Bonds dry up as funding source; Some government projects on hold

Local governments seeking money for roads, schools and a host of other projects are finding it difficult to secure financing, leading some to put those projects on hold.

The demand from investors for municipal bonds has dropped off a cliff in the past couple of weeks, sending interest rates higher and making it more expensive for governments and their taxpayers to borrow. As a result, some local governments are pulling out of planned bond offerings, hoping market conditions will stabilize before they need their money.

“If you don’t have to have the money now, there’s probably a better time to issue,” said Toby Morris, a vice president of public finance for Northland Securities in Pierre. Northland underwrites bond issues and serves as a financial adviser to local governments.

On Tuesday, Massachusetts delayed the sale of $750 million in bonds, becoming the latest big-name borrower in municipal finance to put off a sale. Even small issuers in the Midwest are rethinking bond offerings.

“I think there are concerns all over,” Morris said.

“What was at first just an issue on the East Coast, and later on the West Coast, is now an issue for Main Street.”

Issuers are in “shock” by the higher interest rates, said Thomas Doe, the chief executive officer of Municipal Market Advisors, a Concord, Mass. consulting firm in the municipal bond industry. Doe says interest rates are where they were about eight years ago, in part because the derivative market in municipal bonds has evaporated.

Doe predicts the market is likely to look like it did 15 or 20 years ago: Fewer issues and higher interest rates.

“That adjustment, or that reality, is very difficult for issuers to comprehend,” Doe said.

Todd Hight, the director of finance for the South Dakota Housing Development Authority, said the authority had hoped to issue $100 million in home-ownership mortgage bonds later this year. The authority is typically the largest issuer in South Dakota and already had issued $200 million this year in housing bonds.

“We want to issue before the year ended if we can,” Hight said. “Basically, there’s not a market for bonds.”

Ray Woodsend, a senior vice president for Dougherty & Co. in Sioux Falls, said one of his clients pulled out of a refunding two weeks ago because investors weren’t interested. Dougherty also underwrites bonds and advises local governments.

“I don’t have a lot of clients looking to do anything right now,” Woodsend said.

“If people have a project they have to do, they’ll probably go ahead and do it,” he added. “But you’d think long and hard if it were a $70 million or $80 million project.”

Many of the big institutional investors and banks that buy new bond offerings have been staying out of the market because they’ve needed to hang onto their cash, Woodsend said.

Meanwhile, some government officials wonder whether a downturn in the economy could affect property taxes, sales tax and other revenues generally used to pay off bonds.

In Sioux Falls, growth in sales tax revenue for 2008 is well below projections. The city plans to borrow $124 million in bonds over the next five years to pay for capital projects – more than half of that coming next year.

City Finance Director Eugene Rowenhorst said some of those projects could be put off a year “without doing major damage.” They include a new library, money for the zoo and a junior football complex.

But one project that would be more difficult to put off is a $22 million financing needed to upgrade the levee system along portions of the Big Sioux River and Skunk Creek.

It’s a priority, Rowenhorst said, because the federal government is expected to force as many as 1,600 property owners to buy flood insurance.

Rowenhorst, a former chief financial officer for Citibank, said he’s never seen a market like this one.

“When you can’t sell at any price, you’ve got a problem,” he said.

“It’s one of those things we’re going to have to watch very closely,” he added.

The Tea Area School District also is watching closely. The district will ask voters later this year to approve a bond issue expected to be less than $10 million. If voters give their OK, the district would like to have the bonds sold early next year.

Superintendent Dean Jones said the condition in the market is one perspective that officials will examine. If they can get the bonds issued early and get bids for a new building to house students in grades four through six, Jones thinks the district will save money.

Tea has less wiggle room than other local governments that can put off projects.

“We’re kind of in a position where we know we’re going to need the space fairly soon,” he said.

“In some respects, it kind of is what it is,” he added.

Reach reporter Jonathan Ellis at 605-575-3629.

Jonathan Ellis
October 11, 2008

Source: Argus Leader

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