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Pew Bond Report on municipal borrowing practices

Pew Bond Report on municipal borrowing practices

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Published by jmicek
A Pew report examining how municipalities changed their borrowing practices in response to The Great Recession.
A Pew report examining how municipalities changed their borrowing practices in response to The Great Recession.

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Published by: jmicek on Aug 26, 2013
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10/02/2013

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A brief from
August 2013
Understanding the Great Recession’sImpact on City Bond Issuances
Overview
The Great Recession o 2007-2009 took a substantial toll on city nances that continues to this day.In the cities at the center o America’s 30 largest metropolitan areas, persistent revenue shortalls andincreased demands on spending or services are straining budgets. As a result, local leaders continueto look or ways to relieve scal pressures while spurring economic activity.Policymakers have previously issued bonds to save money on existing debt and jump-start aneconomic recovery. However, this tepid municipal scal recovery, combined with ederal aid to statesand localities in response to the recession, has inuenced recent borrowing decisions or these 30cities. Following the end o the recession, these cities renanced existing debt at historic levels to takeadvantage o low interest rates, and they borrowed to speed up inrastructure projects so they could beready to benet rom the American Recovery and Reinvestment Act, or ARRA. Although these actionshad a notable eect on the timing and amount o debt the cities issued, the total number o projectscities undertook was somewhat lessened by declines in city tax revenues.To better understand how city ofcials managed debt in response to the Great Recession as comparedwith previous national economic downturns, The Pew Charitable Trusts examined these cities’ recentborrowing, using ination-adjusted data rom the Thomson Reuters SDC Platinum database, whichincludes inormation on bond issuances by municipal governments. This investigation ound that,collectively, the 30 cities issued $13.9 billion in reunding bonds—a mechanism to renance existingdebt—in 2012, the largest amount in two decades.
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For the rst time since 1991, such issuancesaccounted or more than hal (57 percent) o the total bonds originated by these cities.
2
New York,Houston, and Chicago, which had the three largest dollar amounts o reunding issuances, willcollectively save an estimated $709 million over the lie o the bonds, compared with the obligationsthey renanced.
3
 
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Why Do These 30 Cities Matter?
Pew’s American cities project conducts original research that analyzes scal conditions, service delivery, andthe impact o demography on the center city in each o the nation’s 30 largest metropolitan areas: Atlanta;Baltimore; Boston; Chicago; Cincinnati; Cleveland; Dallas; Denver; Detroit; Houston; Kansas City, MO; LasVegas; Los Angeles; Miami; Minneapolis; New York; Orlando, FL; Philadelphia; Phoenix; Pittsburgh; Portland,OR; Riverside, CA; Sacramento, CA; San Antonio; San Diego; San Francisco; Seattle; St. Louis; Tampa, FL; andWashington.American cities have an outsized impact on the economies and long-term prosperity o states and the nation.These 30 cities and their surrounding metropolitan areas account or hal (49 percent) o the nation’s totalgross domestic product.
i
Over the period Pew examined, they represent roughly one-third (35 percent) omunicipal bond issuances including more than hal (53 percent) o the $21.6 billion in Build America Bondsissued by all U.S. cities. Collectively, these 30 cities have nearly 34 million residents—more than 1 in 10Americans—with an additional 108 million living in the regions they anchor.
ii
i Pew calculations rom the U.S. Conerence o Mayors and the Council on Metro Economies and the New American City.
U.S. MetroEconomies Outlook: Gross Metropolitan Product and Critical Role of Transportation Infrastructure,
July 2012,http://usmayors.org/metroeconomies/0712/FullReport.pd.U.S. Department o Commerce. “National Income and Product Accounts—Gross Domestic Product, First Quarter 2013 (ThirdEstimate),” June 26, 2013,http://www.bea.gov/newsreleases/national/gdp/2013/pd/gdp1q13_3rd.pd.ii Pew calculations rom the U.S. Census Bureau’s American Community Survey, 2011 data,http://www.census.gov/acs/www.
Pew also ound that the national scal and economic policy responses to the Great Recession changedthe way cities used debt to nance new projects when compared with past recoveries. Federal policyinterventions through ARRA—notably the Build America Bonds program and direct inrastructuregrants to local governments—created incentives or cities to undertake projects during 2009 and 2010that had been planned or uture years.Although these ederal policies cleared out a number o capital projects and lowered demand or newones in the ollowing years, the lack o new money issuances among the 30 cities in 2011 and 2012 waslikely driven as much or more by revenue challenges than by a shortage o new inrastructure projects.In 2011, new money bond issuances in the 30 cities were at their lowest level in more than 20 years($10.4 billion), when adjusted or ination. These issuances remained low in 2012, increasing by just$200 million.This brie looks at how local borrowing patterns changed in response to the Great Recession and theimpact o ederal stimulus eorts on municipal debt issuances. It urther considers the role o debt as anancial management tool or the uture scal health o U.S. cities.
 
3
The Great Recession altered the way cities manage debt
Cities issue bonds primarily to nance large inrastructure projects—such as roads, bridges, schools, libraries,and public utilities. Generally, recessions and the immediate postrecessionary periods result in low interest ratesthat make it attractive to cities or unding new long-term capital projects, because they can do so at a lower totalcost. These periods o low interest rates are also opportune times or cities to issue reunding bonds to reduceannual debt-service costs and trim spending.Municipalities also issue reunding bonds to take advantage o declining-rate environments such as those thattypically ollow recessions to reduce annual and long-term costs by lowering interest payments. A commonpractice during periods when interest rates are low, reunding is an important part o municipal governments’long-term scal management. Reunding bonds pay o the outstanding principal on a previous bond by reissuingthat debt at a lower interest rate. Unlike many other areas o state and local budgets, the payments (or principaland interest) are xed over the term o the bond—typically 10 to 30 years.
4
City ofcials can thereore usereunding bonds to trim the cost o existing obligations, similar to the way homeowners can lower their mortgagepayments through renancing.The recessions o 1990-1991 and 2001 demonstrate this pattern o behavior or new and reunding debtissuances. In 1993, two years ater the 1990-1991 recession ended, interest-rate declines and improving economicconditions contributed to an increase o $2.6 billion in bonds or new projects—oten called “new moneybonds”—a 14 percent ination-adjusted increase rom the previous year (Figure 1A). Reunding bonds alsoincreased rom $8.2 billion to $11.1 billion—a 37 percent jump (Figure 1B). Similar increases also occurred twoyears ater the 2001 recession ended, with new money bond issuances growing by $5.2 billion (25 percent) andreunding bond issuances jumping by $1 billion (30 percent).
5
After the Great Recession, the 30 cities changed their debt issuancepatterns
Figure 1A: Total annual value o new money bonds issued, 1991-2012
    i    l    l    i     l    l    M    i    l    l    i   o   n   s   o    f    D   o    l    l   a   r   s     l    l
 010,00020,00030,0001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
 
Economic growth years Recession and recovery years
Note: Gray shaded areas indicate periods o economic recession as dened by the National Bureau o Economic Research.Source: Pew calculations rom Thomson Reuters SDC Platinum municipal issuances database
Figure 1B: Total annual value o reunding bonds issued, 1991-2012
    M    i    l    l    i   o   n   s   o    f    D   o    l    l   a   r   s    i    l    l    i     l    l
010,00020,00030,0001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Economic growth years Recession and recovery years 

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