State of the Industry: Navigating the Ever-Shifting Landscape

Our public finance experts will sit down for a discussion of the current state of the muni industry, including how key macroeconomic concerns and a volatile political environment are affecting the market amid another record year of issuance and the ever-increasing costs of getting infrastructure built.

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.

Andy Nakahata (00:08):
Thanks, Jade. So in the interest of time, as much as I'm sure you would all love me to read everyone's bio, it's in the app and you can read them yourselves, but I will introduce the panel. To my immediate right is Oscar Padilla. Oscar is a director at S&P Global Ratings. To Oscar's right, to your left, is Cameron Parks. Cameron is a managing director and head of public finance at Truist Securities. To his right is Rob Larkins. Rob is the self-proclaimed dinosaur of our group. Rob is a managing director at Loop Capital Markets and head of California Public Finance for Loop. And last but not least is Samantha Funk. Samantha is a managing director and head of public finance for PNC Capital Markets. We've assembled quite an august group of panelists here and I have a number of questions.

(01:14):
I'm going to, in the interest of time, ask the panelists to limit your responses to a minute or less. If I had a buzzer, I would buzz it at a minute, so beware. Anyway, we're all here in person today in San Diego, which is great. But now that we are solidly post-pandemic with various policies regarding in the office versus hybrid versus remote, how has California public finance changed in terms of workplace, workforce, or clients? Samantha, why don't we start on your side and we'll work this way and then we'll flip it for the next question.

Samantha Funk (02:02):
Sure. Thanks, everybody. It's a pleasure to be here this afternoon. I think the big thing is that many of us working at the banks are mandated to be in the office five days a week. A lot of our clients aren't. There is a lot of consolidation going on, trying to get in-person client meetings. Obviously, we prefer to see all of our clients in person. We try to coordinate and daisy chain those as best we can.
That's where events like this that get all of us together are great—a shameless plug to Mike and the team. The other big impact from my perspective is the impact on junior talent. Growing up in the industry, you sat right next to the bankers you were supporting. Having that real-time, real-life experience and being able to debrief after calls regarding the market, deals, or pricing is imperative.

(02:57):
So, I do think there's a stark difference in what we're seeing from a junior talent perspective.

Rob Larkins (03:05):
Ten years ago, or even seven years ago, it was unthinkable that one could have a successful California public finance career—as a banker, MA, or bond counsel—other than Mark Gadler, who pulled it off for many years. To me, it's remarkable how we've adapted. I agree with Samantha that there's greater pressure on Return to Office (RTO) on the vendor side, but I'm stunned that it's all worked.

Cameron Parks (03:42):
My short answer, Andy, is Tuesdays. What I mean by that is if you want to meet with clients, you have to go for Tuesday. The hard part is being in multiple places on the same Tuesday, which we've certainly experienced. But to Rob's point, it's really interesting. When I think back, it was rare to find a deal participant whose team was based entirely out of state. Now, it's not at all unusual.
There seems to be a dichotomy between those who bought property and had mortgages before COVID versus since then. That is really impacting generations. In our case, interestingly, we can't find enough space in New York. We were adding floors in our New York office because all our junior folks want to be in New York, which is a high-tech state with a high cost of living.

(04:30):
But then again, they're renting. It is very different for those coming just out of college versus those who are farther along in their career.

Oscar Padilla (04:42):
Not much to add on our end. When we look at our offices across the country, we certainly still want to see our clients and the issuers. Going back to Samantha's point about our junior analysts, they are evolving differently than when we started. I've been at S&P 12 years and it's changed a lot. We just started mandatory back-in-office for two days, but it's important for the training we're focusing on.
Just to share a short story: I was in the New York office, where we still have desk phones. I picked one up to call someone, and one of the junior analysts said, "Hey, you're the first guy I've seen pick up the phone to call someone." The way we're learning and evolving is a bit different.

(05:21):
But it's remarkable how we've evolved past the pandemic. I think that will continue as long as we focus on training.

Andy Nakahata (05:33):
Oscar, you can use the payphone and try to explain to your colleagues what that is. Anyway, we are likely coming off of two consecutive years of record bond issuance. What are your predictions for 2026? What's driving the volume increase? Is it more deals, larger deals, or all of the above? Can we have a third consecutive year of record volume? How is this increased volume affecting how the business is processed and executed? And last but not least, how are jumbo loans affecting the market? Oscar, do you want to start?

Oscar Padilla (06:08):
Yeah, strictly speaking on the public finance side, we published this maybe a week or so ago. We are likely to see a 5.5% to 6% increase next year over this year. This year we're looking at close to $600 billion on the public finance side, so expect continued growth.
When we talk to issuers and large states, you see states issuing larger but fewer deals. In the case of California, they have a lot in the pipeline. They passed Proposition 4 last year—the $10 billion bond. They'll start rolling out about $3.5 billion of that in the coming calendar year. So there's a lot in the pipeline here in California, but big picture, we still see some upside next year.

Cameron Parks (06:50):
It's interesting; we don't see an increase in the number of deals. This is clearly playing out through the average transaction size. A couple of interesting statistics: the pace of deal increase is actually higher nationally than it is in California. New money nationally is up by about a third, and the average deal size for new money nationally is up by about a third, whereas it's closer to 20% here in California.
Construction costs, meanwhile, are up by about 50% since 2020. We're seeing a counterintuitive pace of impact in the California market. Stepping back, the average transaction size here in California is about twice as large as the national average.

(07:41):
National transaction size is converging with where we are here in California.

Rob Larkins (07:46):
I think the volume is largely driven by the runoff of federal money; it's mostly gone. Prepayments are not the cause; they've been about 5% through 2023, 2024, and 2025. The COVID "binge" is over, that money is gone, and people who have projects to do are financing them. Regarding jumbo loans, we have seen pressure on SIFMA when these mega-deals settle because bond funds that have parked money in money market funds have to pay for the settling deals.

Samantha Funk (08:38):
I would just add that the depletion of COVID funds and inflationary pressures are impacting Capital Improvement Programs (CIP). In some cases, those are increasing by billions of dollars within a five-year program.
Regarding how processing is going to change for underwriting firms and clients: AI. We are at ground zero right now. Think of RFP responses and presentations—the efficiencies and scale to be created are significant. It's going to be transformative, especially for junior staff.

Andy Nakahata (09:44):
When Rob started in the Stone Ages, everything was in person. Roger Davis was probably chiseling bond documents in stone back then, too. Anyway, all-hands document meetings used to be where deal teams negotiated and knowledge was transferred. Today, comments are scanned and emailed. How does the craft of our business get taught without detailed discussions of the substance of what we do? Rob, we'll start with you.

Rob Larkins (10:12):
To answer the end of your question: it doesn't. That affects both vendors and issuers. A document review session that used to be in person is now different. I think they are great online, but we need to screen-share the comments and actually talk about them. A document review session that lasts 30 minutes is not a true review.
It is in all of our interests to do the deep work. Maybe it takes an hour or an hour and a half the first time. Subsequent versions can just be redlines, but not discussing the terms doesn't serve anyone well. Think of the turnover on the issuer side. In California, people hit 60, max out their pension, and they're gone. You have junior people coming up who are talented but haven't been exposed to the "sausage making." Also, for the junior people: read rating reports. You can learn a lot from those.

Andy Nakahata (11:31):
Samantha, next.

Samantha Funk (11:32):
I completely agree with Rob. I always encourage our talent to read the comments coming through. Spend the time at night and go through the actual comments. The other big thing with AI is that I've heard of people uploading a rating report and having it summarize rather than reading the document in its entirety. You don't learn the same way doing that.

Andy Nakahata (12:12):
Oscar?

Oscar Padilla (12:12):
I'm glad folks are still reading the ratings reports! While we don't see all of the sausage making, it's great to get redline versions. It is important for S&P and other agencies to understand why changes are happening.
Regarding meeting in person: that's why we try so hard to engage on what is actually changing with your deal. Why are you changing the structure? I push for doing these things in person. We are all bored of Zoom and Teams. For big transactions, meeting at least once a year helps get a good grasp of what is anticipated.

Cameron Parks (13:09):
I agree with everything said. There is a concern when investors find something in the financials using AI or technology that we haven't prepared to address or disclose. Keeping up with technology is a theme of this conference. From a disclosure perspective, we must be mindful. It is a real concern because the end users—investors—will be able to find things very easily with technology.

Andy Nakahata (13:56):
Cameron, I'm going to start with you next. Pools have become a common way of managing financing teams, saving headache through procurement processes. But in an increasingly fluid world where firms change and people move, are pools serving their purpose or do they need to evolve? Are they too rigid? What is the best way for issuers to encourage creative idea generation?

Cameron Parks (14:34):
This is near and dear to someone who worked at a firm for 20-odd years and recently changed firms. For many issuers, an existing pool establishes rules of engagement and saves time. However, five years is a long time. Five years ago, we were in the middle of COVID—the world has changed so much since then. Some issuers have two-year pools, but that feels like running for Congress; you're either just elected or running again. Three years seems to be the sweet spot.

Rob Larkins (15:23):
Think about what you're buying. It seems efficient that every issuer does this. The State Treasurer's Office goes through a rigorous process every year. Why not say if a firm is on the State Treasurer's approved list, they are "fair play"? Then you can do short-form, deal-specific RFPs for marketing ideas and fees. Don't waste everyone's time with a 10-page RFP when a firm has already been qualified by the largest issuer on the planet.

Samantha Funk (16:19):
I agree with both. I'd take it one step further: for a bank platform with credit facilities, if we are locked out as a new entrant for five years, it affects our evaluation of facilities. I like issuers that have rolling opportunities or annual "off-cycle" windows to join. That remains more fluid and adaptable to the market.

Andy Nakahata (17:07):
Oscar, I'll start with you. Demographic trends in California continue to shift, yet it remains the fifth-largest economy in the world by GDP. What trends will California continue to experience, and how will this affect various sector credits?

Oscar Padilla (17:27):
It might even be the fourth-largest now on a nominal basis. Demographic shifts are a "mega-trend" we've identified globally. For California specifically, we are looking at "slowing but growing." All sectors—healthcare, education, transportation—will feel the shift.
By 2031, one in five people in the country will be 65 or older. We are hitting the baby boomer push. While California is slightly younger than the rest of the country, we will see a larger share of the 65-plus population.

(18:20):
From 2015 to 2025, California ranked 17th in employment and 43rd in population growth. Population was already slowing down. Our forecast for 2025–2030 suggests population growth might actually improve relatively, but other metrics like employment and GSP may move down. California has unique challenges, but massive strengths. There are nearly 40 million people and incredible research institutions. If we don't see immigration or birth rates increase, AI might be the next step for productivity. It's a structural shift all states must deal with.

Cameron Parks (19:59):
The aging population resonates with me. Will there be a groundswell of assisted living facilities? My mother is 81 and aging in place. With Prop 13, there is a dichotomy between when people bought property and their current mortgage status. On the younger side, will we see continued throughput in schools? Recent developments in immigration and birth rates raise real questions about enrollment.

Rob Larkins (20:41):
The demographic reality isn't going to change. If we have a shrinking customer base in K-12, maybe we should move away from ADA-based (Average Daily Attendance) funding. Regarding higher ed, I saw a talk by the president of Northeastern. He noted that an AI-enhanced Khan Academy could deliver four years of college instruction in two. Does this argue for a lighter real estate footprint for education systems?

Samantha Funk (21:42):
I'll conclude with infrastructure needs. Water, sewer, and transportation require funding, but there may be fewer people to fund them, increasing the cost per person. This is something to think about given the reduction in population in certain geographies.

Andy Nakahata (22:04):
Samantha, I'll start with you. The federal landscape shifts daily. We've seen complexities in healthcare and higher education. How is federal funding playing out, and what impact is this having on state and local budgets?

Samantha Funk (22:28):
We've seen this play out in many ways. Higher ed institutions are concerned about credit quality, particularly those with international students or large graduate populations, due to potential caps on student loans or withholding of grants. We've seen a lot of institutions asking for liquidity.
From a state and local perspective, Medicaid is a big area. We've seen restructuring and the increasing of TANs and TRANs. This will be one of the pressure points looking ahead to next year.

Rob Larkins (23:59):
Samantha stole my notes! To the question of whether local governments need to think differently about the federal government: yes. California Medicaid is $200 billion, and the Feds pay half. It's like the spaceship in Independence Day—it's hovering, and the trickle-down to the local level will be profound.

Cameron Parks (24:31):
On federal funding, we did a transaction last year for EV charging. It was the first of its kind, backed by a federal grant. That business line is now effectively gone. This makes it hard for folks to plan. On the utility front, the clean energy transition continues, and nuclear is re-emerging. Also, in RFPs, you often see questions about DEI policies. The landscape there is very different than it was 12 months ago.

Oscar Padilla (25:36):
I cold-called several states I cover. The top two concerns are: 1) FEMA, because it is unpredictable. 2) The Medicaid phase-down. California's Medi-Cal program serves two out of five people in the state—it's the largest in the country. How they phase down provider taxes will be a benefit or a burden to the budget.

Andy Nakahata (26:30):
I'll throw in my two cents: California is forced to rethink its relationship with the federal government. There have been significant changes at the Small Business Administration. It used to be that you could have 20% citizen ownership for a loan; now it's 100%. This lack of access to capital will change entrepreneurism. We've seen a significant increase in activity in our own small business loan programs as federal priorities have shifted.
Anyway, back to questions. Cameron: housing continues to be a significant issue. Lack of affordable housing, wildfires, insurance access—are these challenges threatening the "house" California built?

Cameron Parks (28:05):
Some folks may choose to go self-insured. Most of us need a mortgage and insurance, leading to more individuals being part of the FAIR Plan. If the fixed cost of homeownership rises, maybe we see less willingness from voters to support GO bonds. That could be a potential second-order consequence.

Rob Larkins (29:14):
It wasn't that long ago that insurance wasn't even a consideration when buying a home. Now, it's the gatekeeper. If this becomes a banking problem, you'll see action. Imagine if Fannie and Freddie said "no" to the FAIR Plan. You also have a "turnover freeze" because people with 3% mortgages or Prop 13 tax bases can't afford to move, creating illiquidity for new families.

Samantha Funk (30:25):
I'll hand it over to Oscar for the credit perspective.

Oscar Padilla (31:01):
From a credit perspective, compare us to Florida, which created a catastrophe fund after Hurricane Andrew to serve as reinsurance. Florida has the highest premiums in the country; California is actually near the median because of Proposition 103.
Whether Prop 103 is repealed is hard to say—no one wants their premiums to increase—but we've already seen State Farm and Allstate increase premiums significantly for fire-prone areas. We actually downgraded a utility district this morning due to elevated fire risk.

Cameron Parks (33:23):
Regarding undergrounding: DWP's plan is to try to get FEMA to fund it. I could see a widespread movement toward undergrounding, which is very expensive and would involve bonds.

Andy Nakahata (33:42):
Everyone is talking about resilience. What does it mean to you, and is there a bond investment solution?

Cameron Parks (34:05):
The severity and frequency of events are undebatable. There's a real question about what investments are prudent. Whether improvements are the responsibility of the property owner or the community (like undergrounding), there is a need for capital to support resiliency.

Oscar Padilla (34:56):
Compare the Panhandle fire in Texas (1.2 million acres, $350 million loss) to the Palisades fire (23,000 acres, $30–40 billion loss). Urban fires are exponentially more expensive. Is FEMA going to show up every time? It's an evolving conversation. Do you need greater reserves? It's not going away.

Samantha Funk (36:21):
One thing we're following is whether the state creates a levy for municipal utilities similar to what they have for investor-owned utilities to provide protection. It plays into credit and resiliency stories for issuers.

Andy Nakahata (36:53):
Lastly, cybersecurity. What concerns do you have regarding transaction management and underwriting?

Rob Larkins (37:22):
The old arrangement where a junior banker emails a memo with bank routing information to 50 people is insane. Underwriters are most at risk because it's their money that goes "poof." We need improved systems. Bad guys are talented; they can replicate an invoice that looks perfectly legitimate, and the money is gone.

Samantha Funk (38:47):
As we move to an automated world, we see cyber fraud everywhere—business email compromise, payables, and receivables. Issuers need to think about disclosure and protection. Fraudsters are invading police radio systems and airports. Even putting on an "out of office" reply provides information they can use.

Cameron Parks (39:57):
Disclosure on cybersecurity in offerings is often very light. Investors may be concerned, especially in project financing. If that money goes away, what do we have? We need to provide enough information to get investors comfortable without giving away the "keys to the castle."

Oscar Padilla (40:47):
Our questions have shifted from "What are you doing to protect yourself?" to "What will you do after it happens?" One state told me they now practice for a cyberattack the same way they do for a liquidity event. Who do you call first? What is the plan?

Andy Nakahata (41:34):
Last question: What is the biggest issue facing California public finance in 2026, and what is the next innovation?

Cameron Parks (42:04):
The biggest opportunity is a steepening yield curve. It's hard to envision long-term rates going lower, but short-term rates likely will. Public finance is also one of the more opaque markets. Whether it's blockchain or other tech, we will see more progress toward opening up the market and increasing access.

Rob Larkins (43:24):
I think the property insurance issue is a "giant Death Star" hurling toward our market.

Samantha Funk (44:02):
I think the political environment and its impact on funding will be huge. Also, inflation may cause people to scale back capital programs. As for innovation, AI will continue to lead the way and hopefully create more transparency.

Oscar Padilla (44:50):
The biggest challenge is the relationship with the federal government regarding Medicaid, alongside a softening economy. On innovation, some vendors say AI can help balance budgets, but it's too soon to tell.

Andy Nakahata (45:30):
I'd like to thank our panel for being disciplined. We have six minutes left for questions. Barring that, would the Transportation in Flux panel please come up?