Financing the next generation of public infrastructure

Lynn Norris: Welcome to Navigating Beyond The Expected, a podcast from Truist Securities. Local governments and other public entities are investing in infrastructure and other priorities at record levels, even as construction and borrowing costs challenge what their capital budgets can accomplish. So what's driving that investment? And how can a thoughtful financing strategy help meet growing infrastructure needs? I'm your host, Lynn Norris, and today we're talking about the forces shaping the public finance market with Cameron Parks, head of Public Finance Origination at Truist Securities. Cameron, thanks for being here.

Cameron Parks: Thank you, Lynn. It's really an honor and a pleasure to be with you, and these are certainly exciting times in public finance.

Lynn Norris: Yes, absolutely. So we've got record levels of investment, but higher construction costs and higher interest rates would ordinarily be expected to discourage borrowing. So why hasn't that happened? What's driving the demand?

Cameron Parks: I think it really starts with demographics. Often, we think about a relatively low birth rate and a relatively slow growth rate within the country. At the same time, our largest generation at this point is the millennials. And the millennials are in their prime working years, prime household formation years, and with that comes a lot of public infrastructure investment. And then there's a number of regional effects as well.

 A lot of those effects regionally really have been concentrated in the South and the Sun Belt and so forth. And so we've seen a significant demand for infrastructure, whether it be schools, roads, hospitals, and otherwise. But certainly our industry has been very active. And so it certainly is something where we have one eye over our shoulder saying, "Well, gee, is this gonna slow down?" But at this point, it feels as though we have reached sort of a new normal in this post-COVID environment.

Lynn Norris: Do you think that entities are accomplishing more with all of this investment, or are they just paying more?

Cameron Parks: I think the straight answer is they're just paying more. For example, the net number of schools isn't necessarily higher. It's clearly an increase in cost. We see different statistics about construction cost but just since 2019, that number, depending on what type of construction it is, has increased somewhere between 40% and 80%. So the same school, the same road, the same utility investment, that just a half dozen years ago, uh, now costs somewhere probably, one and a half times, maybe almost approaching two times, uh, as much as it used to cost.

Lynn Norris: You mentioned schools and roads. Is that where you're seeing the most demand, or are there other public entity investment areas that you're seeing grow?

Cameron Parks: The airport space has been one. I think if you’re flying, you're seeing construction either at your origin or your destination or both. Most recently, really with the data center and AI developments, we're seeing significant spend in the electric utility space.

Lynn Norris: Well, we certainly hear a lot about data centers in the news, as well as the electric consumption. Do you think the communities actually understand the full infrastructure impact that comes with big projects like data centers?

Cameron Parks: I certainly think that communities are learning as we go; there's a lot of shared knowledge and development in that process, but I think in an emerging environment, lessons learned come quickly, and I think that communities certainly are trying to make every effort to protect themselves. A significant concern would be making that investment and then not having that ultimately be utilized. We call that a stranded cost.

And so communities generally are trying to protect themselves with legal covenants to ensure that the burden on those infrastructure investments aren't left, should an enterprise not sustain its presence. I think communities are certainly approaching this eyes wide open, and I think a lot of that shared knowledge across different communities is serving to protect these communities from not ending up with things like a stranded asset.

Lynn Norris: You mentioned that you thought this was now the new normal. So you don't think this is a temporary response to interesting circumstances?

Cameron Parks: Well, coming on the heels of the idea of the AI data center demand. Is there an idea of, well, at some point, “Has every data center been built?” and then you don't have that new infrastructure. And that's certainly possible. At the same time, as we've seen, when one sector may slow down, another one, you know, may be picking up. But the inflation and capital cost increase are unlikely to retreat.

The other thing to consider here is some of our activity is refinancing. And if anything, our refinancing rate has actually slowed down, which has created some degree of a backlog there. And so let's say the new spend were to decline to some degree, like that may be associated with a contraction in the economy. The economy contracts, interest rates may go down, and then you have a surge in refinancing activity.

Lynn Norris: How do voters factor into this? So, is there possible voter fatigue that then curtails borrowing, that then affects critical projects?

Cameron Parks: It's something we're certainly mindful of. We saw the largest decline in voter approvals in COVID in 2020, and a lot of that had to do with voter turnout. So lower voter turnout tends to be result in fewer bond ballot measures being passed. But away from that, we have seen more recently some signs that there may be some lower passage rates, lower support for, bonds that require a, ballot measure. At the same time, those rates remain very high. We may see like a 5% decline, but we're north of 80% overall on success rate for voter-approved bond measures. And I think that gets to the demographics I was describing. I'm not sure anyone really wants taxes to go up, but I think everyone wants good schools. So, we do continue to see pretty strong support.

Lynn Norris: Let's turn to some of the challenges that public entities and leaders face in meeting the needs that we've been talking about. So obviously, cities and public entities are still financing needed projects. So let's talk a little bit more about these costs. How are the higher and less predictable costs affecting the planning and the execution of these projects?

Cameron Parks: It's a great question and one that we find ourselves anxious about. We had this during the period before the financial crisis, when construction costs came in substantially higher in many cases than where estimates were. And we're starting to see that now. So, a recent project I'm working on saw construction bids come in about 20% higher than where the estimates were, and so we were talking a little bit about bond measures. In the case of a bond measure, you're gonna do your measure, and then you're gonna come back, and you're gonna do your projects, and the answer may be that the bond measure doesn't support as many projects as you initially intended. It-- that's, that's for voter-approved type of bonds.

But, on the, you know, sort of revenue-backed self-supporting bonds, a lot of times we have to delay finalizing our structure until after bids are received. And we are starting to see the engineer's estimates come up short. I think one, you know, byproduct of this is the velocity you see in a given community. So certain communities, particularly in a place like Texas, which is growing very, very rapidly, the materials demand isn't as much of a problem, but the demand for specialized labor can be challenging when you have multiple mega projects going on. In a given community, there are only so many contractors that may be capable of delivering. And so that creates a certain amount of inflationary pressure on the capital cost; that's where we, as a finance team, have to stay nimble. The creative solutions often is, come in with an interim funding solution so that you're not having to go and try to estimate what your total capital costs are gonna be in advance of having those numbers buttoned up.

Lynn Norris: What do you think is the greater risk? Is it that the project will overrun a budget, or that the project will have to be scaled back to meet the budget and therefore not really satisfy the need the project was intended to satisfy?

Cameron Parks: When we think about ballot-supported measures, you're often having to make the nominal decision of how many bonds you're gonna have before you can determine your capital cost. So in that case, you're gonna be stuck, effectively funding fewer projects or downsizing your project.

On the other hand, for self-supporting, that entity is gonna have some kind of rate-setting mechanism. And so if they determine they wanna make the investment, whether it be something like an airline terminal or a utility, ultimately, what happens, unfortunately, is that the rate that may be necessary to support those bonds has to go up.

Cameron Parks: Sometimes it may be a matter of delay. It may be, we're gonna issue X many bonds today or this year, and so therefore, to reach our end goal, it's gonna take us that much longer.

Lynn Norris: So what's the risk in postponing something important?

Cameron Parks: There's a lot of research about this and the idea of deferred maintenance, if you will. When we think about growing communities, there's no choice. If you can't fit so many children in a given school, so you have to build a new school. But a lot of the investment we think about may be replacement or improvement, or advancement. And the general statistics are that for $1 of capital cost deferred, you end up paying three to $4 in maintenance.

Lynn Norris: So talk to me about entities that are doing this well. What are they implementing that works?

Cameron Parks: This is where, depending on how you look at it, public-private partnerships can come into play, P3s as they're called. Municipalities have been doing public-private partnerships from day one. There's almost always a private entity involved, and issuers can end up being very effective even doing something for the first time, and even doing something much larger in scale than they've done before.

But often you're bringing in somebody with expertise. Whether that's somebody in-house who, worked in another community or another jurisdiction and had experience with that type of project, or outsourcing and engaging professional consultants. The nice thing I think in the municipal space is there's a lot of sharing of information. And so the entities that do this most effectively are those who recognize that almost nothing that's being done in the municipal space is trailblazing or being done for the first time. And so, trying to pick up on the lessons learned is the most successful way to try to implement a capital plan.

Lynn Norris: What do you think that people outside of the public finance world tend to misunderstand about why these projects that have lots of public support are still so difficult to execute?

Cameron Parks: Sometimes there's a thought that funding equals execution. when you look at it on the outside, you, might say, "Oh, well, we approved that sales tax. It was supposed to build a bunch of roads, and why are the roads not built yet?" but, remember, those roads may only be able to be built in the evening, because, part of the road needs to be operational for people to go about their lives.

And so I think it's trying to build the plane while flying it. In the municipal space, all these services are generally 24/7 needs. So these things just simply take time; they are constructing a lot of projects year in and year out, clearly, right over a billion dollars a day in spend going toward infrastructure by state and local governments. That really speaks to the velocity and demand for infrastructure across the country.

Lynn Norris: It takes financing to complete these projects and financing structures that will attract investors. So let's talk a little bit more about how that connection happens. Once a public entity knows what it needs to build, and it has at least a good idea of what those costs are going to be, how does the financing strategy affect what the entity can accomplish?

Cameron Parks: There's none of our entities who are at the end of their term, if you will. E- Every one of our municipal clients has a lifespan that could be centuries, certainly decades ahead. And so any project they're financing, they're looking at with a long-term horizon. Perhaps the most common structure is a 30-year term. They're taking on debt because they don't wanna fund the capital costs in one year, right? They're gonna pay it back over time.

And then there's the associated interest expense, the debt service cost on that. And so issuers often are mindful of ultimately their credit rating and their market reception. So, to the question, the idea of structuring ultimately is looking at what's the cash flows that support the project, what's the duration that, appears appropriate between the repayment term and when those cash flows are gonna be generated. Cause you also wouldn't wanna necessarily repay something for a long period of time if you're not gonna be receiving revenues supported by that project.

Lynn Norris: So that's how public entities typically borrow, but you mentioned something interesting about short-term. Is that a newer trend in borrowing? The muni market is pretty conservative, pretty careful. Is this stepping out of that a little bit?

Cameron Parks: Absolutely, and I think this is really a byproduct of what feels like an elevated rate environment. We're now seeing sort of three and four years on with rates at a higher level. A number of issuers have determined that they do not want to use the long end of our yield curve, right?

We've seen an emergence over the last couple years that now puts short-term borrowing at, at about 20% of our market. That number was around 5%, 10 years ago. And so I think that you can, you can see that issuers are availing themselves to the shorter end of the yield curve. The shorter end has a lower interest rate. It also gets back to this idea of capital planning, and how to manage what could be dynamic engineers’ estimates into realized cost by staying short on the curve, you can then react. You can upsize, downsize, and so forth. Whereas in our market, typically, you would have a non-call structure, meaning you cannot refinance for the first 10 years. So if you do a long-term borrowing, you've locked yourself in for 10 years.

Lynn Norris: So, is that agility, then, how issuers are weighing those immediate savings versus refinancing and market risk in the future? The agility has that much value?

Cameron Parks: People don't assign a numeric value to it, but certainly a, a qualitative value to it. But the other thing that they certainly do recognize is the interest savings. So if you're saving 2%, you know, on a $100 million project, that's $2 million a year. So if you're going from 5% down to 3, you're saving a couple million dollars a year on that project,

Lynn Norris: So what about investors? What are they looking for in these short-term offerings? Are there trade-offs they’re evaluating?

Cameron Parks: In the municipal market, we're in the tax-exempt space. The largest inflows into our market are occurring is actually in the front of the curve. When I say front, I mean the first third of the curve. And so by these issuers accessing the front end of the market, they're actually more closely aligning with where the buyer base is these days and where the money's coming to market. Average duration for some of the largest funds is somewhere around seven years. The natural buyer base out to 30 years has eroded to some degree.

And, really, that's partly a byproduct of the tax changes in 2017, then ratified again in '25. By lowering the corporate tax rate, it meant that corporations were less likely to, as we would describe it, you know, cross over or look to buy a municipal bond when they could otherwise be buying a taxable investment. So a lower tax rate meant for them that they would need a higher yield on the tax-exempt investment to make it attractive relative to their taxable alternatives.

Lynn Norris: So you have a great example of creative financing approach that helped an issuer make more of a capital plan achievable. Can you tell us about that?

Cameron Parks: We were fortunate to serve as the lead manager for CPS Energy, which is the electric and gas utility in San Antonio, Texas. And they have for a number of years now used a put bond structure where they d- they, rather than issuing 30-year debt, they actually plan to pay it off over 30 years, but they're issuing the debt in the first term, you know, for somewhere in the range of three to five years. And so we did a transaction that was a little over $600 million placed out to three and five years, and the savings by virtue of using the short-term financing was $25 million, about, you which is real returns in their case. What they'll do is turn around and use that debt service capacity to fund additional projects.

Lynn Norris: Well, that's an incredible benefit, $25 million. So what are the takeaways here? What defines successful financing?

Cameron Parks: I think a successful financing is one that meets the objectives, preserves the issuer's financial capability, and then ultimately, the other side of the table is, it's suitable for investors, right? We have to structure a product that generates that demand and meets the need for what the investor's looking for.

Lynn Norris: So how can an advisory team help put together that kind of offering?

Cameron Parks: In these volatile times, what we have been able to do is help guide our clients. One dynamic we've seen is a more 24-hour news cycle, which creates certain challenges. And we have worked with issuers to be more nimble. We see a lot more transactions happening, for example, on Mondays. Monday used to be a day that just wasn't really active in the market. And these days, investors are certainly ready on Mondays. And as an issuer community, we've gotten our antenna up to recognize that really Monday may be a good day. I think if anything, there's an aversion on Thursday and Friday to take on risk, where you have 48 hours where you may not be able to transact. And so that's certainly something that's developed most recently; we are living and breathing the municipal market day to day. So I think what we're able to try to do is help our issuer clients navigate what is really an increasingly volatile rate environment.

I think this has a lot to do with technology, the advancements in technology, and the velocity of information and, we're certainly proud to help our issuer clients figure out how best to raise capital, which again, those needs seem to be just going up from where we are.

Lynn Norris: That's a great point about how technology and the speed of information affect credit markets of all kinds. In fact, we spoke with your colleague Gary Rapp about that very topic on an earlier episode. So I'd encourage our listeners to visit our archive at Truist.com/BeyondPodcast to hear it.

Well, Cameron, thank you for being here. It's been interesting to look behind the scenes of how these really important public projects happen.

Cameron Parks: Thank you for the opportunity. It's been a pleasure

Lynn Norris: But before we let you go, let's give our audience a chance to get to know you a little bit better. So I have some questions here. You can answer them rapid fire style. Ready?

Cameron Parks: I'm ready

Lynn Norris: What part of your job never gets old?

Cameron Parks: Working in public finance, I think seeing, sort of visions become realities. I think about from time to time. I travel with my kids, and they say, "Dad built this airport." I say, "Wait, hold on a second. I didn't build the airport." We've helped provide the funds that built the airport. But it's a pretty neat thing.

Lynn Norris: I can imagine that feels incredible. What's a city you'd like to visit either for the first time or a return trip?

Cameron Parks: You know, the first city that comes to mind is New Orleans. I've never been and heard great things, although I haven't had a chance to get there yet.

Lynn Norris: Awesome. I love New Orleans. You will love it if you go. What's a skill you'd like to learn just for fun?

Cameron Parks: My youngest daughter just took up Rubik's cubing, and in a week, she figured it out, and I've never been able to do a Rubik's Cube

Lynn Norris: I haven't either. Maybe it's a generational thing. Okay, well, I have one more: What's one way you try to go beyond the expected in work or in life?

Cameron Parks: I think going beyond the expected means committing yourself to a project or an initiative. And often you're gonna have things occur that you didn't see coming. So I think we try to bring ourselves to the table each and every engagement wholly and completely.

Lynn Norris: I love that. That's great. All right. Well, that was great, Cameron. Thank you for being here on Navigating Beyond the Expected. I hope we'll get to have you back soon.

Cameron Parks: Thanks so much. It's been a pleasure

Lynn Norris: And listeners, thanks for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. So subscribe today so you never miss an episode, and check out more Beyond the Expected insights, videos, and articles at truist.com/beyond.

You can also subscribe to I've Been Meaning to Do That, the podcast from Truist Wealth, at Truist.com/DoThat. I'm Lynn Norris. We'll see you next time. 

Disclaimer: Truist Securities is the full service, corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisitions, and capital markets capabilities for corporate and institutional clients, including sales.

Trading and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients' full spectrum of financial needs. Securities and strategic advisory services are provided by Truist Securities Incorporated, member FINRA and SIPC. Lending, financial Risk Management, and Treasury Management, and payment services are offered by Truist Bank.

Deposit products are offered by Truist Bank member, FDIC, headquartered in Atlanta. Truist Securities has offices located across the US. Learn more@www.truistsecurities.com. This podcast is for informational purposes only. Opinions expressed in the podcast are current opinions only as of the date of recording.