Opening Remarks: Finance Strategies to Weather the Storm of Childhood Assault Claims

The cost of victim compensation for past crimes against children resulting from AB 218 is sobering. Estimates of the direct liability of K-14 schools are more than $3 billion. Counties, cities, districts and non-profit service providers are faced with exposure that is expected to exceed the K-14 liability many times over. How will agencies already challenged with structural imbalances pay for the deluge of judgements and settlements? This program will bring into focus the magnitude of the financial storm facing agencies across California, and it will also examine the condition of the insurance safety net that is recognized as the first line of fiscal defense. Lastly, experienced issuers and market professionals will explore the public finance strategies that agencies may use to overcome a fiscal challenge that may appear insurmountable.

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.

Michael Ballinger (00:08):
Good morning. I'm Mike Ballinger, publisher of the Bond Buyer. It is my pleasure to welcome you to the CDIAC Pre-Conference Workshop, "Financing Strategies to Weather the Storm of Childhood Assault Claims." CDIAC has put together an outstanding program in addition to excellent panels. We're delighted to have California State Treasurer Fiona Ma speak at the Bond Buyer Conference tomorrow at lunch. The Bond Buyer's partnership with CDIAC is now in its 24th year and both parties have benefited as a result. CDIAC's reputation as a provider of educational programming has encouraged California issuers to attend the Bond Buyer's annual conference. To kick off the CDIAC pre-conference workshop, it is my pleasure to introduce Robert Berry. Treasurer Ma appointed Robert to the position of executive director of CDIAC in January 2020. Under Robert's leadership, the CDIAC team has achieved a variety of notable milestones, including fully replacing the California debt database in service since 1989 with the CDIAC data portal, a cloud-based database that features a secure and intelligent user interface and never-before-offered levels of external data accessibility.

(01:17):
The data portal brought about huge gains in efficiency and accuracy in processing more than 18,000 reports of debt activity submitted annually. It developed an all-new, ground-up development of DebtWatch 2.0, the second generation of CDIAC's transparency site where all the data and documentation submitted to the CDIAC data portal could be viewed, visualized, reported, analyzed, and downloaded by agency officials, policymakers, market professionals, and members of the public. On top of record participation in CDIAC's highly regarded debt and investment education programs, CDIAC introduced on-demand education through the launch of the CDIAC education portal, which is growing rapidly. The educational portal services over 600 registered users and features 58 hours of content and 48 on-demand courses, including a collection of electronic courseware designed specifically for elected officials. Please join me in a warm welcome for Robert Berry.

Robert Berry (02:16):
Thank you very much, Mike. This is CDIAC's 24th pre-conference to the California Public Finance Conference. We're very grateful to the Bond Buyer for our longstanding partnership that enables CDIAC to produce content in the pre-conference that's directed specifically to the issuer community. Thank you again, Mike, for including CDIAC in the 35th California Public Finance Conference. I think we have a terrific program this morning. It's a sensitive yet complex topic with many facets that I'm guessing are not as well understood as they ought to be given the magnitude of the fiscal challenges. So, there's obviously an important educational goal to the pre-conference this year, but I also see it as marshaling the public finance first responders in this room to this problem. I know that if there is any characteristic that people in this room share, in the public or private sectors, it is your inherent fascination with tackling tough challenges.

(03:11):
So, good morning everyone. On behalf of CDIAC Chair, Treasurer Fiona Ma, and our entire team at CDIAC, thank you all for joining us this morning for our pre-conference program, "Finance Strategies to Weather the Storm: Childhood Assault Claims." The title is a mouthful. I've already apologized to Mike and the Bond Buyer team because it didn't fit well on their electronic agenda and promotions, but I was purposeful in titling it this way—describing this program in the serious terms usually reserved for describing a storm or a hurricane. As will be discussed in detail by our presenters, legislation in 2019 and 2023 effectively eliminated the statute of limitations on claims against public institutions for childhood sexual assault, leaving cities, counties, and school districts exposed to many billions of dollars of liabilities at the point of passage. Even as the legislation was being debated, many in public finance and policy spotted the storm forming and suspected that the conditions were right for it to strengthen enormously.

(04:11):
In many cases, these claims, especially those many decades old, are indefensible—often with witnesses, documents, and individuals no longer in existence. As claims began to pour in and continue to accumulate, it really has become an issue of where the storm will strike, what path it will take, which agencies are affected, and whether they are financially strong and prepared enough to weather it. Then, how long will the fiscal recovery take? In the case of those agencies hardest hit, it's likely to take dozens of years. You've heard about what LA County is facing, what LAUSD has done to meet their challenges, and we've read about the difficult declarations by the City of Santa Monica, but this is not just a K-12 problem or confined to LA County. Fundamental statistics tell us that there will be more agencies to face a similar fate, and how many is too many?

(05:03):
Will the effects be felt more broadly? What will the indirect impacts be and how will they be felt across agencies across the state? Indirect fiscal challenges are expected to persist in similar ways to those presented by California's natural disasters. Policymakers thought that insurance would cover the cost of claims, but California's indemnity protection system for public agencies was not designed to handle the size and retroactivity of these types of claims. This has left many billions in claims uncovered, and the source of payment for these uncovered claims is the general fund of these agencies. Claim payouts are competing with myriad other general fund priorities. All the while, agencies across the state experience the pressure of operational cost inflation, reduced enrollment, diminishing state and federal funds, and structural deficits. Very difficult fiscal trade-off decisions are the norm for those directly affected.

(06:06):
If you have the reserves and prepared well, you're one of the lucky ones. Absent adequate reserves, agencies are being compelled to finance the judgments and settlements or worse, face the specter of receivership or bankruptcy. The financing tools are not well known because they're very infrequently used, and they're solving problems with which agency officials and their financing teams have little experience. Since 1992, based on reports of debt issuance submitted to CDIAC, there have only been about 35 issues of debt associated with judgments or settlements, totaling about $1.2 billion. Until the recent issues of LAUSD, none of those issues were for the payment of claims of this nature. The magnitude of the problem, the dire fiscal consequences, and the fact that public finance will be a large part of the solution are the reasons why we decided to focus on this topic for the pre-conference. There is much that can be done on a policy basis.

(07:00):
Our presenters today will be talking about what has been successful, important policy still being negotiated, and other policy concepts not adequately considered yet. But I don't think we can count on policy out of Sacramento to magically strike the optimal balance between victim compensation and local agency fiscal health. The public finance community, with your ingenuity and well-reasoned decision-making at the ground level, will be integral to weathering the storm, containing the damage, and restoring financial sustainability to affected local agencies. We have a very full pre-conference agenda for you this morning. In our first session, our speakers will provide background, discuss the magnitude of the problem, lay out the circumstances specific to certain agencies, and talk about the direct and indirect credit implications. Then in session two, our speakers will discuss insurance, how risk pools provide liability protections for local agencies, how they've responded, their limitations and coverage gaps, and how the crisis has changed the risk pool landscape.

(08:00):
Following about a 15-minute break, our final session will be focused on payment strategies—in particular, a rather deep dive into how judgments and claims can be financed. Our speakers will get into the different types of debt, the structures, their applicability to specific circumstances, the issuance process, market acceptance, and many other details. After we conclude the program around 12:30, there will be a lunch buffet served in the foyer. Then we'll come back into this room and hear from Treasurer Fiona Ma on her thoughts on this topic and other insights from the Treasurer's office. Then we'll wrap up in time for the opening of the main conference. I'm really counting on all of your participation to make this a great program. Our presenters have a lot of content, but we have scheduled time toward the end of each session for comments and Q&A.

(08:50):
Our CDIAC team will be roaming the room with microphones for your questions. There's a slide deck for this pre-conference if you'd like to follow along on your laptop or review the slides later. You can access the slides on the pre-conference event page or via the QR code on the insert in your program. We've also posted a number of resources on our event page that will be discussed today. First, "Childhood Sexual Assault: Fiscal Implications for California Public Agencies," the Fiscal Crisis and Management Assistance Team paper that reported to the legislature. That was really the inspiration for this program. Also, "An Introduction to Judgment Obligation Bonds in California," an Orrick publication that just came out. There are a few copies on the tables up front; it's one of their "green books." I believe they'll also have them at their exhibit in the hall next door.

(09:42):
Moody's Local Government K-12 report, "Sexual Abuse Cases Will Add to Financial Pressure," is also linked there, as well as a link to SB 577. This is the legislation by Senator Laird, a two-year bill aimed at mitigating some of the fiscal hardships. There is also a link to SB 848 by Senator Perez, which was signed into law and is designed to install preventative measures and provide tools to local agencies to mitigate the risks of future childhood assault claims. Before I introduce our first session, just a note about those presenting today: I reached out to numerous people from different agencies and organizations to recruit their expertise and perspectives for this program. Several people had to respectfully decline—people and organizations that have very willingly contributed to CDIAC educational programs in the past. The reason was generally that they were actively managing various aspects of this problem for their agencies and their participation was deemed potentially counterproductive to a positive outcome. This is a position I 100% respect, and I'm sure you will as well. However, this situation makes me even more appreciative of the people who came today to present. They are true public finance and policy champions, and speaking up about this subject is not a riskless endeavor. I'm truly grateful for their participation.