standpoint, I think you could argue sort of state and local governments financially are probably in the best position they have ever been from a fund balance, revenues. And yet I think the answer here reflects sort of the uncertainty and concern people have that even with the financial strength today, the long term challenges are very real and very concerning and that all the reserves in the world may not be enough for stall a really challenging economic climate that that could come. Right.
Tony Hughes (
I look at that result. I do not see it as mixed as much. I see 80% that says everything is good. Right? You add, I do not have my glasses on that for 31 and 47 is 80% says everything is fine or very good yet my view is that credit as a term really depends on where you sit. I mean, if you are a water district in the central valley right now trying to provide service for developments there, or if you are a small county dealing with pension obligations and pension requirements that are just taking up a massive portion or general fund, or if you are a sales tax issuer that maybe head issued a bunch of bonds with a relatively aggressive, additional bonds test, and now find yourself looking at a recession and a decline in sales tax revenues to the point where bonds could be, reserves could be tapped and things like that.
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I guess my view is that is I see that result and I go, okay, that is, that could be true? Cause on the other side, as I mentioned, we did this cow deal last week, nobody asked a single question about all of these things. It was just how many more forests can I get? it was not really a, there was not a lot of concern about fires there. was not a lot of concern about earthquakes. So I think, listen, you guys are all in involved in this credit stuff and it is very nuanced. it is very specific and it is hard to make a blanket statement, but yeah, we are well positioned, but these plagues of I have got written down here, climate change, recession, cyber threat, pensions governance employee retention, out migration of California energy. And, and how is this state going to feel? when the capital gains experience of this last year, next year turns to something much less. I mean, it is going to be an interesting picture.
Douglas J. Kilcommons (
Okay. We will get to the next question, which is somewhat credit related, somewhat crystal ball reading. So we will put that on the screen.
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Okay. In July 20.5 million people, boarded LA Metro trains and buses, a third less than in pre pandemic, July, 2019, Metro will get back to its 2019 ridership numbers in 20 23, 20 24, 20 25 or later, or never. Okay. This is interesting. I expected there to be an overwhelming number four choice here. So I am encouraged to see number three as you overwhelming winner. so Simon and I are going to tackle this one. So Simon sorry. Tony and I are going to tackle this one. So Tony, why do not you start off?
Tony Hughes (
Yeah, thanks. interest interesting result. Like I think one of the first questions I might ask you all in the audience is, do you all are, I am not sure how to phrase it or way the question, but did that between March 2020 and December, 2021 there was a free ridership on Metro trains and buses. Do that? Yeah. well there was. And what do you think happened to their ridership?
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It stayed pretty high. There was a big dip at the beginning, but as they made that decision to go there, before they took that policy off they were in the sort of 85 to 90% range with free ridership Cal train, which is the system up in the bay area that runs from San Francisco down to San Jose. And is it very much of a commuter train. Where in 2019, you could not get a seat and if you had a bicycle, you might as well not even try fell to 20%. And now they are bumping along around 30% of ridership metropolitan transp transit system down in San Diego, fell to 30%, but is now back to 75%. And not necessarily a transit equivalent, but not a transit system, but in my mind, a transit equivalent is as Derek council was talking about the bay bridge, which is a huge system connects east bay to San Francisco is not yet back to where it was.
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So I do not know. I think this Metro experiment was very interesting and I believe that when you realize some of the things that came out of that the carbon intensity of the system was improved because they were not waiting as long people were able to board buses faster. There was more throughput headways could be reduced. And and there are more people off the road that we should actually be thinking about situations and places where transit should be free because, or are free for the riders, because in fact, when will they get back to 2019 is kind of an interesting question, but even in 2019, the fair box recovery rate LA Metro was on a NA on a nationwide basis very low and transit refair box recovery rates nationwide generally are pretty low.
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There are a few systems people point to as being as significant fair box recovery systems. The trolley that runs in San Diego from from Tijuana up to up to San Diego is very high. And there is others even Caltrain was getting in the high sixties, I think at the time, but we should recognize that the good that transit creates for all of us in terms of carbon, in terms of congestion, in terms of a stressor, a much less stressful commute. I mean, there is almost if that train or that bus does pick you up close to where you are starting and drop you off close to where you want to go and you have a seat and you do not have to drive, it is a wonderful experience. so I think this is interesting if things do not change, I think that answer is probably pretty correct. And I think the answer might be that we will get back to 2019, probably in 2028 when the Olympics come to LA. And and it will be an opportunity for people who come to Los Angeles and are all afraid to drive, to get on the trains and the buses. But that is my couple of comments.
Douglas J. Kilcommons (
I will just add that coming from New York and dealing with the MTA and also being one of the analysts that covers the MTA for KB a lot of what you are seeing in other major cities, you are seeing magnified in New York. One of the keys to recovery is a better understanding of what the commuting environment looks like. Obviously five days a week seems to have fallen very far out of favor, as a result of the pandemic, some offices are back three days. Some are two days. Some are any number of days, some are no days. And so trying to figure out where that lands is going to be largely the key to figuring out where the ridership lands. And again, a lot of the unknowns we spoke about in the previous question apply to transit as well.
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I will say that the MTA now this week for the first time is approaching 70% of where it had been before the pandemic, it had been stuck at a lower level for quite a while. And then again, very much the driven by where offices are in terms of occupancy. And there is a it is statistic that that is been quoted in New York right now. office buildings are only occupied by five day a week commuters at 8%. So it is a very low number when you start looking at the traditional five day a week commuter. And so again, figuring out where this is all going to land is really dependent upon that those working patterns. And then ultimately at some point, when again, similar to the question earlier, when stimulus runs out and you are left with a system whose ridership is way down, that is going to unfortunately bring the conversation on around service cuts, who bears those service cuts, how those service cuts that get decided.
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Those are going to be real decisions that need to get made absent some other source of support for these very important agencies. So again, it is just something to think about, but again, it is encouraging to at least see people feel like that we will get back to 2019 at some point. But again, I also agree with Tony that 2025 could be much much later. Okay. So I know we are running up against the top of the hour, so we are going to move to one last question and then a closing question. So why do not we go to question seven, put that up. Okay. The legislative analyst office estimated the California legislature had a $53 billion general fund surplus to allocate in the fiscal 2023 budget. When the fiscal 2024 budget comes around, will the surplus be bigger, smaller or a deficit? Okay. Overwhelmingly smaller seems to have a one. So with that, I will turn it over to Simon and Tony for their view.
Simon Wirecki (
Yeah, sure. Thanks, Doug. And obviously not a surprising result when you end up with a 53 billion surplus that you are comparing against, I think when you look at that 50 plus billion dollar number it is important to remember largely what the driver of that surplus was, which was timing. And the trying to forecast revenues in may of 2020 as we were in the early stages of the pandemic, certainly presented, a lot of challenges and uncertainty. And I think very few predicted that the pace of recovery in revenues and in sort of the state of the economy would be as swift as it was. And as a result the year continued to progress better and better. And I think as a very big positive for the state, they were able to allocate a surplus instead of trying to solve around a deficit.
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And would obviously agree that the likelihood of that happening again is very small. And really the question going into 2024 is, what does the outlook look like overall, as I think everyone knows the state's revenues largely driven by personal income and to a degree by the corporate corporation tax that now reflects a piece of personal income tends to track pretty closely with the overall health of the federal, but mostly the state's economy. And certainly fiscal 2024 provides a lot of uncertainty with what is going to happen. And I think, the CPI print today as Rick hit on creates even more uncertainty, I mean, when will the fed hit their terminal rate target? What is that terminal rate target going to be? And I think the consensus coming outta today seems to be, that is probably a higher target than it was yesterday is tha now four and a half percent and how long will it take the fed to get to that four and a half percent target?
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And as that fed funds target rises does the likelihood of a soft landing decrease and the likelihood of the fed sort of triggering and needed recession to moderate the inflation picture increase. So I think a lot of that is going to play out. And the timing of that is going to create a lot of interesting questions for the state as they try to forecast, revenues in January for the 2024 fiscal year budget. Certainly the picture, year to date or fiscal year to date is a lot different than where we were even one year ago. Even a year ago, they were running significantly above projections, 20%. And through the first month of the fiscal year, I think revenues are down 12% and that is fairly consistent with the trend between the may revised forecast and the last month of the last fiscal year, which was also down. So I really think the question becomes are they able to maintain budgetary balance or does it end up creating a deficit style situation where the revenues are actually going to decrease, beyond what they have held in reserves, which are very significant. But as we have seen the volatility in economic activity can rec havoc on revenues, particularly when you look at the pace of revenue growth that the state has experienced in just the last two years.
Tony Hughes (
Yeah. Yeah. Those are good points. Exactly. Do not remember California. We started here with the gold rush, right. In 2000 or in in 1849. And what followed afterwards was just the first of many boom bust cycles that we have experienced here in California. And I for one can imagine a similar sort of cycle here, not withstanding the current situation, mostly because I think that I read, I was reading in the paper we have a governor who is obviously wants to run for president, right. He is got three things that he really wants to use these resources to tackle climate change, chronic homelessness. And he wants to expand healthcare because these three things, as we know, are California's unshakeable values. That was that is sort of his quote. And I with it obviously a democratic controlled legislature and a governor who has vision and wants to create a platform for a nationwide run for office, a significant run for office, I can see not just the uncertainty in effect on the revenue side, but I can see the expenditures doing what they do when there is a lot of money sitting around looking for a place to go, especially when you are talking about three problems climate change, homelessness and healthcare that probably have an insatiable ability to take down revenues.
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So, I am interested to see, I certainly hope things continue a pace, but if history is any lesson the hangover is, there's a party and then there's a hangover and it that is California's history. So we will see how it goes.
Simon Wirecki (
Yeah. I think that is right. And I think, as much as the administration has done to allocate surplus and excess monies to expenditures, they designate as one times the constitutional funding mandates are very real. And as the actual revenues come in at these higher levels, I think it gets harder and harder to sort of allocate incremental spending to one time. And when we have the inevitable pullback will be interesting to see how those mandates change the budget picture. Yeah.
Douglas J. Kilcommons (
Okay. So I was told we have time for two more questions, so we are going to get to the next one right now. And then I will wrap it up with our final question. let's see. Okay. Question eight, what will have the biggest impact on the public finance industry heading into the next two quarters implementation of the infrastructure, investment and jobs act? The inflation reduction act ESG, which we heard a lot about in the last panel, inflation rising interest rates, which we have talked about today, federal reserve policy, issuer credit, federal state, local election results, or other. Okay. Yeah. That makes sense. Overwhelmingly number four, inflation is rising interest rates. ESSU zero. Would you after all this? Wow. wow. Zero a surprise. Yes. So what waste
Tony Hughes (
A lot of time on these panels in that.
Douglas J. Kilcommons (
So Susan, I will kick it over to you to share your view on this.
Susan Gaffney (
Yeah, I think again, when I surveyed my members, they came up for them pretty much the same results and it is those external economic factors on inflation and rising interest rates. And also what the federal reserve is going to be doing. that is really going to affect the industry. Like not only for the rest of this year, but into the next year. There is God forbid, Congress do anything. and if there is any kind of tax package that comes forward, that the bright light of possibly a new direct subsidy bond program, or a advanced funding, or even bank qualified for the small shores here there is, that is still lurking around, it is unlikely, but that would be also something to keep an eye on that could possibly change the narrative and the conversation that is going on.
Douglas J. Kilcommons (
And I would just add I actually agree with the audience on this without question I think all of these things that are listed here will have an impact to some level. I do think that ESG is going to have more of an impact than the 0% that is shown up on this screen here, but we can debate that at another time. I also think that obviously if we do head into a recession, issuer credit will become something that we will be very intently looking at, particularly in some of the more vulnerable sectors like healthcare for one higher education, obviously there are different parts of that market. All universities are not create equal, so there will be some parts of that industry that will be disproportionately impacted. And so really, I think in a recessionary environment all bets are off but credit will be very important. All right. So we are getting to the most difficult question of our panel today. So hope everyone is ready. I know lunch is awaiting us. But let's get that on the on the screen who will win the world series this year, the Dodgers, the Padres, the Mets, the giants or the Yankees, obviously the Yankees but do not let me influence you on that, but let's see what the audience says.
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All right.
Tony Hughes (
The giants
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Who could have said that
Susan Gaffney (
Poor San Diego.
Tony Hughes (
Well, I think the giants are mathematically eliminated today.
Douglas J. Kilcommons (
Wow. The Mets came in higher than the Yankees. I am actually stunned at this result. Holy Cow.
Douglas J. Kilcommons (
All right. Well, that is our live market survey for this conference. Thanks everyone for your participation and enjoy the rest of the, the sessions.