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Keeley Webster (00:03):
Hi, and welcome to another edition of The Bond Buyer podcast. I’m Keeley Webster, and my guest today is Bryant Jenkins, a managing principal at Sperry Capital. I invited Bryant here today to talk about some of the pressures facing mass transit in the post pandemic era, and particularly Bay Area Rapid Transit, a mass transit system that serves the San Francisco Bay area. Bryant has worked as a municipal advisor for BART for more than a decade. Bryant, you were telling me about the history of working with BART yesterday and how you started out working with them off and on a contract basis before becoming their official outside fa, can you share that story with our listeners?
Bryant Jenkins (00:42):
Oh, certainly. Certainly Keeley. As Keeley mentioned, I work at a boutique financial advisory firm located here in California called Sperry Capital. And the first time I started working for BART, I was living in the BART district, which officially is Alameda Contra Costa and San Francisco counties here in California, and it was 2012. They were looking to do refinancings on some of their outstanding sales tax debt as well as the completion financing for the Oakland Airport connector project, which it was new for BART because it was actually a public private partnership where the contractor designed to build, operate, maintain this cable car, which is different from the rest of BART. But then BART was going to use grants and ultimately sales tax revenue bonds to cover the financing. And after I worked with them in 2012, they were still working on a per transaction basis. So the next time out, and I think the next year, they were looking to issue some general obligation bonds. They had an earthquake safety measure that had passed in 2004 and they were looking to do another transaction with that. And I didn’t get the job, which was disappointing, but I thought it was a great investment and even though I wasn’t their fa, I went and bought some of the bonds and everything just kept on moving forward and I was actually making money on the bonds.
(02:24)
And then they had another procurement. They were looking to do further refundings on their general obligation bond credit as well as on their sales tax in 2015. And we applied and we were fortunate enough to win. And then the only crappy part was I had to go and sell this bond.
Keeley Webster (02:43):
So it wouldn’t be a conflict of interest?
Bryant Jenkins (02:45):
Correct, correct. So then we started doing work both, we finished that transaction, which went pretty well. And then I did one or two small projects for the controller treasurer at that time, a lady by the name of Rose Poi. And there’s a point where she said, you know what? I know we’ve been hiring FAS on a per transaction basis, but I think it’s better for us to have someone involved from a long-term perspective. And when they issued an RFP for that in 2016, we were fortunate enough to win. And then we continue to help them basically refine what later became Measure RR, which is a three and a half billion dollars unlimited, unlimited, a valorem property tax measure that went before voters in the three BART counties in 2016, which passed by over 70% of the vote like in California in order to at least currently you need at least two thirds super majority to pass. And it exceeded that, which was very great. And then of course the next part is like, Hey, you’ve got three and a half billion dollars, how quickly are you planning to spend this down? And so from that point on, we’ve been helping them both with the completion of the measure aa, earthquake safety geo bonds, the measure RR system system stability bonds, as well as on their sales tax. We’ve also helped them both with Refinancings and they financed an administrative headquarters a few years back.
Keeley Webster (04:33):
So a lot of the talk about why BART is not doing as well as say Metro is that it’s more farebox dependent rather than having a property tax to draw on. So can you explain, you just ticked off three different areas that they had financing through property tax or sales tax. Was it just did they expire or were they just kind of like one-off for projects or?
Bryant Jenkins (05:01):
No, I think it’s helpful just to get a little bit of context. I think one is Bart had before the pandemic, BART was one of the highest farebox ratio transit agencies in the country. Their farebox ratio was nearing 70%, I think Caltrain, which is the local commuter rail that goes in San Francisco, San Mateo and Santa Clara counties basically up the spine of the peninsula up to San Francisco. That was the only major transit agency that had a higher farebox revenue ratio. And what I mean by that is the percentage of farebox revenues as a percentage of their operating expenses for BART, basically 60%, 65% of their operating expenses were covered by their farebox revenues, which meant they had enough money coming in from their sales tax revenue, sales tax revenues and other sources. They were able to make allocations to cover other major maintenance projects or other capital projects. And they did this pretty consistently back in the late 2010s when the pandemic hit. I think you alluded to this before, Keely BART is situated to be a commuter rail to get people in and out of San Francisco. The San Francisco has not returned to work the way other metropolitan areas around the country have. I think Castle Systems does a return to work indicator, and I think most places around the country are probably above or at 50% in terms of on daily occupancy and San Francisco’s still at the mid forties. We’ve sort of plateaued.
Keeley Webster (06:58):
I want to dive into that with you a little bit deeper, just how San Francisco’s doing in terms of office occupancy a little bit later. But I had a follow-up question when you were talking about the fair box ratio, and I think you said BART was 60 to 70%, are there other, I mean it seems like that’s always been high compared to other mass transit agencies in the country. Are there others across the country that are experienced the same level of pain that BART is right now?
Bryant Jenkins (07:27):
It Is. I mean that that’s very accurate. I mean, I think people that were dependent on farebox revenues given the change from the pandemic, from the fact that I think hybrid work and remote work are here to stay, that’s really affected a lot of these transit agencies. It’s affected their funding model, their business model. And I think at the beginning of the pandemic, I think for everybody’s sake, people thought, okay, this is not something that is going to radically change life. We’ll get back to what we thought was the new normal or get back to 2019 lifestyle within a few weeks. And remember it kept on going a few weeks, a few weeks, and then all of a sudden it’s like end of 20, 20, 20 21. It’s like, well, we’re still very productive as a country, as society and people enjoy not commuting people and people are allowing their employees to not necessarily go into work.
(08:26)
I think now the people aren’t necessarily going to full remote, but hybrid work, and when I say hybrid work, I mean basically people working from home on let’s say two days a week, usually Mondays or Fridays, and then going to the office, some combination like two or three days a week. And that’s something that I think it’s still evolving certainly, but that’s going on. And that seriously affected Bart to the point where I think right now they’re at about 30, 40% of what they were pre pandemic on weekdays. But it’s sort of interesting that their weekend, their choice customers, people are taking that about 70% of what pre pandemic levels were. And just to give people a little bit of context, the Bay Area’s got seven and a half million people and pre pandemic Bart on average carried about 420,000 people on a given day. And now BART is carrying, I think 160,000 people, 170,000
Keeley Webster (09:35):
Have other comparable mass transit systems across the country, experienced it. It seems like, my understanding is that for whatever reason, maybe because Northern California has always been so kind of tech friendly, it seems like people are going back to the office at a greater rate than they are in San Francisco. I mean, is that your comprehension of it?
Bryant Jenkins (09:56):
That’s true. I mean, it is being felt in various ways because for example, LA Metro, which is a county transportation agency that operates much of the transit in Los Angeles County, which has 10 million people, they’ve seen a greater percentage of their pre pandemic ridership come back. Again, that’s a predominantly bus agency, which is doing a lot of rail expansion now, but they’re at like 60, 70% of their pre pandemic ridership for their overall system. But you also have to put in context, they have a roughly 8 billion budget and only 300 million is generated by farebox revenues and their farebox revenue before the pandemic was sort of trending in the barely double digits, like 10%, 11%.
Keeley Webster (10:52):
So basically Metro, they’re not that dependent on farebox anyway, so having their numbers come back wasn’t as significant for them as it is for BART.
Bryant Jenkins (11:03):
Correct, correct. I think for BART, I think one of the issues is transitioning their funding model, which as you can imagine, it’s difficult for, if BART was a 10 person business, that would be difficult. Nonetheless, an enterprise that services and is really critical not only in the three bar counties, but it also operates in San Mateo County and Santa Clara County here in the Bay Area. It covers the majority of that seven and a half population, seven and a half million population in the Bay Area. So it’s really important and yet it has to change on the fly.
Keeley Webster (11:47):
I’ve heard things about there’ve been a lot of concerns about security and crime and homeless people hopping over the fair box and not paying and writing, and there’s just been a lot of concern about safety issues around BART. I mean, do you feel like they’re solving those problems or do you feel like they really need to put more energy into that to get people back?
Bryant Jenkins (12:15):
I think that they’re certainly making moves in that direction, and certainly ridership certainly appreciates that. I think they are looking for additional police officers for BART PD as well as they have unarmed ambassadors, which is a program that basically helps guide people both within stations and also on the trains and seeks to basically curtail certain incidents on the trains. I mean, look, one of the issues here, and I think this is being felt by any major urban transit agency is homelessness has been, I think it has been much more visible given the lack of folks going downtowns, whether it’s San Francisco or elsewhere in the country. One of the issues is, I mean for BART, BART is a transit agency. It gets people from point A to point B, it’s not a housing agency. And certainly when you consider the context of the region, BART operates like many other important entities here in the Bay Area in multiple counties.
(13:28)
And the issue with homelessness, it doesn’t begin and end at any one county’s border, if you know what I mean. So I think one of the things that’s really, I think, positive for BART is they have moved forward with a new contract for Fair Gates to basically make it a little bit more difficult for folks to evade the turnstile and jump the turnstile. I think these fair gates are going to look more similar to, I think LA Metro has some of these and some of their stations and a few other folks do. I mean, it’s really difficult to jump through. That has been a problem, or at least it’s certainly been identified as a problem. And I think one of the other issues has been what they call station hardening, which they’ve tried to do with their Measure RR GO bond program, basically making it so that these stations, when after the BART system closes at midnight, they’re able to close and not have people sleeping inside.
Keeley Webster (14:31):
So now we’re going to pause for a commercial break and we’re back. So Brian, one of the things I’d wanted to ask you and I wanted to get into was just what has been happening with all the tech layoffs in San Francisco. There’s been a lot discussion about whether or not San Francisco will return to its former glory, and you and I had talked a little bit about how there’s always been a lot of volatility. So what are your thoughts on that and how does that play out for BART?
Bryant Jenkins (15:08):
I think I’m cautiously optimistic probably because not only has historically San Francisco been a boom bust city, I mean going back all the way to the Gold Rush, but when I first came to San Francisco in the late 1990s, we’re in the midst of the first.com boom, and I saw what changed in the region, but then I’ve also been here as part of the second and third.com booms. And I think certainly from my perspective, it feels that we are still, thankfully in the Bay Area, we’re still such a critical network of movers and shakers in technology, in the innovation space in biotech that people are still attracted to come here. Now, having said that, you also have to indicate, look, we have real issues in downtown San Francisco that have to be fixed. We have significant issues with cost of living in the region that make it prohibitive for a lot of people who just come out of school or want to come and move here. And those problems aren’t going to be solved overnight.
Keeley Webster (16:17):
Have you heard any discussion from some of the office owners talking about maybe the solutions, what happened in downtown Los Angeles, at least in the arts district? Well, actually all over downtown Los Angeles, they’d had some vacant office buildings, and it was actually before the crash, they converted them to Loft to loft space. And has there been any talk about that or is everybody more betting on people coming back to the office and in that office space, just staying office?
Bryant Jenkins (16:56):
I think people are certainly pursuing a few office to residential conversions, but I think that’s sort of at the margin. I don’t think that’s going to happen for most office buildings for a variety of reasons. I mean, most likely just the high cost. I mean, I think part of it is, and thankfully I think the politicians in the region, certainly in San Francisco are beginning to understand that previously they could charge business taxes, license fees for businesses to be in San Francisco and downtown San Francisco that were probably multiples of anywhere else in the region. And probably compared to downtown San Jose, which mine you, is a larger city than San Francisco, I think it was about nine or 10 times the cost which they were able to accomplish because the demand was such that people wanted to be located in downtown San Francisco. That’s completely changed, and I think they’re definitely starting to adapt to that, which they need to. But the issue for BART and other mass transit agencies like BART here in Northern California like SF Muni, is that that change isn’t happening as quickly as they would like. And because of that, they need effectively stop gap funding so that they’re able to change their business model, hopefully reduce operating expenses as well as I know a lot of transit agencies and operators here in the Bay Area are looking to regional potential regional transportation measure in 2026.
Keeley Webster (18:29):
What are your thoughts on the, I think it was $5.1 billion in transportation funding for operations that was approved by state lawmakers. Do you think it’s enough?
Bryant Jenkins (18:43):
No, no. Mean, my thoughts are almost irrelevant, but it’s more of the $5.1 billion. It was really, there was 4 billion of a capital program, the transit and inner city, any sort of rail capital program and operators are able to flex those funds for operations. The problem is most of the projects that those funds are on, like the BART Silicon Valley extension, which actually is built by Santa Clara VTA, and it will be operated by BART when it goes on, but it’s still under construction, if they remove those funds, then they’re missing local match funds, which means they can’t move forward because they’re not going to be eligible for the federal funds. So it gets to be a Catch 22 where you can move forward and use those funds. But there’ve been whatever projects you’re working on, those are effectively dead or at least dead for a while.
(19:51)
And then the remaining 1.1 billion is being distributed via population. And one thing for, I think your listeners is California’s got about 40 million people, and Jim Martin, one of my colleagues at Sperry always tells me that half of our state lives south of Wilshire Boulevard in Los Angeles. So out of that 1.1 billion over four years, the northern California will get about 400 million over four years. So if you think that’s a hundred million dollars a year, and Bart, for example, is saying that in fiscal year 25, they’re looking at a $93 million shortfall. That’s not enough. It wouldn’t be, it would barely be enough for just Bart, much less BART, San Francisco Muni, AC Transit, and a whole slew of other operators here in Northern California. Does that make sense?
Keeley Webster (20:43):
Yes, yes, it does. I guess also, so you mentioned that, so what keeps Spark going if that’s not enough money, and instead of BART just going out and going to voters, they’re talking about working with other agencies to do kind of a joint proposition that would benefit all of them, but it seems like that pushes it out even further, and it usually takes, I should ask you, I mean, you’re a financial advisor and you’ve worked on a lot of these measures. How long does it usually take from the first idea of let’s go out for a bond measure to the fact to when it’s actually before voters? I mean, there’s polling and
Bryant Jenkins (21:30):
Yeah, one thing that’s helpful just to understand is for many presidential election years, like 2024, people have already identified it for let’s say, high profile revenue measures, whether it’s on the state, side, regional side, you name it. For example, here in the Bay Area, we’ve been, I think the folks in the Bay Area, like the Bay Area Council, which is representative of a lot of businesses, metropolitan Transportation Commission, which is the Metropolitan Planning Organization in the nine County Bay area. They are looking forward to a affordable housing measure in 2024, really to help spur and facilitate a lot of affordable housing development that need. It’s not, again, this is one of those things where we’ve got significant needs in Northern California and throughout California, and one of those is having affordable housing, having workforce housing, because increasingly, and I see almost every other day, I think yesterday the article was that there’s a cadre of people who work in the San Francisco Police Department who live not just in surrounding counties, but who live in North Carolina, Texas, Arizona, and it’s cheaper for them to commute via hang out in the station house for a week, and then when they get their week or a few days off, go back, fly back, which is, I mean, that’s nuts.
(23:00)
That’s insane.
Keeley Webster (23:01):
That’s really bad for the environment too.
Bryant Jenkins (23:03):
Yeah. Yeah. So I think, well, that’s just the point I want to make on revenue measures is it takes a while, especially when you consider that the voting threshold is two thirds for most special taxes, taxes that people are at the legislature, I think looking to reduce that, whether to 55% or utilize what they call a citizens initiative only requires 50%. But going back to the issue with BART.
Keeley Webster (23:32):
Wait a minute. So I thought if the state legislature wants to put something on the ballot, they have to have a two third approval. But in terms of once it goes on the ballot, I mean, some of them have a majority vote and some of them are two thirds is the one that BART’s looking at, would that be a two thirds majority? Is that what you’re saying?
Bryant Jenkins (23:53):
Yeah, it would be a specific tax. I mean, basically everything in California for taxes and fees is dictated by Prop two 18, prop 13, Prop 26. So
Keeley Webster (24:04):
Yeah, I know it’s pretty complicated,
Bryant Jenkins (24:07):
But just going back to BART, everyone realizes that amount that was provided in the transportation budget trailer bill isn’t enough, and that’s why Sen. Scott Wiener put forth SSB 5 32 to basically put an additional dollar 50 on the tolls of the seven state owned bridges here in the Bay Area for a temporary period of time for five years. And obviously that has potential implication.
Keeley Webster (24:36):
How does that help Bart though
Bryant Jenkins (24:37):
That amount of money would be enough to probably take BART and other transit operators at least through 2026, basically,
Keeley Webster (24:46):
So that money doesn’t just go to BART, it’s going to be split between everybody?
Bryant Jenkins (24:51):
Yes.
Keeley Webster (24:52):
Oh, okay. Yeah. Okay.
Bryant Jenkins (24:54):
So I think for everybody in the region, it’s basically enough money where if you do your operational expense reductions, you should be at least in position where if the revenue measure in 26 is successful for the region, that that would then be able to allow people to pivot and change their business model.
Keeley Webster (25:14):
So you’d mentioned that s and p had changed its criteria a few years back, which affected Bart’s rating and that the agency and that BART had decided not to go with s and p on bond sales going forward. Can you discuss the thinking around that and just what’s the difference, what’s different about how Moody’s and Fitch rate BART as opposed to S&P?
Bryant Jenkins (25:35):
Yeah, and I guess just for context, a few years ago, SS and P came out with a new rating methodology for what they call not-for-profit transportation infrastructure enterprises, or they call it the tie methodology. And the way that methodology, the intent was to be more holistic and to consider not just the credit to the credit worthiness of the revenue pledge, but also the operations of the entity. And certainly when we preface this earlier, BART is definitely suffering right now just in terms of how many people they’re helping, they’re transporting on a daily basis. But that being said, the actual credit is a unlimited advalorum property tax general obligation bond. And so in August of 2020, for example, BART issued $700 million of general obligation bonds and S&P and Moody’s at the time both gave BART a AAA rating when sold debt in November of 2020.
(26:51)
S&P changed their methodology, and part of their methodology basically went for this more holistic approach. Well, the impact of that was effectively to give BART and other entities that rely on property taxes a downgrade. It was not viewed as positively as other revenue streams. And I don’t know how much of that is from the issues that happened with Detroit in bankruptcy back in the early 2010s, but it sounded sort of tone deaf for me because the credit itself is the same credit as unlimited valor property tax that the three BART counties offer, which is rated AAA by S&P. So there was this sort of cognitive dissonance of the bonds getting rated aa, and more recently S&P had a further downgrade to a plus. And I think the issue is when you look and see what the market has done, what investors trade BART’s GOs, that has not changed at all. And also in response after that change in methodology, the district decided not to use s and p on their 2022 a debt issuance of $700 million, and they used Fitch and Moody’s, and they got AAAs from both. And they’re still rated AAA at both of those.
Keeley Webster (28:26):
But S&P, even though s and p’s underlying rating for the GOs is a plus, I mean it does rate BART AA-plus on it sales tax bonds.
Bryant Jenkins (28:37):
Correct. Well, that’s a different methodology though. Keely, that’s the priority lean methodology, which incorporates it’s a little bit more favorable to BART, and BART still uses that S&P rating, but it’s just, I think part of the issue for us is it feels not just feels it, it is inconsistent. And when you look at how BART and other property tax transportation enterprises like Port of Seattle were treated in that methodology revision, it doesn’t make sense because at some level, if the BART credit, which encompasses three counties is rated at a plus and each individual county is AAA, but the credit’s the same, BART doesn’t touch the GO funds that come from San Francisco County and Contra Costa County at all. It doesn’t make a lot of sense.
Keeley Webster (29:36):
I think you described it as kind of like a lockbox system in terms of the comes in and it directly goes to pay the bonds. Is that right?
Bryant Jenkins (29:47):
Per state of California law, it can only be used to pay debt service. So it’s an interesting position from S&P, and I mean, I sort of view it as I understand from the perspective of they need to rate an entire category or entire sector, but it does feel that for transportation entities that have non-operating related revenue streams, in this case, an a valorem property tax that’s unlimited. It does not make sense.
Keeley Webster (30:23):
Do you think the payments, BART’s bond payments are at risk given its current struggles?
Bryant Jenkins (30:29):
No. No, not at all. Tax. The geo tax rate gets calculated by BART. They provide those tax rates to the three counties, Contra Costa, Alameda and San Francisco. Those just like every other ad valorum property tax, whether for the smallest school district or the county, it gets put on the property tax bill. And the delinquency rate right now is below 1% in the district. And I don’t really see an issue. And there’s a reason why Fitch and Moody’s have AAAs with BART’s GOs.
Keeley Webster (31:04):
What does Barts, what do you think Bart does in terms of operations? What do you think needs to be done? I mean, do you think it needs to be right sized? Do you think we’re just really not going to see traffic come back to former levels because everybody likes working at home? Or do you think San Francisco comes back and there’s kind of betting on the office space gets converted to residential and people work from there, but that’s not really going to help bart. So what do you think happens over the next couple of years, both, I guess financially and what BART needs to do on the operations side in order to carry on and continue forward?
Bryant Jenkins (31:49):
I think, I guess it’s sort of twofold. One thing is, and it does go in with I think some of the efforts to both provide more funds for transit. One thing that people in the Bay Area want is more reliable transit, more frequent service, and we have 27 different transit agencies here in the Bay Area. It is better for us to be more integrated together. And that means fair integration. That means wayfinding is, it’s more coordinated. It probably means that some agencies should probably consider consolidation just in the grand scheme of everybody needs to look at both right sizing for post pandemic as well as how can we best deliver the services that we need to provide the commuters here in the Bay Area with our limited resources. And it’s certainly difficult. As I said before, changing your business model on the fly is tough. But I mean, that’s definitely what I think Bart needs to do. And I think just from my perspective, I’m still, I live here in the Bay area, I think like everybody here who lives here and loves it here, I’m counting. I’m betting on downtown San Francisco to improve. I’m betting on the other downtown cores, whether it’s Oakland, Berkeley, heck, even San Jose, to go back to their past brilliance. And I mean, the question for both Bart and I think other entities is what can we do to make that better?
Keeley Webster (33:25):
So that’s all the time that we have for today. Thanks for joining us, Brian. And special thanks to Kevin Parise who did the audio production for this episode. And don’t forget to rate us, review us and subscribe at www.bondbuyer.com/subscribe. For the Bond Buyer, I’m Keeley Webster. Thanks for listening.