In the evolving landscape of public finance, state and local governments are becoming pivotal players as they seek to bolster resilient infrastructure in response to increasingly frequent extreme weather events. With the federal deficit reaching unprecedented levels, the expectation is shifting squarely onto these lower-tier governments to fill the looming gap in funding essential infrastructure projects. There is a silver lining, however; the local governments have a considerable capacity to absorb additional debt. Investors, particularly in the retail sector, are expressing a keen interest in purchasing municipal bonds, signaling a readiness to help finance these critical initiatives.
Prominent voices in the infrastructure investment community recently highlighted this scenario at The Bond Buyer’s Infrastructure conference. Industry leaders like Hector Negroni, the founder and CEO of Foundation Credit, emphasize that the issuance community remains significantly under-levered. He encourages issuers to take bold steps—i.e., increasing debt issuance—indicating that concerns about credit ratings should take a backseat to addressing pressing community needs. Negroni insists that an abundant demand for municipal bonds exists, and added, “The time is now,” suggesting that municipalities have a unique opportunity to seize the moment for funding modernization.
Tom Doe of Municipal Market Analytics, Inc. anticipates a massive expansion in the municipal bond market as issuers increasingly focus on financing projects that cater to climate adaptation requirements. He points out that the anticipated increase in climate-driven migration will necessitate new infrastructure, underscoring a burgeoning intersection of public policy, infrastructure investment, and climate resilience. Doe’s assertion that “this is the big opportunity for the municipal market” resonates with the urgent need for modernization and transformation to face the impacts of climate change.
As found in various analyses, a reduction in the ratio of municipal debt to GDP—falling from 20% in 2010 to roughly 10% today—indicates an overall strengthening of the financial position of local governments. Such evidence suggests that there is robust capacity for accumulating additional debt without the risk of overextension. Adam Stern, co-head of research at Breckinridge Capital Advisors, remarks on the readiness of retail buyers to invest in these bonds, identifying an appetite for tax-free municipal bonds among aged investors with a historical under-allocation to this asset class.
Nevertheless, the road to resilient infrastructure is fraught with competing financial demands. Negroni points out that amidst the pressing need for resilient infrastructure, issues such as reindustrialization and demographic shifts are also vying for attention and resources. Therefore, it becomes an imperative for issuers to not only leverage their current positions but to adopt a proactive approach in identifying and mobilizing funds towards urgent projects.
As municipalities consider increased borrowing, it’s essential to also engage with the challenges presented by potentially fluctuating tax policies. Concerns loom over proposed changes to tax exemptions for municipal bonds, an issue that could imperil the market. However, Doe argues that now is the opportune moment for the municipal market to assert its significance to Congress. The sentiment voiced by Doe stresses the importance of self-advocacy; the industry should take the initiative to demonstrate its potential role in addressing climate challenges and driving funding toward necessary projects.
As extreme weather events become increasingly commonplace and financial constraints at the federal level persist, state and local governments must navigate the complexities and imperatives of financing resilient infrastructure. With a strong appetite for investment and a robust capacity for debt absorption, the conditions are ripe for municipalities to capitalize on this moment. Fostering proactive engagement with federal policymakers and responding effectively to the pressing needs of communities will dictate the success of these initiatives. The overarching sentiment is clear: the time to act is not just now; it’s imperative for the future resilience of communities across the country.