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As I write this column in mid-October the economic situation looks dark. I’m hoping by the time you receive your November issue of WaterWorld that things will be looking a little brighter – the economic clouds will have parted and all will be right with the world.

Jan 1st, 2019
Th Municipal 01

As I write this column in mid-October the economic situation looks dark. I’m hoping by the time you receive your November issue of WaterWorld that things will be looking a little brighter – the economic clouds will have parted and all will be right with the world. Or at least not so gloomy.

I’ve never followed the stock market that closely and don’t normally pay a lot of attention to economic news. But as I watched 25% of my retirement fund evaporate in late September and early October, I developed a strong interest in the topic.

As I searched for alternatives to the stock market my thoughts naturally turned to the municipal bond market. And that’s when I began to read about the growing troubles there.

Like other credit markets, municipal bonds have been nearly frozen by the economic turmoil. Cities, counties and states all use municipal bonds to finance projects and general operations, but since Lehman Brothers filed for bankruptcy in mid-September the $2.66 trillion national market has been frozen with little trading and higher interest rates.

As a result, some $15 billion worth of projects were temporarily shelved as local governments delayed projects to wait for better economic times, according to press reports.

Even before those tumultuous weeks, many municipalities were facing fundamental problems: rising costs, aging infrastructure and large drop-offs in income and real estate tax revenue. To make matters worse, a lot of local governments have moved away from safer, fixed-rate bond issues, and instead opted for variable-rate bonds, leaving them vulnerable to a sharp rise in rates. These factors could add up to serious trouble for communities across the country.

To add another piece to the puzzle, fears about the economy will no doubt lead to reduced consumer spending and the resultant decline in sales tax revenues.

Even when the credit markets return to some semblance of normalcy, there is still the larger issue: for states and cities, as with the rest of America, the credit crisis has tumbled into the real economy. Before the long-simmering credit crunch kicked into high gear in mid-September, municipalities were already predicting tough times ahead in 2009. (See Patrick Crow’s report on the National League of Cities survey in his Washington Update column.)

Although my first reaction to the economic crisis was to move my 401K money into bonds or T-bills, I dithered too long and eventually decided to let it ride. I do believe that as soon as the fear subsides and banks are again willing to lend to each other the municipal bond market will open up. That’s the good news for municipalities. For investors that want a fairly stable, long-term investment, muni bonds have been and will continue to be a good bet.

Still, I fear that our industry, our country and We the People are facing an evolutionary change and where it’s going to take us, I do not know.

On a side note, I don’t know how to feel about the $700 billion pork-laden bill that Congress passed to bail out Wall Street. But one thing’s clear – that money would have more than filled the water industry’s infrastructure funding gap into the foreseeable future. Only time will tell if that was money well spent or if we would have been better off as a nation putting it into concrete and pipe in the ground.

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James Laughlin, Editor

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