Problem: Cash strapped local authorities, inadequate pension provision within an aging society, and reduced infrastructural development. Solution: Municipal bonds.
(Co-written with Karl Deeter, and also posted on the TASC Blog. Please head there to leave a comment.)
Municipal bonds are debt instruments issued by local authorities to finance investment projects. Yesterday’s announcement by government of a Recovery bond is a variant of the municipal bond idea, but on a national level. We have written about municipal bonds before, several times. We are interested in recapitalizing local authorities and regional authorities using these bonds, and we’d like to use this blog post to sound out possible issues with the idea, and compose a plan of action for implementing the idea if people think it is feasible.
Cash-strapped local authorities can use funds generated by municipal bond issues on a yearly basis to reduce their infrastructural deficits in transport, water provision, port equipment, broadband provision, and community initiatives. Ireland’s regions can compete on the quality of our infrastructure, rather than on direct wage competition.
Dealing locally but funded centrally to deal with extremely poor infrastructural provision with broadband, hospitals-both public and private, roads, amenities, playgrounds, local housing, homeless initiatives, and regeneration projects. Individuals can use municipal bonds in order to save and invest, or to fund their pensions, ensuring a guaranteed rate of return on their savings. Local authorities can respond to the needs of citizens directly using these bond issuances.
Ireland's recent flooding has exposed three painful facts. First, increased flooding as a result of climate change is inevitable. This 1 in 800-year event will be probably be seen again inside a decade. It should be remembered the flooding of 2008 broke all previous records in Dublin and Cork. Second, public services were not equipped to stop the flooding from occurring or to deal with the floods once they had occurred. Third, the government cannot pay for the cleanup operation, which may cost a half a billion Euros. In simple terms we need the infrastructure, we cannot go forward with the risk of recurrence unmitigated, and yet we equally can’t afford to pay for the improvements, it is a considerably difficult position to find oneself in nationally.
This is a very interesting idea. I'm assuming that this is linked to the recently announced "National Solidarity Bond"?
Who would the investors be in this arrangement? Is it targeted at private Irish investors or could capital be raised from foreign investors also? Would the investment be open-ended, essentially accepting any and all funds, or would there be an upper limit set to the funding?
Stephen - this is an excellent idea: varying our borrowing/investment instruments gives us greater flexibility. Given that it has been operating for decades - especially in the US - means we don't have to reinvent the wheel. Integrating this into mandatory pension provision makes it all the more provocative.
One issue, however, re: general obligation bonds. While these are regularly issued in the US, local/state governments have wide-ranging revenue raising powers. Here, it is minimal and will come under siege in the years ahead. It's not just that central government will continue to squeeze the general grants. Many local authorities relied on development levies. That's dried up. The rate-base has also been hit. And where local authorities operate their own service provision (e.g. bins) they will be under pressure to fund waivers for the growing number of unemployed and unwaged. Outside of those streams and central grant-funding, they have little ability to raise funds. So how would local authorities repay the debt given the limited tax base and revenue raising powers (this is not an issue, of course, with revenue bonds).
This is not fatal to the argument. Indeed, it could lead us into a fruitful discussion of local/regional government and the role more powerful local bodies can play in economic and social recovery and regeneration. But my question is - are general obligation bonds conditional on such new powers being granted to local level?
@ Colm,
The solidarity bond is an instance of this kind of revenue generator, but we're much more interested in looking at the local level implementations of these. Potential buyers could be large finance houses, individuals, banks, other local authorities, insurance companies looking to hedge themselves against paying out for flood damaged properties, and the list really goes on. I also see this product as a replacement for privately provided pensions with reinvested coupons and tax-free statuses being given to people who take out these products if at all possible. Of course there are issues here in implementation (not the least of which being ROI), but I'm confident they can be worked out if required.
@ Michael,
Yes, the rules would have to change, but these bonds wouldn't be directly managed by LA's, mainly because they don't have the expertise, the NTMA does (and is world-class at issuing and managing bonds), and we don't need more duplication. What would need to change is the legal ownership of these funds--not central government's, but the midland region, and not for a gigantic miscellaneous pot to fulfil other interests, but to achieve a specific objective, like flood protection.
I do see this as revenue-bond issues first, but local authorities could conceivably repay GO issues in the first instance by changing their tax rates, but revenue-generating projects (like tolls) could be built first to start a cash-flow, and then more 'sunk cost/long term benefit' projects could be built afterwards. I agree the issue is really with the type of funding these authorities can take and give from from the centre.
@Michael Taft: When you get a serious downturn jobs are lost and that does feed through to property taxes - that creates a strong argument for qualifying projects under such a scheme. if we are ever to have a general obligation it will involve local authorities being able to charge for the amenities they provide, the foundation for this was hinted at in the Site Value Tax mention yesterday, what is important is to see local revenue go to local government rather than national and then bleed back down.
I agree we need new financial innovations (of the benign kind) to help solve some of the problems that we face. I certainly favour more 'local' innovations as the knowledge of what needs to be done - and how - is more likely to reside there than in a central authority far removed from the location.
That said, I think the structure of local government in Ireland - our authorities are essentially 19th century constructs invented by the Victorians - is simply inappropriate as a locus for solving the problems our communities face. Instead, I would go along with Michael Taft's suggestion that an initiative such as Municipal Bonds (though maybe try Revenue Bonds before we go the General Obligation route!) should be tied to a restructuring of local/regional governance.
Marc Coleman has made the same point: we are 'over-governed' in Ireland due to the over-lapping structures now in place.
Finally, I wouldn't just stop at Municipal Bonds. I would look at experimenting with new types of money (community currencies, Ithaca hours, that type of thing) - eloquently explored by economists like Richard Douthwaite and Bernard Lietaer.
One very constructive belief that's come out of the crisis is the acceptance of institutional failures in Irish society- ComReg and our local authorities are excellent examples of institutions with poor governance and accountability, as well as a definite misalignment of incentives across these institutions.
The use of municipal bonds as a carrot to encourage institutional reform does make sense in that regard, and has historical precedent--the state of Oregon (pun intended) was altered by the introduction of Muncipal bond funding. Bond funding exercises necessarily come with strict oversight conditions, precisely because of the 'local' nature of the funding. So this could be one part of the carrot and stick exercise in encouraging reform.