First of all, I want to thank the committee for giving me this great honor.
I’m going to tell you a bit about myself and my career and then offer a few words about how I’m seeing the municipal market and economy.
I am the daughter of immigrants who met on the Lower East Side of New York. So, I’m a first generation American. I wouldn’t be here or accepting this award if they didn’t settle in the USA or had the grit to reinvent themselves.
I was good at math in junior high and high school and ultimately chose to major in philosophy in college, which I thought of as math with words, more interesting to me than just numbers.
How did I get into the municipal business? I was all set up to get a PhD in philosophy, atthe University of Wisconsin, grants and all and I moved to New York for the interim. That changed everything, not to mention that it was the mid-1970’s when New York City was in crisis, and so was the rest of the country, inflation was sky high and universities were cutting their departments, particularly philosophy.
I ended up with a job as office manager for a not-for-profit management company that was advocating for more funding for education in New York City’s budget. The Rockefeller Foundation wanted to bring together the various groups they were funding into one coalition. The company put together the Educational Priorities Panel, a coalition of not-for-profit advocacy groups.
I realized I wasn’t likely to be promoted out of my clerical position. One of the consultants there was a professor at Baruch College and he suggested I look at getting a graduate degree in public administration. Further, he sent me to a colleague of his at NYU. While I didn’t have “mentors” as we think of today, I had a few angels that steered me in the right direction. I couldn’t afford that kind of tuition at that point. The NYU professor I spoke with told me about a job at the university that came with tuition benefits and there I was, onto the next phase.
Once I graduated, another friend and colleague sent my resume to NYC OMB, and then I was off to the races there. I started with the smallest agencies, the community planning boards and ended up in the largest, oversight of the Board of Education. I’m proud that I was able to get one of the first computers for my group and using Lotus 1-2-3 (remember that?) modeled the special education program. It was under court mandate to mainstream students into their neighborhood schools, a socially reasonable, but very costly proposition. I created a “zero based” budget – how teachers and students and classrooms would line up in a perfect world. Of course, that was completely unrealistic but it was a fabulous negotiating tool and managed to shake out a lot of unnecessary costs in the system.
I have had a number of female role models over my career. Alair Townsend, who later went on to run Crains, was budget director at the time. She created a “brown bag” lunch program where she brought in outside speakers. One of those was Freda Johnson from Moodys’ to talk with us about rating agencies. I thought that sounded interesting so I lobbed in a resume.
Then I was onto the next step. After a few years, the bond insurance industry was beginning to take off and I was recruited to work for then startup reinsurance company Enhance Re, headed by Wallace Sellars who had spent much of his career at Merrill Lynch. Their first office was in Rye, New York and I was living in Brooklyn, so I learned every pothole on the BQE and how to master a stick shift without grinding the gears or breaking an axle.
I wrote the study of Municipal Defaults there. It was an attempt to put some actuarial thinking on the probability of default in the municipal industry. The report was well received and I proposed to do more work in that area while at Enhance and I wrote a work plan. I got a pat on the head and “good idea, do it on your own time” response. One day I just decided to do it on my own and started the first iteration of National Municipal Research. I published a monthly independent newsletter, the Fiscal Stress Monitor, for five years. It didn’t make much money, but I developed a great roster of wonderful contacts.
American Capital Access (ACA), an “A” rated bond insurer was my next stop when I needed to bring I more money for the family. Ha! I did used to hide from Terry who would come to visit Russell Fraser since I did not want my name in the press. Long story short, the company did not assess its risks very well and went under. I think the deals I personally worked on have held up.
I was fortunate to be recruited to Financial Security Assurance(a “AAA” rated insurer) at that time, where I worked until the financial crisis led to their blow up and sale to Assured Guaranty. After that happened, I reinvented National Municipal Research and had a roster of published articles to show my next boss at Wells Fargo. She is not here today but the best thing was the support and freedom she gave me to build an award-winning team and reputation in the industry.
Since I have the microphone, indulge me in a few thoughts about markets and the economy.
One. Don’t get blindsided by macro – it easy to miss things if you do. Two examples:
I mention the Economic Innovation Group – founded by Sean Parker who started Napster. He is also behind development of the new tax credit Opportunity Zone program. In any event, EIG stratified every zip code in the country into five quintiles, at the top were the “most prosperous” and at the bottom “distressed”. The chart in their report (pg.14) depicts growth in jobs since 2007by quintile and pretty clearly shows the utter lack of change in the distressed quintile. Taking the macro view way overstates conditions in the weakest communities and understates the top quintile. You might want to review your portfolio against this review or use it to learn about the Opportunity Zone space. I mention this in “The trouble with Macro” which is on my site.
Second, a recent WSJ commentary re-channeled Meredith Whitney, like second day leftovers, with the “oh so tired” mantra that maybe she was right, just too soon. I offer another tired metaphor, but a broken clock is right twice a day.
The gist of the commentary is that funding ratios of all pensions, in the aggregate have trended down. Spencer Jakab, the author, cited a recent Pew study that showed this. Aggregating and lumping all pensions together is silly, given the many different variables,investments, and assumptions that go into each sponsor’s plan. The important question to ask is how did the plan get to that funding level? A handful of states purposefully lowered their discount rates – an action that the “discount rate cabal” has been suggesting for years. This is a good thing and will push policymakers to accumulate more assets into the plan. Other states, like Illinois, have taken payment holidays. Both lead to lower funded ratios. Lumping those two approaches together is likely to miss those states that are taking positive action to improve their pension plans vs. those that will continue to spiral downward.
While I’m on this topic, if you are worried about the priority of pensions vs bondholders in the event of insolvency or bankruptcy, you need to look at more than funding levels. How much of a bite out of the budget does a payment that reflects current costs AND amortization of unfunded liabilities. When you do that, you come up with a somewhat different basket of states in trouble than Pew.
The Center for Retirement Research at Boston University does this analysis; Michael Cembalest at JP Morgan has published several analyses looking at budgetary impact and I believe this is what BAM’s actuary is doing when they are reviewing credits for insurance. A commentaryabout this is also on the blog.
Two. Infrastructure. If you think the federal government is going to come up with a $1 trillion infrastructure program, fugetaboutit. The idea originated during one of the Trump-Clinton debates, when candidate Clinton suggested that she would fund a $500 billion infrastructure program. Trump doubled down and said he would fund $1 trillion. If you haven’t learned to take the president’s abstract pronouncements with a grain of salt, you are smoking something. Many in the press are fond of saying “it’s something both sides can agree on” … but that’s not a funding plan. I hope I am wrong. There is so much noise that will occupy the air waves in the next few months it would be a surprise to see more than a token federal contribution to infrastructure. Meanwhile, state and local governments are soldiering on.
To date more than $200 billion in new money has been issued and that excludes private placements. That’s twice what would get you to a $1 trillion over ten years, if my math is correct. We in the industry are focused on those deals; Lets help others (ahem, like those on the Hill) put their focus on it.
Three. Echo chambers. That is, the tendency we have to surround ourselves with people that look like ourselves and agree with our opinions. That’s a bad approach in the long run. Everyone in this room understands that a diverse portfolio can protect against ups and downs in the market and the same goes for diversity in the corporate board room as well.
I’m not talking here exclusively about skin color or ethnic background, although that kind of diversity is important too. I’m talking about a diversity of ideas and an openness to listen. Unfortunately, the internet and social media reinforces these echo chambers. I’ve experienced firsthand in meetings, whether on credit or corporate policy, where no one was willing to contradict the leader or was discouraged from doing so. In the extreme, the metaphor is “the Emperor wears no clothes” …. If we want to stay out of trouble, whether credit risk, portfolio success, politics, healthcare, weather, we need to listen to each other. Read the missives from the other side of the argument; engage face to face with people of various viewpoints… it’s not easy but it does get easier overtime.
Four: Think big. This applies to the current discussions about climate change and insurance. I prefer to talk about extreme weather since climate change is too politically loaded. It is hard to dispute that we’ve had extreme, destructive weather events over the last few years. On the insurance front, we have a patchwork quilt of insurance in this country: Citizens Property in Florida was an answer to loss of private insurance. The National Flood Insurance program was also a government established plan to fill gaps in private insurance. After Katrina, Maria, Sandy,Irene, how many homeowners had to fight between insurers – it was wind; no, it was water; no, it was wind….
CalFire and forest management is another. If you look at the global insurance companies that provide catastrophic insurance, they have embraced science and they diversify perils that they cover. Mudslides following Asian monsoons are likely to occur at different times that wildfires in the west. Earthquakes and hurricanes are not necessarily correlated in time. Having a single state, single peril, program against major catastrophic events is inefficient and ends up costing policyholders more than they would have to pay if diversity of risk was built in.
Another example is retirement. We have social security, public pensions, private pensions and many 401k plans; ultimately many are underfunded and will lead to very different wealth and poverty as the population ages. We should be thinking bigger about how we can have respectable retirement years for everyone.
Finally, I’ve had a great time working with many of you in the room and in the industry and I thank you for that. Although this award is for “lifetime achievement”, I’m not by any means done yet! I hope and plan to continue working with many of you in many different capacities.
Thank you
