Battered bond market hurts public projects
SALEM Hidden within the larger economic fluctuations of last year was serious news for Oregon municipalities. The bond market — that typically sleepy backwater of American finance — was also going ballistic.
An oversimplified description of bonds is that they’re the fuel behind nearly every public project. They fund roads, new buildings and hospital expansions. They also give cities the ability to borrow money on a short-term basis. But in October the world’s largest bond buyers —Lehman Brothers, Goldman Sachs, Morgan Stanley — stopped buying, and municipal bond sales in the nation fell by almost 60%. The market has begun to recover, but Oregon municipalities are still faced with high interest rates, a voting public that’s skittish to sign off on new bonds, and the tricky decision of which projects to pursue at a higher cost, which to delay and which to kill.
“That was the most amazing mid-September to mid-October. I’ve never seen anything like that before,” says Laura Lockwood-McCall, the director of debt management at the state treasury. Since that September-to-October stretch, the state has seen a slow increase in the number of municipal bonds sold.
But not all sales are equal. A very good credit rating can suddenly mean a percentage-point difference in an interest rate — a difference that can add up to millions over the life of the loan. That doesn’t just affect agencies that have sold bonds, says Shirley Baron Kelly, assistant finance director at the city of Beaverton and a board member of the Oregon Municipal Finance Officers Association. It also affects those who may want to sell bonds but didn’t account for those new interest costs in their budgets.
“We budgeted 18 months ago,” she says. “Had we only known.”
Oregon agencies will evaluate their bond needs on a case-by-case basis, says Lockwood-McCall. When county finance directors like Dean Stephens at Benton County, and Mike Robison at Clatsop County say they’re not in the bond market right now, the relief in the their voices is almost palpable. Other agencies won’t be so lucky. In November, Oregon voters approved $1.4 million in new bond-funded projects (42% of the total amount was in Clackamas, Multnomah and Washington counties). To fund those projects, cuts will have to be made elsewhere. “This is probably going to be really ugly,” Lockwood-McCall says.
How ugly, no one knows just yet. “There are so many factors that none of us controls,” Baron Kelly says. “I wish I had a crystal ball.”