A new data tool offers a window into how investors are responding to changes affecting the financial outlook of individual governments, including trends like the rise of remote work.
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Public Finance Update - Dec. 20, 2022
Welcome back to Route Fifty’s Public Finance Update! I’m Liz Farmer and this week, we’re looking at a new way to gather data on how municipal bond market investors view changes in government finances.
While the muni market is still viewed as a sort of black hole by onlookers due to slow or inconsistent financial disclosure practices compared with the corporate world, the last decade or so has seen a lot of progress when it comes to analyzing bond issuance data. In particular, the Municipal Securities Rulemaking Board’s EMMA database has made issuance information much more accessible. MSRB is now even experimenting with a data analytics component.
Still, getting comprehensive information about the secondary market—how muni bonds are traded—has required a lot of individual legwork. But now thanks to a new dashboard developed by the University of Chicago’s Center for Municipal Finance, our window into what investors are doing and thinking just became a lot clearer. It’s similar to the S&P CoreLogic Case-Shiller Home Price Index, but for muni bonds. In the same way that real estate agents, buyers and sellers use the home price index to inform their decisions, market participants can use the Center for Municipal Finance Muni Index to get a more contextualized picture of the fiscal health of cities, counties and school districts. The Index goes up when investors are willing to pay higher prices for an issuer’s bonds, and vice versa.
Bigger picture, this not only gives local government finance officers another tool when it comes to meeting with credit rating agencies, but it’s the first time market stakeholders have been able to quickly assess changing sentiment about a government’s fiscal health. For instance, looking at the current data offers clues about how investors are reacting to work-from-home trends playing out in different parts of the country, with places that are seeing more remote work, like San Francisco and Seattle, sliding compared to the overall index.
“Because of the nature of municipal finance, researchers usually deal with long timeframes before we have any usable data on the potential impact of major changes,” said Justin Marlowe, the Center for Municipal Finance’s associate director. “The idea with [the indices] is that you can do something in more real time. So, for instance, if a ratings agency announces a more positive ratings outlook for Chicago, you can see that week what the investor reaction is rather than waiting until the next time they go out and borrow money.”
How muni investors view work-from-home
One of the biggest issues that major cities are dealing with today is the change that the dramatic rise in telework has had on their daytime populations in downtowns and central business districts. While the impacts on city finances are still playing out, it appears investors have already formed some opinions about the prospects for certain cities.
More than a year after vaccines became available and stay-at-home orders subsided, an average of 30% of households still report a member working from home at least one day a week, according to my research for the Rockefeller Institute of Government. But there’s wide variation. In San Francisco, for example, roughly 50% of households report telework, while in Miami about 26% report a member working from home some of the time.
In an analysis Marlowe recently wrote about for the Government Finance Officers Association's magazine, he looked at how some major cities were trading relative to the index as a whole.
For context, it’s important to know that the index is down roughly 65% from when it was launched in 2018, partly due to the change in interest rates. But some have dropped much lower and are now trading at less than half of their value four years ago. Among them are Boston; Charlotte, North Carolina; Houston; Memphis, Tennessee; New York City; Phoenix; San Antonio and San Francisco; as well as Fairfax County in the greater Washington, D.C. region; King County, which encompasses Seattle and Mecklenburg County in greater Charlotte.
It’s a geographically and demographically diverse group but one thing they have in common is a high association with telework. Boston, San Francisco and Fairfax and King counties are among the top five concentrations for teleworking households in the country. Meanwhile, the other jurisdictions have high concentrations of finance workers who tend to pay an outsized share of sales, income and other local taxes.
“In a post-pandemic world, finance jobs are also some of the most amenable to telework, so it’s no surprise that the localities recently in doubt among investors also have some of the highest concentrations of finance workers anywhere in the U.S.,” Marlowe wrote.
The reverse may also be true. The three cities with the strongest recent performance on the index (now at more than 85% of their 2018 levels) are Chicago, Dallas, and Wichita, Kansas. While they all underperformed at times before and during the pandemic, they have seen a big recent surge in positive investor sentiment. One commonality that may explain this, Marlowe said, is that all three have broadly diversified economies with a strong emphasis on manufacturing, and far fewer jobs that can shift easily to telework.
A tool for local finance officials
No matter whether sentiment is up or down, local finance officers can use this data to take action.
Take Chicago. A Crain’s Chicago Business story recently noted that the city's ascension in the index into the top one-third of all large cities comes after lagging behind its peers from 2019 to 2021. “As the city gears up for a $700 million to $900 million bond sale later this fall—including its first ESG issuance—pricing data from secondary market trading bodes well for investors in Windy City debt,” the story said.
On the flip side, cities that are underperforming can use the information as a leading indicator and consider fiscal policy changes before their credit rating is potentially affected.
“If I'm a CFO in a city where there is some souring investor perspective on us, I'm going to use those data to talk to the mayor or others in city government to say, ‘We need to get ahead of this,’” Marlowe told Route Fifty. “It might even be a good motivation to do some policy changes the city has been considering to put something tangible out there.”