Howard County Executive Calvin Ball’s administration is proposing a capital improvement plan that tops $250 million and includes $20.2 million to protect Ellicott City from future flooding.
County officials in a call with reporters Tuesday acknowledged that an unsettled municipal bond market will increase the expense of financing capital projects. The county, however, still wants to issue $94.6 million in general obligation bonds to pay for capital projects in the fiscal year 2021 despite a significantly lower recommendation from its spending committee.
“Likely it will be more costly. How much (more expensive) we don’t know,” Howard County Budget Director Holly Sun said.
The municipal bond market navigated an unusually tumultuous period earlier this month, rocked by rising yields and sell-offs amid the COVID-19 pandemic.
Governments finance projects by issuing bonds to investors with a set payment at the end of a term. As the virus spread across the nation, forcing residents to stay home to stop its spread, local governments started to project substantial revenue reductions.
Investors spooked by reports of dropping revenues during the week of March 18, according to the Brookings Institute, withdrew 2.5% of the market’s value, worth roughly $12 billion.
As a result interest rates charged borrowers surged as the amount of new investor cash into the municipal bond market dropped as returns on those investments fell from 3.7% to a projected -1.3%, according to the Bloomberg Barclays Municipal Bond Index.
Due to the market’s instability, according to the Brookings Institute, local governments only sold about $6 billion of the $16 billion in bonds offered between March 9 and March 20.
The Federal Reserve has since intervened to stabilize that market by offering loans to investors to prevent them from fleeing the market, calming the waters in the short term.
As the fall out from the COVID-19 pandemic on city, county and state revenues continues, however, the usually stable municipal market faces the possibility of greater instability.
Gov. Larry Hogan, in an interview with The Daily Record last week, expressed concerns about the potential impact of uncertainty in the municipal bond market on state and local governments’ ability to finance projects. That concern is magnified as jurisdictions are likely to wipe out any rainy day funds and surpluses, potentially hurting their credit ratings.
“We just had the lowest bond rates ever when we just went out for our last bond sale just a few weeks ago before this happened, and we were in great shape … but our entire economy is going to be disrupted, even for state and local governments,” Hogan said.
Ball’s proposal to issue $94.6 million in general obligation debt is higher than county’s spending affordability committee recommended based on stressed debt capacity due to existing bonds and weakening revenues in the face of the COVID-19 outbreak.
Exceeding that recommendation, Ball’s team argues, is needed to “support high-priority needs” and remains in line with the past five years’ average. While the COVID-19 outbreak continues to stress revenues across the board, Ball said, he’s confident in the ability to accomplish the capital plan.
“I think there’s less volatility on the capital side,” Ball said.
The potential higher cost of borrowing due to increased yields in the municipal bond market is not causing the county to examine “cutting back” on projects, Sun said. Working with a financial adviser, the county will find the best window to issue debt, she said, and it maintains a top bond rating.
“We don’t believe there’s any obstacles to prevent us from borrowing,” Sun said.