SmartTranscript of House Appropriations - 2025-03-10 - 1:30PM

[Vice Chair James Harrison]: Good afternoon. Welcome to House Appropriations. Today is March tenth. We're just returning from the town of meetings recessed, and we are here this afternoon to continue our work on the fiscal year twenty six budget. So anyhow, welcome. We have a guest with us. Michael, if you wanna introduce yourself, and if you'd like to take just two minutes, we'll quickly go around and introduce ourselves. We're missing a couple committee members, who, some travel issues and, but, we're mostly here. So go ahead, Michael. [Witness Michael Gaughn]: Great. Thank you so much for having me today. My name is Michael Gaughn. I'm the executive director of the Vermont Bond Bank. [Vice Chair James Harrison]: Great. So Hello, Michael. My name is Dave Yacoboni from Morrisville, and I represent the Lamoille Washington district. Greetings. Hello, Michael. John Kosenska from Burke. I represent the Essex Caledonia district. Hi. Mike Nigro. I represent Bennington and Powell. Tom Stevens from Waterbury representing the Washington Chittenden District. Morning, Michael. Jim Harrison. I represent Chittenden, Benden, Killington, and Pittsfield. And I'm just filling in for our chair who's gonna be just a couple minutes late, Robin Chang. [Chair Robin Scheu]: And, hi. I'm Tiff Loomley from Burlington. [Witness Michael Gaughn]: Hi there. Nice to see you, Tiff. I'm right up the street from you, I believe, on South Winooski currently. [Chair Robin Scheu]: Well, there you are. We'll have a tour. [Witness Michael Gaughn]: This is a funny thing. I just need to, unpause Bluey for a sick child. I'll be right back. I'm so sorry. [Vice Chair James Harrison]: That's what you said, Trevor. Yeah. Thank you. [Witness Michael Gaughn]: Okay. Very many apologies. [Vice Chair James Harrison]: Travis Horrell. Terrell Cohen on behalf. And Wayne elect, Berkshire Franklin Highgate, Richford. And momentarily missing, I don't know if they're gonna join us be able to join us online when they get around. There's no? Not right now. Okay. Mike Merricki from and Lynn Dickinson from BBC Mall. So thank thank you for joining us. As you probably know, we heard some initial testimony last week from the treasurer and from the commissioner of housing about infrastructure loans done through the bond bank. This isn't something we deal with every day, so we thought he might be a good person to help us better understand the concept and how it works. [Witness Michael Gaughn]: Great. And I was able to watch the testimony, so I felt I felt very loved in terms of providing some answers. So if it's okay with you, I thought I'd just share my screen, and I have some materials to present. If if that works, I can go that way. [Vice Chair James Harrison]: Yes. I I think it does. We also have it is probably your presentation as a handout. [Witness Michael Gaughn]: Yeah. I'm happy to either talk through it or share screen, whatever would be comfortable for the committee. [Vice Chair James Harrison]: Oh, screen's fine. Okay. [Witness Michael Gaughn]: So I've been at the Bond Bank about seven years. My background is in public finance, and I don't I think this is my first time presenting this committee. So I did wanna take, you know, a minute and a half here to tell you a little bit more about the Bond Bank. For a long time, I sort of considered us one of the best kept secrets in the state, but I think we've been doing good work and and the secret's out, so to speak. But, really, our our our work kind of falls into three broad buckets. We were the first bond bank in the country created by you all in nineteen seventy, have a five member board with four appointed by the governor and one serving ex officio, which is the state treasurer. We our primary role is to provide access to and low cost capital for units of government around the state. And fast forward fifty years, and we we, work with just about every community in the state other than the city of Burlington who maintains their own credit rating and, other than its work in the clean water and drinking water SRF, which we're involved with, finances on their own. And I think the treasurer mentioned this when when he was in. But we we were formed really following school construction in the late sixties and early seventies. The the schools that were being built at that time were financed with short term notes from local banks, and the local banks, were not able to different banking regulatory environment were not able to provide the long term capital, although they were providing short term capital. And there's some vestigial parts of the statute that speak to that, like the fact that you can roll over a bond anticipation note for up to ten years. And so the bond bank was really formed to alleviate that that capital crunch. And that core program is the majority of what we do even today, and really that's what we call our pool loan program. So what we do is that we pool loans together twice a year. We just we just completed our winter winter pool loan financing. Pool loans together, issue bonds in the wider markets. Those are tax exempt bonds. Those bonds that we issue are credit enhanced by the state of Vermont through two means that we can discuss, but but the bottom line is we get a a great credit rating of double a plus, double a two, and we pass along that cost of capital when we issue those bonds to our borrowers without markup, minor adjustments for purposes of cash flow, but but really, they're effectively getting a double a plus rate, and that could be Putney or that could be South Burlington. There's a tremendous amount of equity built in that system that's that's really terrific and and is the reason I'm sitting here talking to you today because it's such an amazing model and has been copied widely among about fourteen other states around the country. So we did that for the majority of our history until the nineties, we became the financial administrator of the state's SRF programs that provides clean water and drinking water infrastructure dollars. It's a match program with the EPA and the state of Vermont. Department of Environmental Conservation does the programmatic review side of that, and then we do you know, we manage the cash balances, and the loans are actually in the Bond Bank's name. I should have mentioned the pooled loan program sits around six hundred and fifty million or so. Today, the SRF work is around two hundred and forty million. And then that was kind of what we did up until about three years ago when, we started looking at other programs. There's a lot of activity out of DC. The bond bank has a lot of expertise in managing federal programmatic requirements, distilling them down to something that's bite sized for local communities, and managing some of the more technical compliance related aspects of of federal programs. And so our first foray into that well, we started doing a lot of investigation, but our first real program outside of the two I described was our flood relief program in, twenty we signed a loan we announced it in twenty twenty three and made the loans in early twenty four. And to date, we've made about nineteen million dollars worth of loans for flood impacted communities to help bridge FEMA reimbursements, and that's proven to be extremely important and impactful. Then we also last year launched our energy efficiency renewable energy program. We secured a forty million dollar loan from USDA at zero percent that we will relend to local communities for related investments, around two percent or so. And then, we also received a grant last year from, Department of Environmental Conservation for just under seven million to help with, small water system capacity issues. We're both lending that out to bridge FEMA reimbursements for water and wastewater systems as well as providing grants. So just to give you a sense of the breadth of our activity. And then fast forward to today, we're we're always here to help out. One of our our goals as an organization is to be a model state partner, and and this is certainly no exception. We sit on the front lines of a lot of infrastructure conversations around the state. So, happy to, yeah, we think there's a lot of promise in this, in this initiative, the Vermont Sustainable Infrastructure Fund. So before I move on to that specifically, any questions on the our operations of the bond bank more generally? [Chair Robin Scheu]: Let's see. Oh, no. [Vice Chair James Harrison]: That's your hand. Go ahead, Mike. [Witness Michael Gaughn]: Okay. Thanks. And there's a on page three here, just a sense of scale for our programs. So we really have a couple ideas around how we could make this really effective. And and I I think everyone acknowledges that in a perfect world, we'd have, you know, a hundred million dollars to do infrastructure investment, but it's not a perfect world. And and we'll we'll, you know, accommodate scarcity such as it is and and do the most with what we can. I think in the the committee meetings from last week, there are a lot of questions about the bond bank and and sort of how we fund ourselves. And and we're really efficient organization. We have four full time employees. The majority of our operations are funded by earnings on an unrestricted reserve fund. That unrestricted reserve fund is a key component of our credit for our pooled loan program that I described, but it also provides supplemental income for us so that we can pay our salaries. And then we receive, you know, some modest fees from from some of the other activities that I described, but really that's the majority of of how we finance ourselves. And so that's nice because it isolates us a little bit from having to turn a profit on the loans themselves, which isn't to say there aren't administrative costs, but, that that's a key part of our financial structure that's relevant to this discussion. So as it as it relates to this infrastructure fund itself, I'll go through the different ways in which I think we could deploy it. But as it relates to sort of the most vanilla of the applications, the most right down the middle, you know, loans to communities for infrastructure. We need to keep that really well below, the cost of inflation, both, just regular old inflation as well as construction inflation to make, I think, this appealing. And so we target around one percent or so for for the deployment of those dollars. Because if we get the rate that low in today's market, we're effectively creating equity for those projects because their market rate might be four between, you know, four percent if it's a tax if it's a municipal entity and then maybe, like, seven percent if it's a, like, a private developer who's seeking, you know, financing from from, say, VHFA or somebody like that. Because because what's happened, you know, historically is that the the developers have to internalize a lot of that infrastructure cost. And so their their cost of capital is higher than would it be a municipality. But even as we've seen across the state, municipalities, even with their lower rate, don't always get to the finish line on those infrastructure projects. So I think we just have to, like, make that rate rock bottom. And so one percent is what I hope we could target with this. So I think that was a key question from your discussion last week. And then, you know, the other question is like, okay, nine, dollars fifteen million, whatever it is, that's not a whole lot of money and we've got a lot of needs. So how do we put that to work most effectively? So we really have three ideas for how we can, how we can make this work. One is that we're we're just doing direct loans, and that's probably what you thought of when you read about the program. We take dollars into us, and we make loans for, you know, under the criteria that we work up with DHCD. And those are the ones that are going to be, you know, those smaller communities, communities with less capacity, smaller loan amounts, higher need projects, Those are the ones we target for that that type of application. But there might be other cases, particularly if they're larger projects, where we leverage the our pool loan program, our larger program. And even though that's a really low rate because borrowers are benefiting from a tax exempt rate at effectively, you know, the state's credit rating, those projects to achieve affordability still might need a lower rate. And so what we would envision doing is taking some of the money in the fund and putting it help help essentially buy down that interest rate, in a way that eventually returns the money back into the fund over time. But it allows us to leverage this other source of capital, versus having to just use every single dollar out of this fund. So it might be, say, making up numbers here, but a ten million dollar need, and we put a million dollars from the, the sustainable infrastructure fund into it. And then the remaining nine million, we finance out of our pool loan program and then, you know, bring bring down the rate proportionally. I've completely made up those numbers and so it's going to be facts and circumstances when we review those projects but that's that's one one idea. And then the third way, and this is probably a little bit more the most fuzzy of the potential applications, is that if we have this corpus of a fund that's, again, say between nine or fifteen million dollars, we then we you that's that's a valuable thing. Right? Because we have all those revenues that are coming off that fund over time and it's all equity and it's a real asset that we can deploy. And and rather than, you know, lending out that money, maybe we use those sorts of repayments as a as a guarantee or a credit enhancement for other financing that an infrastructure project may may choose to pursue to given that the repayment source is often just one project or one developer behind that, it might they might need some credit enhancement. So those are the sort of three applications in which we see this fund being deployed. And, you know, again, even though it's a small amount, like that doesn't mean it's not highly impactful. We heard from a few weeks ago there was some testimony in house general and housing from former mayor Weinberger and David White, White and Burke. They've done some work to look into you know the type of small scale infrastructure projects that are needed to enable housing. And those projects they were looking at or identified were were in the hundreds of thousands of dollars. And so certainly there's going to be applications that are in the millions of dollars and we see that. But if we're talking about projects in the hundreds of thousands of dollars, you know, you can do a lot with with ten to fifteen million dollars And so I don't think the size of it is necessarily prohibited from making a big impact. So those are questions. [Vice Chair James Harrison]: Yeah. [Witness Michael Gaughn]: Yeah. That was well, that was the end of my sort of prepared remarks. [Chair Robin Scheu]: Oh, okay. Great. Thanks. Grab a look at [Member John Kascenska]: So sources of funds coming in are what? Obviously, interest, but what how how does how does money come into the fund other than returning from loans that you've made? [Witness Michael Gaughn]: Yeah. That would be what I would envision the source to be for this particular fund. So you have the repayment at, one percent. We're gonna have some administrative costs, although we're gonna work really hard to keep those minimal. We will have, you know, to the extent those funds are sitting there, we're we're good about treasury management, and we will reinvest reinvest the funds to try and grow the the corpus of the fund. And, and then we, we leverage it as much as possible. [Vice Chair James Harrison]: So what [Member John Kascenska]: I'm getting at is originally with money put into the fund from some outside source, are you are you bundling loans from other institutions into your bond bank? How does that all work? [Witness Michael Gaughn]: Are you Well, you know Matt, I'm sorry. Yeah. I think we'd envision making direct loans. So we run a number of different programs. Right? And and in all cases, the bond bank is the ultimate holder of that loan. We're doing what are called direct purchases of that community's bond or revenue bond or, you know, whatever the case may be. To the extent we're leveraging private capital, it's through the sale of our bonds or our credit instruments. And so we are, in fact, leveraging tons of capital because we because compared to the we've got very good collateral in terms of the repayment sources from our municipalities, but we leverage those. You know, in the pooled loan program, we've got, like, a ratio of, like, five percent equity to ninety five percent debt because the collateral is so good and there's credit enhancement from the state. So when we, the bond bank, issues debt, that's what our private investors, that's what our leverage see. And that's good because it then it essentially homogenizes the credit that stands behind it. And that's why we can give Putney the same rate as we can give South Burlington or whomever, Elmore. I mean, talk about our smallest bar, towns of eight hundred people who are getting a double a plus rate. [Member John Kascenska]: So private investors, I heard you use the word. So you got private investors providing capital that you used in operating the bond bank. [Witness Michael Gaughn]: That's yeah. That's exactly right. That's exactly right. So we sell our bonds. People Vermonters buy them. Individual Vermonters buy them. Institutions buy them. Travelers insurance buys us. Then we take that money and make loans to units of government. And, you know, we've also worked with, like, the local banks like, Northfield, for example, in in in figuring out ways to leverage private capital. But in all cases, we're doing the work of managing, you know, a loan a a bond offering that might have twenty loans behind it. And that's like a unique, skill set we have to close twenty loans at one time, and and and use this as collateral for debt that we issue. [Vice Chair James Harrison]: Thank you. [Chair Robin Scheu]: Thanks, John. And then I have a question. [Vice Chair James Harrison]: Michael. John here. In one of your slides, you have a flex fund. What what is that? Is that [Witness Michael Gaughn]: a new Oh, yeah. Fund? Yeah. That was we use that for program development. So when we this energy efficiency renewable energy program that I mentioned, before we that is really sponsored by this new USDA loan we got. But before we got the USDA loan, we wanted to figure out how it worked. So we have a small, like, a small amount of money where we essentially experiment diligently with, you know, all of our lending, underwriting standards applied to it, but that's that's what that is. [Vice Chair James Harrison]: And is that something that you're you're adding to over time or is it just pretty much it's there to have gotten [Witness Michael Gaughn]: you started? I think about it like working capital for new program development. It's it's a fairly small amount and we kinda like test things out and then figure out larger sources to to, I I suppose fully launch the program. [Chair Robin Scheu]: Great. Thank you. Mike, this is Robin Shai. Sorry. I was late. I was dealing with a flooded basement. [Witness Michael Gaughn]: Oh, dear. [Chair Robin Scheu]: But I'm glad you could be here. It's been quite a day. So when you, the borrower is a municipality as opposed to a developer. Is that correct? That's right. [Witness Michael Gaughn]: That's right. Our, our statute is only to work with units of government. Okay. So towns, villages, school districts, any unit of government. [Chair Robin Scheu]: Okay. And you had mentioned your unrestricted, reserve fund. Is that your pooled loan program for six hundred and thirty nine million? [Witness Michael Gaughn]: It stands behind that. Yeah. It's, once you tell thing once you tell the rating agencies you have some money, it no longer is unrestricted. [Chair Robin Scheu]: So It's very long restricted money. Yes. [Witness Michael Gaughn]: Yeah. It's it's restricted, unrestricted, but it does kind of serve in an endowment for our operating activities and that's where it comes into this conversation. That's why we can undertake things like this and keep costs really low. [Chair Robin Scheu]: Right. And so I'm wondering, just for argument's sake because I think that this concept is definitely worth of the of infrastructure for, building houses. If if we didn't contribute the nine point one million or the fifteen or the whatever, could you use the money in the pool loan program to do that anyway? [Witness Michael Gaughn]: No. We don't. Yeah. We don't have that capacity, unfortunately. [Vice Chair James Harrison]: Okay. [Witness Michael Gaughn]: We also even if we did, there's no way we could keep it at one percent. [Chair Robin Scheu]: Okay. Thank you. Jim? [Vice Chair James Harrison]: So, this is all in the realm of the world we live in today, but there's been some suggestion and we don't know what's gonna happen in Washington with a tax package later on, but have suggested that municipal bonds would no longer be tax exempt. And if that were the case, and and I hope we don't put down that path, but let's just say we did, How does the attractiveness of this approach change? [Witness Michael Gaughn]: Oh, yeah. So, obviously, we're laser focused on that policy issue and we've spoken with the delegation and are helping to coordinate some of the other issuers that benefit from tax and financing the state. But it just makes this even more impactful because then your opportunity cost is not four or five percent through the pooled loan program. Your opportunity cost is a taxable rate of seven percent. And and so if it wasn't struggling before, it struggles even more if that goes away. Yeah. [Vice Chair James Harrison]: But if if municipal bonds were no longer tax exempt, my assumption is that I don't know the you wouldn't be tax exempt either. [Witness Michael Gaughn]: That's right. No. The cost of capital for everybody would go up. Our school projects would be more expensive. Our road projects, our equipment purchases, everything across the state would be more expensive if the tax exemption went away. Thankfully, because of the bond bank and the way we pool and get to scale, we'd continue to have access to capital, but certainly it would be a lot more expensive. [Vice Chair James Harrison]: Okay. Thank you. [Chair Robin Scheu]: So, like, I wanna go back to, the direct loan program for the moment. When Alex Farrell was in here, he gave us sort of a hypothetical it didn't feel like it had been very fleshed out. I used to run revolving loan funds, so I have some familiarity with some of this. But, you know, if we if we had a nine point one million dollar fund, and he he was talking about a hypothetical with a maximum award of four million, that gives you two loans, a little leftover. But have you guys thought about loan rates and terms? I I'm hearing one percent on terms of a rate, but what about loan size, terms, other things? [Witness Michael Gaughn]: I think certainly with the direct lending, what we'd like to target for the four million dollar loans, I think that starts to get into a range where we'd hope to leverage our pooled loan program to some extent and just bring down the the rate, to make the to make the underlying project a little bit more financially feasible. But what we heard in that testimony from general and housing is that there's a lot of potential infrastructure costs that are in the hundreds of thousands of dollars. And those are the ones where where we would anticipate doing direct loans that are, you know, flexible as is allowed under the statute to allow that underlying project to mature and reach stability so that it can sort of absorb the, you know, the whatever form of tax payment that supports the supports our loan. So I think we could actually do if that's the size and there's been a lot of diligence on that with, like, projects I think in Fairly, like, we can do quite a few projects even even with, say, ten to fifteen million [Chair Robin Scheu]: dollars. Right. And so from the direct loan side, have you have you guys talked about a maximum loan size or, what the term would be for amortization or anything? No. [Vice Chair James Harrison]: I I [Witness Michael Gaughn]: Yeah. I think I think fifteen to twenty years is what we anticipate doing on terms because we want Yeah. Obviously, we want some modestly rapid amortization to replenish the fund. And at and at that rate, you know, the project really isn't worse off. In terms of size, our experience is that until you have something real, you don't have real conversations with the borrowers. And that's happened in our energy efficiency program and our flood lending programs. And so we actually have dollars available and we actually have a timeline that's in the months rather than years, we we don't have substantive conversations because folks have a lot going on, and it's difficult to focus on something that's hypothetical. [Chair Robin Scheu]: Right. And and do you have sort of mentally, I won't hold you to this. So you mentally have kind of a maximum loan size for direct loan. But, I mean so I get it. I hear four million. You might do some portion direct and another from the pool. But what would be the portion you do with the direct, or what would be the most you do if it was a single project? [Witness Michael Gaughn]: I don't think I can I yeah? I can't answer that. I mean, I I I because I think part of what we're trying to solve for is need here. So my own background, in addition to public finance, is in working in sort of, like, real estate economics. I I did a lot of the sort of but for test in New Rochelle, New York, in Westchester County, working with some large developers there, but on the public side. And I think each project is going to look a little bit different in terms of what it needs for feasibility. So it may be, you know, one of the larger projects we see, but the but the gap that we can overcome is actually quite small. I just I wouldn't be yeah. I don't know, I guess. Obviously, I wanna help the most we wanna help the most projects possible. [Chair Robin Scheu]: Right. [Witness Michael Gaughn]: And so there's going to be a relationship with her. If we only do two loans, it's probably because those projects are bigger and serve more units. And so then maybe we get to the same end. Yeah. But that's yeah. I think that's about all I as far as I can go on that subject. [Chair Robin Scheu]: Alright. Thank you. Anybody else have any questions? Anything else that you would like to let us know? [Witness Michael Gaughn]: I think we covered it the last, you know, the last slide in the deck here on page five does give an example of how we've used multiple it was our we've, like, gotten a lot of leverage out of this out of this case study, but it is an example from Charlotte and how we use our pooled loan program for the majority of the project's financing need and then our specialized energy efficiency and renewable lending program, help complete the the project financing, with just a little bit. So, you see there about one point five million dollars from our pooled loan program and then, just under three hundred thousand dollars from our specialty lending program. And so we have just expertise in how we can sort of, blend these things together, which I think is going to be very applicable, for this program because we might see SRF, pool loan program, and the sustainable infrastructure fund all in the same project. [Chair Robin Scheu]: Sure. That makes sense. Any last questions? No. Thank you so much for making the time. I know you have a two o'clock hard stop, and it's two o'clock. Yeah. Thank you [Witness Michael Gaughn]: so much. I look forward to seeing you all in person soon. [Chair Robin Scheu]: Okay. Take care. Thanks, Lynn. [Witness Michael Gaughn]: Bye bye. [Chair Robin Scheu]: Bye bye.

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