Municipalities should be looking for creative solutions to offset coronavirus-related revenue losses rather than defaulting to incurring more debt, former state officials said Thursday.
In a webinar hosted by the Volcker Alliance and Penn Institute for Urban Research, panelists seemed to agree that borrowing may not be the best way to shore up revenue losses, and urged localities to consider taxation and monetizing public assets as part of the solution.
“I don’t think borrowing is always the good option,” said Michael Imber, former commissioner for the Connecticut Pension Sustainability Commission and managing director at Conway MacKenzie. “If it’s really short-term and you’ve got capacity, then yes go ahead. If borrowing is just an excuse to avoid making hard decisions, you’re wasting a crisis.”
“As bad as this looks, we have an opportunity in the crisis to take strong leadership positions and fix the problems that have plagued cities and states and look for a long-term vision on fixing it,” Imber added.
States have at least a trillion in pension liabilities, panelists said, and many municipalities are close to hitting debt limits.
“So there is a considerable amount of debt outstanding,” said William Glasgall, Volcker Alliance senior vice president and director of state and local initiatives. “It makes you wonder if whether we’ll borrow very heavily to get over the hump now, but this is at a cost of some kind of painful restructuring later.”
States and local governments have looked to the federal government for help with losses in revenue due to the coronavirus. The Federal Reserve created the Municipal Liquidity Facility in April to purchase up to $500 billion of short-term notes — a potential short term solution for some municipalities.
Panelists said there has now been discussion of the Fed taking out longer-term obligations. The Fed has repeatedly said they plan to serve as a backstop and to be a last resort for issuers, which is reflected in its pricing details released earlier this month.
“The facility that they’ve set up, while a good backstop is not being used perhaps because of the hesitancy to take on more debt and having to repay it because this is not a short-term phenomenon,” said Susan Wachter, co-director of Penn IUR.
Coronavirus hits differently than the last recession in 2008. Former Philadelphia Mayor Michael Nutter took office in 2008 and said that because it is a health crisis, COVID-19 has forced governments to shut down every business.
“The impact is even greater,” Nutter said. “The economic loss will be larger and with no particular end in sight.”
States and governments will need a variety of ways to find revenue, which could be through raising taxes and monetizing public assets.
During a financial crisis, states and local governments can turn to more creative solutions to increase cash on hand.
“States, working in partnership with local governments, need to think differently and consider things they may have never considered before like shared service models, consolidation and so on,” said Eric Berman, Massachusetts’ former deputy controller and partner at Eide Bailly LLP.
Governments tend to own a lot of land, which can be monetized, Berman said. He cited as an example the Massachusetts Turnpike, which is flanked by solar panels on either side.
Pension plans and other post-employment benefit plans could also be a source of economic activity.
“There is an expectation that governments are going to look for creative solutions to bridge their budget deficits this year and next,” said Imber. “Some will be tempted to take pension holidays, where they’re not putting away money. They’re going to likely be punished by the rating agencies for doing that and their bondholders won’t be terribly pleased either.”
Imber said governments could benefit from investments of public assets to the public pensions. Assets, such as land, could be transferred into a trust, which could issue ownership shares to one or more pensions.
The manager of that trust could be incentivized to maximize the economic value of the assets, Imber said, so that as the trust grows, it would offset pensions underfunding. That manager, for example could create a solar farm on that land and grant a 50-year lease to a utility to build and operate that solar farm, increasing the value of the land. The city could then sell the land and use that increased land value to pay off pensions, Imber said.
"As we struggle through this financial shock from the pandemic, this lot approach could be a useful tool to help bridge budget gaps and capitalize on a new approach to economic development," Imber said. "And most importantly, make good on the promise to retirees to fund their pensions."
