Many U.S. States and Cities Missing Lifetime Borrowing Opportunity, Reports Reuters

By Hilary Russ and Robin Respaut

NEW YORK/SAN FRANCISCO – The building serving as a middle school in Oregon’s Corbett School District, constructed in 1923, shows its age. At the time of its establishment, horses and trailers were utilized to dig the basement. Each winter, it faces flooding issues, lacks a sprinkler system, and contains asbestos and lead paint in some areas.

This May, voters in the district rejected, for the fourth time, a proposal to sell bonds for a new school facility, bypassing an opportunity to finance it at potentially low borrowing costs.

Corbett is not the only district facing this dilemma. So far this year, the volume of debt sold in the U.S. municipal and state debt market, valued at $3.7 trillion, has declined compared to 2015, despite historically low borrowing rates.

The yield on top-rated 30-year municipal bonds reached a low of 1.93 percent in early July, significantly lower than the 3.27 percent recorded a year prior. This dip even positioned municipal yields below comparable Treasury yields, owing to the income tax exemption granted to U.S. investors on the interest earned from most municipal bonds.

There are various reasons for the slow pace of municipalities in taking advantage of this rare opportunity presented by low global rates and the intense search for higher returns by investors.

One major hurdle is that municipal borrowers need to navigate voter approval processes, which limits their agility in responding to favorable market conditions. Many communities are still recovering from budget cuts made during the recession, causing hesitation to take on new debt responsibilities, regardless of low costs. Others are constrained by stagnant economic conditions, significant pension liabilities that compete for funding, or a combination of both.

"Beyond the larger states and cities that often lead the way, many others are uncertain about having sufficient voter support or the economic capability to increase expenditure," noted James Colby, a portfolio manager at VanEck Global, which invests in municipal debt for its exchange-traded funds.

In one instance, voters in Travis County, Texas, narrowly opposed a $287 million bond intended to replace an outdated, overcrowded courthouse in Austin due to concerns over the proposed location’s expenses.

In New Jersey, many state-funded road and bridge projects were halted recently because lawmakers could not agree on extending the funding program amid ongoing debates over raising gasoline taxes for transportation spending.

Fiscal challenges and political dysfunction contributed to last year’s budget delays in Illinois and a nine-month budget stalemate in Pennsylvania that left public schools struggling to remain operational.

As a result, municipalities and states issued $227 billion in debt from January 1 to July 19, which is a decline of 1.6 percent compared to the same period in 2015. Most of the tax-exempt debt has been utilized to refinance older bonds at lower rates rather than to fund new projects.

Despite this trend, in better-performing states like California and New York, some of the most financially troubled municipalities are increasing their borrowing. These entities are selling bonds because buyers, who previously avoided them, are now seeking additional yield. Other communities are forced to borrow merely to meet operational expenses or to complete essential projects.

With negative yields in Germany and Japan, the global search for fixed-income assets amidst market volatility has prompted some foreign investors to purchase U.S. municipal bonds, despite the absence of tax benefits.

Municipal bond funds have seen consecutive net inflows for the past 42 weeks, with this year’s inflows reaching $36 billion compared to $13.8 billion for all of 2015.

However, potential issuers still face challenges from voter reluctance. "It’s a result of the credit crisis, an aversion to debt, and efforts to stabilize budgets," commented Peter Hayes, head of municipal bonds at BlackRock.

Following the rejection of an $11.9 million bond proposal, officials in Corbett are considering a more expensive private loan option that does not require voter approval.

"I keep telling people that interest rates are at historic lows," stated Superintendent Randy Trani. "But despite this, we haven’t been able to move forward."

Many voters wish to preserve the historical building, and with a significant portion of the population over 50, there is a noticeable reluctance to incur additional taxes. "They have no connection to the school at all. It’s tough to motivate them to approve tax increases," Trani noted.