Luncheon

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Treasure (00:08):
Thank you. Thank you very much. It's great to see everyone, and I'm going to call my lifeline up here with me, my deputy over my finance investments and cash management, John Sheldon, to join me since he started about a year and a half ago. And I'm not sure whether everybody has really heard what we're doing in our office. And so we thought this was a good opportunity to just talk a little bit about what I'm working on, what our office is working on, what the state of our state is these days since AB 218 is very depressing. I know they wanted me to talk about that and I said, well, I'm not really one of the experts. Mike Fine is the expert. So they said, well, he's going to speak at nine o'clock and 10 o'clock. And I said, well, I will be here to listen to his presentation.

(01:07):
And it seems like he's got it all under control. We thank him. I know that he has been taking a lot of arrows for his leadership and the recommendations that have come out from the report, but sometimes leadership is not always easy. So we really appreciate Mike for stepping up. So I'm just going to talk a little bit about the state of the state. I think we were doing pretty good the last couple of years, even during COVID, we faced record surpluses. Our first year of COVID, we had a $46 billion surplus. The second year we had a $96 billion surplus. Those are record surpluses that I wish we would see again. I doubt we'll see them ever again. And because of the laws that we have in the state of California, we can use certain excesses for infrastructure or we have to return it back to the voters.

(02:09):
And so the governor did a little bit of both. He did have two rounds of refunds or prepaid debit cards. Some of you may have gotten it, some of you may have thrown it away thinking it was a solicitation, and then put a lot into infrastructure. Essentially gave 120 legislators something on their wishlist, something that they've been wanting to do but haven't had the financing or the funding to do it. The really hard things like bike paths and community pools and libraries, those are the ones that are the hardest to fund. And so lots of construction happening, lots of activity. Even during COVID, my office was still issuing bonds as many of you know, and we didn't miss one bond sale and John's going to talk about the bond sales after. So I'm really proud of my office's work and the state, and revenues are doing a little bit higher than expected than the budget, which is great, but we are highly dependent on our tech sector.

(03:26):
Most of the gains or the revenues during COVID did come from personal income taxes and corporate taxes. Many of the companies were hiring, they were still offering stock bonuses and options and merging. And then post-COVID, they started laying off a lot of workers, but then AI slipped in and 35 out of the 50 top AI companies are headquartered in California. And so we are highly dependent on these unicorns, and I kind of joke that we should maybe change our state animal from a bear to a unicorn. And so people now put up the bear with the unicorn horn on it, but clearly AI is here to stay. It is controversial to government because a lot of government people don't necessarily understand it, and there's really ways that AI can really help people, but it also could harm people. And so that obviously is one of the discussions.

(04:36):
We are still very strong in aviation. We're strong in gaming. The governor doubled our film tax credits to try to bring back more filming to California. Life sciences is doing good. We just had a recent symposium last week at Cal State LA on manufacturing. Because of these tariffs, they're supposed to create an atmosphere of companies wanting to onshore, keep everything here in California. But we all know that we cannot manufacture an iPhone no matter how hard we try, it'll never happen all in California. And so these tariffs have really shown the impacts to our state, to our economy, to our relationships around the world. But more importantly, it is a tax on consumers. And so our consumers are really complaining about the high cost of everything, and that's what they want government to do is try to lower it. So I'm very happy that in the US Senate now, some of the Republicans are trying to buck what's happening and try to force zero tariffs, for example, try to get back to basics.

(05:52):
For example, Canada does not sell any California wines. They do not sell any Kentucky bourbon. Any product that is made only in California, Canada is not selling. Mexico—we depend a lot on our Mexican counterpart, not only for labor, but a lot of our farmers now are growing in Mexico because of the seasons and because of the workforce. And so we are just really tightly connected globally, and these tariffs are a huge problem. Agriculture is having a difficult time because of the employees, all the raids. Our construction industry is also impacted because many of our construction workers were also Mexican. And so hopefully I'm hoping that we can get over these tariff wars and get back to business. Like I said, we're doing a little bit better in terms of our revenues here in California, so that's a good thing. However, every day seems like there's some gap that is going to happen. The most recent one is SNAP and then also childcare. We heard about foster youth. I mean everything that California is strong.

(07:12):
The fact that we have gone from the fifth largest economy to the fourth largest economy this year means that California is doing something right. We speak over 200 languages in California. We fully embrace diversity, equity, and inclusion. I will not back down; sometimes I'm the only one in a room talking about it. With investment folks, I know because you're getting pressured, you're getting threatened. But in California, we have a governor who is standing strong. We have an attorney general who is also filing many lawsuits and all of us that have been here—my parents came for the American dream. Now it is the California dream because people like me cannot make it in other states. Okay? We are getting discriminated against and many of the laws are prohibiting foreign nationals from buying real estate, for example, in their states. So I do a lot to welcome everyone to come here.

(08:11):
A lot of foreign direct investment wants to come to California. We are trying our best to open up those doors, show them the pathway, introduce them to certain industries, certain places around the state that are more friendly to certain types of investments, and then also wooing people from other states. I know Texas—whenever I hear that Texas thing, I'm like, okay, but cheaper isn't always better. And many of these tech companies that move to Texas all of a sudden start coming back because the young people don't want to move to Texas. It's not friendly for women and minorities. So they are trying to come back, but they need to know who to talk to, who is going to kind of walk them through. They all want incentives. They want free grants, and we all know in this room they sometimes have to issue debt.

(09:07):
And so that is always an option, trying to figure out the best way for them to fund and finance their manufacturing plant or their warehouse or whatever. There are lots of battery storage now and data storage is a big thing that's happening around the state. So I am still positive, but it is a lot of pressure on us. Last year or two years ago, we issued 17 distressed hospital loans to most of the rural and smaller hospitals around the state that were having difficulties. It basically allowed them to stay open, but they continue to have operating deficits as well as trying to meet the seismic requirements. And so healthcare is number one for many of us. And so we anticipate that we're going to have to do a little bit more in that sector. Education is being attacked in terms of research dollars. When you stop a tenure research project, it's going to have to start all over again when you hire the people back.

(10:10):
So we are pushing hard not to have to take those hits. And everybody's stepping up with different types of ideas, just like these jobs bonds, they're constantly asking us for ideas. And when they do, I look at John and I go, "John, do you have any good ideas?" The other day, before I turned over to John, at the manufacturing symposium, I said, "Hey, we're always looking for good ideas. What do you have?" And someone said, "Well, Texas is thinking about opening up their own stock exchange. What about California?" And I said, "That would be brilliant. How do we do it?" And I said, "John." And John goes, "I'll run it." I go, "Perfect. Here you go, right?" We're always open to good ideas, trying to keep businesses here, trying to grow our economy and trying to make sure that everybody has the opportunity for that California dream. So John,

John Sheldon (11:09):
Hello everybody. Thank you Treasurer. As the Treasurer said, I started about 18 months ago, which it seems actually shorter than that to me. It's been a fun 18 months. I would start just by saying I probably should have thought about public service a while ago. It's fascinating. It's interesting. You're kind of under the tent, all of you, bankers and lawyers who don't get to see everything that happens at the issuer level, it's worth a whirl. So if you ever get the inkling and want to talk about it, I will be a huge advocate for it. Also, as the Treasurer points out, I think the morning sessions organized by Robert at CAC and his team were fascinating and interesting, and I agree kind of depressing as well. But I did want to just offer a couple of thoughts on that before I turned to what's been going on in the Treasurer's office, at least at the finance level. Clearly, Mike Fine wrote a fantastic report. If you have not read it, it's worth a read or at least read the executive summary; take an interest in it. It's very interesting, and I think as all of the panelists said, victims should be compensated.

(12:34):
It's a very, very depressing subject, but victims should be compensated. And I think the point of the report was to figure out how to do that, how to execute it. And I think a lot of you in the room, some of you have already started to participate, others are, I'm sure, looking at it very carefully. And as a lot of your clients will face similar challenges to some of the ones who've already started to settle and or go to trial, there'll be plenty of opportunity in that case. I don't say that at all flippantly; I say that meaning we need to figure this out. It's a lot of money and we're only kind of at the beginning, so keep your eye out on it. The second point I'd make is, to me anyway, there's a lot of similarities to what we've been dealing with with disaster prevention, wildfires in particular here in California, to this kind of situation.

(13:25):
You have a very, very complex situation involving insurance companies with very different levels of risks, lots of litigation. And if you look at what Southern California Edison is trying to do with a victim's compensation fund, that's another point that we didn't really cover too much today, but it's in Mike's report as well. I think it's a very, very good idea and worth focusing on. And I would also advocate taking a look at that in relation to what some of the trial attorneys and private equity firms are taking out of the system. That's just money coming out of victims' pockets. So that ought to be acknowledged. And of course, insurance costs going up in this marketplace for our local governments just as it's going up for all of us who own property is a difficult situation. The only other piece I'd mention is there's a lot of good recommendations in the report; they're worth taking a look at.

(14:23):
I think a couple that stand out immediately obviously are stretching repayment terms so that you don't necessarily even have to issue general judgment obligation bonds; that could be one easy solution. I would just leave it as the legislature has a lot of thinking to do. I think the Treasurer has been a very good partner to the legislature over years. And I think that's one thing I'd say that I've gotten to do a lot of just in my first 18 months is spend time thinking about legislation and how it can work more efficiently and transparently for all of us that live here. There's a lot of great ideas out there. There's a lot of great ideas that cost a lot of money. And of course, the first thing we see out of legislature usually is, "well, let's just borrow it, right?" Well, let's borrow it, and then you get legislation that has no parameters around the borrowing whatsoever, and maybe it's not even security for that borrowing.

(15:16):
So we've been getting to spend a lot of time on those kinds of issues, which is actually pretty interesting to me. From the standpoint of the bigger picture on the Treasurer's office on the finance side, to get into a handful of things, I think the Treasurer mentioned the $3 trillion of transactions that kind of flows in and out of the treasury is one point of focus. We have the fortunate situation of having some fantastic depository banks we work with, I'm sure some who are sitting right here in this room, but our central treasury and securities management division handles all those transactions in conjunction with other state departments and the controller in particular.

(15:57):
It's kind of our bank, if you will, at the state level. The debt markets, which all of you are very familiar with, have been good to us this fall. We went to market a number of times. We were not upended by the April tariffs announcement, which I can't even remember the phrase for that now. Was it like Redemption Day or something like that? It was some silly name thing, but it certainly did a number on us during the market, at least in one of our sales in April. We did not have that situation in the fall, as you know the markets have been very strong. We've seen great demand for our bonds. We finished up our fall borrowing last week, I believe it was, with a competitive GEO sale that followed a couple of other negotiated sales. I want to thank the banks that participated in that sale.

(16:52):
And we as the state, again, are fortunate; we have a lot of focus and we get a lot of participation in our competitive sales. And that does not mean we won't continue to also use the negotiated market; we will for a variety of different reasons on that front. On the bond front, just to finish up, we're spending a lot of time on the Wildfire fund. Y'all know that there was legislation passed to extend that fund. We will spend some additional time on trying to improve the borrowing mechanisms that's in that bill. There'll be some trailer legislation that'll come, I think relatively soon. And then on the investment side, another group that I get to oversee, we're still sitting on about $150, $160 billion of cash. A chunk of that is the Local Agency Investment Fund, which we take very seriously in protecting that money and providing another avenue for local agencies to invest their money.

(17:57):
I think as the Treasurer said, we are looking great on revenues at the moment, but there's a lot of turmoil probably to come through HR 1 as you all have probably been reading. And I think protecting those resources and using them over time is going to be the wise thing to do. Of course, that's not our choice, that's kind of the governor and the legislature, but we'll be in execution mode. And I often tell people that ask me how it's going: I love what I'm doing. We are executing. We're trying to be as efficient as we can in the Treasurer's office. And in a lot of cases, we're handed things to do like, "you need to do this, execute it." And I think the Treasurer's given us a lot of leeway to do it in the most efficient way.

(18:42):
And that's again a testament to her leadership, which is fantastic. And then finally, I'll just end on: we have a lot of information on our websites. That website is, I think, going through a redesign as we speak. The Treasurer has always emphasized to me since I started that we're all about communication and transparency in everything we do—in the markets that we enter, in the legislative arena, in the various departments in state government, and our state and local government. So what I would say is if there's ever issues that you all have that you're not feeling you're getting enough information on, please speak with us. We'd rather hear that directly and try to rectify it than hear it after the fact like, "well, we didn't know and the Treasurer didn't tell us," or "the governor didn't tell us," or whatever. We'd rather know that upfront. So with that, I think I'll stop and turn it back to the Treasurer.

Treasure (19:33):
So thank you very much. And I want to give Robert Berry and his team a shout out. They do an excellent job in terms of their data portals, Debt Watch, Debt Guide. But I would like to ask all of you to help us. How many of you have gone through our education portal? Three? Three, okay.

John Sheldon (19:56):
Must be all bankers.

Treasure (19:57):
Okay. So when I first started, I served on the San Francisco Board of Supervisors and then the state assembly. And no one really trained us in terms of bonds and pension funds and interest and all the nuances that you all deal with every day. So we put together a series of eight modules. They are short, anywhere from 15 maybe to 25 minutes each. And it's really to, number one, educate elected officials because they are still responsible. Their name is on the door. So if all of a sudden their city falls into bankruptcy, they can't blame anyone; they are going to be on the hook and also liable. So that was one of the main reasons we did these. But then also for people who are working in your organizations—new hires—just so that they can get acquainted with some of the issues that we talked about.

(20:51):
And after seven years, I actually understood most of the things that the speakers were talking about. But if you would, maybe if you don't want to watch it, assign your staff to watch it and give us some feedback. Because our team did take a while; it probably took us two years to try to figure out the topics and hone it down so that it would be simple enough for folks to understand. So it is on our little sheets, you should have these QR codes, and it is under the education portal. You register and then you can watch these eight modules at your convenience. Also, during COVID, we received $28 billion from the federal government. And whenever I would go to communities and ask them, "Hey, did you know this money was coming?" they'd be like, "No. How do we know about it?" And even the PPP program, right? I mean, who accessed that program? Well, people who were sophisticated, whose bankers called them and they knew how to fill out all the forms so that it was gone very, very quickly, and the rest of the folks... So we started putting together these small business resource guides, also for nonprofits.

(21:50):
And our latest is school higher education guides. One of my top priorities has been financial literacy and trying to keep our young people out of high student loan debt. And one of two ways that our young people that are underserved usually rely on Cal Grants and Pell Grants. Pell Grants is a federal program; let's see how long that's going to be around. And then our Cal Grant program has been around, but we're trying to make it a little more robust so that these students can actually access it. And then the last one that we just issued is on tech and manufacturing incentives.

(22:48):
So these are, again, grants, loans, and bond funds. So they're all on our website, treasure.ca.gov. The first box, I think, is probably down now—it was our manufacturing invite. The second one was for wildfires. So we also created guides so that victims of the wildfires can see what is out there and available. And then under that is other resources where our guides are there. So we are trying to get the information out. A lot of the funding we get from the legislature or the governor does not come with marketing and PR dollars. And so we just put it on the website and we expect everybody to know that new information is on the website. Doesn't work very well. So we try to use our social media platforms. We're out there doing webinars, seminars in person, trying to get the word out about all the different resources that are out there. So I think our time is up. If anybody has any questions? Anyone? Someone asked me about karaoke today. I did not get a request to do karaoke tonight, so I apologize. But if anyone wants to go do karaoke, let me know. I will be here tonight.

(24:11):
Okay. Thank you. And we'll see you tomorrow at Bonfire.