This article appeared in the December Michigan Counties magazine
The holidays and new year are at hand. I must ask, “Are you making a list and checking it twice?”
I refer not to a list for Santa, but one for the bonding plans for your county in 202.
Bonding is most often undertaken for capital improvements. Projects on your wish list might be for buildings and office space. They might be for county responsibilities such as the courts, jails, libraries, public works, parks and recreation, or the drain and road commissions. Finally, your list might include projects that could be undertaken in cooperation with the cities, villages, and townships within it.
Other than state government, counties are the level of government best suited to bond financing for capital improvements. Several factors work in the favor of Michigan counties, as is reflected in their healthy credit ratings. For some counties, frequent participation in bond activity as is made possible by serving as the conduit to bond markets for a number of internal and external entities, creates economies of scale.
Their broad geographic footprint includes wealthy and less wealthy communities that even out to give the counties strong, reliable tax bases. Notwithstanding the property value declines caused by the Great Recession ten years ago, county property values usually do not experience declines of any serious magnitude.
Additionally, counties benefit from steady streams of state revenues. These include distributions for revenue sharing, court funding, public health and mental health services, and road funding (for counties that have pulled this function back from their road commissions).
All of these provide assurances to investors that bonds sold with the full faith and credit of the counties will get repaid.
Now is the time to make that list and check it twice. After some disruption in the bond markets back in the Spring because of the pandemic, interest rates have returned to favorably low levels. In August, municipal bond markets experienced record low interest rates and they have not changed much since then. The historically low rates are likely to remain available as long as health and political uncertainty keep equity markets on edge and investors seek safe places to put their money.
It looks like many have already noticed the opportunities and taken advantage of them. Even with health and political turmoil all around us, 2020 has had the largest bond volume in recent history.
For the rest of you, here are some things to consider regarding your capital improvements lists and the possibility of bonding.
First, you might ask whether there are sufficient skilled trades in your area to undertake the projects if the funding can be secured. Notwithstanding the high rates of unemployment caused by the pandemic, Michigan continues to struggle to attract and retain individuals capable of performing certain jobs, including skilled trades.
Have you prioritized projects? Lord knows Michigan has collectively underinvested in infrastructure, so any new investment is a positive. but funding to maintain existing infrastructure or to comply with regulatory requirements should come at the top of the lists.
Next, ask whether projects on your lists are suitable for borrowing. Like a mortgage or car loan for your personal finances, bonding allows the cost of building or obtaining capital assets to be spread over the life of those assets. This is a prudent approach to spreading the costs across different generations of taxpayers that all stand to benefit from the investment.
Borrowing has costs: the upfront costs of issuance and the long-term cost of interest. The purpose of this exercise is to align the length of the repayment schedules and total cost with each project.
Clearly, buildings, sewers, and the like are expected to last for several generations and bonding is a wise strategy.
For projects with shorter projected lifespans or relatively lower costs, you might want to consider working with local commercial banks for the convenience in the length of the time to access funding.
Other projects, although seemingly capital in nature – I’m thinking of vehicles, H-VAC, and other equipment – might be best suited to a pay-as-you-go approach.
Finally, I ask whether your county has existing debt? Instead of considering new bond issuances in isolation, your county should consider the benefits of refinancing existing debt at the same time as taking on new debt. This can have the twofold benefits of lowering interest rates for existing debt and smoothing repayment schedules to avoid spikes or troughs. The Government Finance Officers Association offers sound guidance for those considering refinancing.
The recession will have some negative consequences for property values – more foreclosures and devalued commercial properties – and therefore there is some downside risk to property tax revenues, but nothing on the scale we saw with the Great Recession. This will play out unevenly across our 83 counties.
Unless your equalization directors see much greater risk than I foresee, my advice is to capitalize on the historically low interest rates while you can.