What are the implications of policy changes in Washington on the municipal market:
- What potential changes to the tax code mean for the market
- How tariffs play a role
- Implications of immigration changes
- Federal funding programs
Transcription:
Ajay Thomas (00:09):
Good afternoon everybody. Welcome to the Texas Bond Buyer Conference. It's really nice to see a lot of friendly faces and friends and colleagues and industry participants here this afternoon. Well, this is a really exciting panel from the standpoint of substance and a lot of theater, both because there's just so much uncertainty that's been in the marketplace that surrounds everything from tax policy to tariffs, which we all got a real good taste of this last several days and what's been being contemplated both at the federal level and certainly at the state and local level in reaction to what's happening with the Trump administration and some of the proposals that are going around the halls of Congress. So with that, I want to really start off our discussion really there and what is happening at the federal level with some of these policies that range a whole series of different topics.
(01:05):
While there's a lot of fixation on taxes and tariffs, we do have other things that are happening with government efficiency, with immigration, things that are going to affect healthcare delivery, and there's just a whole series of issues that I think are going to be very pertinent and interesting to what happens in our industry. So with that Emily Brock, you're right at the forefront of what's going on and being an advocate for the industry and for every participant that cares about public finance, you're probably going to be the most popular person at this conference for what the latest views are, more than you already are at most of these events. But with that, maybe you could give us an update from your seat as to in your work what's happening in Congress and in the White House and in some of the threats facing the municipal market as we sit here today.
Emily Brock (02:01):
I never thought as a little girl that my popularity would hinge on being the biggest nerd on Capitol Hill, but alas, I do want to say and credit where credit's due. It really has not been me advocating this time around, and I say that I've been doing this for 10 years now, so I have seen three different comprehensive tax reforms, five government shutdowns, five 17 continuing resolution, so a fair amount of activity happening and threats to the municipal bond tax exemption. But this time around there has been so much vigilance on behalf of the entire market, both the issuers, the bankers, the lawyers, and everyone in between who participate and advocate on our behalf. I just want to say thank you, especially for those in Texas and the work that you are doing, but to give you a status update, I did ask a friend in the corner if she could just hold up news reels because that's as current as they get these days.
(03:06):
What is current and what's incredibly important to us is the status of the federal activity that is working toward tax reform. As we all know, the 2017 tax cuts in Jobs Act are set to expire this year because we are a two year congressional budget cycle. So much of them would have expired in 10 years. So now what happens is, of course, the House and the Senate have to agree on a lot of things. The largest of which is how much is it actually going to cost us to extend these tax cuts and Jobs act? Right now we have two different reconciliation bills, one's in the house which says it's going to cost $4.5 trillion and one in the Senate, which says it's going to cost us $1.5 trillion. As usual, the math is not math. So what we need to do is we need to understand our vulnerability or our threat, and what we do is we look at, well, what are the methods by which Congress can use to pay for that, either 1.5 or $4.5 trillion?
(04:11):
Well, they can mess around with the taxes, right? If you raise tax rates, you raise revenue for the federal government. If you lower tax rates, you lower taxes for the federal government, but then they can also look at mandatory and discretionary spending. The difference between the two is discretionary is like your operating budget. That's where Doge comes in. So to the extent that there are actually jobs lost and there isn't necessarily operating funds that are needed for the agencies, that's cost savings. But really what the house is looking toward is that mandatory spending side, and that's where we talk about Medicare, Medicaid, social security, veterans benefits, student loans, all of those things fall underneath that. It's kind of like your YouTube TV subscription and your HBO subscription that you signed a long time ago and they kept having those rates go up, but you love 'em too much to let 'em go, so you keep on paying for it.
(05:11):
The house is very interested in looking at those mandatory spending parts of the federal government to try to see where they can actually shore up those funds. Alas, that comes back to us was our vulnerability level, the municipal bond tax exemption. When that first category, the tax exemption is actually one of the top 10 tax expenditures of the federal government and who's above us. Well, beloved, things like the child tax credit, like estate tax, like salt, all of those things are above us, and so when they start crossing off things above the list, our vulnerability goes up and up and up. So our advocacy is at a heightened pace right now. It is more important than ever, especially for Texans to reach out to members of Congress to let them know that the municipal bond tax exemption is vulnerable and we need their support and know I am not gaslighting you. It is go time. It's time to reach out.
Ajay Thomas (06:19):
Thanks. That's a great start. Emily. Let's discuss dollars and cents, and I think this will be pertinent to all three of you that are on the panel, and you talk about the vulnerability and some of the other options that are immediately ahead of the municipal tax exemption and how we become increasingly vulnerable as those are accounted for. Do you sense from the conversations happening now in Washington that they've come to some consensus about what the value of the exemption is, and is that enough as a pay for to really make it vulnerable as people are so concerned about it?
Emily Brock (06:57):
Yeah, I mean, $4.5 trillion is a lot, and the Joint Commission on Taxation has scored the entire municipal bond tax exemption at $300 billion over the course of 10 years. Now, what that means is it's not only future issuance, its current outstanding holders of debt and their tax exemption. Now, I don't know about you, but if they take away the tax exemption for grandmas and grandpas, my mom, my dad, I will go after them. This is certainly a non-negotiable tactic to go ahead and take away the tax exemption on currently hold debt, but that's the value that they've been given. That's a substantial amount, 300 billion, but does it go toward paying 1.5 trillion or $4.5 trillion? That I think is the next question at the end.
Ajay Thomas (07:47):
Nicole, in your role, you have a unique vantage point. You've been a banker, you're a credit strategist currently, and you work with a lot of the bankers at your firm in their clients and their issuers over what some of these type of issues ultimately mean for them from a credit perspective. Where do you see the world, let's say either the muni tax exemption is eliminated completely, partially certain sectors, how does that affect credit spreads and investors and issuers and how they might interact with one another going forward?
Nicole Kracum (08:23):
Thanks, and thanks for having me speak on the panel today. Excited to be here. So repealing or limiting the tax exemption would raise borrowing costs, taxable bonds yield more than tax exempt bonds and sometimes in many cases by more than 50%. So doing a simple analysis from a spread perspective, that could look like 150 to 250 basis points. And if you're increasing your interest costs, well that makes your debt service a larger part of your annual budgets, and so with that, you have the crowding out of other spending priorities, you may have to increase taxes, or in other cases, issuers may pull back on capital spending or reevaluate their capital programs, so it would make a major impact to put another kind of dollar amount on. It reports estimate that governments saved $714 billion in borrowing costs, and that was from 2000 and 2014 due to the tax exemption.
(09:32):
Other estimates looking forward, borrowing cost savings of 824 billion is estimated for the next decade due to that tax exemption. I think in earlier panels some people talked about some of the other possible implications of losing the tax exemption. We think about limited or non-existent market access for the smaller or less frequent borrowers. So that's going to cause a major impact for our market. And again, to put some numbers on it, roughly 25,000 muni borrowers have outstanding debt under 25 million, and that's compared to a thousand corporate entities. A couple other implications of losing the tax exemption, issuers would have less ability to call debt for savings, and then refinancing risk would enter the picture as well.
Ajay Thomas (10:29):
Thank you.
Nicholas Samuels (10:31):
I just add to that Ajay, right, because that's an important point, right? Is that so much of the stability of the municipal market is that you're issuing largely fixed rate, amortizing long-term debt for capital purposes, and if you've got to move into a taxable market that is not used to that and wants to see different kinds of debt, that just is diminished when the tax exemption is lost.
Ajay Thomas (10:58):
Nick, let's continue on a little bit with that. So as the structure of how a municipal issuer may have to access the marketplace and cost necessarily with that, I think there's some consensus that will automatically go up for them From your vantage point, how is that recalibrate maybe make you rethink from a rating agency standpoint, the credit quality and viability for some of these issuers going forward, especially as you look at different parts of the country, maybe regionalize it, and here we've got fast growth areas here like Texas and in the south, Southeast versus maybe somewhere like the Northeast where you see some population flight and some declining ability to support tax bases and revenue streams.
Nicholas Samuels (11:47):
Yeah, I mean bigger issuers who issue frequently may be able to adapt better. Some of those issue taxable debt now because of the purposes that they issue for are very diverse, but like Nicole said, smaller issuers or small issuers who issue every few years or not very often will have a harder time getting into the market and would need to see to find different ways to finance their capital needs. We talked about even bigger issuers, but who have big capital plans and big capital needs who would see their borrowing costs go up? Maybe they have to adjust their capital plans, but that doesn't mean that their capital needs are diminished, especially for certain types of purposes. So it creates new challenges.
Emily Brock (12:35):
I would also say this access to capital is really salient in a member of Congress's office. For those of you who don't know, GFOA supports a website called built by bonds.com, channeling our inner leventhal, as you know in a high tech way, but built by bonds.com is a repository for issuers to go in and tell their story what has been built by bonds, but also there's a number of other resources on that website, one of which University of Chicago generated over the last couple of weeks. All that we asked was who is issuing in each congressional district? And you go into this website and you can poke on your congressional district and you've got a laundry list of the last 10 years of issuers, and we walk right into the member of Congress's office and we take a marker out, we draw a line right above that $30 million mark and we say, everybody below this is going to have a hard time finding access to capital. That is a compelling point. They're looking at that and they're saying, but my kid went to that middle school, but I drove across that bridge today. But as you're looking at it, it sinks in that access to capital will be much harder for those essential public service providers in their community.
Nicole Kracum (14:01):
Cool. Yeah, one thing to maybe add there is people talk about the fact that states may have to intervene if we get to this dire scenario where the tax exemption is taken away, that states would have to intervene and maybe with numerous avenues, bond banks or guarantee programs or state intercepts, et cetera. But in a lot of cases that would require state law changes, political will to get that done, and then resources to actually build out that program. So it's not easy and it's costly, so it's not a good solution.
Ajay Thomas (14:43):
The other issue for some of the smaller issuers and ones we see most frequently all across Texas in other parts of the country, is just going to be the shift in how you have to access capital if you can get access. Because I think going to a fully taxable market, while the municipal market is now more increasingly familiar, I would say not totally educated in a taxable market of how a municipal issuer works from a credit perspective, and Nicole, you probably have a lot of knowledge about that, the anticipation that you could move theoretically into a more of a corporate style market with big term bond bullet maturity type structure as opposed to the serial bonds that are municipal issuers are used to not only drives the cost up, but also limits access to the marketplace for a whole range of issuers because they're not able to issue bonds that way.
(15:39):
And there's certainly the winners and losers of being a bigger size deal in a corporate market versus less one. And also the weekly competition for airtime with investors and to get their focus because now instead of a $10 billion heavy week in Munis that we talk about for issuance, you could be in a week of 45 and 50 billion with a whole range of corporate is issuers competing for investor attention. So there are a lot of different issues that result out of that. I know Emily, in your efforts and your discussions, the conversation certainly is to play defense and hold off any adjustment to the muni tax exemption at all at this point. But we are all hearing about members of Congress and staffs thinking about in the White House, thinking about sector specific maybe type cuts, taking more of the scalpel approach to the muni tax exemption, as they say, for sectors such as housing and higher education, healthcare, the use of private activity bonds in different segments, how does that ultimately resonate with members of Congress to say, we really don't want to go even there. We think that the Muni tax exemption needs to stay intact as a whole for the municipal issuer?
Emily Brock (16:59):
Well, I mean it, it's actually a pretty legendary story from 2017 when a certain member of Congress who was chairman of the Ways and Means committee had written into the 2017 Tax Act, the complete elimination of private activity bonds, and boy, oh boy, that was a lot. It's still a lot, but here we are again, and I'm thinking back to that 2017 circumstance where Chairman Brady came back and he was talking with an airport and an airport said, if you get rid of private activity bonds, that new gate is gone. Is toast talking with a 5 0 1 3 college? And they're saying, yeah, if you eliminate private activity bonds, that student housing is dead, right? So I don't know if it's actually true or not, but five days later, private activity bonds were out of the bill. So telling the story of what private activity bonds do in your community seems to be an essential element of making sure they stay out.
(18:12):
But I'd also like to say GFOA has a policy. Bonds build community, all types of bonds build community, and the way that we operate on Capitol Hill with the public finance network is together with the AHA with nacubo, with all of the private activity bond issuers along with geo and revenue bonds, we don't really see a distinction, but they do. You are hearing sentiment on certain members of Congress's staff and certainly those that were there in 2017 who had opinions back then, they still have those opinions now and education needs to take place. That is the projects need to be articulated to them that will have a much more difficult time, become much more expensive in their districts. Those are the most compelling stories that help for them to understand elimination or taking a scalpel approach. Not only does it not raise enough revenue to be compelling to pay for either 1.5 or $4.5 trillion, but it also makes costs for hospital beds much higher.
Ajay Thomas (19:24):
Nick, maybe you can speak to this and then Nicole, as we think about different sectors and the importance of having access to tax exemption for them, I think higher ed comes to mind, right? Where we have a whole range of different institutions facing real headwinds with, we even heard on the previous panel with K through 12 about their challenges with enrollment. That certainly is bubbling up to the higher ed sector where you have an enrollment cliff coming. When you think that is just as an example, but you look at other sectors like housing and healthcare where we are seeing some discussion about maybe the tax exemption's not needed for them. How do you view that from your lens as severe for that sector versus is that a winner and loser scenario between geo issuers in higher ed? I mean, how does that impact the marketplace from your view?
Nicholas Samuels (20:19):
Well, let me answer it in several different ways, right? Because picked out a sector that is facing a whole set of unique headwinds now, and it would be very interesting whoever introduces the controller tomorrow who's moving on to a new job in higher ed to hear what his thoughts about that are. But look, I mean, let's talk about just the credit challenges for the higher ed sector, right? They already are facing enrollment challenges. They're facing enrollment. That's just because of changing demographics in the US because of changes in views of the value of higher ed of a higher education degree. They're facing challenges to the extent that international students can't as easily come to the US now. Those tend to be students that pay more than US students, and they're now facing this very challenging environment of research grants and other types of grants being withheld from them with not a lot of sense of what sort of the process or warning of when those grants might be withheld.
(21:26):
So really big challenges. And of course, higher education institutions also, depending on where they are and what they do in the context of research, can be economic drivers for the local governments that they are within. And that has real potential to the extent that those types of things are withheld or slowed down to really slow economic growth in their areas. Also would be a good question for the controller tomorrow, because Texas a and m has a lot of very important research institutions related to transportation and some other things that really are drivers here and important sources of data that we use in all of our transportation research.
Ajay Thomas (22:08):
Nicole, maybe if you can answer it from this perspective, from your credit strategist point of view and the intermediary link you play between bankers, issuers and investors themselves. How do you possibly see the investor base as a whole being impacted by all the discussion going on in Washington about the threat to tax exemption to possibly yes, we're there's chance that it will be eliminated outright to certain sectors. Taking all that into consideration, do you see a thinning of the investor base happening? Do you think that No, they'll just course correct. They'll adjust, they'll be expansive and there'll be enough buyers out there.
Nicole Kracum (22:50):
That's a tough question because so you're saying in going to taxable market,
(22:58):
So presumably that would bring in some new investor types where the tax exemption didn't benefit them, so presumably it would bring in some of those new types of buyers. But municipal credit in a lot of cases is very, can be esoteric, can be particularly for some of the issuers that we were talking about earlier. They're smaller or issue less frequently. An investor, an international investor may not have the time or wherewithal to want to understand those smaller credits. So those types of buyers may not automatically shift into our market beyond that, it gets complicated. I mean, yeah, I'll stop
Ajay Thomas (23:51):
There. Yeah, I know something I worry about is we've seen over the last 12 to 18 months, certainly the proliferation of activity from SMA that are participating in a lot of transactions and helping to clear the market in a lot of cases. And we're not seeing wild over subscriptions on deals anymore as we used to in certain times of the market. And so when you do get into these periods of time where there's competition for investors and certain investors are making market decisions and either stepping to the sidelines out of the marketplace for various reasons or taking a more cautious approach in where they make investment decisions based on alternative investments that are available at any given point in time, the tax exemption being either eliminated or capped in some way, I think it's starting if not already, already, creating anxiety among insurers that need and have active capital programs that fight for investors every single transaction, every single day trying to get as many eyes on their deals as possible out in the marketplace.
Emily Brock (25:02):
Yeah, I think there's no love lost for investors in Congress despite popular belief. I think what Congress is looking at is you really have to extract yourself from an analytical viewpoint from the municipal market. You really have to talk about use when you're talking to a member of Congress. There is no other private activity bond more beloved than affordable housing right now. You talk to any member of Congress and they will say, I don't love private activity bonds, but I love affordable housing. In fact, I did talk with a member of congressman. They were saying, we just love Litech and we throw our full support behind Litech, but we do not support private activity bonds. And I said, well, that's going to be a hard one to take apart there. You need one to have the other. And so really educating them to say, private activity bonds by use is articulated in a tax code and it is able to be scalpel out by use. But then you kind of throw in the most recent discussion, of course about stadium bonds. Popular belief on the hill is that stadium bonds are private activity bonds. They're not always private activity bonds. So articulating that use and really having a conversation about what it is that you're the tool, the tax tool that you're looking at and what it means to the citizens in your community is a conversation that is a real conversation that happens very frequently with us, between us and folks on the hill lately.
Ajay Thomas (26:46):
Well, I appreciate you bringing up the importance of affordable housing. In my role in different capacity as being on the board at Texas Department of Housing and Community Affairs, I know the agency is highly focused on affordable housing and delivering more units here in the state of Texas all over the state, and we certainly appreciate those programs and have a partnership with the federal government. That's critical. So I hope that that resonates. It's certainly a position we're taking as well as the agency. Let's transition a little now to the tariffs, adding that into the equation. Obviously tariffs were on top of mind this week for everybody here.
(27:25):
We've seen different changes, proposals, obviously implementation that has stopped and paused. The cost for new and renewed infrastructure has just risen so considerably for issuers over these past several years. And even though we've had some reduction in some materials, it's just not subsidizing meaningfully enough now that tariffs are introduced, and we're in a world of where that's likely to continue for a while despite the 90 day moratorium here, how does that change the game for issuers? How does that affect Congress's view congressional members in terms of the things that they think about in their own communities back home?
Nicholas Samuels (28:13):
I'll take a first step.
Ajay Thomas (28:14):
I think you want to start. Yeah,
Nicholas Samuels (28:14):
Right. I mean, so look, there's so many different channels of credit risk, at least from this tariff issue. So first, just think about regional economies. The states that are heavy in exporting agricultural commodities. The states that are heavy on auto manufacturing, whether that is Michigan and the traditional Rust Belt states that are very reliant on parts coming from Ontario and assembly happening in Michigan and back and forth. The southeastern states, which are mostly foreign auto manufacturers that are very reliant on parts coming in from different places, and they also mostly cars made for the domestic market, but they're also exporting cars to other places. Those are regional and local economies that are negatively impacted by tariffs. So 0.1, 0.2, which we've talked about a lot, is just construction materials, steel, aluminum, lumber, all of the kinds of things that are impacted by higher tariffs make it more expensive for everyone for state and local governments doing big construction projects for individuals, building houses, just all of those kinds of things. Three is the potential impact on consumer behavior. Prices go up, consumer confidence goes down. People maybe want to spend less. States like Texas maybe could see a bit of a bump in sales tax revenue as prices go up. But if spending goes down as a result, overall that's more a negative. But I think there's an even bigger credit nugget to pull out of tariffs, which is whether they're temporary or whether they are durable.
(29:57):
The revenue from tariffs is supposed to pay for the tax cuts that want to be made and that the administration wants to make. And if they don't raise that much money or as much as they predict, then the spending cuts have to be bigger. And that is to a whole host of very important state and local and other downstream programs that have even bigger money impact than the municipal tax exemption. Like Medicaid, which is an $880 billion program is the biggest state expenditure covers more than 20% of the US population, the biggest health insurer in the United States. So if that becomes even more of a target, then states have to make either significant changes in benefits or have to find other ways to find money to maintain the programs. And Medicaid is not just health insurance for lower income people. It is the thing that pays most of long-term care costs, whether that's for people with intellectual disabilities or other types of disabilities or the elderly who are in institutional care that's not paid for by Medicare, that's paid for by Medicaid, which is a shared program between the states and the federal government. If the states have to pay more, they're more likely to reduce benefits. I think the last panel, there was some discussion of maybe then we'll need to look to the state to kind of help us with this thing. States are great at pushing their problems down to lower levels of government and other types of entities. The federal government could be pushing its issues down onto states also, and just to the extent that they have to cut or find other solutions, there's less space to do other things like help other types of entities.
Emily Brock (31:51):
I would say there's a bit of powerlessness at the local level to say, well, if the tariffs happen, then the tariffs happen. And once again, we're going to have to deal with whatever our allotment is. But I was suggested New York GFOA and talking with this town of Lake Plad, CFO, who said, we get our salt from Canada for salting the roads. And she was just kind of like, well, what are we going to do about that? And I said, just, I don't know, stay calm. Unfortunately in the beltway is a discussion about trade-offs. Well, if for example, state and local tax deduction, the ceiling is raised from 10 to 25,000, can you trade off that revenue raising for slashing something else? And they're having those types of conversations where we're saying Separate the two, please do not. This isn't all of a sudden an amalgamation of a federal fingers at the local level. The local level has the tools available to them to make their decisions. We have the 10th amendment of the United States of America for a reason. We like to make local decisions at the local level, help us have the tools to make those decisions locally.
Ajay Thomas (33:16):
Nicole bat you could touch on, and maybe you have some general quantification around this. We talked Medicaid cuts specifically potentially getting pushed down. There's elimination and reduction in grant spending, funding, federal contracts being canceled. How does this affect the world of credit spreads in looking at issuers just in broad classification terms? Is it we know it made wider, is it three wider, five wider? Do you have a sense of what the market looks at in terms of how you evaluate this?
Nicole Kracum (33:51):
Actually did that, I think I'm going to take maybe a wider view on this and just speak more broadly about impacts and maybe how issuers are responding to or what this means. So potential Medicaid cuts and grant program freezes and contract cancellations. Kind of what all this speaks to is that the federal government is becoming a less reliable fiscal partner. And so that adds a lot of uncertainty. And so this, along with other policy wildcard that we've kind of been talking about really make longer term planning more important for issuers. And so we've seen issuers engage proactively with the rating agencies and with investors to convey how they're responding to these emergent threats. And in this environment, disclosure becomes all the more important robust disclosure.
(34:53):
And we talked a little bit about the higher ed sector, so some things that we've seen from there of late. If you look at Q1 issuance in the higher ed space, it was at 11.6 billion, which is a historical level, and that doesn't include corporate cusip. So if you include the corporate CUSIPs, that increases to 12.4 billion. And this was dominated by the higher rated institutions, which as we've talked about, have been targets of some of the negative policy actions. And so these borrowers are looking to conserve cash and kind of turn to debt as they're navigating this environment and preparing for responding to these threats. They're also authorizing new and expanding their use of commercial paper programs and revolving credit facilities. So a little bit different take on your question there, but I thought that would be interesting for the group.
Ajay Thomas (35:54):
Absolutely. Thank you for that. Nick it seems like what all we're talking about, whether it's the threat to tax exemption to implementation and aftermath of tariffs, some of these other issues that are related to that in terms of what the federal government is looking to maybe push down on states and local communities, it sort of screams to me that issuers are going to be having to increasingly think strategically about resiliency whether whatever level of government issuer you are, and I know we've talked a little bit about, and there's been focus on disaster recovery and climate and what's going on with different communities and how they're addressing it from your vantage point, and as you look at credit, strength and resiliency, do you think that any of these issues stand out to you as an issuer, really needs to start focusing on how they manage through certain funding mechanisms that they're maybe exposed to the federal government or how resilient they need to be if they can't issue tax exempt bonds, for instance anymore?
Nicholas Samuels (37:05):
Well, the strongest rated entities are doing that anyway because they have very strong fiscal governance, and so they're sort of scenario analyzing those things all of the time anyway. But you used the word resiliency, and we can think about that in a lot of different ways. Fiscal resiliency. I think we'd want to talk a little bit about disaster relief, but I think also if you've listened, as we've listened to the three of us talking, we've probably said the word uncertainty at this point, like 25 times in the last 25 minutes. And that is the thing that is creating the greatest credit challenge right now is there are really new levels of uncertainty just coming from many different directions for municipal issuers right now. But I want to talk about the real resiliency for a second because you mentioned disaster relief, right? And the same with Medicaid.
(37:58):
That's a 60-year-old program where there's a known status quo in the context of disaster relief funding, right? There also has been a really known status quo. So you have an event, a natural disaster event, there's a presidential declaration. You very much know you're going to get reimbursed for your first responder cost and your debris cleanup and all of these kinds of things. If at a specific level, if you go through certain exercise of keeping your receipts and submitting your reimbursements. And I don't think that that has been questioned per se, but there is a lot of uncertainty about political rhetoric of will those funds flow in a timely way so far? Yes. But in the context of other kinds of resiliency, right? There is a program created in the Infrastructure Act called Brick, and I'm not going to get the acronym right, building Resiliency into Communities or something like that, which was just canceled either earlier this week or at the end of last week.
(39:04):
Texas local governments lost more than $500 million from that of resiliency programs, which would make them more resilient to future disasters and maybe cost less than going forward. Those grants are gone and as part of this overall budget cutting. So it really means that if you had thought that certain types of capital improvements or other types of resiliency programs or adaptation programs would be paid for by the federal government or that they would have a share in it, that's not the case anymore. So now you have to reevaluate your capital spending and where the money's going to come from and what's the thing that you can't do if you really think that you have to do this other thing.
Emily Brock (39:47):
Just to emphasize that key point about the fact that we're kind of on our own now, on January 28th, the memo, the Office of Management and Budget sent out a memo that said they were pausing federal funding and that my friends was the largest click rate we've had on any webpage of G a's history of maintenance of our website, 46,000 clicks in the morning. So that goes to show not only how pervasive the question was, I mean 46,000, we have 27,000 members, 46,000 clicks means lots of people who aren't our members were probably interested in what we had to say and any updates and any new information, and I didn't have a whole lot of information to give. We can't give information that's not authorized or official. We can't give leaked documents because I'm not sure if they're official or not. It's very hard right now in this uncertain environment to understand what is official and what is not official.
(40:57):
But what we can do as GFOA is we can offer recommendations on how to clean up your own fiscal health and make sure that you're prepared for the event that maybe there are clawbacks of federal funding. Number one, make sure you have an inventory of all the grants. Number two, make sure all of the grantees and the grant awards around your organization are accounted for. What are the promises that you have to maintain according to your letter of award and how do you report those back? Number three, make sure you're preparing for your CFA if you're spending more than a million dollars in federal funds. And number four, I'm probably most important, make sure that you are exercising extra due diligence on third party contracts that rely on those federal funds as well, because that's where the risk lies for the issuer. So we're taking this information in. We're trying to generate as much helpful information for issuers out as we can, but once again, it's a weird thing to be popular in this environment, a weird thing to be popular for, but GFOA sure got a lot of clicks that day.
Ajay Thomas (42:05):
Absolutely. One thing I kind of note, we're in Texas and being the Texas Bond Buyer conference things, it seems like there's certainly a movement out of Washington to push more to the states and decentralize sort of the federal programming and government back down to the state level. And I think as Nick pointed out and mentioned in his earlier comments, a state has a tendency to push that then to back down to the local level when you see issues like immigration and being discussed in Washington. And you had state of Texas, for example, take a more certainly visible, proactive role in managing the border, the southern border here, which it felt didn't get enough support from the federal government over the last several years and costs went up for the state in that regard. When a state like Texas arguably is viewed as successful at doing that function that the federal government is supposed to take over, do you see that as more firepower for congressional members to say, see, we told you so we don't really need to be doing this at the federal level. You should be pushing that down in the states, and it gives them more credibility to do that.
Emily Brock (43:18):
No, of course. I mean, I think that there's world famous for taking three or four examples and saying, see, this is how it is. And you're sort of screaming into the wind to say, yeah, but there's 78,000 more issuers out there than these four. And so it's always a constant battle of rhetoric to say, this is how it is. This is the current reality, which is why, again, going back into telling your own story to your members of Congress has a much more powerful thing, is a much more powerful thing than sort of the swirling rumors that happen inside of the beltway.
Ajay Thomas (44:03):
We've all been involved in conversations in Washington, what's been going on, and we talked about several of some of the high level more public issues. Emily maybe start with you. Is there anything that, from an issue perspective, that is viewed as, wow, this is important to issuers in the industry to really wrap their mind around they do this, this is in threat in what's being discussed from a policy perspective in Washington. Is there something that we don't hear about maybe often as frequently enough that you're hearing that, oh, well, that's actually under consideration.
Emily Brock (44:38):
Oh, well the tax exempt municipal bond, right? But that's like every other word out of my mouth. But I think that, as I mentioned before, there's a lot of sort of false ties that are existing like, oh, well, what if we take this little bit of the tax exemption away, but we give you this? And the reality is sort of separating those conversations, whether it is the state and local tax deduction or the fallacy that tariffs will actually raise enough revenue for the exemption or for the tax bill itself. It's incredibly, the math is not math thing. And so we continue to try to drive home the point of what individual decisions of individual tax code policies are going to have and the implications of local governments moving forward.
Ajay Thomas (45:35):
Right. Nicole, maybe end with you on, we've talked about a lot of these different policies and how some of these policies being enacted create heightened credit risk for state, local, and municipal governments. In light of these risks, what are you hearing issuers are responding? How are they dealing with it?
Nicole Kracum (45:53):
Yeah, I spoke to some of these earlier when I was talking about navigating the uncertainties as the higher ed. I talked about the higher ed sector, what they've been doing, but access to liquidity and making sure you have the reserves in place to handle these moments. If you don't know if, for example, fema, it came out recently that FEMA tends to cut 325 million in grants for the state of New York for flood mitigation in New York City. And so to get hit with a grant being pulled, that's almost like a climate risk event or it's this sort of immediate hit. Are you prepared to respond to that? Do you have the buffers in place to be able to navigate that challenge? And so like I mentioned before, just a proactive outreach to the rating agencies and to investors. We're seeing issuers do that in this environment, looking at their disclosures, making sure they're addressing these emergent risks and showing that management is focused on these issues. You can't shy away from what's going on, so how are you navigating this environment? I think I'll stop there.
Ajay Thomas (47:15):
Thanks. Sure.
Nicholas Samuels (47:17):
And lemme just add to that because I think the theme of all of this has been the muni tax exemption. That's status quo, that's been around for a very long time, right? We talked about 60 years of the Medicaid funding status quo. We've talked about what the status quo has been about disaster, really funding, and there's many more of these things. All of that is what is creating the uncertainty right now of maybe we'll pull back from this, maybe it'll take this form, maybe it'll take that form. And so issuers have a lot that they have to be able to adjust to and many hard decisions potentially to make about what they can and can't do. That $300 million, that was part of the brick elimination. So okay, you have a risk that you were working towards mitigating and you were going to pay for it in part with this money that's not going to be there anymore. Or you're a higher ed institution that runs this institute or that institute and the grant money is not going to be there anymore. So how do you adjust to this new status quo? And all of this has changed in 79 days.
Ajay Thomas (48:28):
Very, very true. I think we will end there. So we can leave some time for some questions, but I'll end with this. I think we collectively feel issuers are the absolutely the best advocates for what's going on right now, especially with the threat to muni tax exemption and bringing to life how valuable a tool that is for your local communities. And to the degree you can reach out to your congressional delegation, your state representatives in your area and jurisdiction, and impart to them how important these issues are. And as Emily put it, making tangible connections to this is what tax exempt bonds build in these communities and how they make them affordable not only in real time and for future, but how you manage your tax rates and the strength and the future of your institutions in the community that make your community what it is. So great discussion. Thank you so much for that. And I'd love to open it up for questions. If there are any questions, we'll take a few. And like the last moderator said, I really can't see out there, so I really don't know if anyone's got their handwriting. See one Rob Dailey. I believe that's you,
Nicole Kracum (49:43):
Rob.
Audience Member Robert Dailey (49:44):
Question for Emily. I guess you hear, thank you. You hear legislative leaders in Washington talk about Republican Unity. Even the split between the House and the Senate was described by the two sides differently in both trying to find some way of saying, no, no, no, it's all the same thing. Does that result in, are they just trying to mask what is really a major divide that's going to be a massive problem and challenge to get through? That means we may not have a tax bill until September? Or do you expect the party discipline to pull through? I mean, how do you gauge that?
Emily Brock (50:24):
Yeah, the party discipline is, that's a great question because there has been so many different fracturing of the Republican party so far to get where we are. And by that I mean the fracturing of the Republican Party in the house is famously you've got your budget hawks versus those who are sort of more flexible on a potential pay for schedule for the tax bill. And then the fracturing between the house itself and the Senate, which you may know this, the Senate can't pass a bill unless they have 60 votes. That's why they're called the House of Reason, because they need to make sure that they reach across the aisle in order to pass any legislation unless you are doing it under reconciliation. So the process that we have right now is two reconciliation bills, a house that is fractured in and of itself between the budget hawks and Speaker Mike Johnson and everyone else, all the other Republicans.
(51:34):
And then you have a Republican senate who's saying, you guys are being a little too little too fast about this. You need to slow it down. You need to be reasonable. You need to start thinking about climate and immigration separately and addressing the tax bill a different way. In fact, it might be current policy where we don't have to count that $1.5 trillion. That was the 2017 tax Act. I'm getting technical here on you, but it does show sort of a difference between sort of the frenetic nature of what we're hearing coming out of the Republicans in the house and the rather calm approach that the Senate is taking. Party discipline means you have got to have the Republicans in the House and the Republicans and the Senate on the same page. And I don't know, I haven't read the headlines in the past 45 minutes, but right now they're deciding to go at it alone. The house is going their own path, and the Senate is going their own path. They have to have one reconciliation bill. So unless there is unity, they cannot pass a bill without 60 votes, which requires Democrats. So I mean, I think that's the reality of the issue is we see this from the outside looking in. We don't see a whole lot of party unity. What is the reality of the fact that you can get this to pass by the time the CR expires?
Ajay Thomas (53:05):
Great. Any other questions? Thanks, Rob for that question.
Emily Brock (53:13):
Another plug. So those of us who cannot reach out to our members of Congress for whatever reason, maybe your GR person reaches out to your members of Congress, maybe it's your elected official that reaches out. You do have a tool to reach out, and that is built by bonds.com. And I have so few projects on the Texas map. It is actually not proportional to the amount of bonds that there are outstanding in to Texas. I have so many other projects across the country, I need more projects in Texas. And we will do that outreach on your behalf. We will make sure that we show up to your member of Congress's office and say, these things are built by bonds. They're the things that you touch and you use, and they are integral to building community in your state of Texas.
Ajay Thomas (54:03):
Thanks for that, Emily. And that's a nice wrap up point. We're just about out of time. A lot of media issues, a lot of substance. Appreciate Emily, Nicole, and Nick for your expertise. I think it's very valuable and helpful in educating us all about what's going on with the issues in Washington. Thank you very much.