Much like the corporate bond market, the past three years have seen record low rates for purchasing municipal bonds. As a result, a large number of communities have sought bonds to pay for major projects, infrastructure repairs, or even offset budget deficits. But the market is now putting more scrutiny on cities and towns in terms of the amounts and terms they are willing to extend.
The reasons are due to a number of cities that took on too much debt, that borrowed for the wrong things or that sought municipal bonds without a solid capital improvement plan to manage it all. In all of these cases, borrowing should have started with a bit of soul searching, municipal bond experts agree.
Cities and towns typically use municipal bonds for one-time major capital outlay expenses, road and building repairs and construction and to refinance previous higher-rate debt down to lower levels. But really anything outside the regular budget or beyond normal budget limits is fair game if it is done wisely. Getting it right includes taking long-term bonds for large-scale borrowing; taking short-term bonds for smaller projects; staggering bond durations; and that a community keep its total debt burden to less than 10 percent of the operating budget.
That is certainly the case in Melrose, which recently announced its intention to bond $480,000 to purchase new texts books and digital book licenses. The city is paying interest on its book bond at the rate of less than 1 percent for the first year and then slightly over 2 percent for the remainder of the bond.
Melrose Mayor Robert Dolan says this purchase is intended to be a once-in-a-decade investment: to acquire new materials for a new math curriculum, to fill in gaps in existing subject areas, and to establish resources parity in the various public schools. The digital licenses will enable the city to keep up with new releases of the texts as they are produced. The city also has other bond commitments, including renovations at the high school, and keeps its annual total debt to less than 5 percent. That helped Melrose to recently receive a bond rating upgrade from AA- to AA from Standard &Poor’s.
“The challenge, which is very similar in municipalities to individual borrowing, is that the banks and municipal bond investors are taking a closer look at their investments and liabilities, as to how much they are lending, and the borrower’s ability to pay it back,” says Dolan. “So although more [communities] are borrowing, it seems those who are more financially stable, whether individuals or communities, are able to borrow at a lower rate with more flexibility.”
Dolan sees three top issues when it comes to cashing in on the municipal bond market right now: managing debt position, operational flexibility and timing.
With regard to managing debt, “Melrose has an informal policy that limits no-exempt debt to 5 percent of the operating budget,” Dolan says. “This is a very fiscally conservative position. That ensures that we are continuously investing; that we are not borrowing so much that we are negatively impacting our operating budget; and that we have a debt plan that allows us to see where old debt is dropping off and new debt is coming on.”
The city of Melrose updates its capital improvement plan annually. “The municipal rating agencies look positively on communities that have fiscally prudent borrowing plans,” Dolan says.
“Communities without a good debt plan and capital improvement plan end up going for years with minimal investments in infrastructure, over or under the ground,” Dolan says. “The ability to fund capital projects in an operating budget is often either nonexistent or minimal. Municipalities can perhaps pave one or two streets a year, leaving a backlog of streets in need of major repair. Good, targeted borrowing at low interest rates is good capital planning.”
With regard to timing, “I think a lot of communities are bonding more … probably because during such bad economic times the goal was to keep people working and to maintain basic services for residents,” Dolan explains. “This has left very little will or ability to take on larger capital projects. I would argue, as our debt plan shows here in Melrose, that we avoided that and we remain true to our ongoing plans, thus allowing us to do more capital investment than our surrounding communities.”
