Bonds

GFOA will tackle ESG best practice, David Erdman predicts

Transcription:
Caitlin Devitt: (00:04)
Hello, I’m Caitlin Devitt, infrastructure reporter at the Bond Buyer. And I am here in Austin, Texas at the GFOA’s annual conference. It’s the 116th annual conference. And that’s where we’re broadcasting from. So welcome to another bond buyer podcast. Also I would just like to say on a programming note, if you hear noise in the background, it’s because we’re sitting outside ballroom , in this massive conference. So you’ll be hearing people going to and fro and chatting. I am here with the famous David Erdman, the debt manager for the state of Wisconsin, who very sadly is retiring. Well, you’ll still be around. You’re just not going to be from the issuer side. He’s moving to a municipal advisory firm. And I would ask him where, but we both know that our intrepid Bond Buyer reporter Yvette Shields would be upset.

Caitlin Devitt: (01:03)
So, he’s keeping it close to his chest. Anyway, he’s been on the debt committee for a long time. He is a very important person. And so we wanna talk a little bit about some stuff that happened yesterday at the debt committee, there was a hours long, you know, at their annual meet. And, um, some of the interesting stuff you think happened, maybe a little bit of what you wanna get done before you leave, in general, you know, your impressions of the debt committee and the GFOA thing just to get started that you said yesterday that I wanted to hit on was yesterday was kind of this big review of best practices. Sounds like it was the most thorough review in 10 years. That’s what Emily Brock said that they’ve undertaken. And so that was interesting. And I don’t know if you wanna talk about that, but one thing that you also said is that you think ESG is gonna be probably GFO is next best practice. So can you elaborate on that?

David Erdman: (01:54)
Well, first off, thanks for having me this afternoon. And thanks for being in Austin at the GFA conference. From a GFOA perspective, we already have best practices out there for credit related aspects of E S and G there’s three different best practices, and they focus on the nexus to credit, meaning more like the Standard & Poors, the Fitch, the Moody’s, as to what people are looking for for municipal credits, as they relate to environmental factors, social factors and governance factors. You know, what I think is probably the next best practice for the G, debt committee is to talk about designated bonds, um, another different avenue or another set of avenues for ESG. You know, this is, you know, the, the green bonds, the social bonds, the sustainable bonds, where you actually designate a bond issue. I think that’s probably the next best practice for the debt committee.

David Erdman: (02:46)
You know, we haven’t picked that up yet, in part is, and I think you heard this yesterday from a couple different people, is that the whole ESG topic continues to evolve. And I think, Carol Kostik from the MSRB talked about how they responded or received 52 responses from the RFI back in April time period and a wide range of responses. But I think, you know, the RFI, the MSRB got some hard feedback about you don’t have the authority to do that, but I truly think one benefit of the RFI was they got people to talk and by people talking and that included issuers, investors, and everybody in between us and that those discussions have, I think helped kind of clarify if you’re gonna do a green bond or if you’re gonna do a social bond, or if you’re gonna do a sustainable bond, you know, here is the start of some framework that, you know, issuers, municipal advisors, bond counsels are gonna be expected to follow in order to get from, yeah, I’m gonna designate this bond to actually issuing that bond. So the best practice, I think that would be next for GFOA, in my opinion, would be that designated bond best practice, which is different than the ES and G credit best practices that we already have.

Caitlin Devitt: (03:55)
Right. And when we’re talking about designating, can you be a little bit more specific about that self designating versus third party?

David Erdman: (04:03)
I, I think that’s a big part of the best practice, figuring

Caitlin Devitt: (04:06)
That out.

David Erdman: (04:07)
Kind of. Yeah. I think, you know, I’ve issued green bonds, self designated self designated for our SRF program. So it’s going to finance water and sewer projects and very clear in my minds that those are green bonds. Right. But in my opinion, and again, this isn’t a hundred percent, but this is probably closer to 75%, in my opinion, is that if you’re going to do a designated bond, even if it’s very obvious that it’s what it’s gonna be used for. I believe investors are looking for a third party verification.

Caitlin Devitt: (04:35)
They want third party and they want it because they’re gonna be shopping and they’re gonna be putting in their funds.

David Erdman: (04:40)
Right. Or, you know, some of the noise that we’re currently hearing in the corporate side, from the SEC as to, you know, the names of, comments that came out this past week, or other corporate, guidance that’s been given is that they’re gonna be looking for they being investors. And the SEC are gonna be looking for proof that you do have a green bond here, right. And self designate may not be good enough. They may be looking for again, a third party opinion.

Caitlin Devitt: (05:05)
Have you done that as a issuer? No, I haven’t gotten it. Because we just talked to somebody who did that, and I know this came up yesterday at the debt committee. And he was saying though, that even though in the market you couldn’t necessarily tell a difference between the green bond and the non green bond. The the one that was verified from the third party, the insider story was actually that investors came to the non green side because they were interested in the green side. Yeah. So you, there was a benefit to

David Erdman: (05:34)
It. Yeah, no. And I, and you know, there’s a lot of things in the municipal market world that have an impact on pricing of bonds. Yeah. And I think people are trying to look to see green bonds, non green bonds, and how do they compare to each other, um, you know, triple a rating versus double a rated, um, you know, a state entity versus the county entity. Every investor has a little different interest in what they wanna buy. And green bonds may be one of that. You know, how an issuer gets a better price is to get as much interest in your bonds. You know, so if we’re AA rated state and someone’s looking for AA rated bonds for a portfolio, they’re gonna be looking for double a bonds and they’ll come to the state of Wisconsin and try to buy our bonds. The more interest that we get, the lower that we can reduce the yields or higher, we can increase the price. So just having more of interest will actually be a benefit to issuers. Long way of saying is that you may not be able to see the direct benefit of green bonds, but through the overall process as to how bonds are priced, there is gonna be a benefit

Caitlin Devitt: (06:27)
When you did the, the self designated green bonds, the SRF. Did you hear anything from investors in terms of, oh, we like this, or if you do more, we’ll be back or what, or was it silent?

David Erdman: (06:37)
Anything. We, um, we did both issues on a competitive sale basis. Oh, okay. So we didn’t have the ability to be working with an investment banker or municipal advisor, uh, to get some market intelligence. So I really have no way of, of saying, but again, I think as the discussions on green bonds, ESG, designated bonds has gone through, again, I think it’s becoming more and more clear that investors are looking for that third party revocation. Right.

Caitlin Devitt: (07:02)
So that might be part of it. Do you have any sense of the timeline of when this might come out? The best practice?

David Erdman: (07:07)
Well, after we had the public meeting, we had a closed session and we discussed kind of our work plan for the upcoming year. You know, there’s other things that that committee is gonna be taking on that may have a little higher priority. But you know, unless you have your head in this and you can’t ignore that ESG is the topic du jour right now. Yeah. So I think just because of the excitement that the market has for ESG, I would, I would hope that this designated bond best practice would be something that is wrapped up here in the next year.

Caitlin Devitt: (07:34)
Okay. How often does, uh, just for context, how often are best practices added?

David Erdman: (07:39)
We’ve added, in the last couple years here, we’ve added four new best practices. We did, we added the E,S and G like I mentioned, and we also add a best practice on voluntary disclosure. Okay. What happened yesterday was, you know, the debt committee broke into five different groups and we, we reviewed all of the outstanding best practices. And there are so many that I’m on the debt committee. I don’t know how many there are, but I would guess there’s probably close to 40 best practices total. So we took a look at all of ’em just to kind of say, you know, there’s been a lot happening here in the last couple years, COVID, LIBOR cessation, ESG. So we took a look at all the best practices in light of what’s been happening just to see if we had to make some tweaks and turns. And in the public meeting yesterday, you saw some best practices that had some big changes and other best practices that just had some wordsmithing in order to make them more up to date more current,

Caitlin Devitt: (08:27)
We’re gonna pause for a short break for a message from our advertisers. So out of the big changes, what did you, was there anything that you wanted, um, you know, obviously the wordsmithing, but out of the big changes, was there anything that you wanted to highlight that happened yesterday?

David Erdman: (08:46)
You know, it was a great effort and I, I applaud all the members of the debt committee for the time. Because you know, when you put four or five people together and talk about a particular topic, you have four or five different opinions. I mean a lot of public finance is more art than science. So, everybody put a lot of time in to come together to develop some best practices. I think one challenge for me is a large issuer in GFOA is that I issue debt 24-7. I mean, I dream of debt. Um, so it’s fine. Yeah, no it’s not, but you know, so I’m used to doing a lot of unique things and different things because I have a lot of debt to issue. GFOA has membership from the size of state of Wisconsin to ABC sanitary district that maybe has 20 people.

David Erdman: (09:27)
So when we develop these best practices, you know, we have to figure out some way of developing our best practice that the sophisticated issuers can use. And also the people who don’t issue bonds can use. So there’ll be some best practices where, for example, the variable rate products, I think the best practice says generally GFOA recommends you shouldn’t do variable rate. Yeah. You know, one thing I’m gonna do before I leave my job at the state of Wisconsin is I’m gonna probably price some variable rate, um, floating rate notes. So I did vote for that best practice yesterday to say, generally GFOA says, you shouldn’t do it, but in that same, best practice, it says, well, if you do, here are some of the things that you need to take into

Caitlin Devitt: (10:01)
Consideration. Yeah. And, and that was interesting. So it almost sort of expanded a little bit. And um, and as you noted, it’s also like in the environment we’re in right now in a raising a rising interest rate environment, you’re gonna start to see more of it probably. Yeah. You know, I, I believe so. It’s just, it’s been so long, you know, we’ve been in a low rate environment,

David Erdman: (10:19)
So yes, yes. I, uh, one reason for me doing floating rate notes, it’s something I’ve been looking at doing probably for 10, 12 years. And again, I’m retiring, so I have a bucket list of things I wanna complete. And uh, no that’s on your bucket list. It was on my bucket list. Um, there’s probably 120 things on my bucket list, which I’ll probably get 10 done. Okay. so there’d be quite a few things for the next capital finance instructor to say Wisconsin. Oh,

Caitlin Devitt: (10:41)
Okay. Um, so is it is the first time in 10 years that you’ve done floating variable rate floating?

David Erdman: (10:48)
Um,

Caitlin Devitt: (10:48)
I mean floating rate notes,

David Erdman: (10:50)
We, we did some variable rate demand obligations in 2019. And the reason we did that was, um, the clarity platform.

Caitlin Devitt: (10:58)
Oh,

David Erdman: (10:58)
I remember that it’s a platform in which, uh, investors put bids in. So the actual pricing of the variable rate products are done competitively based upon investor demand. Yeah. Uh, so I did some very VRDOS in 2019 before that, um, I issued some commercial paper back in 2016, but um, you have to go back to probably 2008 or nine from the last time that we issued a lot of favor rate obligations and

Caitlin Devitt: (11:23)
It’s like one 30, right. That’s what you said for next week.

David Erdman: (11:25)
Or, um, we’re doing 130 million, getting ready to price next week. You know, the Fed is meeting next week. So, you know, our pricing will probably be dependent upon market kind of reactions and noise to the fed meeting. Most likely we’ll probably price the following week, the week of the 20th. And what

Caitlin Devitt: (11:40)
Are you using it for?

David Erdman: (11:42)
Uh, general governmental purposes.

Caitlin Devitt: (11:43)
Okay.

David Erdman: (11:44)
So, um, roads, prisons, grants.

Caitlin Devitt: (11:48)
Okay. Anything else you on your bucket list that you are that you’d like to do?

David Erdman: (11:54)
Well, I mean obviously, um, cleaning my office, um, that’s kinda, I guess, standard with anyone who’s gonna leave after 33 years. And the problem is you live in the same house for 33 years. You kind of know you see what happens, you accumulate a few things that need to get cleaned out. So, but seriously, you know, obviously, you know, making sure that my office, my staff are, you know, have the tools that they need in order to complete their and continue their jobs. The state has announced, or opened up the, application process to fill my position. And I believe they did interviews last week. So the state’s hoping to have someone appointed to take my position before I leave.

Caitlin Devitt: (12:31)
You’re leaving in July.

David Erdman: (12:33)
Right. July 1st is my last day. Yes.

Caitlin Devitt: (12:34)
And so, and there’s no news on that front about who your replacement is going to be?

David Erdman: (12:38)
Placement’s gonna be, not as of, as of today. So, but yeah, I mean a bucket list. So

Caitlin Devitt: (12:43)
Sometime in the next few

David Erdman: (12:43)
Weeks. Yeah. But yeah, there’s a lot of things I want to get done. Um, things that I think if I can get done would just help my staff be in a better position. At some point soon, like probably next week when I return to the office, you know, it’s gonna be a matter of really prioritizing the top two or three that I can get done. And just, you know, working with staff and showing them, you know, where the information may, may be for them to complete the other task.

Caitlin Devitt: (13:06)
You’re gonna stay in, you live outside Madison, right?

David Erdman: (13:08)
Yeah. I live in Stoughton, Wisconsin,

Caitlin Devitt: (13:10)
Stoughton, you’re gonna stay in Stoughton?

David Erdman: (13:12)
Uh, for now I am gonna stay in Stoughton, but uh, with my new opportunity, we will see, you know, where that, uh, ends up for a best residency.

Caitlin Devitt: (13:20)
Like weather wise. See, I’m trying to get some hint, a place that you wear shorts or a place you might need us.

David Erdman: (13:27)
Well, I was excited to come to Austin, but after, uh, two and a half days of a hundred degree heat. Yeah. Um, I’m no longer excited about maybe moving to Austin to work. Right. Okay. So you can knock that one off.

Caitlin Devitt: (13:36)
All right. You scratching Texas off or at least Austin. Yes. Yes. Um, okay, Dave, well, thank you so much. You’ve always been, you know, such a great source and, and, uh, interesting, I mean, good source and asset for the whole issuer community. Anything else you wanted to add or

David Erdman: (13:51)
Say no. I mean, you know, thank you to the Bond Buyer. I mean, obviously, you know, the, the municipal marketplace needs an area in which we can share information and, uh, you know, the Bond Buyer and, and news stories, advertising, you know, conferences that you guys put together is a great way for us to share information. I mean, we talk about the MSRB having EMMA for disclosure. I mean, from just, you know, general information exchange, not really related to disclosure, I mean for the bond market, the Bond Buyer is it for the market. So thank you for, for what you guys do.

Caitlin Devitt: (14:19)
Okay. Well, thank you and enjoy the rest of the conference.

David Erdman: (14:22)
Thank you.

Caitlin Devitt: (14:23)
Don’t forget to rate us, review us and subscribe@www.bond buyer.com/subscribe from the bond buyer. I’m Caitlin Devitt. And thank you for listening.

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