Leah Pappas Porner:
Well, good morning, everyone. My name is Leah Pappas Porner. I am a partner with Calfee law firm. And I am honored to be joined by my partner, Blake Beachler, who chairs our public finance practice. But our great guest today is the treasurer of the state of Ohio. Robert Sprague. Thank you for joining us. We really appreciate the time and your future comments in this webinar. Thank you so much for this morning.
Ohio Treasurer Robert Sprague:
Thank you very much to Leah. Looking forward to seeing you again soon in person not just via zoom, but this technology is fantastic. Leah of course is a force of nature in Columbus. And it's a great honor to be with you this morning. And looking forward to answering your questions. Blake, thanks for joining us from Cleveland. And looking forward to answering your questions as well. As we get started here, I just wanted to, first of all, say thank you to John [inaudible 00:00:58] as well. He's doing a great job in your DC office. Always enjoyed being with John. He's got something interesting to say and an interesting perspective on things, every time I talk with him. And we truly are strong as Ohioans. And I think that it's our resolve that has led us to this wonderful recovery so far, in the state of Ohio. And we have a lot of opportunities ahead.
Ohio Treasurer Robert Sprague:
There will be some belt-tightening. We you just saw from OBM. We've got about a $2.4 billion reduction in revenues. That's actually real money even for the-
Leah Pappas Porner:
Yeah-
Ohio Treasurer Robert Sprague:
state of Ohio. And so there's going to be difficult decisions along the way, but the treasurer's office is leading on that. We've cut our budget already by 20% for this fiscal year. And then the next fiscal year which starts on July one, we're looking for more cost savings. And so I'll talk about that as you begin to ask me questions. And we'll talk about how we're saving, and some of the innovative things that we're doing in the office. But so glad to be here with you today.
Leah Pappas Porner:
Well, thanks for your time. As I sit in our Columbus office and look over our beautiful state house. I am excited for the reopening of Ohio and everyone coming back down to our Capitol and, resuming the work that we do for our clients and advocate for them. So, with that I'll jump into a very hot topic, which is the [CARES Act 00:00:02:23] .
Ohio Treasurer Robert Sprague:
Mm-hmm (affirmative).
Leah Pappas Porner:
Many of us followed what Congress was doing, and watching as it moves to the state. So, as the CARES Act hits Ohio give us your opinion about at a local level and at a state level. Are we ready for the CARES Act money? Is there enough flexibility around the use of the CARES Act money? Give us your thoughts around that?
Ohio Treasurer Robert Sprague:
Sure. Well, I think the U S treasury has issued guidance. We've received that guidance from the U S treasury. And then we've received about $3.7 billion of cash from the U S treasury. And in total is about 4.5 billion that came to Ohio. Some of it went directly to the bigger counties and bigger cities. The rest of it came to the state treasury for disbursement. And you'll notice that Senate bill 310, which is at the state house now I'm sure you're going over for some hearings on that. Later on this afternoon or tomorrow. But, that has some about $300 million of local CARES Act money, that's going to be distributed to local governments. Here's the challenge for the CARES Act is that, when it was appropriated Congress did it in a way as they responded to other disasters. So, think hurricane Katrina, right? Huge amount of additional activity.
Leah Pappas Porner:
Right-
Ohio Treasurer Robert Sprague:
You're cleaning up trees. You're rebuilding roads or rebuilding houses. A lot of marginal additional expenses. This crisis was not like that. It was everybody stay home. There weren't a lot of additional expenses. And yet when Congress appropriated that money for the CARES Act, they said it can only be spent on unbudgeted at the beginning of March. COVID related expenses. And so that's our challenge. We really need Congress to take the handcuffs off and let us use the money as we need to, to move our state forward and make the investments. And quite honestly, some of the operational needs that we have as a state over the next two years, in addition to just the COVID related responses.
Ohio Treasurer Robert Sprague:
So, to give you just an order of magnitude. That Senate bill that we talked about, it's appropriating about $300 million. We have 3.7 billion sitting at the state treasury, that the US treasury has already issued debt for. And they've sent us cash to do that. So, I'm very pleased to be working with Congressman Warren Davidson. He has a very good bill. That's called Restoring Freedom to Local and State Governments Act, for the CARES's money. And basically takes a lot of those restrictions off, and would allow us to use it for our needs as we move forward. Not just to make sure that our localities are taken care of in our counties and our townships, but also then to be able to move our state forward economically.
Leah Pappas Porner:
Maybe we should bring Congressman Warren Davidson, and talk a little bit about his efforts there. Right?
Ohio Treasurer Robert Sprague:
Absolutely. I'm sure the rest of the Ohio delegation is on board with that as well. But, yeah. I think he'd be great. He's very smart and-
Leah Pappas Porner:
Super guy-
Ohio Treasurer Robert Sprague:
very thoughtful on the financial piece.
Leah Pappas Porner:
Blake, do you have a question?
Blake Beachler:
Yeah. Treasurer, you alluded to the loss of tax revenue for the States. And also local political subdivisions, counties and cities, with the loss of income tax revenues, sales tax revenues, et cetera. The list goes on. How do you think that will affect the ability for those local political subdivisions to... issue bonds or indebtedness to finance capital projects? Or other needed permanent improvements?
Ohio Treasurer Robert Sprague:
Well, I think there's three elements to that. The first is the revenue piece, which is what you've already talked about. Now there's actually two different pieces of the revenue that you've got to think about. The first is the one-time shock. And we didn't collect a whole lot of sales tax in March. We didn't collect a whole lot of sales tax in April. Right? But, now that we're out of this and the economy has reopened June, July, we're collecting much better sales tax. And you're starting to see those figures float back up to 85%, 90%, depending upon where you're at in the state of where they were before. So, that one time revenue hit could be filled with one-time money. Say some rainy day fund money. And we can go on. Now where we'd run into trouble in the longer term is when you have, reduction in revenues on a more permanent basis because of less economic activity.
Ohio Treasurer Robert Sprague:
So, if that bounce of sales tax or income doesn't get back up to that 100% level, it only reaches 92% or whatever that is, that's where we're going to run into trouble on down the road. And it's tough quite honestly, to forecast that right now. That being said, do I think that municipalities or local governments are going to have trouble accessing the debt market? My answer to you would be absolutely not. We actually went to market last week with about over $150 million issuance. Lisa Eisenberg led the transaction from our team. She did a phenomenal job. And you're not going to believe this, but we got 1.4% on 15 year paper. It's just-
Leah Pappas Porner:
Wow.
Ohio Treasurer Robert Sprague:
unreal.
Blake Beachler:
Wow.
Ohio Treasurer Robert Sprague:
And one of the reasons for that quite honestly, is that you're starting to see a stratification in the credit markets across the country. Not just in corporate debt, but also in the [muni 00:07:46] debt. And there's a tremendous thirst and need for strong credit.
Ohio Treasurer Robert Sprague:
And the state of Ohio is an extremely strong credit. Not just because of the underlying diversity of our economy, which is one thing the credit ratings look at. But also because of the very low amount of debt service that we currently carry. We're only at 4.7% of GRF revenues. Which is by design and in the constitution, but it's a lot lower than a lot of these other States that are [inaudible 00:08:17]. Whether it's California, Illinois, or Michigan. And so, people look at that and they say, "wow. State of Ohio has done a great job managing their debt rating." Now your question was about localities and I'm getting to that. And one of the reasons is because we have an Ohio market access program, that we run out of the treasurer's office. So here's what we'll do for any local government.
Ohio Treasurer Robert Sprague:
If they'd like to enter the credit market, and they're [inaudible 00:08:40] issue a bond anticipation note. We are willing to put the full faith and power of the state treasury behind that local government. So we essentially guarantee the repurchase of that into our investment portfolio. And the way the credit market looks at that guarantee, is that they're going to give that local municipality the same credit rating as the state of Ohio. And as credit spread widens, there's going to be tremendous value in that Ohio Market Access Program. And that's one of the things it's going to ensure us, to be able to gain access for our localities in the state of Ohio, into the credit market. And let me just conclude that answer by saying, we are actively looking at ways that we can help our local governments. That's something that's very personal to me. The informer city auditor, city treasurer.
Ohio Treasurer Robert Sprague:
I understand. I've seen this movie before. And I understand what municipalities and local governments are going to face in this recession. Because I was there during the great financial recession. And so, one of our focuses in the treasurer's office has been and will continue to be in the future, some innovative products. And one of the things we're looking at right now is a cash management tool, for local governments to be able to borrow against their future property tax receipts. So, we're constantly trying to be innovative. That's a very innovative concept. It's a pooled product. Very low cost to capital. So, really excited about some of these ideas that we have on the front burner.
Blake Beachler:
And I can say with personal experience working with the OMAP program, it's very user-friendly and streamlined. And it's really helped some of Calfee clients get access to the markets. And really get a lot of interest cost savings. So, thank you for putting that program together. And as you said, [inaudible 00:10:34] does a great job with that program as well.
Ohio Treasurer Robert Sprague:
Thank you, Blake-
Blake Beachler:
Thank you-
Ohio Treasurer Robert Sprague:
We're so glad that you're a part of that. And we hope that not only will you continue to think about things like the Ohio Market Access Program, but also these new cash management tools as we begin to roll them out.
Blake Beachler:
Great, great. And those are mostly local borrowings for short-term borrowings. I assume one year...
Ohio Treasurer Robert Sprague:
These are short term borrowings, absolutely. To help manage cash and liquidity flow for local governments. The interesting thing about our counties and a lot of our local governments is, they actually stand at a fairly strong cash position right now. But we think that as the recovery wears on and we enter that third phase, which is true economic recovery. That in the fall and the winter of next year, into the spring and summer of next year as those cash balances are depleted, there's going to be more and more of a need to manage cash and liquidity through the balance sheet. And so, we stand ready to help local governments with that.
Blake Beachler:
I'm sure. That's great. On a similar vein recently, when there was more turmoil in the markets, you guys, the treasurer's office stepped up. And really helped a lot of the large hospital systems throughout Ohio, in purchasing some of their outstanding variable rate demand in debtedness. Can you just briefly touch on that? What the office did and how it helped?
Ohio Treasurer Robert Sprague:
Yeah, absolutely. And this is something that we're always willing to do. Which is put our $13 billion balance sheet to work for the people, and the institutions of the state of Ohio. And early on we had this huge credit market dislocation in March. And many of our hospitals in the state of Ohio, including the Cleveland clinic and many other prominent hospitals, finance a portion of their debt through variable rate demand notes. Which are auction-based. They reset every week. In the third week of March, they saw that reset go from 1.3% to 8%. So, their borrowing costs skyrocketed at the same time. And this was before the federal reserve really had stepped in, and Jerome Powell had activated any of the powers that were passed by the CARES Act in Congress. And so, as the credit markets began this wild dislocation,
Ohio Treasurer Robert Sprague:
and people were searching as to what would provide liquidity, we said, "look, we're going to devote almost a billion dollars of liquidity into our hospitals. They are running toward the Corona virus. They are the people that are on the front lines of this. They're the people that are going to help our state recover. And we don't want them to have to be looking over their shoulder at the credit markets, and wondering why their cost of capital is skyrocketing. At the same time that they don't have any revenue because of the coronavirus." So, we stepped in with almost a billion dollar facility. We immediately began the purchase of these investment grade debt. Some of it was North of 8%. We bought it at two. And we figured that was a great deal for the taxpayers of the state of Ohio. 2% really strong hospital credit. And much better than what we were getting in other pieces of our portfolio at that time.
Ohio Treasurer Robert Sprague:
And at the same time, a huge help to these Ohio institutions that were helping our citizens get better from the coronavirus. And so, we actually had one CFO that I won't name, but he was up in your neck in the woods. And Goldman Sachs actually didn't reset the auction that week. Even though we stepped in and said, "we're willing to buy it at 2%." They kept the rate at above six. And the CFO called Goldman and said, "look, not only do I want my rate reset at 2% because we have a willing buyer, but you owe me a check for about $10 million." And he got it. So, this is-
Blake Beachler:
Wow-
Ohio Treasurer Robert Sprague:
big money for our hospital systems and I think a huge help. And also returning and using our balance sheet, to restore stability to the credit markets in Ohio.
Blake Beachler:
Well, we certainly appreciate you stepping up and helping our local hospitals. That's great-
Ohio Treasurer Robert Sprague:
Thank you. I do want to mention, we've got a lot of quality people on our team. Very innovative people. And John [inaudible 00:14:49] deserves a huge amount of credit. He's a Clevelander. And I want to mention John's work because I know you've worked with John, and-
Blake Beachler:
Yeah-
Ohio Treasurer Robert Sprague:
he's done [inaudible 00:14:57] a great job with that program. Very innovative
Leah Pappas Porner:
Treasurer, as you know we are fortunate in Ohio to have so many wonderful financial institutions.
Ohio Treasurer Robert Sprague:
Mm-hmm (affirmative).
Leah Pappas Porner:
But small community banks and the large national banks, and several headquartered right here in the great state of Ohio. When you look at our financial institutions, how have they fared through the pandemic? And what has been your interaction with them and any feedback that you have about them? Because many of us rely on their employee base. Their community involvement and the great innovative work that they do, for the financial markets. So give us some reflection of how they're doing.
Ohio Treasurer Robert Sprague:
Well. Let me pick out a very special player in the banking market up there in Cleveland is KeyBank. And they're special also to the state of Ohio. We have our depository actually for the state treasury, with KeyBank. And KeyBank has been fantastic. They helped manage our liquidity during the crisis and as a result, we're constantly trying to build liquidity because we're running through about $150 million a week. At the state that we're spending. And so, we're always looking at our ladder. We're looking at our money market availability, and always trying to position ourselves from a place of strength and liquidity. We have almost, I think, half a billion dollars now at Key. And there's a couple of different reasons for that. And we've put money at a lot of the other Ohio banks and institutions. And again, we freed up and we're prepared to do almost a billion dollars in our Ohio lending institutions.
Ohio Treasurer Robert Sprague:
Why? Because we know when we put deposits at a community bank, maybe in my hometown of Findlay or Cleveland or anywhere across the state. We know that those deposits eventually are going to help small businesses. That's the money that then the banks can loan out to small businesses, to get our economy restarted. And why shouldn't we bring back our money from New York city. And those securities, and put it to work here in the state of Ohio, so we can make those loans and get our economy back on track. So, that was something that we did early on, and we really appreciate all of our banking partners and the financial institutions across the state. And I want to answer your question directly. What do you see in terms of the strength of our community banks? And also some of the large banking partners that we have across the state. Chase and Fifth Third and Huntington and Key. Some of the biggest players, PNC. Some of the biggest players in the United States.
Ohio Treasurer Robert Sprague:
I can tell you, they are strong. This is a much different financial situation than 2008, 2009 and 2010. Which was really a financially induced economic recession. This is a demand shock. And clearly not all sectors are treated the same. I think we can all see that if you're an airline, it's going to be-
Leah Pappas Porner:
Yeah-
Ohio Treasurer Robert Sprague:
a tough road ahead, right? If you're in the hotel industry. I was talking with a financial institution, they said that some of our hotels are at 50% capacity. Which they're thrilled about because they were at 10% earlier in the month. But even at 50%, they're only able to command two thirds of the pricing that they were before the crisis. So, there's a pricing problem along with an occupancy issue. So, there's credit risk out there. Obviously, that's going to be difficult. A lot of our restaurants and some of the retail space and getting that open.
Ohio Treasurer Robert Sprague:
But one of the things that you've seen our financial institutions do, about the community banks and credit unions and our big, large financial players is they've all reduced their credit exposure to commercial real estate. And that's a good thing. And they also have a lot of liquidity that they've built up at the federal reserve. And a lot of reserves at the federal reserve. And the federal reserve has made dramatic changes. Thanks to chairman Jerome Powell. Who's done by the way, a brilliant job of managing this crisis. They've changed a lot of the requirements for banks so now that liquidity, is freed up on their balance sheet. Some of those reserves. So there's a lot of things that are happening behind the scenes. That are more complex and technical that the federal reserve is doing. To make sure that both our large lending institutions and our community banks and financial institutions can respond to this.
Ohio Treasurer Robert Sprague:
And they're doing a great job. The final thing I'll say about this is, we had a terrific program that Congress enacted and that our banking system partners implemented. And it was the PPP program. I can tell you early on, I had my entire team looking at look, "how can we get small business back up and running? Is there a program that we could run out of the treasurer's office using our balance sheet, to help with small business loans?"
Leah Pappas Porner:
Mm-hmm (affirmative).
Ohio Treasurer Robert Sprague:
And quite honestly, Congress came along and they've got a bigger balance sheet than I do. And plus they were offering loan forgiveness. And they'd pay for payroll and mortgage expenses and utilities for eight weeks. And we said well, we can't compete with that. What we'll do is we'll just pile on and make sure that everybody knows about it. And so our regional liaison went out to the chambers and said, "look, you've got to take advantage of this PPP program." And our financial institutions they did such a phenomenal job of getting those applications processed. And where we stand now is the first $350 billion that went just like that. And the small businesses to stand people up. And the second tranche of that PPP loans, there's still about a hundred billion dollars left. And so our financial institutions have just done such a great job, of getting that money into the hands of small businesses that need it. And I've talked to several of them over the last few weeks. A lot of the small businesses were very appreciative of the way that program worked.
Leah Pappas Porner:
Thank you for that. That's very helpful and encouraging to hear about, how strong the position our banks are in. Thank you for that. I'm looking at some of the questions that came in from our audience. And one of them is to ask an update about the Ohio Checkbook Program. Could you tell our listeners a little bit more about that?
Ohio Treasurer Robert Sprague:
Sure, absolutely. The Ohio checkbook is you can literally log on right now. If you weren't listening to the zoom meeting and you could find every expense of the state of Ohio, on that system through last week. So, you can see exactly how we spend our money. And this is going to become more and more important, as our money is extremely valuable at this point. And we got to spend it wisely on taxpayers. And every dollar counts. And so, taxpayers can hold us accountable for that spending through the Ohio checkbook. But that program was fairly expensive for us and the treasurer's office. And so, we began an initiative almost a year and a half ago, to take a look at our expenses in the treasurer's office, and see how we could better serve the taxpayers and reduce our expense profile. And one of them was through reconfiguration of the Ohio checkbook.
Ohio Treasurer Robert Sprague:
And so we're going to have a tremendous cost savings there. We're working with Lt. Governor Husted's Innovative Ohio Program. And I called up Lt. Governor said, "there's no reason for us to have this duplicative service." He said, you're absolutely right. Let's do this." So we're working hand in glove with the OBM. Which is the Office of Budget Management at the state. They've been great partners on this. And we are so excited here in July, we're going to come out with a brand new look for the program. It's got some additional capabilities so that we can add some analytical tools on in the future, which is going to be fantastic. And, for the first time the Ohio checkbook is also going to have the capability to have revenues, in addition to just the expenditure. So, it's a real upgrade of the product. Very excited about it. And you're going to see the new look and feel it here in just a few weeks. It's very, very good. My team has done a great, great job with it.
Blake Beachler:
Very nice, very nice. I want to close out with one additional question. About a year ago I think it was the state operating budget, approved your offices use of its results Ohio. It's a pay-for-success program. Can you just elaborate a little bit on that? Describe the pay-for-success program, and maybe where your office is in developing it.
Ohio Treasurer Robert Sprague:
Absolutely. Thank you for that question. I'm very excited about results Ohio. It is the first of its kind in the country. And what we are doing here is creating unique public private partnership, where the state says, "look, there are certain problems that we need to solve, that we would like to have private industry work on and innovate on. And if you're able to come up with a better idea or a better program than what the state already has, we'll buy it. We'll pay for it." And so the way this works is we all agreed, the governor's office and the General Assembly appropriates some money for a particular type of project. It might be something related to public health. Our public health system probably needs an investment and updates. Some innovation. As we've just seen through the coronavirus epidemic. And so, they come up with an idea, they fund a pilot project.
Ohio Treasurer Robert Sprague:
We all agree on the metrics up front. And at the end of the pilot project, we have a third-party come in and measure the results. And if they get over that hurdle rate for the pilot project, the state agrees to effectively buy that pilot project back from the private group. Typically a nonprofit that has started that and run that. And now, we have a fantastic new program that works better than what we were already doing. So, a way to encourage innovation, involve our private sector partners as well. And really unleashed the ideas of the private sector. And I'll tell you, I think so many times we are focused on the here and now, but we need to look forward to the future. As to what our state can be. We have the ability to innovate. And this results Ohio program allows us to do that in the public policy space.
Ohio Treasurer Robert Sprague:
And I think you're also going to see tremendous opportunity for our state on a go-forward basis. It's really going to be an opportunity for us to gain from the readjustment of supply chains across the world, as we reshore some manufacturing from China. I think we all agree, we can't make our pharmaceuticals there exclusively anymore. And there's going to be opportunity there. And also in our competition with other countries in terms of the airline industry. That's another place that we lead in. In Dayton and in Southwest Ohio. GE has the most advanced airline engine in the world in Ohio. And we do research and development there. So, we are a state of innovation and results Ohio lets us use that innovation to the benefit of the public sector. To help us create new, better programs. Which I think are going to be even more valuable, now that every dollar is going to count in this next budget.
Blake Beachler:
And that's exciting.
Leah Pappas Porner:
Very exciting. Treasurer, thanks so much for your time today. And a special shout out to your staff who worked with us. And I would be remiss if I didn't highlight our good friend, Bill Beagle, and helping us think through how to do this webinar. And I'm looking forward to the time that Bill Beagle makes us cheesecake, because he is probably one of the greatest cheesecake bakers of all time. And so, until we can see each other again face to face and your team, Blake and I just want to say a great thank you to the treasurer's team. And to you treasurer Sprague for your leading the state, and for joining us today. I hope our Calfee friends that are listening, enjoyed the comments and the conversation. We miss you. And look forward to seeing all of you again. Everyone stay safe. Thank you, treasurer Sprague. Thank you to your staff. Blake great seeing you as well.-
Blake Beachler:
You too.
Leah Pappas Porner:
Thank you so much.
Blake Beachler:
Thanks
Ohio Treasurer Robert Sprague:
Thank you Blake. Thanks Leah. Look forward to seeing you soon.
Leah Pappas Porner:
Thank you. Thank you so much. Bye bye everyone.