Municipal Market Experts Provide Insights and Optimism
MuniNet was present this week at The Bond Buyer’s Midwest Municipal Market Conference in Chicago, IL. The conference covered an ambitious agenda, with nine separate panels each taking the stage during this single-day event. The eclectic list of municipal oriented topics ranged from basic market challenges for borrowers and investors to the crisis in infrastructure financing to cutting edge innovations involving social impact bonds and green projects.
Here are some of the takeaways we thought were worth noting:
Social Impact Bonds
One of the most interesting panels focused on the nuances of Social Impact Bonds. This type of financing is actually structured as a loan, and is more accurately referred to as Pay for Success financing. The innovative structure of these loans is that is shifts investment risk from governments to private interests. Only socially beneficial projects are eligible for this type of financing, and government pays back investors only for projects that are successful.
The panel acknowledged that not all social impact bond projects will be successful, nor is the model always an appropriate solution. Efforts by the United Way of Utah and Goldman Sachs to provide quality preschool programs for needy families was discussed as a success, and a behavioral learning project for incarcerated adolescents on Rikers Island as an unsuccessful project.
Pay for Success financing seems like a mutually beneficial tool for putting policy innovations to real-world scrutiny. Investors, typically banks and foundations, can maintain decision making over where and how to commit their funding, service providers and policy innovators get the funding to put their ideas and efforts into practice in an impactful way, and government gets to take a try-before-buy approach to policy remedies for social challenges. If a project is successful, investors get paid back by the government, and both private and public entities have strong incentive to provide further funding and to scale up the program.
The social benefits of municipal securities and the projects and operations that they fund was a theme that was maintained throughout two panels on infrastructure generally and water utilities specifically. While these sessions went into detail about the steps and stakeholders of each deal, it was the costs that delays to updating America’s infrastructure incur. A study was referenced from the American Society of Civil Engineers that the lack of action to repair and upgrade roads, airports, water facilities, and others will cost American families $3,400.00 a year, each year, over the next decade. An interesting discussion also took place around water rates; while there was agreement that rates must remain low enough as to be affordable to all citizens, the argument could be made that rates are so low that people take water and water infrastructure too much for granted.
Comments were made again around the social benefits being properly qualified when analyzing these investments. While the mission and purpose of green bonds received universal praise, there was acknowledgement that infrastructure projects that are not environmentally beneficial are increasingly rare, blurring the lines between green bonds and other municipal securities. This is actually a positive trend, as environmental responsibility moves beyond being a sector of the economy and becomes an acknowledged foundational principle of the way society needs to operate.
Municipal Market and Regulation
Special focus was given to Bank Qualified Bonds, which are bonds from small issuers (<$10 million total issues annually), for which banks can deduct the carrying cost. The general concern was that regulators allow incentives for investors to finance small issuers remain in place. Another panel took a broader look at the municipal market, and both panels felt optimistically about demand for municipal securities; munis provide strong opportunities for both strong stability and return due to their tax-exempt status that most private investments just cannot replicate.
Regulatory trends and broadening the investment base for the muni market were investigated. The changing role of ratings agencies within the market, and the costs and benefits to different sized entities seeking ratings; it was acknowledged that more is not always better. A top challenge to expanding the investment base were agreed to be that corporate bond investors don’t necessarily understand how to analyze municipal bonds, particularly general obligation bonds. One recommendation from that panel that stood out was to improve the marketing and measurement of the positive social impacts of municipal securities; investors derive benefits beyond the strictly financial, a fact of which there could be more awareness.
The Municipal Securities Rulemaking Board (MSRB) has recently asked for comment on a proposal to require municipal advisors to disclose information regarding the direct purchases and bank loans of their municipal entity clients. Although there wasn’t consensus about the efficacy of the specific proposed requirement, the panel agreed that the subject matter is worthy of attention, and commended MSRB for their request fostering public awareness.
Looking Ahead at Elections
Frank Shafroth, Director of the Center for State and Local Government Leadership at George Mason University, addressed the crowd during the event’s luncheon. Mr. Shafroth spoke to what the municipal finance market can expect to see from the potential administration of the presumptive presidential nominees. A Clinton administration would not see any changes that would significantly impact the muni market. Alternatively, a Trump administration would likely lead to renewed efforts to make a deal on tax reform. Such efforts could jeopardize municipal securities’ tax-exempt status, significantly upsetting the dynamics of public finance.
Overall, there was a lot of agreement about the mutual benefits of the municipal market, and the desire to see increased support for the industry. The benefits of sound investments by municipal governments are valuable, and conferences like these are an important piece of making these benefits known.
by Jeffrey L Garceau