Municipal Borrowing Hits 10-Year High due to COVID-19 and What it Means for You

The Wall Street Journal recently reported that municipal bond issuance hit a 10-year high of $252 billion in 2020 and for the first time in 7 years, the total outstanding municipal debt hit $3.9 trillion. Due to COVID-19 and local governments’ already tight budget constraints, it is likely that this trend will continue. Despite steadily rising debts and low municipal bond interest rates, today’s low bank yields mean that investor demand remains steady. You can read the full article here.

Our Analysis

We are seeing budgetary pressures first-hand as many municipalities are struggling to maintain their pre-COVID established OPEB funding policies which is resulting in many pushing off their OPEB trust payments. However, at a time when debt issuance may be more necessary than ever, it is important to manage your liabilities. Here’s our advice during this time:

• Try to make your OPEB funding payments as planned, if possible.
• If you can’t make your payments, form a plan to make up for missed or downsized payments in the future.
• Look for other ways to manage your liabilities. For example, you could re-evaluate your medical plan offerings.
• Given low interest rates, now may be a good time to consider debt issuance. Just keep in mind your total debt portfolio, including pension and OPEB to ensure there are no unintended consequences such as a credit downgrade.

During times of economic growth, clients often ask us whether it makes sense to issue pension obligation bonds (POBs). If you’re not familiar, POBs are bonds issued to pay a municipal’s obligation to their pension fund. While we don’t normally recommend pension obligation bonds, if you are considering it, this is a time when evaluation may make sense with today’s low interest rate environment.