Municipal bonds, usually among the safest places to store money, may no longer be so secure.
The months-long economic lockdown has robbed city and county coffers of expected income, leaving them without funds to meet many of their obligations, perhaps including bond payments.
Since March, cities’ revenue fell 21 percent from the same period in 2019, the National League of Cities reported. At the same time, care for COVID patients made staggering demands on local governments’ budgets and rainy day funds.
Cities that rely largely on property taxes fared best; those depending on income taxes or tourism have been left scrambling.
The U.S. Federal Reserve, which has pushed bond interest rates to rock bottom and held them there, has bought local governments’ bonds through its Municipal Lending Facility. Congress’s new stimulus package once again includes no direct aid to cities and counties.
Cities also have lost income as the economic shutdown has kept commuters from city centers, starving the economic ecosystems that live off commuters’ spending. Some workers have moved away to locales with lower personal taxes.
The lack of funds also threatens the future of local governments’ pension plans, many of which have been underfunded for years. Retirement funds in Connecticut, Illinois, and Kentucky have less than half the money needed to meet their obligations, according to the Pew Charitable Trusts.
TREND FORECAST: The downward revenue spiral among cities and counties will force governments to choose between paying bondholders, paying retirees, or paying their bills.
To cover these large losses that were in fact created by politicians locking down economies, they will impose new taxes on businesses and consumers to raise revenue. This in turn will escalate new, anti-tax populist movements across America and much of the world.
