Eroding Munis
Carbon risk is affecting your neighborhood and your tax dollar is not going as far as it should
The details of your municipal bond measures matter. Sounds strange and it is definitely from left field from a person in software product, however, the signals are material.
Don’t worry, this isn’t going to be a finance exercise where I explain the finer points of bond maturities and a diversified non-investment grade portfolio strategy. And, those are just words that I saw while researching this topic, a rabbit hole, we aren’t going to get into, and I can’t even if I wanted to, cuz I don’t really get it.
Follow me on another journey.
Imagine you are a regular tax payer, a voter, and living in a coastal town. Picture homes by the beach? Me too, the ocean is rad. Now Zillow states that on average, nationwide, the cost of a waterfront home is more than double what a non-waterfront home is worth and even exceeds 10x for certain zip codes (1). If your roads are as pot-holy as mine, then it would also not come to any surprise to hear that your municipality could conceivably look to pass a bond measure to improve roads, schools, mass transit, etc… It might even come with a breakdown like this one for “Elevate Denver (2)” These and similar bonds often pass and muni-bonds historically have a low default rate, which is good because cities need cheap access to capital so comprehensive municipal improvements can be made and services to citizens improved.
Let’s dive into some of these component parts.
Roughly speaking, municipal bonds, munis for short, are a financial vehicle for cities to raise funds for public works. Cities typically hold a certain credit rating and the bond can be broken out a number of different ways to ensure its attractiveness for investors risk tolerance. This means that the number, duration, dollar amount, project type and quality can all be considered as leverage points for decreasing the assessed risk of the bond and thus investor appetite. The Elevate Denver example broke the bond out to a 10-year initiative with three funding periods for example. There is even an emerging trend to break out the green projects from these bond packages because they appeal to a different subset of investor (3).
This is not particularly surprising though I encourage you to read between the lines and, please note, I am going to make some leaps here for the sake of not making this a total snoozer article. Aside from an eery resemblance to mortgage-backed securities bundling, not unpacking that, you as a tax paying voter should be curious. If the city bean counters are breaking apart your comprehensive bond measure to minimize risk and cheapen the cost of capital, shouldn’t you be able to evaluate the portfolio in a similar manner? Shouldn’t you also want the funds, your funds, to be most efficiently disbursed to the projects with the lowest risk and highest return? How might you handle the results of a report stating that risk in the bond that was being raised because some of the projects earmarked are considered to be at high risk of climate impact, or already deemed as blue zones, or in need of managed retreat by the scientific community? It goes beyond feelings, when the proportionate contribution of anticipated property tax fails to include assessments for a tidal wave of property clawbacks and eroding property values. Puns intended. Your assessment could well hit you as a striking lack of fairness exacerbated by lack of transparency.
In summary, we should all care how this next arc of internalizing the cost of our growing carbon footprint impacts how our cities are spending our money. It isn’t that the cities are not prioritizing the right work, though a healthy debate on that should continue, I’m focusing on the rising seas are causing a rising cost to fund the projects in our communities. This higher cost will more acutely fall on the communities who can least afford it. It is a big problem and one we can begin to tackle with awareness and transparency.
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