With low interest rates, a growing U.S. economy, and all the federal money Washington sent to local governments during the last pandemic, the past few years have marked a “golden age of public finance” for Philadelphia and the United States. other major cities, says Tom Kozlik, who has been fundraising for cities since he started as a financial analyst for city agencies under Mayor Ed Rendell.
But conditions are changing rapidly. Costs are rising rapidly, the economy is slowing, federal subsidies are down. Cities will have to adjust how they tax, borrow and spend quickly, or prepare for tough times in the near future, he warned city officials and investors who buy the bonds communities use. to fund buildings and other long-term projects, on a recent return trip.
After leaving City Hall in the late 1990s, Kozlik worked in municipal finance on Wall Street until Bear Stearns exploded. He returned here as managing director of municipal bonds at Janney Capital Markets and PNC, then to Texas in 2019 as head of municipal research and analysis at HilltopSecurities, which competes with Philadelphia-based PFM. , as an advisor to local governments to raise funds.
He is often quoted in the national media – and recently had to throw much of his past advice out the window, as interest rates are rising faster than most municipal finance professionals have ever seen, a- he told members of the Philadelphia Area Municipal Analyst Society (PhAMAS) recently.
The years of cheap borrowing are over: higher rates forced cities, like other bond issuers, to promise investors much higher bond yields to entice them to buy municipal bonds. The more money spent on debt service, the less money there is available to pay staff and other day-to-day bills.
It’s not just that money is getting more expensive. The pandemic has driven office workers from downtown towers, and fewer commuters are spending money or paying taxes. The federal money that mitigated the pandemic during the massive shutdowns is drying up, and it’s not clear that a recession will convince a divided Congress to spend much more.
“Things are not coming back. That’s normal,” and cities should plan to cut costs or find new revenue quickly, Kozlik concluded.
Here are Kozlik’s observations on threats to the city’s finances, many of which fell upon his audience like a slamming door:
Scared borrowers. As recently as last spring, Kozlik and other analysts predicted that municipalities would borrow a record $500 billion this year by selling bonds to pension funds and other investors. But as interest rates have soared, cities have delayed long-term funding commitments, and bond sales are unlikely to hit $400 billion this year or next either. This results in fewer jobs and business contracts, and a slower economy.
Rise in interest rates. Pension funding, which has cost Philadelphia more than law enforcement in recent years, is no longer Wall Street’s primary concern for local governments. Even though public pensions have been depleted by the fall in financial markets and many are seriously underfunded, a recent survey shows that analysts are even more concerned about rising interest rates and prices, falling American labor and divisive politics that prevent decisive policy, as fears that cities will go bankrupt.
Empty offices. Workers are not returning to office centers, including downtown Philadelphia. Nationwide, restaurants, air travel and apartment rentals have recovered post-pandemic, but only half of workers have returned to offices; in Philadelphia and San Francisco, it’s more like 40%.
Lower income. As offices close, real estate appraisals and taxes also drop.
Crime. Polls show that Americans are more concerned about crime and the police are less confident in protecting them.
Building challenges. Labor and material shortages and rising costs have crippled construction to the point where, even as the federal government takes back billions in funding from cities, city managers told Kozlik they should have hard to spend it on projects in the near future.
Policy. The politicization of public policy, which has stalled Congress on immigration and other key issues since the 1980s, has spread among state and local governments. States like Texas ban East Coast investment banks that have adopted anti-oil and anti-gun policies; in California, activists are pushing to punish banks that finance fossil fuels and arms manufacturers. In practical terms, this means that there are fewer banks available to sell government debt in these restrictive states and, therefore, higher borrowing costs for taxpayers.
“The speed and magnitude of change, and the number of variables that are changing, are not recognized by most people,” Kozlik said later in summary. “Most people in various industries react to one or two changes in the landscape. Very few recognize the major transformation taking place in all areas with work, technology, education, demographics and politics.