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School Business Insider
Navigating Economic Uncertainty: What School Business Officials Need to Know
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- [00:01]
John Brucato
You're listening to ASBO International's School Business Insider. I'm your host, John Brucato. Each week on School Business Insider, I sit down with school business officials and industry experts from around the world to share their stories and explore the topics that matter most to you. Find out what it means to be a school business official and get your insider pass on all things school business. Hello everyone, and welcome back to School Business Insider. Economic conditions are constantly shifting and school districts must navigate changing interest rates, inflation and policy decisions to make sound financial choices. With the new White House administration and evolving market trends, school business officials need to stay informed to manage investments, control costs, and plan for the future. Today, from PMI Financial Network, we are joined by John Huber, SVP and Chief Investment Officer, Kendra Shelland, VP and Institutional Portfolio Manager, and Michelle Weiberg, Chief Sales and Marketing Officer. Together they bring expertise in market trends, economic policy impacts, and investment strategies for school districts. In today's episode, we'll discuss how the economy is influencing school finance and the cost of doing business and the risk and opportunities ahead for school districts. Welcome to podcast, everybody. I'm so happy to have you.
- [01:32]
John Huber
Yeah, thanks. Great to be here.
- [01:35]
John Brucato
Yeah, glad to have all of you on and really kind of dive in on what's ahead for 2025. But before we get into too much, why don't we just take a quick opportunity to just have each of you introduce yourselves. Michelle, why don't we kick it off with you?
- [01:47]
Michelle Weiberg
Perfect. Thank you, John. Thanks for having us today again. Michelle Weiberg with PMA. I have been working with local governments going on 33 years, so spent my entire career working with local governments and largely in the K12 sector. I currently head up all of our sales and marketing efforts for PMA across the country and responsible for kind of how we attack the markets we're in and look to new markets as well.
- [02:16]
John Huber
So.
- [02:16]
Michelle Weiberg
So again, thanks for having us.
- [02:18]
John Brucato
Yeah, welcome on. Kendra, how about you?
- [02:21]
Kendra Shelland
Thanks, John. My name is Kendra Shelland. I've been with PMA for about three and a half years now. Prior to that, I spent 12 years in fixed income sales and trading, specializing in securitized products and mortgage backed securities and things as that. Here at pma, my role really serves to be sitting within the portfolio manager, but working with our clients to really understand the challenges that they're having and ensure that the way that they're investing is really serving the purpose that they'd like it to and so really kind of making that connection here.
- [02:49]
John Brucato
Great, great. And John, how about you?
- [02:52]
John Huber
Yeah, great. Great to be here with you, John. And yeah, I've been doing this a long time as well. So 35 years and you know, gosh, the last, I guess 12 here with PMA. Prior to that I headed up RBC's asset management effort here in the US and prior to that was at Wells Fargo's predecessor, Norwest. So been doing this a long time and it's interesting, been working with public entities really throughout my career. My first, when I was in my younger 20s or mid-20s, my first account was a municipality, the city of Minneapolis. So they've been doing this for a long time. And certainly there's unique aspects to managing money for school districts versus other kinds of municipalities. But thanks for having us today.
- [03:35]
John Brucato
Yeah, pleasure to have all three of you today and obviously a wealth of knowledge. So I'm sure listeners will get a lot out of our conversation today. So that being the case, PMA recently released your Winter 25 market outlook, really highlighting economic shifts heading into 2025. Can we just get an overview of maybe just a high level summary of what you feel is happening with the economy and what is that direct impact for school districts? And really what should school business officials really be keeping their eye on as we move into the new year?
- [04:05]
John Huber
Absolutely. I'll take this one, you guys can fill in. But, but I mean the important thing that people need to understand is the economy's been super resilient and that resiliency kind of continues in through the fourth quarter as we look at kind of the fundamentals, and that was 18 months ago. Two years ago, everybody was calling for a recession and not only did that not occur, but we actually saw growth increase in 2000 for the majority of 2024. And so looking at where GDP is today and kind of where we're headed, we'd expect growth sometime, you know, throughout the course of 2025, somewhere in that two, two and a half percent type of level. So slower growth than maybe what we were experiencing in 2024, but still strong good above trend growth. Super important within that is, you know, obviously fundamentals remain pretty stable. You know, we've had continued strength in the labor market. Powell was providing testimony to Congress yesterday, talked a little bit just about kind of the balance of risks and that he doesn't believe that kind of labor, inflation and problems therein are something that he's overly concerned about at the present time. Unemployment rate right around 4% and continuing to see decent statistics from that perspective that continue to provide I think strength because consumption's call it 70% of economic growth over long periods of time. Certainly that was the case in the fourth quarter as well, right around 68%. But the thing how that the Fed's really struggling with is inflation and kind of what is that future path of inflation. We just had a report this morning, CPI got released. So month over month headline CPI was up half a percent. The year over year number bounced back up to 3%. And importantly the super core number, which is something that people care about, which really takes out more of the volatile kind of housing component or implied shelter costs within inflation, the super core number was up almost 8/10 of a percent. So that's the highest figure that we've seen since January of last year. So we've seen a steady progression in terms of inflation which has allowed the Fed to ease policy. They've eased policy here several times here in the second half of 2024. But now the Fed's kind of on hold and so the implications for schools are many. Right. The inflation issue is real. Wage inflation obviously acts with a lag, but we continue to see that, but maybe not at the levels that we saw maybe a year or two ago. Higher rates provide better earnings potential. Right. And so I think that's a great thing as well. But it also increases the cost of doing things and I think that's a concern as well as we kind of, you know, try to empathize and understand what school business officials and districts throughout the country are dealing with. I don't know, Michelle or Kendra, if you've got other things to add there.
- [07:13]
Michelle Weiberg
I would just kind of echo the relationship of inflation and pressure on wages. I'm assuming and thinking that most of the business officials listening to this know that firsthand very, very well. Pressure on wages I think has been significant. Adding to that, the just overall shortage of labor, particularly in teaching, in the teaching profession, probably sort of a double edged sword here, needing to continue to be very competitive with your wages to attract the teachers. But that is going to be incredibly hard to sustain over time, particularly as we see Esser funds sort of roll off. So everyone on listening to this is incredibly aware of that. But that, that certainly I think is one of the major links of what John just said to what you're seeing in your own financials.
- [08:10]
John Brucato
Yeah, and John, you mentioned, you know, about 18, maybe even 24 months ago, there was a lot of call for a recession and a lot of concern about that. You know, hindsight's 20 20, I mean when sitting now in, you know, 1Q25 what really had changed from what was projected? Because I mean the, every outlet seemed to be calling for this, this huge cliff of, of a recession coming and it was going to be terrible for the economy, but things seem to slow down and smooth out. Was it Fed policy that helps kind of tamper that inflationary pressures? Like what, what, what actually happened? Because it was, it was pretty alarmist for a while.
- [08:48]
John Huber
Well, I think obviously Fed policy remained pretty restrictive if you want to think about where it's been relative to maybe where people would want it ultimately. We've seen borrowing costs move higher for everybody, municipalities as well, school districts as well, but we're seeing it in the mortgage market as well. But the economy kept kind of going. So I think the underlying fundamental strength of this particular cycle, this credit cycle or market cycle has been stronger than people understood. We knew there was a lot of stimulus kind of flowing through the economic engine, but there was more to it than that. And in some ways, you know, we've had this discussion quite a bit the last few years and you know, consumption levels are high. I mean you saw it kind of in the super core number today. Recreation services, so movies, events, sporting things, you know, Taylor Swift, what have you. There's been a lot of people experiencing life, travel as well, going out to eat. So services component of inflation has been stickier and higher for longer goods inflation. So the cost of things once we kind of moved through kind of the post Covid bottlenecks, if you want to call it that, you know, have been coming down. But somewhat shockingly or surprisingly, we saw goods inflation move back up in the print here today. So you know, we don't want to see that happen. It probably gives the reason when they talk about data dependence, right. And waiting on the data, they've eased several times now. Rates are more accommodative and market wants to see how things kind of go here. So policy uncertainty from a monetary policy is real. And you've got all these other kinds of other policy headlines going off every day, like getting rid of paper straws, things like that. Important stuff to the future of the world. Right? So.
- [10:44]
Kendra Shelland
Right. If I could just add something to that. I think the question what changed? I think another way to look at it is what didn't change? You know, we saw mortgage rates go much higher, but we still see a strength in housing prices. And so what didn't change? People continued to spend despite higher costs. And so without that change, that kind of drove an economy that stayed positive and didn't send us into that recession.
- [11:12]
John Huber
It's been a soft landing. I mean, really. I mean, the Fed's done a good job. I mean, from that perspective. And I guess, you know, other people didn't screw it up. So from that perspective, it's been kind of a little bit of a Goldilocks scenario. But it seems a little bit too good to be true, doesn't it? We know something's kind of always coming around the corner in the markets, right?
- [11:32]
John Brucato
Well, that was going to be my question. Kendra, you said something really interesting. Although interest rates increased, so did the demand for housing. Usually you would think with higher borrowing costs would be less of a demand. Do you anticipate maybe people have overextended themselves and what their capacity is to maybe purchase homes and things like that? And we'll see something similar to like a 2008, maybe not to that scale. But are people putting themselves in a riskier position with maybe less of a nest egg because they still wanted to buy homes but just at a. At a higher rate and at a higher price?
- [12:06]
Kendra Shelland
I don't think that only applies to homes. I do think that there is a mentality of spending today, especially after the recent history that people may be overextending themselves in general. There's also a section of people that probably don't think that a home is in their future. And so they're spending what you would think might be saving for a home. And so I don't think that's only applicable to the mortgage market. I just think that's a trend that we've, that we've been seeing and that we'll have to work through and maybe just the next iteration of spending.
- [12:36]
John Huber
Well, the one thing that I think is important there, I think, Kenner, you bring up great points. But if you think about the growth in wealth, right. It's been a heck of a bull run since the great financial crisis. So if you look at actually the debt service ratio at the household level, where we are now versus where we were back in, let's say, 2008, that's dropped from a ratio of around, call it 12% to today, right around 10%. Now it's cyclical low right after the COVID basically, or right during. COVID was right around 8%. So we've seen debt service ratios move back up, but not to a level that's higher. But to your point, it's surprising intuitively. And so, you know, trust the data, but also trust what you're observing. And so what's driving that? I think there's a scarcity of housing supply. So there's classic economic stuff going on as well. And you know, depending on what's happening, perhaps, you know, family formation rates have been a little bit smaller, what have you, and those that are moving into housing, maybe they've got help, you know what I mean? It's just to your point, I mean, the level of inflation that we've seen in the housing side and that's been able to persist in a different rate regime has been somewhat surprising.
- [13:53]
John Brucato
Yeah, yeah. So the Federal Reserve, as you had mentioned, has been making rate adjustments pretty consistently over the past 18 months or so. How does that affect school districts? And, and what really should they be paying attention when, when the Fed is making these rate adjustments? Because it, you know, they, they come out and school business officials may not understand what the direct correlation is to their work. So kind of break that down for us. What should they really be paying attention to when Jerome Paul's talking and adjusting rates and such?
- [14:26]
John Huber
Yeah, I mean, I'll go here first and you guys can fill in. Don't mean to be hogging the mic here, but. So the fed funds rate, the Fed can only control front end rates, right? Borrowing costs kind of on the front end in terms of their fed funds rate and kind of what they said, there's some other policy levers that they've got and obviously we just went through QE obviously coming off the great financial crisis. So there's other things they can do with the balance sheet, but just in general, they use this hammer, and that hammer is called the fed funds rate. Every other interest rate, the one year treasury, the two year treasury, the five year treasury, anything longer, and any other borrowing costs, including where municipalities and school districts borrow, are based off of that what I would call overnight rate and then the forecasted overnight rate forever. Right. Because basically how the math works in the bond market is basically it's just accumulation of those overnight rates for whatever period you're looking at. Right. So there's a lot of data and work that gets done every day by geeks like us on things like that. But it's important because what the curve's telling you is that when the curve is kind of, let's call it upward sloping, like it naturally is, short rates are lower than higher rates, which is where we are now. It's been a long time since we've been here. So we also think that's a very positive thing for the market in terms of our outlook. That's telling you that future interest rates in general are going to be higher than rates where they are today when rates are kind of inverted. When you saw the yield curve inverted, it's showing that longer term rates, short term rates should be going lower. So you could justify kind of that lower long term rate. There's also supply, demand, technicals. Where does the treasury want to issue. We know we have a new treasury secretary with percent under Trump. All that stuff can change dynamics, but ultimately it gets into kind of expectations along with some combination of technicals. And so what people should read into it is short term rates and where the Fed's at is going to impact kind of their earnings on their liquidity, their cash, the stuff that they're keeping there, that's safe. Right. And then they need to compare that with kind of where their needs are in terms of having their assets and liabilities. Right. Spending to a plan, spending with purpose matching kind of their, their need dates for cash or for spending or for savings with the appropriate time horizon. And so, you know, I think there's opportunities to make better investment income as we kind of move forward. I think that's one of the big things. Unfortunately, with rates kind of where they're at too, it could impact borrowing costs. So it really depends on each district's individual kind of needs. I don't know. I'll hand it off to Kendra or Michelle.
- [17:10]
Kendra Shelland
Yeah, I think you make a good point with the treasury curve. And one thing that's really important to think about is not just that overnight rate, but what a sound financial plan can do is allow you to evaluate your savings or what your long term reserves are if you have them. And interest rates are at a level that we haven't seen in a very long time. And so investing at these higher levels for that longer time horizon, if you have the ability to, could be really beneficial from an income interest perspective, not just tomorrow or the next day, but down the road. So if you have that ability to align a long dated liability with a long dated asset, you can really take advantage of these higher rates that we haven't seen in a long time.
- [17:51]
John Brucato
You know, Michelle, you had mentioned prior the impact on school districts. I mean, ARPA funds and federal funds kind of waning on school districts. Inflationary challenges. You know, inflation has remained somewhat of a challenge for school districts across the nation. You know, what does that mean for districts that are managing payroll, transportation, operational costs? What does that mean in the day to day for these districts?
- [18:15]
Michelle Weiberg
You know, I think we're going to talk a lot today about the power of a plan. I think it's very important to be proactive, there's only certain, there's only so many things that are within your control. And I think the idea of things happening to you, you have to kind of think about how you can be proactive so that you're not reacting to those things happening to you. So I really do think solid financial planning, that's a long range forecast and it's also a short term look at cash is incredibly important. And to understand how to filter out those anomalies that have happened in the past couple of years, particularly on the revenue side, is going to be so important. So we feel there's real power in planning. I think that it allows you to develop processes. There's a lot of P words here, processes and procedures and policy that keeps you protected from changing whims of the political climate of leadership of whatever is happening again to you versus, you know, so get out of reacting and more into proactive.
- [19:36]
John Brucato
That's great. And you know, you mentioned too that in the report the cost of borrowing could shift depending on what you were talking about with fiscal policy to, to the same point of long range planning. What should school districts and business officials consider when it comes to capital projects or refinancing or borrowing? What opportunities and challenges do you kind of see coming up in the, in the next 11, 12 months?
- [20:03]
John Huber
Well, I mean, obviously policies in flux, right? I mean, there's one consistent thing that's happening is that we don't know what's happening, right? So it's, it's, it's, it's changing. So the municipal market, you know, obviously there's been a lot of discussion around tax exemption and the efficacy of such a structure. Obviously we think it makes a ton of sense, the savings that it provides taxpayers right over long periods of time. And aligning kind of that social good, that interest with the financial reality too, and aligning capital, suppliers, investors, municipal bond investors to provide that capital to our communities makes a ton of sense. It's worked great for decades. We've been an innovator in that regards, I think to other countries. I think it's been a big advantage for us. You know, bigger picture, you know, hard to quantify, but huge in terms of interest, savings and aligning people's, you know, capital with projects that need to happen in our community. So you know, if that changes, obviously things move in terms of funding and funding formulas and obviously changes by state and jurisdiction, what have you. But I mean obviously property taxes drive a lot of it, but there's certainly national funding on things and I know Michelle and Kendra probably have a better view in terms of what those impacts might be.
- [21:21]
Michelle Weiberg
Well, I think certainly for borrowing, you know, when you, when you are borrowing as a municipal issuer, you're going 10, 20 years out. There's far less volatility in that part of the curve, Kendra and John, would you agree, than you see in the short end of the curve. So I don't think there's a real issue with that. I think you have a need, you fund that need with your issuance. You do everything you can to get your credit rating as high as you can, to get your cost of money as low as you can get it. What John mentioned in terms of the threat of losing tax exemption, that is a very real issue out there and I know that ASBO and that AASA are mobilizing around that. I think one of the really easy things that everyone listening to this podcast can do is go out to that GFOA portal, it's called Built by Bonds and enter in projects you have funded with tax exempt bonds. That is going to light up a map and hopefully we can show that tax exempt bonds are used in every taxing jurisdiction in the country and an incredibly important to local governments. So I would encourage everyone to be going into that portal and it's real simple entering in work you've completed with tax exempt bonds.
- [22:43]
John Brucato
That's great. And I'll include a link to that in the show notes so people can get right to it from this broadcast. You know, it's funny with the short term versus long term borrowing just a few years ago when we were issuing some bond anticipation notes from some work here in my district, we got zero percent in a few of them and it was great. And then fast forward a couple more years. We're you know, threes and you know, we, we struggled a little bit to really react to the market. We were trying to be as proactive as possible, but when you're in the thick of it, it's hard to know where those interest rates are going. So there are definitely direct implications on budgeting for principal and interest payments on short term borrowings when the market is moving so quickly. So you make some great points on that as well. So sounds like things are starting to kind of smooth out a little bit. So we won't see hopefully that volatility too much. But things to keep in mind when considering short versus long term borrowing.
- [23:35]
John Huber
Well, I think you bring up a great point there, John, and I didn't mean to interrupt you, but it's just in terms of Investing the P's that Michelle was referencing earlier having great alliteration.
- [23:45]
John Brucato
Michelle, love it.
- [23:46]
John Huber
Right, right. A lot of P's there. Right. And so I'll add a P. It's called performance. So if you want to perform over long periods of time, you need to, with that plan, it has to have purpose. Right. So you gotta, you gotta, you gotta make sure if you have a need date that's out the curve investor that need date so that you can minimize that what I would call budget volatility, you know, and kind of an insurance or a bank, you know, an insurance company, they would call it surplus volatility. Right. And so it's by having your assets and liabilities aligned even out the curve. If you've got long term reserves that you need there for gosh knows what, you know, make sure that's working for you because you know, you know, God forbid rates moved down to 2% and you didn't lock up money that you could have at, you know, four and a half, you know, 5% there, wherever it might be on the investment side of things. So you know, it's just, you know, have that plan and I think what can happen is it makes you more, it's going to be a less, it's less stressful, I think. Right. And so you can go to sleep at night and realize that yeah, rates are moving up or rates are doing down, but the moving down. But my assets and liabilities, the values of those are moving together as rates move. And if there's some math to that, but certainly, you know, reach out to somebody that can help you with that. We're here to help as well.
- [25:03]
John Brucato
Yeah, I'd like to talk a little bit more specifically about some strategies that school districts can look at. So in the report that PMA released, there's a projection of cash returns maybe around 4%, while fixed income could be anywhere from 4.5 to 6%. Talk me through how districts should approach short term liquidity versus long term investments and how should they really be approaching that if maybe they're not keen to the market or maybe they haven't had a lot of experience with investing district money.
- [25:32]
Kendra Shelland
Yeah, I can, I can start here. I think that's a great question and I think that's a great point you bring up because last year that outlook would have looked a little bit different given where cash rates were and talking about an inverted curve and longer term rates being lower. Interestingly, the, the investment plan would probably still be similar or very close or the same because you are, it Starts with that investment plan and looking at what your liquidity needs are and investing to maximize your income potential for those liquidity needs. But we can look at other pieces of the plan and really taking a step back and looking at it holistically and looking at those long term operating reserves and what can those do for you and how that investment strategy might differ from your liquidity strategy. And so having that plan in place to know how much liquidity you might need versus how much reserves you might have is really the first important step to capitalizing on that income that you can potentially have. Now that's a little more visible in the way you put it with cash returns starting to decline and fixed income instruments increasing. So then you start to see a little more long term return on those, on those longer term investments at the same time that you can, that you can work in those, that liquidity side.
- [26:46]
John Brucato
And where does the practice of cash flow kind of fall into that? I mean what, what should districts be doing for short term and looking at their cash flow versus maybe parking some money in a, in a higher yield account that would generate greater interest earnings.
- [27:03]
Michelle Weiberg
Certainly one of the P's, right. It's part of, it's part of that plan is to understand your cash flow. Make sure you're using a tool that helps you analyze past trends, you know, carve out any anomalies and project it into the future so that you can understand an adequate level of liquidity. Don't. What did John and Kendra say? Don't overpay for liquidity.
- [27:32]
John Huber
Don't, don't pay for liquidity you don't need.
- [27:35]
Kendra Shelland
Don't pay.
- [27:36]
Michelle Weiberg
That's what you say. Don't pay for liquidity you don't need. I think given what the yield curve looks like for the last year or so, districts weren't harmed by keeping a lot of money liquid. But that will shift. And I think they need to get back into that practice of understanding that adequate level of liquidity and not putting more in than they need and then looking at intermediate investments, looking at long term investments and investing out accordingly again, asset liability matching and proactively manage that over time.
- [28:20]
Kendra Shelland
And Michelle, in talking about this in the past, Michelle's really brought up how that allows you to stick to your policy through volatility. So it allows you to take out the noise of what's happening in the market. Because if you're sticking to that plan, you still have the longer site in your focus and you can, and you can speak to that plan and what might come eventually from it and not just worrying about that day to day movement.
- [28:42]
John Huber
It's. No one can time the market perfectly. We do this for a living. We can't do it. No one can do it. Hedge funds can't do it. No one can persistently guess. Right. Even an educated guess as it relates to kind of where rates are headed. So whether you're borrowing money and rates could be lower 12 months from now, like God, I wish we would have waited. Right. You don't know that. People don't know. Things can change. And so as a fiduciary, which we all are. Right. And we think about each of our clients as patients. We think of our job as a doctor. Right. Yeah. I work for pma, but I really work for you. Right. We work for all the citizens that we in taxpayers that we support. So we're really trying to do what's best for you. And trying to think about that means putting them on a healthy diet. Right. And regular exercise. Right. And easier said than done. I know, but you can cheat here and there. But the thing is in the end it's, it's, you know, to be successful, you have to be disciplined. Right. And stick to your, stick to your plan.
- [29:44]
John Brucato
Yeah. John and Kendra, you both mentioned the yield curve a little bit. For those that aren't the investment wonks. Can you explain what that is specifically and how that correlates to investment strategies for school districts?
- [29:58]
John Huber
Sure. So the yield curve, they talk about it. The U.S. treasury issues debt. The U.S. treasury is the largest market in the world. It's the most liquid market in the world too. There's a lot of other things going on with the US Dollar. And the US treasury market continues to be the gold standard as it relates to the risk free rate. So where the Federal Reserve sets the Fed policy, short term treasury bills that you might look to buy, or short term agency paper or discount notes, what have you, commercial paper, all short term rates that are investable are kind of based off that short term treasury bill or treasury where it trades. The treasury also issues and keeps a curve in three months and six months, nine months and 12 months and two years and three years and five years. The issue across the curve as well. And there's other issues that have already been issued that are still outstanding that trade in a liquid market all day long. And Wall street and investors throughout the country and really globally buy those. Right. I mean, as global central banks and sovereign wealth funds, big purchasers as well. So the yield curve just really references borrowing costs for the US Government across different terms. And so for like right now, you know, the market's selling off here today after that CPI print we talked about earlier. The five year is sitting at, you know, close to four and a half percent. And overnight rates are closer to, let's call it four and a quarter, 4:30, you know, whatever it might be, you know, low four. So there's a positive carry of, call it 20, 25 basis points by extending out the curve. And, you know, there's a lot of different investors that have different goals. Right. A hedge fund might be trying to say that spread's not wide enough, we need to see it go wider. Or a simple investor like you or me or our parents or, you know, school districts might say, hey, you know, I can't. I'm not worried about that. I know, I know I'm going to need the money in a week. I'm just going to invest it overnight or I need the money in six months, I'm gonna invest out to six months. The hard part is again, putting together that plan, understanding that low point of your kind of cash cycle, understanding what you need within that kind of, what I would call first liquidity bucket, your immediate liquidity. What is kind of your next tier of liquidity? Stuff you might need, but you don't know exactly. Maybe put that out a little bit longer and then stuff that you really haven't had to touch and make that work hard for you. Because if for some reason recession does occur, rates are probably gonna move lower. And if that happens, you know, you don't wanna be going back and going, oh, gosh, now we gotta cut back on our budget and, you know, whatever, close down on some service that you provide to your important constituents within your school districts. Long winded answer there. Sorry.
- [32:57]
John Brucato
That was great. Thank you. So I wanna shift our focus a little bit to policy changes in the shift in the administration. We're almost the new administration. And although the political strategy may be flood the zone, I'm wondering what the new administration in the White House may be with potential fiscal policies that could impact school district funding and financial planning. So, you know, almost four weeks in. What, what, what are the tea leaves telling this group in terms of what school districts should keep their eyes on?
- [33:27]
Kendra Shelland
Yeah, absolutely. I mean, the. We did hear from a few members from the Fed yesterday, and I think it's important that they do remain independent and they're going to be looking at data that comes through the market. And so I think one way you could look at it is how some of these policies influence economic data. So if we look at tariff policy that comes through and if that could be inflationary and other things such as that, or how that might influence that data, because that data will eventually come through to the Fed and that's going to go through to policy on our federal funds rate that we've been talking about. And so that's really what they're, what they're analyzing right now. Things such as the CPI print that.
- [34:03]
John Brucato
Came through this morning, the report that was released by PMA as well, also referenced potential tax cuts and increased government spending. What could be the effect with these shifts on revenue streams for school districts? Not specific to investing, but, you know, there's been a lot of consternation around title funding and that kind of federal funding is kind of a major issue that we're taking a look at. But when it comes to tax cuts and increased, you know, government spending, what is your take on what that could, could do to school districts?
- [34:37]
John Huber
Well, you know, tax cuts are something that, you know, were based on campaign promises. We have not seen specifics as it relates to that. There's been stuff floated, but what gets floated, what gets get done in terms of like flooding the zone, as you talked about earlier, John, it's hard to separate that out anymore. So you just take it as it comes. But in the spending side of it, you know, while we have kind of Department of Government efficiency practices going on and looking for areas of government waste and that work, if you look back at the current administration's prior four years, spending didn't really change. We really didn't see a change in spending, and that's been consistent whether it's been a Democrat or a Republican in office, spending continues to move higher. So short of some sort of identification of significant savings that can occur, our best guess is that the trend continues. It's hard to stop from a spending perspective. We know interest costs as part of the fiscal balance continue to move higher. But looking and projecting out beyond kind of one year around, through my years and kind of working with DC on some of these issues, I'll never forget the head of the CBO telling us that the only budget you need to care about is this year's budget, because anything out the curve is political. And so what's actually happening right now, I think we just got a new right kind of director in there and kind of what's going to happen. We'll see what evolves in the fiscal policy front. Certainly, I would say education is not going, you know, is probably an area that is at some risk. Right. If you just take the political language that's been provided without specifics. I think you need to manage in a risk framework as it relates to kind of what you're thinking about there. But Michelle, you're closer to it than me.
- [36:34]
Michelle Weiberg
Well, and there may be a more pressure on those lower income school districts parts of the country than the higher income, higher property tax value, you know, areas. So I think although the whole system will probably be under stress, it's probably going to be not going to be felt uniformly.
- [37:02]
John Brucato
Right. You know, Michelle, you make a good point, especially with the higher need school districts. I was up in Albany these past two days working with legislators on the New York State budget specifically. But you know, traditionally we don't talk a lot about the federal budget because it's obviously there's a lot of correlations to how it funds each individual state. But just given all of the news in the news cycle that's been out recently, the federal funds have been a highlight. And if I'm remembering correctly, I believe New York State specifically, 40% of their education budget is funneled through from the Fed. So if those title and idea funds are gone, that totally changes the local landscape for us too. Even regardless if you're, you're a high needs district or high wealth district, the state funding mechanism is severely impacted because now that piece of the pie has to be then shifted and really reduced because the federal supplement of all that money is now potentially gone. So I think you make a great point point where the higher needs districts would likely be disproportionately impacted. But when you're talking about an entire state's funding stream drying up, everyone's going to feel that in some capacity. So. Well, I guess we're very much in a wait and see approach, but you make some great points on that as well. But Kendra, I think you did mention tariffs as a potential impact. But what are the broader geopolitical risk and supply change factors or supply chain factors into a broader economic outlook for schools? I mean, is the cost of doing business potentially going to get higher if there are tariffs implemented on some of our greatest allies in the world that are, that are exporting goods into the US like what, what, what does that potentially look like for districts during that scenario?
- [38:54]
Kendra Shelland
Yeah, I think when you think about goods coming in costing more and we think about how capital projects have increased in cost over time, that would be a direct correlation. So that higher inflationary number would hit that line of higher costs of things that need to get done and that capital expenditure kind of continues to need to be done, that's not going to slow down. And so I think that would be a direct impact both from a cost perspective and then it would also influence kind of fiscal and monetary policy as well.
- [39:27]
John Huber
No, I think you bring up a good point. I mean, I just input costs. I mean you've got varied economics, consensus economic thought is that obviously it has an impact on inflation. Right. So it's going to impact supply and demand. Right. And it's going to come through in some form. And price. Right. Is how it'll come through. So people debate that and you know, certainly open to that. Right. And different viewpoints. But in general, if you think about it, it makes sense. Right. Unless someone's going to have their margin get squeezed. Right. They're going to eat that cost. That cost is going to get transferred onto the consumer, whether that's the school district or that's you and me. Right. And so that just makes intuitive sense. Right. So we'll see kind of how that moves over time. The other issue from a policy perspective is immigration, you know, and how does that feedback into the labor market. And while we've seen Powell's pretty clear yesterday, he's not worried about labor inflation. But now you got this other thing going on and it's hard to put a figure around it because it's kind of all happening in somewhat in secrecy. Right. In terms of kind of what's going on, it's not evident. You can't actually look at kind of what the impacts of that's going to be. But you would think for certain things, who knows, janitorial services, I don't know, I can't think of all the different expense categories, John, that you deal with on a day to day basis. But I mean if you lose, it's not a lot of people, you know, that are available to go do work that needs to get done. I mean we see that in the other services. Inflation. Right. If you, if I'm having a bathroom redone right now, the bathroom is cost, cost, you know, a good chunk of what I bought my house for 25 years ago just to do a bathroom.
- [41:11]
John Brucato
Yeah.
- [41:11]
John Huber
You know, and so that's real. And so people are. It's not just eggs, it's everywhere. And so there's bigger policy implications to all this too. And the one thing we haven't talked about too is geopolitical risk. Right. The world is an uncertain place, increasingly uncertain place, yet we keep going forward. So in some ways these twenties kind of remind us a little bit of the roaring 20s, 100 years ago.
- [41:34]
John Brucato
Wow. So history does repeat itself. Interesting.
- [41:36]
John Huber
We'll see. I mean, that's the risk, right? Keep driving down that road, right? It's good while you got it. But we have to plan, right? As risk managers, right? As. As right. As school business officials, you gotta be. And as, you know, as fiduciaries, as advisors, you know, and if you. And if you have questions on this stuff, get advisory help. Right? Get an advisor. You know, you get what you pay for in life, right? I mean, whether it's shoes or purses or belts. Right. There's certain things maybe we can skimp, like maybe T shirts, I don't know. But the point is, you know, I'm just.
- [42:11]
John Brucato
But apparently not bathrooms, John. Cause it sounds like you got a really nice one.
- [42:15]
John Huber
Right, Right. That's true. Boy, I can't wait.
- [42:19]
Michelle Weiberg
I just stayed at a hotel and the bathroom had heated floors, John. So I got to ask. Is your new bathroom going to have heated floors? It's a game changer.
- [42:28]
John Huber
I skipped.
- [42:28]
John Brucato
Oh, come on, Joe. That's the move.
- [42:30]
John Huber
I know that's the move. I don't. Lame. I'm lame, admittedly.
- [42:35]
John Brucato
Sorry.
- [42:35]
Michelle Weiberg
Yeah.
- [42:36]
John Brucato
So you bring up a good point. I mean, working with your advisors, getting fiscal assistance. But you give me some strategies and what school business officials can do to be proactive. I mean, should they be tuning into FOMC meetings? Like what. What are some good resources that they should be using that is relevant to. To how economic fiscal policy is going to impact their district specifically?
- [43:00]
John Huber
Well, I think get to get to you, and I'll let these guys answer, but I think it starts with that plan and it gets to your policy. So unearth the investment policy. Take a relook at kind of investment statutes. Talk to your friends and colleagues that are doing what you're doing. Look for best practice through ASBO and other affiliated groups that are there from an advocacy perspective. Open yourself up to information that maybe are against, maybe where your bias is and think about what it is you need to do longer term to put, you know, a better financial path forward. I think, you know, it's not comfortable sometimes taking quote, unquote, risk. But it's the risk that you're not understanding, that you're not measuring. And so just try to get smarter and more educated about it, you know, beyond the accounting. And try to, you know, you have to understand there's all these political dynamics you guys deal with too, right? In communities. So I. We do not under. We do. We understand how important that is. But like Just, just trying to, trying to continue to lead locally, I guess, you know, and then share that information with your cohorts. I don't know, I paint it off to Kendra or Michelle.
- [44:18]
Kendra Shelland
Yeah, I would agree with that. Under, you know, going back to that foundational understanding of your plan, understanding the inputs and the outputs and how they affect each other. So as we go through this point of volatility, policy wise, that could have a direct impact on you understanding what that move does. So not predicting what that move is going to be, but understanding what it could be. Michelle put it in a nice way, she called it stress testing. So looking at your cash flow and understanding where those low points are and if something were to shift, how does that low point shift? Does it shift in time? Does it shift in severity? What could happen? How do we plan for that and how do we protect ourselves against that at the same time as maximizing our income? Because we understand what's going on and what could happen.
- [45:05]
Michelle Weiberg
Well, there's no shortage of news, so I feel like you have to be selective and you know, you only have so much time in a day and so many, so much room in your brain. So find those news sources that you like, you know, and I would say just stay informed, but you know, look for the sources that you like that speak to you, that you can get it in the digestible form you want it. Reading notes from the FOMC meeting, probably not everyone's cup of tea. Reading a summary that like we blast out. Maybe that's more like it or that CNBC does or. So I do think it's really important to stay informed, but I, I wouldn't be paralyzed by that. You can be paralyzed because you don't know where to start, you know, So I would just like find sources that speak to you and, and make sure you're hitting those every day.
- [46:01]
John Huber
Well, John, I think the other thing I'd add there is too, if you, if you, if you can work with an advisor, you could look at it and purely look at it as a costing exercise and say, oh my gosh, this costs more money. Or maybe it's the part of the job I really enjoy. I like talking to my local broker dealer, right? But the point is like where and how do you add value in your job and where can you spend your time? To Michelle's point, you don't have a lot of time, right? You guys are busy, you're working all the time. And so it's, you know, hiring an advisor can make a lot of sense. They're availing themselves probably to more things throughout the day than you are for the 15 minutes in the morning. You have to go think about that. So just getting advice, you know, working with, you know, if you've got service providers like a local government investment pool or different advocacy groups that you work with and just start to think about ways that maybe you could put together a more full plan. I think it's super important you do it personally. Right, Right. We do it in our personal lives, so it makes probably sense in our professional lives too.
- [46:57]
John Brucato
Yeah. So 2024 saw record issuance for bonds. Does that have a correlation to 2025? What do you think that means for districts moving forward as we kick off 25 here?
- [47:11]
John Huber
I think it definitely has an impact. I mean, obviously supply meets demand. And so I think part of what you're seeing a little bit with the treasury volatility is beyond just the economic fair. There's also supply technicals. Right. You're expecting more supply and with that rates would rise until demand comes in and kind of meets that level and yields stabilize. So more supply indicates to me probably higher borrowing costs here as debt rolls off and you have to refinance until something changes. Right. And that would mean Fed policy at some point does ease again. Again, we think that the Fed will move again probably at this point with this data, maybe just once more, probably towards the latter half of the year. But with that said, you know, more treasury supply could push rates or keep rates elevated, which could increase borrowing costs.
- [48:11]
John Brucato
So as we wind down here, what kind of final word of advice or what could you impart on our listeners? As you know, we think about all that we've spoken about today in terms of being tuned in and clued into the markets to the economy, the administration. What's kind of your final parting words of advice? John, we'll start with you.
- [48:31]
John Huber
Well, rates are attractive. I mean, rates could move higher. But the bottom line is you're investing in risk free liquid Treasuries. If you call it 4.5% right now. That's not bad, right? I mean, I think there were a lot of people. A couple years would be like, I'll invest out for the rest of my life at 4.5%. So rates could move to 5. But I don't think the economy is going to continue to expand. If rates move up into that kind of 5 to 6% level, I think you'll see a bigger slowdown in GDP and then the Fed will have to react and rates will move down at that point. So It's a good time to be an investor. It's a good time to revisit your plan and to invest with purpose and match, invest out the curve as possible to match your assets and liabilities so that you can sustain that earnings power in future years when policy could change and rates could be much lower.
- [49:25]
Michelle Weiberg
Yeah, I'll echo the plan. You know, a good plan puts the power back in your hands and allows you to be proactive, not reactive. I think it's incredibly important so you're not just taking what the market gives you, taking what the federal government gives you, local legislation. You know, you are proactively controlling the things that you can.
- [49:49]
Kendra Shelland
I'll take a slight twist on the plan and kind of go back to that, speaking to your peers or an advisor and be open minded about that plan. You know, maybe look at it in a different perspective or a different light and get into the details so that you understand it and just really take in what's going on around you and work with your peers.
- [50:09]
John Brucato
Well, John, Kendra and Michelle, thank you all so much for joining me on School Business Insider. It's been a great conversation and I hope you talk to you soon.
- [50:16]
Kendra Shelland
Thanks.
- [50:16]
John Brucato
Thank you.
- [50:16]
John Huber
Thank you.
- [50:17]
John Brucato
Thank you for tuning in to School Business Insider. Make sure to check back each week for your favorite topics on School Business.