Flint Not Alone In “Municipal Trifecta of Doom”

Flint Michigan’s water problem will be repeated around the country.  Race may be an issue.  Low income residents are definitely an issue.  But the cause is the “municipal trifecta of doom”:  aging infrastructure, declining revenue base and higher costs for municipal bonds.

“About two thirds of all infrastructure in the United States is financed by state and local government municipal bonds”, according to Lynette Kelly, Director of the Municipal Securities Rulemaking Board (MSRB) in Washington, DC.  Municipal bonds are currently the most likely financial tool to fix the problems with lead encrusted water pipes, failing bridges and crumbling roadways.

Municipalities issue bonds using borrowed money.  The rate of interest municipalities pay for these bonds, a long term debt obligation, depends on how financially healthy rating agencies like Moody’s.  Rating agencies consider the financial health of the municipality, the quality of management, the municipality’s demographics, current debt and the general economy to set a rate.  AAA is the best rating.  BBB is a medium grade rating.  With each notch lower on the rating scale, the cost of borrowing what is typically a 20 year loan goes up a notch.

In a city like Flint, where the population has declined by over 30% since 1990, 48% since 1950, the financial need for new infrastructure is high but the bond rating is likely to be low.  For years, until Detroit exited from bankruptcy, the bond rating was at “junk bond” status.  Flint and Detroit are not alone.  Over 25 US cities with peak populations over 100,000 have populations declines of over 30%.  (LINK) The physical plant of the city, the buildings, schools, hospitals, pipes, wires, roads and bridges, are still in place.  The volume of infrastructure  hasn’t declined in proportion to the municipality’s size.  But the tax base to support the city’s management and infrastructure has declined, compounding the challenge of planning for and financing infrastructure repairs.

Aging cities with declining tax bases and constant but aging infrastructure are exactly the cities facing the higher costs for municipal bonds to make the repairs that the water pipes in Flint so badly needed.

But wait, there’s more.  More bad news for aging cities trying to improve their infrastructure.

New disclosure regulations for issuers of municipal bonds (ie municipalities needing money) have recently been issued by GASB, Governmental  Accounting Standards Board.  Statement 68 (http://www.gasb.org/jsp/GASB/Pronouncement_C/GASBSummaryPage&cid=1176160219492) went into effect in 2014.  Municipalities wishing to enter the bond market after the effective date must comply with these new requirements.  The municipalities will be required to disclose unfunded liabilities like unfunded pensions.   Cities in the US have funded 74 percent of their pension liabilities, leaving an unpaid balance of $99 billion according to a Pew Center on the States report.

But US cities have pre-funded only 6 percent of their healthcare debt, leaving a shortfall of $118 billion, according to Pew.  http://www.pewtrusts.org/en/research-and-analysis/reports/0001/01/01/a-widening-gap-in-cities .  According to Kelly, GASB is now working on a separate accounting standard which would mandate that government financial statements reflect unfunded OPEB (Other Post Employment Benefits) liabilities. So in the near future disclosure of these much larger health care liabilities, in addition to pension liabilities, may be required, for municipal issuers.

Assuming a strong correlation between poorer municipalities and higher unfunded liabilities, these GASB regulations will make municipal bonds even more expensive for the cities most needing the infrastructure improvement funds.

Solutions?

What are the solutions for aging cities hitting this perfect trifecta of doom?

MSRB’s Kelly suggests three possibilities:

  1. Public-Private Partnerships that are both creative and solvent
  2. Infrastructure Bank operated by the Federal government providing grants and loans
  3. Federal credit guarantees to lower the cost of borrowing on the bond market for municipalities that want to rebuild their infrastructure

In this season’s political campaigning, we’ve heard a lot about building a huge wall but not much about re-building America’s aging cities.

by Barbara Thornton, Asset Stewardship

************
Contact: bthornton@assetstewardship.com
Follow Barbara Thornton @AssetStewards
Sign up to receive the latest AssetStewardship.com posts in your email inbox. http://eepurl.com/beiXkD

see also:
http://assetstewardship.com/category/asset-type/public-buildings-facilities/
http://assetstewardship.com/category/asset-type/water/

 

Leave a Reply