Buck Financial Blog

Don’t Shoot Me – I’m only the Drummer

Side-by-Side: The Economic Case For and Against a 25bp Hike

One of Elton John’s great early albums was called “Don’t Shoot Me, I’m Only the Piano Player.”  Well, I play the drums, not the piano, and the current drumbeat in the financial markets is disconcerting.  But please don’t shoot me.  Municipal issuers and public finance professionals are keeping a close watch on Washington ahead of next week’s pivotal FOMC meeting. The debate over whether the Fed will raise rates comes on the heels of persistent core price acceleration and escalating geopolitical energy pressures. While there are compelling short-term arguments on both sides of next week’s decision, looking at the bigger picture reveals a broader trend. At Buck Financial Advisors, the core macro thesis remains unchanged: we are entering a prolonged era of structurally higher inflation and elevated market interest rates. To help contextualize next week’s decision within this long-term trend, below breaks down the defining arguments for and against a rate hike, followed by how it fits (or doesn’t) into the longer-term trends.

Bottom line: two capture stories, not one

Both cases in the table are internally coherent and draw on the same underlying facts — elevated core PCE, breakeven inflation expectations contained longer term but increasing shorter term, a fragile Treasury refinancing picture, deteriorating consumer sentiment, and a synchronized global tightening backdrop. But the decision itself is not a clean signal of which pressure won, because there are two separate, opposite ‘boxed in’ stories available depending on which pressure you think is illegitimate for the Fed to bow to.

Fiscal-pressure capture: holding or cutting under visible fiscal stress — record debt-service costs, an intervention already aimed at capping Treasury yields — risks the perception that the Fed is subordinating its mandate to help finance government debt. Under this story, hiking anyway is the independence signal.

Market-expectations capture: futures and the front end of the curve have likely already priced a high probability of this hike, especially with the ECB having just moved. Deviating from that pricing risks a disorderly repricing across rates, FX, and equities — arguably a faster shock than the hike itself. Under this story, hiking is not independence at all, it is the Fed delivering what markets have already decided for it, and holding — defying priced-in consensus because the data argues for it — would be the actual show of independence.

Buck Financial Advisors’ View

Like so much in the financial press, Wednesday’s decision is, in my view, receiving outsized attention relative to its importance.  The press are like magicians, in my view: holding up the shiny object in one hand to divert your attention from what is going on with the other.  I outline above compelling short-term arguments on both sides just so that, if the Fed doesn’t raise rates Wednesday, you don’t take that as capitulation on its part, though the financial press will certainly say it is.  The bigger picture reveals a broader trend.  As written previously (“Are We Still in Kansas?”), the macro backdrop to a host of things like the cost of construction to interest rates supports increases in both, which I believe will then result in the monetary authorities implementing some sort of yield curve control to bring down interest rates (but not construction costs per se).  That would be consistent with the Fed holding pat on Wednesday.  If they do hold pat, that could mean the fiscal dominance may have begun.

A recent financial piece I read included the statement “It’s not interest rates that matter, it’s interest expense.”  (Grant’s Interest Rate Observer, August 28, 2026 – “Debt is the word unspoken.”) While the Fed sets interest rates, the impact of those rates is that rate multiplied by the stock of debt against which it’s applied. Interest expense is now 19% of Federal revenues and exceeds defense spending (13-14%).  Think about that – we spend more on paying our creditors, including foreign creditors such as China, than we spend on defending ourselves!  Currently, interest expense sits at about 3.2-3.3% of GDP.  That means over half of the fiscal deficit is due to interest expense.  Many sources note that the percent of the US Federal budget (e.g. percent of spending) needed for interest expense is about 14%.  And this is with an economy not in a recession.

Where this lands vis a vis a government’s ability to pay is debt-to-GDP.  When Paul Volker raised interest rates in the early 1980s to fight 1970s inflation, this ratio stood at about 30%.  Today this ratio is about 122%.  You’ve heard the phrase “We’ve mortgaged our future!”  That’s true.  But instead of treating this like a mortgage and getting this ratio down to, say, 60% over the next few decades, our government (responding to the incentives we voters give them) refuses to address this, and it resorts to gimmicks which will not address the long-term issues.

These gimmicks include buying Yen (to stave off Japan selling US Treasuries), increasing to $6 billion the buying off-the-run long-term Treasuries, increasing the Foreign and International Monetary Authorities (FIMA) repo facility (to stave off Japan from selling US Treasuries), and others.  But the most concerning gimmick used to help contain interest expense to me is the Treasury’s concentration of the debt stack towards the short-end of the curve, resulting in the need to finance about $12 trillion per year currently: $10 trillion maturing over the next 12 months plus $2 trillion in current deficit spending.  Next year, that grows with next year’s additional budget deficit.  According to Debt Dashboard, the current average interest rate on outstanding Treasury debt is 3.44% versus 1.48% five years ago.  And, next year that average will be higher, so they will be refinancing more debt into a higher interest rate environment.

In his tour de force “The Price of Time: the True Story of Interest”, Edward Chancellor outlines three ways governments work out of a debt crisis, meaning a situation where a country’s debt servicing costs exceeds its ability to pay the debt (14% of budget, 122% debt-to-GDP, the inevitable recession will make these worse).  These are: 1) outright default, 2) tax increases and spending cuts (currently politically unpalatable), and 3) debasing the currency to service debt with less valuable dollars in the future.  Chancellor shows governments over time have overwhelmingly chosen currency debasement. Currency debasement equals inflation, the same item needing more units of the currency to acquire.  That house you want to buy is the same house it was five years ago, it just needs more dollars to acquire because the seller needs more dollars for the next house, for car repairs, for medical insurance, for whatever.  It’s not like your house is generating increased future cash flows like that of a growing company.  It’s the same house.  Gold is the same 1 oz.

I believe country’s debt and debt servicing costs will be the dominant driver of decisions of policy-makers over the coming few years, and that, like the numerous times before, the easiest political way out of a this is to debase the currency, i.e. inflation. This has begun but is not in full force of where I believe it will ultimately land.  If I’m right, this has implications for you: 1) whenever you might be looking at financing a facility, if your budget allows, consider going out as long as possible on the yield curve when borrowing to finance your facility; and 2) look at adaptive re-use for new facilities versus new construction to make it more affordable, or other strategies that achieve the same result.  In terms of the maturity of your debt, going long now avoids potentially higher interest rates in the future.  And, if future financial repression occurs (QE, yield curve control), you could refinance in that environment if the rate is lower because inflation will really be in force at that time, so you will repay debt with cheaper dollars in the future.

So, whatever happens on Wednesday (September 16, 2026) won’t change the big picture.  You are most definitely not in Kansas anymore, and I believe ultimately the politicians will choose financial repression versus spending cuts and revenue increases to allow the debt to be inflated away to a more reasonable level of debt-to-GDP.  This would make financing your facilities more expensive over time.

But, again, don’t shoot me, I’m only the drummer.

This article was prepared strictly as a summary of general macro-economic analysis and represents the long-term market thesis of Buck Financial Advisors LLC as of September 12, 2026. It is intended solely for educational and informational purposes; it does not constitute specific investment advice, a solicitation, or a municipal advisory recommendation regarding the timing, structure, or issuance of any securities transaction. This content has been reviewed and approved in accordance with the firm’s Written Supervisory Procedures (WSP).

In August of 2026, American Preparatory Academies d/b/a Utah Charter Academies (UCA) closed a $71.1 million financing to expand their operations into Salem and Eagle Mountain, as well as fund an auditorium at their West Valley 2 campus.

UCA initially formed in 2003 and currently operates seven schools in Utah serving over 5400 students in K-12. When Eagle Mountain opens it will have eight schools. UCA is a classical, liberal arts charter school dedicated to providing content-rich curriculum and research-based instructional methodologies to allow its students to achieve academic success and to develop good character. It follows the classical education model of the Trivium, respecting the grammatical, logical, and rhetorical phases of learning and development, and applying those principals in the classroom. In addition to a rigorous academic program, which puts UCA among the top schools in Utah for academic results, it offers a full gamet of extracurricular activities including sports, various music programs (chorus, orchestra), and other performing arts. UCA is managed by American Preparatory Schools, which his responsible for the curriculum, hiring of personnel, and capital plans including real estate expansion.

The West Valley 2 expansion will provide 11 additional classrooms and a performing arts auditorium. The Salem expansion funded the purchase of adjacent land and will also fund construction of a building and gym that will expand the school from K-9 to K-12, with the new facility housing grades 7-12. The Eagle Mountain expansion includes the purchase of land and the construction of the initial facility for 630 students in grades K-6.

Buck Financial Advisors LLC served as municipal advisor to UCA for the transaction. Robert W Baird served as underwriter, Chapman & Cutler as bond counsel, Farnsworth Johnson as borrower’s counsel, Quarles & Brady LLP as underwriter’s counsel, and Zions Public Finance, Inc. as municipal advisor to the issuer. With this issue, Buck Financial has closed just under $7 billion in charter school financings.

Congratulations to the students, staff and families of Utah Charter Academies.

As of December 2023, Buck Financial Advisors has completed over $6 billion in charter school financings, exceeding 225 individual transactions in 18 different states.  This is a little more than two years since Buck Financial crossed the $5 billion mark in 2021.  Buck Financial was formed in 2001 to specialize in charter school facility finance.

Sources of financing used by Buck Financial Advisors has varied from fixed-rate, fully amortizing bonds to New Markets Tax Credits, bank loans, private loans, CDFI and other mission-driven sources, subordinate debt, soft put-bonds, and others sources that in my advanced age I simply can’t remember.  That’s the beauty being an independent advisor and charter school specialist – you aren’t married to any one source of financing and you have the relationships to fit the type of financing to the client’s need.

Charter schools are facing so many hurdles: political attacks, efforts to limit their growth, the pandemic, and facility cost inflation that is unprecedented.  Yet, you all persevere and thrive, finding ways to square the circles in creative and adaptive ways that your traditional public school brethren simply can’t match. I like what I do, and like being a small part of some of what is good about this country: the combined effort to change the life trajectory of so many kids through access to a quality education.

Client relationships often exceed 10 years, and exceed 15-years in some cases, which is a testament to the quality of service provided by Buck Financial Advisors.  I am truly grateful to all clients who have made this possible, as well as the other professionals and colleagues with whom I’ve worked with along the way.  I’ve gotten to know some simply incredible people who toil and sweat to make the lives of so many students and families better, whose efforts and attitudes are truly humbling.  In the end, its those personal relationships and the number of quality charter school seats resulting from these collective efforts that truly matter.  Looking forward continuing to work with all of you, and thank you, again, for working together all these years.

In November and December 2023, IPS Enterprises, Inc. closed two capital markets issues in Florida.  One of the issues was a $33MM new money issue to acquire and renovate a call-center in Lakeland, Florida to house IDEA Florida’s 3rd campus in the greater Tampa area.  The second issue totaled $87MM and was used to: 1) refinance senior debt on four IDEA Florida campuses in Jacksonville and Tampa, 2) refinance a portion of debt on properties no longer planned to be developed, and 3) provide working capital for various capital uses.  The Lakeland financing was issued through the newly-formed Capital Projects Finance Authority, and the refinancing was issued through the Capital Trust Authority.

IDEA Florida, Inc. currently operates four campuses in Florida, two in Jacksonville and two in Tampa, with construction ongoing to open two more campuses in Fall 2025.  Each IDEA Florida schools is designated as a “School of Hope” under a special Florida law passed to encourage high-performing operators to open and operate schools near persistently low-performing traditional public schools.

IPS Enterprises, Inc. was formed by IDEA Public Schools for the purpose of providing central office services to IDEA schools outside of Texas, and to also lease facilities to non-Texas IDEA schools.  IPS currently serves IDEA campuses in Florida, Louisiana, and Ohio, and has completed over $450 million in facility financings and refinancings since 2017.

Buck Financial Advisors LLC served as Financial Advisors to IPS on both transactions.  Morgan Stanley served as underwriter.  Hunton Andrews Kurth served as bond counsel and borrower’s counsel.  Orrick Herrington & Sutcliffe served as underwriter’s counsel on both issues, and Quarles & Brady served as Co-underwriter’s counsel on the refunding issue.  Regions Bank served as Trustee.

Congratulations to IPS, IDEA Florida, and to the students and families they serve.

In February 2024, BASIS Texas Charter Schools, Inc. (BTX) closed on a $30 million revolving Line of Credit.  BTX is a growing CMO which often needs to be in a position to take down land and/or begin the construction process in between planned capital market transactions.  This line of credit, issued by Texas Capital Bank, will allow BTX to begin the ever-longer construction timelines and still be able to open schools on time.  It was issued on parity with other obligations under its Texas Master Trust Indenture, which obligations now total about $170 million.

BTX is a CMO operating 14 schools in three Texas metropolitan areas, enrolling over 6,000 students.  It offers a STEM-infused college preparatory curriculum endeavoring to achieve world-class academic excellence.

Buck Financial Advisors served as Financial Advisor and Independent Management Consultant.  Shulman, Lopez, Hoffer and Adelstein LLP served as borrower’s counsel, Jackson Walker LLP served as bank counsel, BOK Financial NA as Trustee, and Clearwater Ventures as Owner’s Representative.  Congratulations to Andy, Andrea, and all the folks at BTX.

On November 8, 2022, I posted the piece  called “Are we Still in Kansas?”  As almost a year has gone by, I thought a look-back might be worthwhile.

In that piece, I wrote, among other things:

” … some math to consider.  Under the recent QE program, the Fed was buying about $1T in US Treasury securities per year, and about $500B mortgage-backed securities.  The 2022 fiscal deficit was $1.4T. From 2020-2022 the fiscal deficits have totaled about $7.5T and the Fed has net funded over $4T of that, monetizing $4T of debt.  So, the Fed has been the marginal buyer of the majority of the increase in US Treasury supply since before the pandemic. To be sure, we have seen a run-up in Treasury yields in 2022 as QE stopped and QT began, all while the deficit ran to $1.4T in 2022.  But going forward, the Fed process is reversing (remember, year-to-date the rundown of the Treasury General Account has completely offset QT so far).  While the fiscal deficit for 2023 is forecast to lower to “only” $900B (optimistic), the Fed is SELLING over $1T per year of US Treasury securities under the Quantitative Tightening regime instead of buying that $900B as it would have under QE.

So, there is a marginal increase in supply of US Treasuries in fiscal 2023 of over $2T ($900B deficit + > $1T QT) versus 2022, which has to be absorbed somehow.  We have lost the largest buyer of US Treasury securities for the last several years in the form of the Fed.  We have also lost the second largest buyer of US Treasuries in the form of foreign central banks.   Looking further out, by 2032 the CBO forecast is for an AVERAGE of $1.6T in federal deficits per year, adding another $14-16T or so of debt to be absorbed.  So, who is going to buy that increased supply of US Treasuries next year and over the next decade, and at what interest rate, if not the Fed?  (A lot more to discuss here but that’s for another day).”

Fast forward to October 2023, the $900B deficit forecast from that time period was indeed optimistic, having nearly doubled to $1.7T.  That means the market has to absorb that $1.7T PLUS the $1T of QT from the Fed.  A total of $2.7T of Treasuries represents 10% of GDP roughly.  The question remains: who is going to buy those Treasuries, and what is the implication for the level of interest rates needed to clear them?

As I write, the US 10-Year treasury flirted with 5% despite two regional wars, meaning the flight to quality isn’t behaving consistently with historical behavior.  We may be seeing a bid today (10/23/23) as hedge fund manager Bill Ackman unwinds his funds’ bearish bets on USTs.   There is more chatter that the Fed is done raising rates.  But, that doesn’t change the overall fact that interest rates on USTs have zoomed past 15-year highs over the last 4-6 weeks!

As it relates to who is going to buy them, we know (or greatly suspect) its not the Fed, we know its not the Bank of Japan, we know its not the PBOC, and we know that banks are less interested in UST due to current portfolio losses and due to proposed increased capital requirements to hold treasuries.  These are the four largest buyers of UST going back a while.  Is Bill Ackman going to buy UST or just unwind his shorts!

Does the loss of historical largest buyers of UST help explain the recent run-up in UST yields despite two regional wars?  It does to me.  What does it mean for the future direction of interest rates?  Are there other potential flashpoints in the world that could cause the typical flight to quality?  Sure: oil-rich Azerbaijan’s recent conflict with Armenia-leaning Nagorno-Karabach could expand to Armenia itself.  Serbia and Kosovo are potentially at it again.  Not to mention Taiwan.  However, those seem more like “trades” in UST to me than true investment, though if that happens this trade could run some amount of time, to be sure – there is still a lot of money swimming around as discussed below.  To me, true investment will be driven more by the disparity between the $2.7T (or more) annual supply of UST and the world economy’s demand for that amount.

Consider the following:

• $7.6T, or 31% of UST debt, must be rolled over next year.  We need current investors in those to re-up or the amount needed for new buyers will increase over the $2.7T mentioned above.
• The CBO assumed an average 3.8% interest rate in its July 2023 forecast, and 10-year yields are 1% higher than that.  Short-term rates exceed 5%, so as that $7.6T of debt gets rolled over, the average interest rate on the outstanding UST debt will greatly exceed the July 2023 CBO forecast.
• In the current fiscal year, interest expense in the Federal budget will exceed $800B, up more than double from 2021’s $350B number.
• On current trends, interest expense will exceed Defense spending in 2025 and Medicare spending in 2026.
• The US represents 4% of the global population, but represents 40% of global government budget deficits, and 60% of global governments’ current account deficits.  To keep the “show on the road”, to quote Louis Gave, the US must attract “50-60% of the marginal increase in [global] savings year in and year out.”
• In 2022, the US froze Russia’s foreign exchange assets for foreign policy reasons, sending a message to sovereign holders of UST that they might want to consider other investments going forward.  Is that conducive to getting 50-60% of the marginal increase in global savings?

What this all means to me is that the fundamental forces affecting UST yields are going to keep upward pressure on yields so that we can line up enough buyers to invest in UST instead of investing in something else.  Of course, the Fed could decide to re-start their historical asset-buying to protect the federal budget deficit, bringing back the largest buyer of UST over the last 5 years or so in the process.  As I wrote in last year’s post: Will we return to Kansas at some point?  Maybe, perhaps even probably.  At some point, it would not be surprising that the Fed will have to lower interest rates and resort to again buying assets.”

If (or when) the Fed does this, it will increase the money supply, which should be expected to have the impact on prices that we’ve seen over the last few years, i.e. inflation should be expected to re-appear instead of prices continuing moderate.  To date, the Fed has reduced its balance sheet liabilities to about $7.9T from a peak of about $8.9T.  Money supply as expressed by M2 came down from $21.9T in April 2023 to about $20.8T in September 2023.

On top of those events helping inflation to subside, the Treasury General Account has take another $800B out of the economy by increasing its balance from $40B in May (pre-debt deal) to $840B in October 2023.  That represents eight months of Fed QT in only 4 months.  So, these figures help explain why core inflation has come down.

But, interest expense in the Federal budget is beginning to explode and neither party is demonstrating the onions to do what is needed to restrain spending.  Taxes can only go up so much before adversely affecting GDP.  Right now, Fed liabilities to GDP ratio is still 29%, down from a peak of 35-36%, when historically it has been below 10% and was never above 16% prior to 2008. So, there is still a lot of money in the system. That is why the “last mile” of the fight on inflation is difficult this time.  And, this is even before the Fed may revert back to QE, or even before our politicians get religion and address the deficit (which will hurt GDP in the process, keeping ratios elevated, etc.).

We’re in a tough spot.  What to do?  As I wrote in November 2022: “… 1) increase cash to the extent you can, 2) if you don’t have a working capital line of credit, try to get one, 3) use a higher interest rate for capital planning purposes than you have been, and 4) modify the design of your project to fit within the new cost reality.”

These remain important management considerations as conditions have worsened than outlined when I wrote that.  We’ll get through this.  Focus on why you started your school(s) in the first place, and know that your efforts are worth it and will positively change the trajectory of your students’ lives for years to come.  And as always, let me know if you need to talk something through.

Sorry, Dorothy, but “No!” We’re not in Kansas anymore, but it’s possible we’ll return at some point.

One the best teachers I ever had was my finance professor at the University of Denver, Lou D’Antonio.  A New Yorker who had spent time on the bond trading desk of Salomon Brothers, he was tough.  Because more than just finance, he tried to teach us how to think.  His pet phrase: “When you are spinning your wheels, go back to the definitions.”  Somewhere in those definitions you would find the clue as to how to solve whatever problem you were facing.

Beware, this is somewhat of a lengthy read.  For those who want to cut to the chase: 1) increase cash to the extent you can, 2) if you don’t have a working capital line of credit, try to get one, 3) use a higher interest rate for capital planning purposes than you have been, and 4) modify the design of your project to fit within the new cost reality.  But, if you can spare 15 minutes, I think you’ll get some interesting takes on important subjects that really will affect you.

So, what problems are the charter sector collectively facing?  There are numerous, to be sure, but as a financial advisor helping schools to finance facilities, the problem I want to define is how schools need to adapt financially to what appears to be, for the near term anyway and possibly longer, a new economic environment.  What is this new economic environment?  It’s one where the Fed won’t have your back as it has for more than a decade.

There are some of you reading this who have never known anything in your professional lives other than the Fed “Put” or Quantitative Easing (and if you didn’t get the “Dorothy” reference above, that’s definitely the case.  Google “No place like home”).  Stock market wobble?  Fed response: lower short-term interest rates, increase credit!  Dot-com stock bubble burst?  Fed response: lower short-term interest rates, increase credit.  Housing bubble collapse?  Fed response: lower short-term interest rates and buy mortgage-backed assets, also lowering long-term interest rates, and really increasing credit!  Stock market fall in response to an attempt to normalize interest rates (2018)?  Fed response: back to QE.  For over three decades, going back to Alan Greenspan, every time there was some sort of financial turbulence, the Fed came to the rescue with actions that increased the liquidity in the system and the amount of debt in the economy.  This has accelerated since the financial crisis of 2008.  And, their policy response was always lopsided – it takes much longer to tighten than it does to ease.  Much, much longer!

Ben Bernanke just recently (2022) won a Nobel Prize in economics for his reaction to the 2008 Great Financial Crisis, under which the Fed not only lowered its interest rate to zero but also ballooned the balance sheet of the Federal Reserve from less than $1T to over $2T in just 3 months, from September to December 2008, and growing thereafter to over $4T by the end of 2013.  His response to the 2007-2009 financial crisis stayed in place until the end of 2014, five years after the crisis itself!  I remain in disbelief at this award: the top prize in economics was being given to a person who reacted to a financial crisis with the “Hair of the Dog” remedy.  Like so many, the members of the Nobel committee ignored any analysis of what is causing these increasingly frequent financial crises to which the Fed was reacting.  Apparently the committee was spinning its wheels as we used to in Professor D’Antonio’s class, believing that the 2007 housing bubble just showed up out of nowhere, much like Bernanke assumed in his research on the Fed’s reaction to the 1929 stock market crash –  the crash just happened!  People just suddenly stopped buying anything, for no reason.

Well, these things don’t just happen!  They are created by: 1) flawed human judgement and a tendency to overdo things (madness of crowds, FOMO, etc.), along with 2) monetary policy that has fostered moral hazard for those flawed humans and created asset and credit bubbles.  For the last three-plus decades, policymakers have reacted to every problem from whatever bubble by creating more liquidity, and more low-cost credit, which in turn fuels more bubbles.  There is plenty of research out there which you can tap if you are interested, but to quickly point to some examples, just try and digest the following.  In late 2021 there was over $17T in global debt that yielded NEGATIVE INTEREST RATES.  The prices of some bonds were bid up so high that lenders paid borrowers for the privilege of lending them money, completely ignoring the time value of money, let alone credit risk!  Additionally, the Fed was buying over $100B of securities per month, increasing M2 by same, up until March of 2022.  This included mortgage-backed securities at a time when the inflation rate had already gone through 7% by the end of 2021 and prices of homes were already unaffordable to most of the population. Whisky Tango Foxtrot!!  A non-fungible token (NFT) sold for $65 million last year.  (Challenge – what are some creative phrases the acronym NFT could stand for in that circumstance?)   Money supply in the form of M2 has increased in two years by 41%, from $15.4T to $21.7T, from the beginning of 2020 to the beginning of 2022.  It was $7.1T in 2007, fifteen years ago, one third the current level.  We have tripled the money supply in the economy in only fifteen years, and increased it by almost the 2007 amount in just two years since 2020!

Policy makers, in their reactions to various crises, have purposely taken the return of holding cash to zero, and taken short-term borrowing rates to zero (via Fed Funds and T-bills).  They have both incentivized and provided the liquidity for the taking on of more debt to speculate in riskier assets in order to make any sort of nominal return (Liability-driven investments, anyone?).  And what eventually happens? People lose the sense of risk they are taking on because, Hey, the central bank has my back!  It’s privatized profits but socialized losses!  It’s like those looters we’ve seen recently, grabbing anything in sight because they think there is no cost to doing so, but in the process driving out businesses that serve their communities.  The Fed essentially made money have no cost (and no return), and people reacted by borrowing gobs of it to invest in government-sponsored irrational exuberance.  This misallocation of resources hurts the economy – I mean what does a $65 million NFT really do for the economy?  Result: creation of asset bubbles and an ever-growing pile of debt!

I read in Roubini’s new book that in 1999, global debt stood at 2.2x global GDP (note: that level was already inflated by central bank policies versus levels from previous decades).  It then increased to 3.2x in 2019 (an increase in debt of 100% of global GDP in 20 years), and 3.5x after the Covid pandemic.  For advanced economies (using the term “advanced” loosely), the ratio was 4.2x in 2019 BEFORE the pandemic.  For the United States, our Federal debt-to-GDP was 107% pre-Covid, went to 132% last year, and now stands at 121% (after the run-down by $1T of the Treasury General Account, which has to date completely offset the impact of the Fed’s QT – but I digress). Total debt of households, non-financial corporations, non-profits, and governments (including Federal) totaled 302% of GDP at the end of 2021 (3x GDP).  Household credit card debt just increased since a year ago (Oct 2021) at the fastest pace in 15 years, reaching a record $16.5T.  So much for those pandemic savings.  We are absolutely awash in debt, and I just don’t know how that can ultimately be a good thing. (If you are a proponent of Modern Monetary Theory and want to joust, bring it on!)

And as they always have, eventually the bubbles created by all that credit will burst!  And what has the Fed usually done in response?  Because of the ever-growing pile of liabilities which the Fed helped create, it has had to use the Hair of the Dog remedy by either lowering interest rates (if they were not already at zero) or buying more assets, including the debt of corporations rated below investment grade, to increase liquidity and incentivize taking on more debt.  And as noted, this is all some of you have ever known your entire work lives.  And, it’s called a Debt Trap.  We’re caught in this trap (“and we can’t walk out” – name that singer)!

And for years, the charter school finance industry benefitted from this situation as much as we could.  Borrowing on a long-term basis for entities who could be put out of business by a change in political winds at interest rates in the 3% range, sometimes in the 2% range, was commonplace.  Taking advantage of banks’ liquidity to utilize shorter-term debt at favorable terms for schools with limited direct operating history – been there, done that.  But, things are changing.  Why?  Inflation.

For many reasons I won’t go into here (but would be happy to talk to you about), we are now facing a level of inflation that most of you haven’t seen in your lifetimes.  I will only say that, it turns out that when you create in less than two years 35-40% of all the dollars outstanding, that increase in the money supply can end up leaving the financial economy (stocks, bonds, real estate) and entering the real economy (groceries, restaurants, electrical gear boxes, subcontractors, railroad workers, airline pilots).  Due to factors of its own making, the Fed now has to address this or face a potentially fatal loss of credibility.  And losing Fed cred would hurt everyone.

The Fed is both raising interest rates and, VERY IMPORTANTLY but little discussed, is also taking liquidity out of the system and reducing the size of its balance sheet in order to combat inflation.  It is that last process which I am most concerned about having a medium-term impact on the cost of financing facilities, possibly longer.  And that is because I am going back to the definitions like I was taught by Professor D’Antonio.

Many very smart people are forecasting long-term interest rates to decrease from here due to the likelihood that we enter into a recession in 2023.  Typically, that has been what has happened, and recently the US 10-year Treasury rates have declined from 4.3% to 3.7% (predicated on many things like a downtrend in the US Dollar, but down 60 bps nonetheless).  And, the US Dollar still is the world’s reserve currency and the basis for most international transactions, so demand for it remains strong.  But one thing is different this time.  This time the Fed is tightening going into a recession when usually it eases going into a recession.  It has never tightened going into a recession, I am told.  Regardless, some math to consider.  Under the recent QE program, the Fed was buying about $1T in US Treasury securities per year, and about $500B mortgage-backed securities.  The 2022 fiscal deficit was $1.4T. From 2020-2022 the fiscal deficits have totaled about $7.5T and the Fed has net funded over $4T of that, monetizing $4T of debt.  So, the Fed has been the marginal buyer of the majority of the increase in US Treasury supply since before the pandemic. To be sure, we have seen a run-up in Treasury yields in 2022 as QE stopped and QT began, all while the deficit ran to $1.4T in 2022.  But going forward, the Fed process is reversing (remember, year-to-date the rundown of the Treasury General Account has completely offset QT so far).  While the fiscal deficit for 2023 is forecast to lower to “only” $900B (optimistic), the Fed is SELLING over $1T per year of US Treasury securities under the Quantitative Tightening regime instead of buying that $900B as it would have under QE.

So, there is a marginal increase in supply of US Treasuries in fiscal 2023 of over $2T ($900B deficit + > $1T QT) versus 2022, which has to be absorbed somehow.  We have lost the largest buyer of US Treasury securities for the last several years in the form of the Fed.  We have also lost the second largest buyer of US Treasuries in the form of foreign central banks.   Looking further out, by 2032 the CBO forecast is for an AVERAGE of $1.6T in federal deficits per year, adding another $14-16T or so of debt to be absorbed.  So, who is going to buy that increased supply of US Treasuries next year and over the next decade, and at what interest rate, if not the Fed?  (A lot more to discuss here but that’s for another day).

Typically, when supply increases versus a given level of demand, the price of that “thing” must decrease, and certainly when there is a decrease in demand like losing your two largest buyers the price usually decreases.  For bonds, a decrease in price means an increase in interest rates.  And, to me, this is why I’m not a “bond bull” as many of those smart people are (which is another way of saying they could be right and I could be wrong.  I think I have to include that disclaimer legally, but I hate that so I’m laying out my rationale for you to judge if it makes sense or not.).  I’m not saying rates will skyrocket, but I’m not ruling it out, either.  I am saying that, by definition, supply and demand matter.  Further, unlike what you hear every day in the financial press, I am also saying that an eventual Fed “pivot” and to return to the good old days of yore when the Fed had our backs isn’t coming next year, and not likely in 2024.  To believe that, you must believe that inflation will trend downward towards the 2% target before the Fed makes meaningful progress in the downsizing of its balance sheet and the money supply (remember, Fed policy is lopsided – and tightening occurs much more slowly than easing.  Also remember, we haven’t yet experienced net QT due to the rundown of the Treasury General Account).  The markets want to believe in The Judy Tenuta Theory of Inflation Reduction: “It could happen!” But that is not what typically has happened.  I read a quote from Stanley Druckenmiller that inflation has never gone below 5% until the Fed Funds rate has exceeded inflation (i.e. achieving positive real short-term rates).  That’s a Fed Funds rate at or above 5%.

Per David Rosenberg, historically the 10-year Treasury rate doesn’t peak until the 2-year Treasury rate peaks, being 98% correlated with the 2-year.  And, the 2-year Treasury is 97% correlated to the Fed Funds rate.  Dave is one of those really smart guys and I read him every day.  But, if that is the case, with the Fed Funds rate is going up another 100 basis points or so (even if the pace does slow) taking the 2-year and the 10-year along with it, how does this translate into significantly lower bond yields, even if we do go into recession?  We need to rely on the 2-3% uncorrelated behavior between the 10-year, 2-year, and Fed Funds for rates to decrease?  And, should a miracle happen and we avoid a recession, the increase in aggregate demand that implies should have an upward impact on rates, especially if and when the price of oil goes back up due to increased demand that would accompany a return to growth (and also due to the decrease in O&G CapEx since 2014 due to ESG concerns. But, I digress).  Of course, the geopolitical crisis-du-jour can cause a run into US Treasuries – as I write protests in China are resulting in a bid for US Treasuries.  But, geopolitics are difficult to base your capital plans on.  Remember, the Fed is tightening going into an economic slowdown when it usually eases, we are increasing the US Treasury supply necessary to be absorbed by the economy by $2T (7.5% of all Federal debt outstanding at the beginning of 2022), and we have lost our two largest buyers of US Treasuries.  If you need a 10-year Treasury bond at 2.5% or lower to have your project pencil out, you are taking a risk that your project ends up under water.

And speaking of an economic slowdown, just look at California.  Last year, it had something like a $90B surplus, so much so it gave $10B of that back to voters just prior to the 2022 election (Hmmm!).  Next year, it is facing a $25B shortfall (WSJ 11/20/22 – “California Heads for Budget Crunch”) .  Remember, we’ve been told that what happens in California eventually happens in the rest of the country.  CARES Act funding is running down, which was being used up to plug budgets that are suffering from what seems to be a systemic decrease in ADA as well as funding the extra effort to get students caught up from the impacts on learning of lockdowns.  So the forces that some believe will cause a decrease in interest rates WILL CAUSE a decrease in liquidity and funding.  And, that is a different financial environment than we have been used to for a long time.

Will we return to Kansas at some point?  Maybe, perhaps even probably.  At some point, it would not be surprising that the Fed will have to lower interest rates and resort to again buying assets.  This is because of the Debt Trap.  When Volker was Fed chair in the 1980s, the Federal debt-to-GDP ratio was 32% versus 120-130% now, and he took rates to 16% to combat inflation (inflation that, like today, had begun as a result of loose monetary policy, increased Federal spending, and was then exacerbated by two geopolitical oil shocks).  Now, with Federal debt where it is, the percentage of the US Federal Budget taken up by interest expense, and total debt (government, state, corporate, household) at 302% of GDP, the amount of debt in our system just can’t absorb that kind of significant increase in rates to combat inflation.  So, we may have to rely on shrinking the Fed balance sheet and/or a hard landing to contain inflation.  But importantly, leveraged markets of all types will be adversely affected by the decrease in liquidity, if not actually breaking in some cases.

Since the tightening began earlier this summer, some things have already broken (the UK gilt market, some crypto exchanges and stablecoins) and these issues were liquidity-based (becoming solvency-based in the case of FTX – also fraud – but I digress).  It is highly unlikely that nothing else will break, given the amount of leverage in the system.  And if something meaningful breaks, financial markets and politicians will have a hissy fit.  As a result, many knowledgeable folks predict the Fed will blink at some point, much like the Bank of England just did.  But, if something big breaks, it’s because the tightening is still in progress, so we most likely won’t be at the 2% target for inflation when that fit hits the shan.  Of course, the inflation rate will face downward pressure almost automatically due to the “base effect” – measuring year-on-year price increases off of higher prices a year ago versus early 2021 increases the denominator, which decreases, well, you guys are educators so you know what happens to the ratio.  But, for costs to go down we need deflation, and unless the Fed can make meaningful progress to shrink its balance sheet and reduce the money supply, deflation is unlikely in my opinion.  So, the costs of purchasing/constructing your building or buying pencils will likely remain higher than they have been over the last decade or so even if they don’t increase by 8% per year.  But they could increase at 4-5% per year.  The talking heads on TV often say we’ll have a soft landing – if so, what exactly is the deflationary impact of a soft landing?  Higher aggregate demand is deflationary how?  To go lower, we’ll likely need a hard landing and the Fed not to blink.  Hard landing = recession = lower revenues.

By the way, if the Fed blinks before inflation is at the 2% target, or well on its way to it, we’ll be at what Lyn Alden calls “checkmate” for central banks: the point at which they must print money even though the inflation target has not been reached.  In that situation, inflation will be permanently higher than it has been for the last three decades, and we will remain in a more difficult economic environment from what you have been used to, possibly even the dreaded “stagflation”.  Lions, and tigers and bears! Oh My!  If the Fed doesn’t blink, then the Fed Funds rate continues to go up or at least remains up, liquidity goes down, and we’ll probably experience the much talked-about hard landing.

So, what to do?  Your state is likely to experience a decrease in revenues over the next few years as this unfolds.  So, first, bolster your cash balances to the extent you can and however you can – again, cash is no longer free and actually will return 4% or so.  Also, if you don’t have a working capital line of credit in place, try to get one (such a line of credit may need to work in concert with any facility debt outstanding – there are ways to deal with that so call me.)  Remember those deferrals coming out of the Great Financial Crisis?  This credit bubble is far larger.  Working capital matters.  For those of you planning to grow, plan on an interest rate much higher than you have been used to over the past five years to see if the project still pencils out.

How much higher of a rate to assume?  That depends on your funding source.  For short-term loan situations when the bond market may not be a reliable source for you, those loans are based upon either the Prime Rate or SOFR (the Libor replacement).  Currently (Nov 2022) the WSJ Prime Rate sits at 7% and that is before the December Fed meeting.  Even the bond bulls project the Fed will increase by another 1% or so, which means somewhere around an 8% Prime Rate at least.  SOFR is now around 3.8% and will rise with future Fed Fund increases.  Most sources of funding, either from banks or from CDFIs (which often get their funding from banks) will require a spread over the cost of their funds, so expect a spread to Prime or SOFR resulting in short-term rates anywhere from 6% to 9%, in my opinion.  You read that correctly.

Bond markets may rally, lowering yields temporarily, but I expect over the course of your planning process that the need to digest $2T of US Treasury securities without the biggest recent buyers will not allow rates to decrease, and may require them to increase.  Further, the drying up of liquidity and the prospect of prolonged inflation COULD hamper the demand for long-term bonds.  The Fed may have to ramp up its QT program by actually selling longer term Treasuries (versus the passive run off they are using now), in order to steepen the yield curve (increase long-term rates) to get banks to buy those US Treasuries (since the Fed is no longer buying them and due to the banks’ need for an upward-shaped yield curve to make money.  But, I digress.)  That would result in higher long-term US Treasury rates off which municipal rates are based.  So, for even seasoned schools planning to access the bond market for long-term debt, without some sort of credit enhancement the first number you should use in your planning process should be a 6 in my opinion, possibly higher depending on your credit situation.

I realize these rates might cause some sticker shock since they’re so far above what we’ve been used to.  At worst, by using higher cap rates, you will improve the economics of the projects you ultimately proceed with.  The design of the projects themselves will have to adapt, replacing the “esthetic” with the less expensive “functional.”  You just may have to do without some of the extras.  If you have to build a tornado shelter because you live in Tornado Alley, further design efficiencies will have to be incorporated.  Modulars may be part of the mix.  Ground up construction may have to be replaced by buying existing properties and rehabbing them.  So far, construction lead times have lengthened, also increasing the construction period and the amount of capitalized interest necessary for a project.

Bottom line: it is important to know that, for some time at least, you are operating in a different economic and financial environment than you have been used to.  Liquidity is at a premium now because cash will no longer be free, its supply is decreasing, and it will earn something for those who hold it and cost more for those who borrow it.  And, it is likely that more things will break, causing economic disruptions! For the foreseeable future, the Fed does not have your back!   But, to the extent I can, I’ll try to have your back, and would love the chance to discuss your situation with you.  In the meantime, it could be a while before we get back to Kansas.

For a year in which the debt markets were very volatile, Buck Financial Advisors was able to complete thirteen financings for charter schools across the country totaling almost $600 million.

The need to better serve America’s youth has never been more apparent than coming out of the Covid-19 crisis and lockdowns of K-12 schools.  And a fairly decent subset of charter schools and charter management organizations continued to step up to the challenge in 2022. Through organizations ranging from the largest CMO operator in the country, whose operations span four states, to a stand-alone school in one of the smallest states, charter schools continued to expand their educational offerings and, in some cases, refinance debt for savings, using a wide-range of funding sources facilitated by Buck Financial Advisors.

IDEA Public Schools Florida continued its expansion across Florida with four projects financed in both Tampa and Jacksonville.  Sources of funding included loans from CLI Capital, bonds issued in the capital markets for a brand-new campus, and of course the School of Hope’s Revolving Debt Program from the Florida Department of Education.  IDEA Florida operated two previously financed schools in Tampa in 2022 and is now operating a total of four schools, having opened two in Jacksonville for fiscal 2023 in addition to the two operating Tampa schools.

IDEA Texas also continued its Texas expansion by financing additions to numerous existing campuses across the State, issuing about $94 mil in tax-exempt bonds through the Clifton Higher Education Finance Corporation.  IDEA also successfully remarketed over $170 mil of taxable FRN notes issued in 2021, with the remarketing completed on a tax-exempt, long-term fixed rate basis just at the beginning of the capital markets becoming spooked by the prospect of Fed increases in interest rates.  Sometimes a little luck goes a long way!

Las Americas ASPIRA Academy in Delaware financed its expansion into high school grades with the completion of a $20.9 mil tax-exempt bond financing through the Delaware Economic Development Authority.  Las Americas ASPIRA is proof that quality comes in all sizes, as their program continues to obtain quality results for Hispanic families in Newark, DE.  Their bonds were also completed early in the year, before the markets began their “yield rally”.

Great Hearts America has been operating successfully in Arizona and Texas for a number of years.  In 2022, it increased its reach by expanding into Baton Rouge, Louisiana, financing the acquisition and construction of its first campus with a $22.5 mil loan from its long-standing partner bank, Arizona Bank & Trust.  Great Hearts Louisiana will open up Great Hearts Harveston in August 2023 serving grades K-7.

KIPP Public Schools Northern California continued its expansion into the Stockton, California area with a $34 mil loan from the Equitable Facilities Fund to fund the rehabilitation of a an existing day-care facility and acquisition of up to 15 portable classroom modulars at KIPP Conway Homes, as well as fund the construction of a permanent elementary school facility for KIPP University Park.  This represents the third financing from EFF for KIPP NorCal over the last four years.

BASIS Texas Charter Schools continued its expansion plans with a $43 mil tax-exempt note issued through Arlington Higher Education Finance Corporation.  The note was purchased by Morgan Stanley, is callable in 2025 and has a final maturity of 2026.  The funds financed the acquisition and Phase I and Phase II construction of BASIS Cedar Park near Austin.  The financing received a Ba3 rating, as BASIS Texas works to increase its rating to investment grade by 2026 in order to qualify for entry into the Texas PSF Bond Guarantee Program.

Magnolia Public Schools in California completed two financings to find permanent facilities for lease campuses in the Los Angeles area.  The first was a $3.2MM acquisition of a parcel adjacent to their MS#5 campus which will be used for expansion, and the other was a $24MM construction loan for their MS#5 to provide permanent facilities for that high-performing school.  Funds were provided by CLI Capital in both cases.

Partnerships to Uplift Communities, operating in the San Fernando Valley of Los Angeles, completed an advance refinancing for savings (imagine that in this market!) of their 2014 tax-exempt bonds with a taxable loan from Equitable Facilities Fund.  The $22.8 mil loan refinanced PUC Valley’s 2014 bonds issued through the California School Finance Authority and was PUC’s first loan from EFF.

Great Hearts America – Texas also continued its expansion by financing Phase II of its Lakeside campus in the Ft. Worth area.  The $19. 4 mil bond issue has an underlying rating  of Baa3 by Moody’s and are enhanced by the TEA’s Permanent School Fund’s Bond Guarantee Program.

Green Dot Public Schools California issued its $22.9 mil bond issue in 2022 through the California School Finance Authority.  The bonds were rated BBB- by S&P Global, and utilized CSFA’s credit enhancement program to fund the DSRF.  The 2022 bonds refinanced construction loans for Animo Ellen Ochoa Charter Middle School, as well as refunded for savings GDCA’s 2011 tax-exempt bonds issued for its Animo Inglewood Charter High school.

The vast majority of these financings were for long-time clients.  Buck Financial Advisors is very grateful for the continued trust that our clients place in our ability to source the most appropriate type of financing for the situation.  Six different sources of funding, from bonds to bank loans, were utilized for these thirteen financings.  In a very challenging year in the financing markets, Buck Financial Advisors’ clients were able to further their missions to serve more kids and keep more money in the classroom.

We expect 2023 to be even more challenging, as real estate costs have not quite “caught down” to the increased cost of capital across virtually all markets.  As will be discussed in a separate post, Buck Financial Advisors think schools need to adjust their discount rates used in the real estate planning process for the changing conditions from those in the last five years.  But, whatever their needs, Buck Financial Advisors will do its best to ensure our clients’ ability to affordably serve their families.  All the best in 2023.

In October 2021, IPS Enterprises, Inc. closed on two construction loans for a previously acquired property in Cincinnati which will house IDEA Price Hill, the first campus for IDEA Greater Cincinnati and IDEA’s first campus of their expansion into Ohio.  Price Hill is scheduled to open in Fall 2022.

IPS had previously acquired the property earlier this year.  The project will renovate the former Cincinnati Christian University campus into a K-12 campus and the regional headquarters of Greater Cincinnati.  Price Hill is one of the areas in Hamilton County that is in need of educational alternatives such as those provided by IDEA.

Central Bank & Trust provided the senior loan, with BlueHub Capital and Local Initiative Support Corporation providing critical subordinate debt.  About three weeks from the planned closing, the appraisal came back with a disappointing value, preventing CB&T from advancing as much as they had planned.  BlueHub and LISC stepped up to fill the lion’s share of the gap, and the project truly could not have moved forward without them.  Both senior and subordinate lenders were great partners on the project, working very hard to provide the funding in a manner which will allow Greater Cincinnati to grow as planned.  Grant funding from Accelerate Great Schools in Cincinnati also was an important part of the funding mix.

Buck Financial Advisors served as financial advisor to IPS Enterprises, Inc.  Other members of the working group include Hunton Andrews Kurth as counsel to IPS, Dickinson-Wright as counsel to IDEA Greater Cincinnati, Krokidas & Bluestein LLP as counsel to BlueHub, & Frost Brown Todd LLC as counsel to Central Bank & Trust.  PMSI of Austin Texas is serving as project manager for the redevelopment and construction.

Congratulations to IDEA Greater Cincinnati, the families in the Price Hill area, and to all who worked so hard to help IDEA’s launch into Cincinnati.

In July 2021, BASIS Texas Charter Schools closed a $65 million financing to construct Phase I of three new schools in Benbrook, Pflugerville, and San Antonio.  This financing is designed to allow it to be easily taken out when two other financings that BTX previously entered into will be callable.  By that time, BTX should be well positioned to enter into the Texas Bond Guarantee Program under the Permanent School Fund.

In 2017, BTX became a member of an obligated group financing for its then-existing campuses in Texas, which obligations are not callable until 2026.  In 2020, BTX issued direct obligations that are not callable until 2025.  The goal of the 2021 financing was to arrange cost-effective, 100% financing without “kicking the can” down the road w/r/t redemption so that BTX can refinance all obligations into the PSF when available as easily and efficiently as possible.

As financial advisor to BTX, Buck Financial worked with Morgan Stanley Bank to structure a 5-year tax-exempt financing which would provide all the necessary funds for construction and allow BTX to refinance the 2021 financing at par earlier than the other financings would likely or legally be considered for refinancing.  BTX will construct three new campuses to add to its 6 existing schools, and expects to serve approximately 3.700 students in Fall 2022 across the Texas network.  The goal is to finance BTX’s growth over the next several years with similarly-structured financings until such time as the PSF can become a reality.

BTX is affiliated with the BASIS network of charter schools which operate in Arizona, Baton Rouge, and Washington, DC in addition to Texas.  The network goes back to 1996 when the first BASIS schools was founded in Tucson, Arizona, and currently educates over 20,000 students network wide.  BTX is managed by BASIS Educational Group out of Phoenix, Arizona.

Shulman, Lopez, Hoffer & Adelstein, LLP served as bond counsel and borrower counsel, Hunton Andrews Kurth served as special tax counsel, BOK Financial as Trustee, and Coldwater Ventures serves as Owner’s Representative to BTX.  The financing was issued through the Arlington Higher Education Finance Corporation.  Orrick Herrington & Sutcliffe served as counsel to the purchaser.  Congratulations to the students and families of BASIS Texas!