Pew: Cities Refinanced $13.9B in 2012, Largest in Decades

Taking advantage of historically low interest rates and accelerated infrastructure projects, America’s 30 largest cities refinanced $13.9 billion in existing debt in 2012, the largest amount in two decades, a Pew Charitable Trusts report found.

The report, “Understanding the Great Recession’s Impact on City Bond Issuances,” found that for the first time since 1991, issuances of refunding bonds in 2012 accounted for 57% of the total bonds, some $24.5 billion originated by these cities. While the refundings in 2012 were extensive, they imitate the general pattern of previous economic recoveries when cities took advantage of ongoing low interest rates several years post-recession to refinance substantial amounts of existing debt.

“This stands in contrast to prior years, when refundings never exceeded $11.1 billion or 45% of total bonds issued,” Pew said. The average for the 22-year period Pew examined was $6.9 billion and 29%.

New York, Houston, and Chicago, which had the three largest dollar amounts of refundings, said they would collectively save an estimated $709 million over the life of the bonds, compared with the obligations they refinanced, Pew said.

“Federal policy interventions through the American Recovery and Reinvestment Act  — notably the Build America Bond program and direct infrastructure grants to local governments — created incentives for cities to undertake projects during 2009 and 2010 that had been planned for future years,” Pew wrote.

Pew noted that the lack of new money issuances among the 30 cities in 2011 and 2012 was likely driven “as much or more by revenue challenges than by a shortage of new infrastructure projects.”

Pew found that in 2012 — three years after the recession officially ended — new money bond issuances did not rebound like typical post-recession patterns. In fact, in 2011 the 30 cities new money bond issuances were at their lowest levels in 22 years — $10.4 billion, when adjusted for inflation. These issuances increased only by $200 million in 2012, Pew said.

“The falloff in issuances for new projects was widespread across the cities, despite decreases in interest rates similar to previous recessions,” Pew said. “This suggests that many cities either funded new projects through other means or simply did not undertake new projects.”

In more than two-thirds of the cities, revenues were still below their pre-recession peaks in 2011, two years after the end of the Great Recession. Without the necessary revenues to seed or pay for new projects, cities were reluctant to incur large amounts of new debt before their finances recovered.

As a result, cities slashed budgets and cut back on new debt-financed capital projects despite favorable interest rates and the demand for more secure investments.

Even as revenues begin to rebound, some cities are likely to keep using refunding bonds as a significant debt-management tool contingent on interest rates remaining low, Pew said.

Some of the other 30 cities included in the research were: Atlanta, Los Angeles, Detroit, Boston, Phoenix and Miami. Over the period Pew examined — Jan. 1, 1991 through Dec. 31, 2012 — the cities represent roughly one-third of municipal bond issuances including 53% of the $21.6 billion in BABs issued in all U.S. cities.

“Municipalities will continue to face difficult economic conditions until revenues recover more substantially,” Pew concluded. “Other factors such as the federal sequester and pending changes to Federal Reserve policy are also changing the landscape for cities as they seek to manage costs associated with debt service while financing needed infrastructure improvements.”

For reprint and licensing requests for this article, click here.
Tax
MORE FROM BOND BUYER