2024 Municipal Industry Outlook

Transcription:

Kevin Murphy (00:09):

So we have one extra chair here, but we will go ahead and do introductions and if our fifth panelists can join us, we will incorporate him into the, but yeah, good idea.

Kevin Murphy (00:41):

So I will, let me start off by introducing our panelists for the 2024 municipal industry Outlook panel you all. Mike introduced Natasha who's managing director and co-head of infrastructure East for RBC capital markets and among other things on her resume, a member of the municipal securities rule making board. Mark all our panelists I think. But Mark Kim, Chief Executive Officer of the MSRB and among, in addition to his experience there for many years, past experience in finance with New York City and Jay Olson, who is currently the Deputy Controller for Public Finance for the city of New York, in addition to a long history in the muni industry, including with OMB and New York City issuers and Suzanna Randall, New York State's First Chief Resiliency Officer, the New York State Department of Environmental Conservation.

Kevin Murphy (01:52):

And our fifth panelist who was delayed but will be here in I think 10 minutes or so is Leonard Jones from Blaylock Van. So we will start off with Natasha. So would you give us your thoughts or RBCs thoughts on maybe the year we had and the year we might have in terms of interest rate outlook, and what are issuers you think going to be doing or that you work with in terms of products and strategies this coming year and part three, where's that going to? Where does RVC think that's going to lead in terms of overall supply this year?

Natasha Holiday (02:33):

Great. The crystal ball question, but thank you Kevin and it's a pleasure to be on the panel with my fellow panelists and colleagues in the industry. I think 2024 is going to be one of our most dynamic recent years. Want to definitely acknowledge our group head here at RBC, Bob Spangler's in the back there who's really done a phenomenal job guiding the platform and it's something that we've been really, really focused on. Before we can talk about 24, I think we have to spend a few minutes talking about 23 because there's remnants of 23 that are definitely overhangs and we're still digesting a few things from 23 into 24 and in many ways we'll kind of set the stage I think. But the biggest takeaway from 23 really is the resiliency of the economy, the resiliency of the US economy. I mean we experienced sustained higher interest rates and a backdrop of geopolitical uncertainty abroad and at home, and I'm sure we'll talk a little bit more about that.

(03:43)

I mean federal dollars that had really propped up the coffers of many of our states and cities began to run dry or that part of federal dollars began to run dry. But then also there was just signs of weakness in the marketplace. If you look at JP Morgan's reports from a consumer's perspective around savings and cash deposits, those all stood lower as we kind of wrapped up 23. And so it continues to be this overhanging question mark around are we headed towards recession? How much as far as fed increases is too much? Will we see cuts this year? And at the same time, in January of 2024, the US economy added 353,000 jobs. So that's really the conundrum. I mean, in some ways that's really the conundrum that the Fed is facing as they determine the approach for policy on rate cuts or rate hikes or just sustaining a higher rate environment and for how long.

(04:58)

But there is consensus building that likely rate cuts will be a part of our outlook for 2024. RBCs view is that there'll be five freight cuts this year with the earliest starting in June of this year. I know there's some people who would love to see a rate cut earlier. It's probably not likely though, and even June may still be a little too early. If you look at people like Larry Summers who was very early in saying the view that it could be higher rates for some time. And so what does that mean for our issuers? Obviously we've got Jay Olson on the day so he'll be able to speak more eloquently and intentionally than I can about issuer approach. But I think as a broad sense, you saw a lot of conservative states use money to do cash deficit and of debt and so that as a solution for them to stay out of the markets is no longer going to be on the table for this coming year or for this year. So you would expect to see issuance pick up from a backlog perspective. You would also expect our larger issuers to continue to be steady as far as their spending rate. And the only thing that I really think underlying is going to change that is if we really do see significant layoffs that impact the economy. The other piece is this work from home.

(06:35)

I don't even know what to call it anymore. It doesn't really exist for most of us anymore. I think most people are actually back in the office and I think you're going to see that view take hold in more corporations. I said this at an earlier conference a couple years ago, the first company to have really significant work for home and try to bring people back was Yahoo. When Marissa Mayer was a CEO, it was a two-part strategy. One, they had a whole bunch of engineers that were working from home and they wanted to let people go, so they were like, we need to come back to the office. Those people would kind of go off and figure out something else to do. But two, there was this waning productivity lag. So I think you've heard from a number of CEOs that they just feel like there is a productivity lag in the workforce in the work from home construct.

(07:27)

So I do think that right now most people are in office between two or three days. I think that we're probably going to go back to seeing people in office four days a week that helps urban suburban economies from everything from riding the trains and public transportation, which a lot of people are not doing right now. There's clogging up the roads as you are making those choices to come into town to sales tax and some of those and then tourism. So all these other things that become bigger pieces as far as the economy. I think I'll just switch really quickly and maybe talk a little bit about investor demand and what we're seeing and what the expectations are for 2024 because it really is an industry right now that's been really dominated by technicals. So our investor base is very much focused on ratios. SMAs continue to be a bigger peace and party in this marketplace from an investor standpoint.

(08:31)

And because of higher rates, they're moving farther out on the yield curve. So usually SMAs dominated 10 to 15 years. Now we're seeing them go out to 20 years and that's really helpful because what we also have seen is that the longer part of the curve out to 30 years has actually had the most volatility. So people don't necessarily want to lock in because we don't really know directionally where rates are going. And so they want more to take that risk, particularly from a tax standpoint, from a denomination, from de mini standpoint. So you saw a lot of more five and a quarter, five and a half coupons last year. You may still have to see that a little bit as the year goes on and volatility continues to be the name of the game, but it's still robust. So I think that that's really exciting.

(09:24)

You still have your mutual funds, your ARBs, your insurance accounts that are all participating on the long end, looking at absolute yields, looking at valuation and looking at couponing from, I know we can't not talk about the fact that we saw two firms leave our business and the end of 23 and we're still digesting that in 2024, but that's going to have a meaningful impact on our marketplace. With Citi leaving the business in totality, UBS continuing to operate retail and institutional trading desk, but not really servicing clients, not participating in negotiated flow one, I just want to say that for all of our professionals out here who were at one of those two firms, we're really rooting for you, right? We're rooting for you to find new homes to continue to be a participant in this marketplace to continue to use your talents because I think that I've been in this industry almost 20 years.

(10:31)

We have fantastic people. This is an industry full of fantastic talented people and so that creates some benefits for some competitors in the marketplace who may have been regional players who may not want to get bigger and play in different places and build their practices in different parts of the country. I think the biggest question mark is for Citi in particular, the secondary market where they were truly a liquidity provider and a dealer capital provider that puts potential strain from a liquidity standpoint. I mean our investors need to have liquidity. You see it in pinch points last year. I think we're going to continue to see pinch points this year where investors may not have a lot of capital to move to buy a new issue to trade. And so market participants like Citi was a big player and so we're going to need to see how that begins to shake out.

(11:35)

And then lastly, I'll talk a little bit about just some products that we're seeing in the marketplace. Every so often there becomes a flavor of the year and if there was a flavor of the year for 23, it was tenders, but we've seen a recent rally in the marketplace and so it actually doesn't make tenders quite as favorable as we had seen in 2023. And so I think that as a tool and the toolkit for issuers and as a product that you'll hear from your bankers will continue to ebb and flow, but those particular products have been really, really helpful to investors because they've been able to increase their liquidity by offloading bonds, giving them back to issuers. Issuers have been able to structure refundings and savings in ways that they haven't been able to since advance fundings went away. And so I think that that is one tool. We're also seeing a lot more outside of the traditional general government sector around P three activity, more private capital coming to the table, much more innovative financing structures. And so I think that all those things kind of sit in the backdrop as a part of the outlook for 2024.

Kevin Murphy (13:00):

That's great. Thanks Natasha. I think I'm not sure which of those threads to pick up on to transition, Jay maybe in the five days in the office category, Jay also with the city or the recent rally, but I said at the top, January was off to a great start. February is off to a great start two in terms of volume, thanks in part to TFAs deals that priced yesterday, one and a quarter billion. Maybe you could talk a little bit about what the city was looking to do there, how it went and in terms of strategies and products that the city issues might be looking. That was all fixed rate. Will you be doing some variable rate to follow that and talk a little bit?

Jay Olson (13:49):

Sure. Thanks Kevin. And when you asked sort of how it went, I was reflecting upon that it should be an easy question. Oh, it was fine next, but I mean my frame of reference runs a little longer. I remember selling TFA recovery notes right after the nine 11 attack. I remember trying to get deals done during 2008 when the financial institutions were looking a little less than solid, and I remember in 2020 as the market was shutting down during COVID to try to get bond deals done. So that's sort of where I'm coming from in terms of a frame of reference, and I don't mean that's to lower the expectations, but I could see Bill Thompson sitting right in front of me here. So thank you. The deal went very well and what we were trying to do, and I think this leads to plans going forward, while that was a new money deal and we have a considerable capital program to do, and this dovetails with Natasha in terms of volume on the January financial plan, it was reflecting around 1.15 billion of new money issuance between general obligation TFA and the water authority of that amount as that, as the total for the plan.

(15:02)

There's about four and a quarter billion left to do for the fiscal year. Now others on this panel might say, well, is that a lot or is that a little? But before we opine on that, if you look ahead on the financial plan, and this gets to our plans, 2025 is showing 12 and a half billion and by 2028, 14.4 billion. So I think that's a lot of volume and it's reflective of if you just look out the window, the amount of infrastructure that we have out there trying to keep it in good repair and keep adding nice things. So that really is the prime mover for us that you talked about. The interest rate backdrop and issue approach. We play rain or shine and we just keep pushing forward to finance the capital program. So it leads to, well, how do you go about doing it?

(15:56)

And for a lot of my tenure, floating rate debt had been wonderful, just cost of funds for starters, not to mention diversifying our offerings into a different market. And for a very long time that had been sort of a no-brainer, great cost of funds, it's absolutely worth the increased management responsibility to get that out the door and keep it going. It's a little unclear these days when you look at volatility as Natasha had pointed out, and just the absolute rates of where resets are going. When you look into the other added costs and kind of scratch your head, it's like, well, is that better than 30 year fixed rate debt? And it's very weird to be confronting that, and that is going to be among the big questions we are going to noodle over with our colleagues at OMB and the mayor's office, whereas we jointly try to get done all this volume over the rest of this fiscal year and going forward, and that's not even to mention the refunding opportunities that would be on top of that hopefully.

(17:03)

And again, you had asked about what opportunities there are and it's unclear. I've actually seen recently, okay, there's some bonds that are just not efficient to refund and before it had just been sort of a layup, you could sort of suck down everything and get it all done, and that's not the case anymore. So just everything's gotten a lot more complicated and we just have to do an awful lot more stuff and we rely upon most of the folks in this room, whether you're a lawyers, investment bankers, credit providers, and we've been incredibly fortunate to have a number of very talented professionals to work with to implement a very large capital program at decent rates. So I think I should probably stop there unless anyone wants to tag up.

Kevin Murphy (17:54):

Thanks Jay, I want to come back to you as well as get to Mark on the recent city UBS exits, but maybe first if I could go to Suzanna. So the thread here is big numbers and 4.2 billion is another big number. That's the 2022 New York State Environmental Bond Act authorization that was passed by voters. I know you're not really able to tell us how much of that is this year, next year in terms of bond issuance, but I guess a couple of themes to ask you. Well, first of all, voters like bonds for this, which is good, and also in the category of all the backlog that in New York state and nationally there is in terms of new money financing needs for infrastructure. It's not just the old just bridges and tunnels and housing, but there's new categories of infrastructure that this voters recognize are needed given climate change and other pressures. So maybe if you could talk about, first of all, what are you doing in your new office? Talk a little bit about if you could, about the Bond Act, the authorization categories. What does that mean in terms of some detail and specific projects? Because in addition to showing us this is a new category of infrastructure, we'll see nationally more and more. Also this room will be interested to know maybe you can or can't talk about how much spending will go on, what the schedule is, and we know bonds will follow.

Suzanna Randall (19:34):

Right.

Kevin Murphy (19:36):

And sorry to interrupt, and we have Leonard Jones is joining us. Just wanted to, okay, sorry. We'll come to you next.

Suzanna Randall (19:42):

No worries. So to set the stage a little bit, the Environmental Bond Act, and I'll call it the Bond Act just for ease because it's a long name as we all know, the Clean Water, clean Air Green Jobs Environmental Bond Act. So now you understand why just the Bond Act. So one of the things that we've done in New York is we've recognized that there's historic underinvestment in disadvantaged communities. And so in 2019 with the climate law, we set forth a plan, really a baseline of investing in disadvantaged communities with a minimum of 35% of the Bond Act being invested to benefit those communities. If you go to climate.ny.gov, you can look at the 45 indicators that were used to delineate areas that have been termed disadvantaged communities here in New York state. They are a little bit different than the Justice 40. We were out ahead of the federal government on that, so we got our map up first I guess.

(20:38)

So that's something to note. We have a goal of 40% of the funds benefiting those communities that we have historically not invested in or under invested in. So that's an important baseline to note. The other thing that we will cut across all of the projects that we're going to fund are prevailing wages, making sure as per the name Green Jobs, that's a priority that was put into the legislation for the types of projects that we can fund. So that's important to note and there's some nuances to that. Certainly I'd encourage you to take a look at the ACT itself. You can get the devil of the details from reading through the legislation on the jobs front thing. In terms of the types of projects, I think that that's probably the most exciting piece for you all to know what's going to be funded and then that we're going to come back ultimately through the comptroller's office to then issue bonds to recoup funds and repay our general fund.

(21:27)

There are four main categories in the Bond Act itself. What I'll do is I'll go through each one and give you a little bit of an idea of the types of projects and the types of things that'll get funded in each bucket. The open space land conservation and recreation bucket, it's up to $650 million, so that's the most we'll spend in that category. We're talking about easements for farmland protection, really significant need if anyone was watching budget hearings yesterday, no, that's my world. I guess more for environmental conservation. Those were yesterday. So you can imagine we've been a little bit breakneck. It's a real need in terms of protecting farmland across the state, protecting our access to food as we see climate change that has a real impact on farmers and certainty in those net industry and growing our food. So protecting farms, protecting open space and land conservation both for recreation and for habitat.

(22:23)

One of the things that is going to make us more resilient as we move forward and we see increasing storms and we're already seeing them, it's not climate change in the future, it's here. It's now is intact habitat, intact ecosystems that function in a healthy manner. So you'll see that as a theme through several of the categories I touch on. How do we start to build ecosystem resilience really across the state because that's going to be an asset for all of us, both for our mental health, our physical health and our physical wellbeing in terms of infrastructure resilience, recreational infrastructure projects. Part of that is also getting people out there, getting us out into nature. So supporting our parks, supporting the open space opportunities that we have. We're also going to be investing in fish hatcheries. $75 million has been an earmark for that, and that's recreational opportunities for folks all over the state.

(23:16)

You may have, if you've been watching the news about little projects here and there, one of the first ones announced was up in the Adirondacks. It was an Adirondack rail trail and Saranac Lake Depot project that the Bond Act dollars were in the process of moving the money into their account to start spending off the general fund to get that project going and get it completed. So that's a little bit of a flavor of the open space land conservation easement bucket, shall we say. The second bucket I'll talk about is the climate change mitigation, and it's really about adaptation and mitigation. So we're looking at things that reduce our carbon footprint. So the first 500 billion committed was towards zero emission public school buses, so we're talking about electric buses across the state and the charging infrastructure that's needed to power those buses. There's also a complimentary EPA program that's out on the street right now, and so really we're looking to jumpstart communities across the state getting as they go to buy a new bus, right?

(24:12)

Instead of buying a new diesel bus, they're buying the electric vehicle and we're paying the incremental costs with these dollars so that we're getting them into the next chapter where we need to be across the country in terms of our carbon footprint and getting kids to school safely. I mean, how many folks here remember the diesel fumes on your bus to school? I was just going to say, right, that lovely taste or the lead taste, lead fuel, that's another taste, right? So it's really getting kids out of that environment and reducing those emissions across the communities where these buses are traveling, $400 million, at least $400 million is going to go towards green buildings, and those are state owned facilities. The ACT specifically calls out suny CUNY state facilities, state campuses. The first rollout of funds is on the street now. So if you have an interested school district in your neck of the woods, have them look at it.

(25:00)

It's for green building improvements for schools. It's the Cleaner Greener Schools program through NYSERDA. It's about energy efficiency and decarbonization. So it's really looking at both of those things and how we can maximize the benefit for each of these dollars that we're putting out there through these projects. One of the themes that I would say is it's all about co-benefits, right? There's no such thing as single purpose funding. If you're spending a dollar, you've got to really realize multiple benefits, whether they be social, economic, environmental. It's really about stacking up these benefits with the investments that we're making across the state. We're also investing through some existing programs, the Climate Smart Communities, urban forestry programs. That was something that was just announced in the governor's state of the state, investing in both the infrastructure needed to produce seeds and seedlings and get trees ready so that we can get them out to communities, whether they be urban or rural, and get trees in the ground and growing because that's going to be part of a real important piece of our future really for all of us.

(26:03)

Carbon sequestration, urban heat island reduction, I think we're probably going to see some green roofs dotting the landscape. That's something that the governor certainly mentioned quite a bit. That and poor pavement were two things that she highlighted, so to note that those were in her public remarks. The third bucket is water quality and resilient infrastructure. I know the mention of the state revolving funds earlier in the keynote, one of the big buckets that's already gone out the door was through EFC and New York State's Environmental Facilities Corporation, really innovative award-winning SRF across the nation. They put out $200 million and those projects have been awarded through their Water Infrastructure Improvement Act and inter municipal grant program. So we'll see some of those. I think they'll start closing this spring on some of those projects. So that's pretty exciting and it's at least 200 million investment in that corner, so at least for now we've pushed out 200 million.

(26:58)

We'll see what happens. We'll also be investing in municipal stormwater with a focus on green infrastructure. Again, back to that co-benefit piece, right? They've got to have multiple benefits, and that's at least $250 million. There's a whole list of other types of projects that will then use the balance of that fund or that bucket. I like to call them kind of buckets of goods or baskets of goods. Harmful algal blooms are certainly an issue that we're seeing across the state, not just in areas which are higher density, but also in rural and remote areas. So that's something we're going to be looking at. Septic replacements, lead service lines, rip buffers. There's a whole kind of grouping of eligible topics. And again, back to that co-benefit piece, if we can fund something under one heading that gets all these other benefits, then that's really where we want to be.

(27:47)

That category, the water quality and resilient infrastructure. And the last category, which is flood restoration and flood risk reduction are a little bit unique in that they say at least in the language of the act, so at least 650 million of the Bond Act will go to the water quality piece and at least 1.1 billion will be spent on restoration and flood risk projects. So we have $300 million that may be able to push in where it's most needed on either of those two categories. You've probably heard about the Blue Buffers program. Yes, no, maybe so it's up to 250 million for voluntary buyouts, and this is really big. The governor's been talking about buyouts in the wake of recent storms that we've seen. Certainly there are FEMA dollars out there and we're looking to pull in as many of those as we can with our bond Act funds as a base or a match to those funds because 250 million, I think you all know, the price of property all around the state will not go very far for voluntary buyouts.

(28:46)

And we need to do more. We need to do more to get people out of harm's way and get things out of the way. And that really, I'll end on that really leans towards the framework that we're looking at restoration and flood risk reduction through is a watershed approach. So we have a program that's been incredibly successful, resilient New York streams. We've funded studies and projects where you literally go out on a stream segment or in a watershed basis, do a hydrology and hydraulic report. So you're using hard science to then quantify and model, if we take this bridge out, if we take this dam out, if we leave that and we do this, what are the scenarios that we can do to protect these homes here? Or do we have to offer a voluntary buyout program because there's nothing we can really do with changes up and down the watershed to protect those folks or get them out of harm's way.

(29:38)

And then how do we then align those projects and do them in combination so that we get the best benefit we can for the community up and downstream? You might think sometimes floods cause or dams cause flooding upstream of themselves versus attenuating floods just downstream. So we're looking at the whole complex nature of these types of projects to try and invest through a new program that the governor's announced, the resilient watersheds implementation grant. So you'll see a lot more from that in the coming days, but it's again, I think exciting. It includes dams, flood control measures, restoration of habitat, and things that really try and get at the bottom line through multiple ways. Okay?

Kevin Murphy (30:17):

Yep. Thank you, Suzanna. Thank you for all that detail. That's great and good luck to your office and getting all that out the doors as quickly as you can. We're

Suzanna Randall (30:26):

Pushing, we're pushing.

Kevin Murphy (30:27):

I mean it's just, so whether it's on the east coast or the west coast and recent climate change flooding, it's among the many things in the news these days. Last year when we were here, I think one of the things in the news with Bond Buyer was the MSRBs E-S-G-R-F-I, that was the hot topic, but ripped from the headlines this year. I think we'll talk about trade reporting rulemaking and any other topics you'd like to cover, Mark. And then maybe at the end of your remarks, could you come back to the question of the exits and what your MSVs information or perspective they might have on that? And then we'll go to Lenny. Thanks.

Mark Kim (31:14):

Sure. Thank you Kevin for monitoring the panel. I also wanted to thank Mike Ballinger and the bond buyer for inviting the MSRB to participate and share a regulatory outlook with all of you. I also wanted to say, Lenny, of all the conferences I've ever attended, that was the coolest, most dramatic entrance I've ever seen by anybody. I kind of picture you coming out of the subway and running down Central Park South to make it here in time. I have two regulatory updates that I would like to provide to all of you. The first update is on the MSRBs recent fee filing, which establishes the fees that regulated entities will pay to the MSRB in 2024. And the second is on the amendments that the MSRB filed regarding our Rule G14, which establishes trade reporting timelines. Let me start with the fee filing. You may have seen some of the bond buyers coverage about this, and I wanted to address the SEC's recent order to suspend our fee filing and to explain what that means for the industry last year. The MSRB filed with the SEC and the SEC approved our so-called rate card model, and it's this model that establishes the fees that the MSRB will assess on the entities that we regulate. This model was developed based on feedback from the industry and achieves two important goals for our stakeholders. One is transparency and the other is accountability.

(32:55)

The rate card model provides greater transparency to the industry in the MSRB's fee setting process. In particular, this model institutes a automatic reconciliation at the end of each fiscal year of both the actual revenues that the MSRB received from the fees that we assessed relative to the budgeted revenues that we were expecting to receive from those fees. And then there's an automatic true process that makes sure that the MSRB's fees that we are not over assessing or under assessing any of our fees relative to our budget and our projections. The model also establishes greater accountability in the management of the MSRB's organizational reserves. Any operating surplus that the MSRB may generate will be automatically returned to the industry in the form of lower fees through the rate card model process.

(34:03)

In the past, the MSRB'S practice had been to retain any operating surplus and to build up its organizational reserves. In the past, it would take an affirmative action by the board to return an operating surplus to the industry. Under this new rate card model, it would take an affirmative action of the board to prevent a return of the surplus to the industry. So again, we developed this rate card model. The SEC approved this rate card model, which is used to establish the fees that we assess on regulated entities. And we believe this model provides greater transparency and accountability to our stakeholders. So what does this mean for the industry? So in effect, a suspension order is as if the MSRB never filed its 2024 fees. So what will happen in practice is our old 2023 fees will remain in effect.

(35:13)

We are projecting that the industry as a result of this suspension order, we're projecting that the industry will pay greater fees in aggregate than they would have under our 2024 fees. In large part because of an operating surplus that the MSRB had in 2023, which we were using to effectively subsidize the 2024 rates. But the suspension prevents those rates from going into effect and reinstates the old rates. The suspension has also caused some operational challenges and some confusion in the industry, and the MSRB has received a number of calls from market participants about the suspension and its impact on their operations. We issued a regulatory notice that clarified the effective date of the suspension order and we'll take other further actions as necessary to minimize any disruption caused by the suspension. If you have concerns about how the suspension might be impacting your firm, please reach out to us and we'd be happy to work with you.

(36:30)

We believe again that the rate card model and the 2024 fees are in the public interest and we remain committed to engaging with the SEC and stakeholders to ensure that the MSRB has the resources it needs to advance our congressional mandate. The suspension order has initiated a public comment that period runs through February 23rd. If you are inclined to submit a public comment, I would urge you to review the SEC suspension order. They ask several questions that they are seeking public comment and feedback on, and I would encourage you if you are going to submit a public comment letter to address those particular issues. So that was the first regulatory update. Let me provide one other regulatory update and that is on the amendments to MSRBs rule G14, which established a new one minute reporting standard for trade reporting in the municipal securities market. We developed this new trade reporting regime in close coordination with FINRA, who was developing a similar trade reporting requirement for the corporate bond markets. And we wanted to make sure that we have consistency and harmony across the regulatory framework so that trade reporting times are similar across all capital markets.

(38:14)

We went out for comment last year on this one minute proposal. We received a very, very robust response back from the industry. The vast majority of the comment letters opposed the amendments moving the industry to a one minute proposal from the current 15 minute reporting time requirement. As a result of extensive engagement with the industry and with commenters, the MSRB developed two important exceptions to the one minute reporting standard. The first is with respect to firms that have limited trading activity in the marketplace, and the second exception to the one minute reporting standard is for certain types of manual trades. MSRB and FINRA filed our respective rules with the SEC. They are out for public notice and comment right now. The comment period ends on February 16th, which is actually next Friday. So if you are planning to submit your comment, please do so quickly. So those were the two regulatory updates that I wanted to share. I'm happy to answer any questions about any other updates.

Kevin Murphy (39:35):

I did want to all the investments that you've made in technology and all the insight you have into the market wanted to, could you comment on the effect perhaps potential effect of the exits in the short smaller number of firms in the market?

Mark Kim (39:51):

Sure. I think just building on Natasha's comments, which I think provided a really good perspective on Citi and UBS's exits or pullbacks from our market, from a banker's perspective, I'll offer perhaps a slightly contrarian view from the regulatory perspective. So we monitor and track firm exits in dealer concentration in the municipal securities market. There have been some concerns and questions about the potential impact on liquidity as a result of these exits. And as we look at primary market activity, Natasha, I think we've been in the business about the same time. So over the last 20 plus years that I've been in the industry, Citi has been a dominant player in the primary market and a lead underwriter. In many of those years, Citi was the top underwriter. But over the last several years there's been a very noticeable pullback from Citi in the primary market. And in 2023, they ended the year I believe as the sixth ranked firm in the league tables. We see a fairly similar pattern and trend in Citi's participation in the secondary market. Historically, Citi had been a dominant provider of liquidity in the secondary market. Their participation measured as a percent of par traded was in the double digits.

(41:32)

In the last few years, we've seen cities' participation decline dramatically in the secondary market to a low single digit percent of par traded. So with respect to the potential impact on liquidity, I think it's largely already happened, although the news only just broke. I think market participants have seen cities retreat and pull back from the market over the last several years and firms have stepped up and responded and filled that gap. So I think the good news here from a regulatory perspective is that the municipal securities market has again demonstrated its resilience and its strength even in the face of a once dominant market player exiting. So that's the regulatory perspective. We don't feel that city's exit poses a systemic risk to liquidity in the market.

Kevin Murphy (42:32):

That's good to know. Very interesting perspective. Before I go, sorry, before I go, just Jay, did you want to jump in at all quickly on the pullbacks?

Jay Olson (42:42):

Just briefly. Echo I'd echo Natasha's sentiments. Just from a human perspective, you sort of hate to see people be involuntarily separated from their jobs. They had a lot of really great people and we really hope they land well in every confidence that they will as it pertains to the space they occupied. Anyone who's seen an offering document for City GOs, TFA or water, we'll notice there is no shortage of names on that front cover and I certainly will lament the removal of two names, but I think I'm still fixated on the large numbers we have to do and we have to keep pushing forward one way or another. And it's certainly sad to see firms leave and your take on the liquidity and the origination is certainly noted, but we have to continue pushing forward financing the investment in our infrastructure and taking advantage where fundings are profitable and the technical expertise specific to us in those firms. Hopefully they will land elsewhere and that knowledge will be able to continue to use and more importantly, the individuals possessing it will continue to be able to use it.

Kevin Murphy (44:02):

Definitely. Thanks Jay. So Lenny, if you want to just quickly jump in on that same topic from Blaylock perspective, but also wanted to, Natasha gave the audience a high level perspective on outlook for the market and issuance from not just I guess from your perspective with lac, but your long experience with Moody's and credit analysis with your teams there. Can you give us a little bit of a drill down on the 2024 outlook by specific market sectors, whatever you'd like to cover, and then where does that lead those sectors in terms of volume?

Leonard Jones (44:40):

I'm sure I can. Mark, I appreciate that comment on my entrance, but it didn't feel so good.

(44:50)

I took a red eye in from Portland last night and typically red eyes aren't late, but unfortunately I was in a red eye that was late, so I apologize to everybody first talk about UBS and city. Yeah, it doesn't feel good having been in the muni industry my whole career to see firms exiting and not supporting the muni industry, but I don't really see an impact on our industry. The, what I'll call regional and minority firms have been stepping up significantly in the last few years and I think have plenty of capacity to step up and take more of that responsibility to issue bonds in our market. We also, I don't really think there's going to be a pricing impact. The same financial advisors are still there and they'll still make sure that pricing is fair. So I don't really see any challenges from it, but there are a lot of opportunities for a small firm like mine. There's a lot more talent on the street that I assume like what they do and want to continue in this market and there are places for them to go on these regional and minority firms that are looking to grow and step into that space. And so I guess I agree with what other folks on the panel here have said, but do not see a impact from it and no challenges, but opportunities.

(46:36)

As far as the numbers, we don't really project municipal numbers at Blaylock, but you're right, we have looked at the outlooks and overall I would sum it up saying we will probably see a slight increase in market volume this year just looking at some of the sectors. The states overall are working off their covid funds. They I think can withstand the interest rates being higher for longer and the revenue growth will continue. It's slow. I think numbers I read are two 3%, but that revenue growth is here and they're spending pressure with inflation wages and stepping in to where the federal government helped out entities like MTA before the states are going to have to step in to help those entities now. And so we see a slight increase in overall volume from states versus last year. Although last year was low, local governments are experiencing slower growth.

(47:57)

Right now they're a little more resilient because most of the funds come from property taxes and it takes a while to change the property tax levy, but there's a strain particularly because of housing costs, which have gone up a lot. And so with the increase in housing costs, it becomes difficult to raise property taxes. And so we think it'll probably be a flat issuance as it relates to local governments. Interestingly, one of the places that we'll probably see an increase in issuance or state housing finance agencies, affordable housing is an issue right now all over and the higher for longer actually helps housing finance agencies as mortgage interest goes up and investment income seems to grow a little bigger. I think the single family is on solid footing. Single family can offer lower interest rates and down payment assistance. So that makes it very able to really compete in single family and multifamily is also doing well as the faults are low.

(49:19)

And there's a lack of product, a lack of multifamily housing. And so we think there will probably be an increase in state HFAs issuing bonds. A couple other areas, school districts, again, they're funded mostly by state revenue or property taxes, so there's some stability and states still need to support school districts. Enrollment is going down as there are less students and there's competition from charter schools and private schools. But with that maybe half the states have per pupil funding and the other half don't. They have different models. And so labor costs are going up in school districts, but the capital costs, which have risen for a while seem to be moderating. So we think there's overall moderation in that area. There are a lot of reserves the school districts still have from the money they got during covid. And so we see issuances being flat there, even though it was low last year, we think it'll be flat water and sewer again is stable.

(50:44)

It's a necessary product and they have autonomous rate setting authority, so they're been able to increase rates as they need to overall. And we realized that capital costs have gone up, but with the autonomous rate setting, it's kind of evened out and we think issuance will be similar to what it was last year, even though again last year it was low. And I guess the last area of healthcare, healthcare has been the big problem. Child and public finance, the COVID pandemic stopped other procedures really turned upside down with what was happening with healthcare. Labor costs have really gone up, but healthcare seems to have recovered. Profitability is going back up. It's not to where it was before the pandemic, but it's gone back up. And so we think healthcare will again be stable to what it was last year. And so there are a couple of sectors where we see a slight increase in issuance this year, but generally we see it as being stable to last year.

Kevin Murphy (52:07):

Okay, thanks. I like the slight increase part of that. I guess why don't we ask, are there any questions anyone in the audience has either for the panel generally or for particular folks up here? I think we Go ahead.

Audience Member (52:28):

I dad a question for Mark. Mark, I wondered if you could give us an update on where stand.

Mark Kim (52:36):

Sure. I'm not sure I can provide much more insight. We're like you on the outside looking in. The SEC and treasury are responsible for developing the data standards under FDTA. The expectation is that they will publish those standards later this summer and put them out for comment, for public notice and comment. I can share that in the background. The MSRB is providing technical assistance to treasury and the SEC with respect to the types of data and the formats of the data that we have and what we do with the data and how we store it, et cetera. That is, I believe, helping to inform treasury and SEC in terms of the type and quality of data that exists in our market. But in terms of the establishment of the data standards themselves, MSRB is not involved in that process.

Audience Member (53:38):

Thank you.

Kevin Murphy (53:39):

Okay, thanks. Good question. You have any other questions? No. Okay. Seeing none, I think, I guess we just thank our panelists. This is a great panel. Thank you.