By Mark Funkhouser

I recently had the pleasure of participating in the 12th annual Municipal Finance Conference, which showcased the latest research on municipal finance by market stakeholders, regulators and academics and was hosted at the Brookings Institution in Washington, D.C. While few government practitioners attend (except as speakers), it’s an event that all local officials should keep tabs on because it is a good “point in time” measurement of trends likely to impact the industry.

The discussions this year touched on climate change, infrastructure financing, debt and financial reporting standards. The overarching message was that the municipal finance world is getting more complicated but that those who are able to harness data and use it to inform their policy will be a step ahead in the eyes of investors. 

Here are my main takeaways from the conference, and my views on their policy applications:

Climate risk has a cost

Municipal governments may not have any immediate financial risks related to climate change, but investors are factoring climate risk into their long-term calculations. Research showed that municipal bond investors have suffered losses in the secondary market on bonds associated with places that were victims of natural disasters. It’s no wonder, then, that separate research found that the market adds a premium to bonds from localities with exposure to heat stress, making that debt more expensive for issuers.

The positive side of this is that there is also evidence of a so-called “greenium,” meaning that investors are willing to accept a slightly lower rate of return for bonds that will pay for certain climate-friendly projects. Data and accountability therefore are key factors when it comes to marketing these bonds: Those that were marketed as climate-friendly, and especially ones that came with a third-party verification, were easier for underwriters to sell and therefore resulted in a lower cost to the issuer.

Read more from F&A

• Banks Are Following the Money on Climate Change. That’s a Good Thing.
• Why Climate Advocates Should Focus on Affordable Housing

The staffing crisis is an increasing risk for local governments

The staffing crunch in government finance departments is becoming a major consideration influencing state and local budgets and credit quality. Local governments are already suffering the consequences of late financial reporting via credit rating withdrawals that will make it more expensive to borrow in the municipal market. Governments have raised salaries — but so has the private sector, which has also been struggling to hire workers. Instead of setting their sights on increasing staffing back up to pre-pandemic levels, there are steps governments should consider to rebalance their staff workloads and operate more efficiently within their existing means: F&A has written about ways to leverage technology to drive process improvements and create more people-focused and user-friendly government (for employees and constituents). Strategic planning can be another powerful method to boost performance — and workplace morale — while improving outcomes in resource-constrained organizations.

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• Playbook: Governments & Work After COVID: An Opportunity for Transformation
• Getting creative in recruiting for public service

Remote work is shifting the balance of power

Remote work is also forcing local governments into difficult decisions about where — and whether — to reallocate resources. Transit funding in particular is a problem no one seems to have the answer to as ridership in major cities has yet to come close to pre-pandemic levels. While buses can be rerouted and even turned into free transit, rail infrastructure is locked into the hub-and-spoke model. The challenge for transit authorities and the local governments that fund them is how to readjust spending and economic development to encourage a new style of ridership within the existing limitations of rail infrastructure.

This rethinking also means that the balance of power between downtowns and their suburbs is shifting. As the center of the hub-and-spoke model, downtowns have traditionally had more power and thus more resources directed to them. But outer neighborhoods and surrounding suburbs are now gaining in power because remote work has changed residents’ typical orbit. Local officials will have to consider this shift as they think about how to reinvigorate downtowns without taking away from momentum and growth elsewhere.

Read more from F&A

• Dispatch from the Mayor’s Office newsletter: For downtown revival, water the grassroots

Even progressive states have regressive taxes

We traditionally think of places like Massachusetts, New York and New Jersey as progressive states for their graduated income tax structure that leans more on the wealthy. But a paper presented at the conference by the European University Institute’s Johannes Fleck pointed out that high property taxes cancel out that progressivity. While states are mostly responsible for setting income tax rates and not property tax rates, that is not a major concern to the taxpayer who is paying both.

Previous research by the University of Chicago has found that property taxes are regressive largely because of the way residences are assessed. Lower-income folks tend to overpay, while the wealthiest homeowners underpay. But this issue of assessments can largely be addressed by implementing new modeling. Cook County, Illinois, Assessor Fritz Kaegi turned around his jurisdiction’s property tax inequities in just one year when his office revamped its approach home valuations by focusing on getting more accurate micro-market data.

Read more from F&A

• Playbook: How Government Leaders Can Capitalize on Federal Funding to Fuel an Equitable Future

More (complexity) is not better

Increasing regulatory requirements and legal pressures have over-complicated official bond statements, making municipal bonds harder to sell. Research has found that these issuer statements’ complexity is correlated with increased borrowing costs. Interestingly, this markup is only associated with individual investors (who make up the bulk of the municipal market) and not institutional investors with the resources to process the information.

In other words, most people don’t know how to separate the signal from the noise, and governments are getting dinged for it. And I doubt that’s limited to bond documents. Local government practitioners reading this should take these research findings as a mandate to review their own communication about finances and ask: am I helping or hurting my cause?

Read more from F&A

• Why Governments Shouldn’t Fear a New Era of Financial Accountability
• 3 Ways to Restore Your Residents’ Faith in Government

The papers delivered at this conference are heavy on the math, and the topics can seem esoteric and obscure, but they have real significance for local officials. Each of these trends is a heads-up for leaders who want to build and maintain effective, equitable and fiscally sustainable services for their communities.