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City leaders across the nation strike a consistent theme: No local government could have predicted or adequately prepared for a public health and fiscal crisis like COVID-19.
Cities, of course, remain in the eye of the storm. With rising caseloads, schools back in session, (some with virtual classes or a hybrid schedule), and leaders backpedaling on reopening plans, the extent of the pandemic’s social and economic toll remains a guessing game.
But the crisis is also raising serious concerns about cities’ preparedness for other difficult-to-predict challenges, and amplifying questions about how they can best prepare themselves to prevent, weather, and adapt to catastrophic events and a changing economic landscape.
A global pandemic, climate change and natural disasters, automation and artificial intelligence, rising energy costs, civil unrest, and cybersecurity are all threats collectively labeled “urban resilience” challenges that can adversely impact the fabric of a city.
“[It’s] not just pandemics, but any hard-to-predict issue, such as riots, infrastructure collapse, wildfires, earthquakes” that can cause a chain reaction, said Michael Pagano, dean of the University of Illinois at Chicago College of Urban Planning and Public Affairs and director of the school’s Government Finance Research Center. “Cities disappear or change rapidly and completely, sometimes never coming back but always coming back differently.” And when that happens, he said, the lament is often, “If we only knew.”
The degree to which cities have incorporated planning for such issues into their overall strategy — whether through policymaking and collaboration or through infrastructure — depends on the city, its region, and whether the challenge is on a city’s doorstep or off in the distance.
One gauge of whether a city may be resilient is to examine if it has “a plan that builds in shocks that can’t be predicted,” said Rick Mattoon, senior economist and economic advisor at the Federal Reserve Bank of Chicago. “If they can demonstrate that they have such a plan in place, that will be a big advantage to them in attracting investments.”
Whether the pandemic has accelerated that thinking — or pushed it to the backburner — is hard to assess.
“Human behavior changes slowly unless a catastrophic event shakes us up,” Pagano said. “The pandemic is one of those shocks, as is the Black Lives Matter post-[George] Floyd murder. It’s time for non-incremental thinking. And a massive shock that will not likely abate for years can or should stimulate the rethinking.”
While future threats are difficult to predict, the tenets of sound fiscal management provide a good starting point. Sarah Frey, a director at PFM Financial Advisors LLC, said there is correlation between planning and well-managed government. “Liquidity is always an important issue,” she added.
Resiliency
Some cities are incorporating resiliency thinking in their long-term infrastructure plans, in workforce development and training, and in the creation or naming of a resiliency officer to coordinate efforts.
Aside from having liquidity to deal with emergencies, market participants say cities also would be well-served by adopting collaborative relationships with other governments and the corporate sector that allow for quick turnaround in times of trouble. Having rules in place that allow for virtual council meetings and emergency powers — although the latter can sometimes bump against political interference — can also help.
Cybersecurity and climate change are among the issues that in recent years have received growing attention from city managers.
“Increasingly, cities have been planning for climate change in part, not because it is unexpected, but because 20 years ago, when we were warned about climate change, we didn’t expect it to happen as quickly. Now, cities in coastal areas are preparing alone and in collaboration with their states,” Pagano said.
Civil unrest has also flared up, triggered by Floyd’s killing in May by a Minneapolis police officer, sparking a prolonged period of protests across the nation. Events have scrutiny of police spending on a spectrum from modest shifts to social services to an outright disbanding of police departments.
Energy costs stand to steer housing and transportation planning as they can influence decisions on how people get around, with transit pushed aside in favor of driving when gasoline prices fall and vice versa when they rise.
Researchers’ predictions that many jobs will one day be performed by robots sow worries among labor on automation and artificial intelligence that can get in the way of political will needed to prepare for a changing workforce landscape.
The Rockefeller Foundation zeroed in on the idea of cities addressing resiliency issues with its 100 Resilient Cities program that launched in 2013 and ironically wound down in 2019. The initial idea was to plan for climate change. Grants funded the hiring of chief resilience officers by participating cities, along with the development of resiliency strategies and the promotion of international collaboration. The program’s reach extended beyond climate and disasters to include issues of transportation, food and water security, employment and crime.
That progress is threatened by the pandemic, which created short-term financial crises that threaten cities’ ability to sustain longer-term investments. Miami’s first CRO Jane Gilbert departed in July, and published reports expressed concerns the position would be cut as other local governments were trimming such staff. The city recently announced that Alan Dodd, who has led Miami's Department of Resilience and Public Works since 2018, will take on Gilbert’s role while maintaining his current duties.
Balancing Act
While the pandemic may bring simmering issues to the surface, planning for future challenges may prove difficult in the near-term. Cities that had finally recovered from the decade-old recession were preparing in case of a traditional downturn, not a catastrophe.
“You have a situation where they were in good shape, had saved some money to deal with a normal downturn, but now they are dealing with something completely unpredictable,” the Chicago Fed’s Mattoon said. “They are facing immediate concerns and immediate pressures and don’t have the luxury to do multi-year planning … for issues that are coming down the pike.”
Pagano agreed and said it runs deeper: Cities tend to be more reactive than proactive.
“There’s a balance question that incentivizes procrastination and delay. I think of issues like pandemics or cybersecurity breaches in much the same way I think of repair and maintenance of infrastructure — that is, everyone knows that we should invest continuously in our fixed assets and prepare for the 100-year flood, but we also know that voters control to a large extent how much money the city works with each year,” he said. “And it’s hard to convince taxpayers to pay more for future possibilities, especially if it means trading off service levels today. We’ve not mastered the proactive game and we certainly haven’t mastered the ability to weigh future benefits against current costs. We hope against hope that a disaster won’t happen on our watch.”
The lack of national mandates and direction from the federal government during the coronavirus pandemic underscores the need for cities to look to other partners as they plan for future catastrophic events.
Since it’s not realistic for cities to hoard cash given other pressing demands, Mattoon said, the formation of some type of federal institution that would lead a national or at least regional effort in planning for and dealing with resiliency challenges offers the best fix.
The pandemic underscores the need for collaboration in some form, agreed Pagano. “A pandemic such as COVID-19 — because it knows no borders — requires governments to plan together, which is the reason for federal agencies or state agencies to coordinate in response to the improbable.”
Moreover, resiliency issues are considered when assessing a city’s overall economic well-being. So the more proactive a city is, the better — as there are no overnight fixes, said Dan White, head of fiscal policy research at Moody’s Analytics, which operates independently from Moody’s Investors Service.
Having your fiscal house in order is a good start. “The cities that are in the best shape fiscally have the ability to look ahead and see what is coming down the pike,” White said. Struggling cities are more focused on just getting through “to the next fiscal year.”
While having plans in place is a best practice, he added, studying an issue is a good first step. “Even studying it is addressing it.” Forward-thinking strategies, like infrastructure planning and looking at a range of pandemic recovery scenarios, are also good strategies, White said. A strong, non-combative relationship with the private sector is also a good sign, he said, as it creates a healthier economic environment that can better withstand threats.
The reality, sources said, is that some challenges are difficult to plan for and preparations are driven more by politics than anything else. Infrastructure designed to mitigate climate change, such as a seawall or a stormwater capture system, don’t generate the same level of fanfare as a new school or road.
“I think that climate change projects and even infrastructure maintenance suffers because it is less visible and sexy,” said Bill Oliver, a retired New York City-based buy-side analyst. “We are still repairing damage to the transit system caused by Sandy in 2012 and the biggest capital projects to prevent similar flood damage have not gotten that far. There may be some forward-thinking cities like Seattle and Portland that are doing things, but I think there are very few.”
Ratings
The pandemic has pushed “environmental, social and governance risk” to the frontlines for rating agencies, but the extent to which still-evolving topics outside the scope of the pandemic weigh on a rating is hard to pinpoint.
“Our criteria and all of our credit work is designed to be as forward-looking as possible,” said Michael Rinaldi, head of U.S. Local Government Ratings at Fitch Ratings. “But the further you look down the road, the less visibility you have … so there are certain limitations from credit analytics.”
For Fitch, the coronavirus outbreak and related government containment measures create an “uncertain operating environment for U.S. state and local governments and related entities in the near term.”
Credit pressures or events that may appear to pose threats years down the line might not receive explicit recognition in the criteria but they “have a way of filtering down to key rating drivers that underpin our work,” Rinaldi said.
A city that may be challenged by a pattern of out-migration or certain environmentally related risks may see strains on its tax base, balance sheet, and the emergence of long-term revenue growth damage. Fitch will look at the data and factor it into any analysis.
Fitch is paying more attention to infrastructure planning to combat existing and potential problems, such as stormwater remediation. Cybersecurity planning is also a subject their analysts will inquire about during review. In some areas, like cybersecurity, practices are rapidly evolving and it’s difficult to gauge which policy would be most successful.
“What’s important most of all is that local governments are thinking about” looming challenges, Rinaldi said. “I think it depends on the issue. It depends on the values of the community and that is going to be markedly different from each city to the next.”
“It's not necessarily for us to opine on what's critical to a given community or what is essential,” he added. “Our focus is can they accommodate the services or investment they are making in the community and do they have the ability to meet financial commitments particularly to bondholders, so if the investment or lack thereof creates additional risks that is something” that is woven into the analysis.
Advice
“I definitely see more attention and the focus accelerating” on issuers addressing resiliency issues, said PFM’s Frey.
PFM is seeing that attention in the form of budget practices as well as funding dedicated to planning, and efforts to look at issues holistically through the promotion of affordable housing, workforce developments, transportation investments, and healthcare. It’s baked into the long-term planning advice offered to clients.
One PFM client defines resilience as addressing climate change, strengthening neighborhoods and deconcentrating poverty, and creating economic opportunity. In certain local governments, engagement is also clearly seen in dedicated staff resiliency officers.
A city’s capital improvement program and funding plans will typically include potential resiliency projects as well as measures to address the potential effects of acute incidents like weather, housing shortages, criminal justice and, most recently, pandemics.
In some cases, the funding plan and advice the firm provides includes the evaluation and potential use of bonds labeled, certified, or verified as green, social, and/or sustainable.
For some clients, those issues are an increasingly important component of credit rating evaluation, so the firm’s advice on credit strategy is filtered through that lens.
To mitigate the downside, PFM suggests cities look at their ability to meet near-term expenses, prior to potential federal emergency management aid or insurance reimbursements; pre- and post-event rating agency and investor disclosure; emergency operating and capital budget reprioritization; and financial decision-making and approval processes in stressed scenarios.
PFM said it’s fielding more questions from broker-dealers and investors than in the past on resiliency issues, and there’s more emphasis on disclosure and a greater interest among some investors who are adjusting their investments.
But the level of attention paid by some issuers on these topics is the source of debate, with pricing at the center. If an issue is not clearly one that is material and must be disclosed, issuers want to know if it’s worth their while to disclose.
“Until there’s a pricing benefit, some aren’t going to make substantial movement if it’s not a priority in the community,” Frey said. “That’s where the rubber hits the road.”
Generally speaking, in the current market, PFM said it has not seen climate risk have a measurable, negative impact on the pricing of municipal bonds, though the market could get to that point.
PFM will lay out resiliency topics it sees as relevant to a particular borrower sharing its opinion that “a few years down the road this may become more of a differentiating factor” with rating agencies and investors. Frey noted some investors have already laid out strategic repositioning of some funds to favor social sustainability projects and that can influence issuers.
While dealing with resiliency issues may first show itself in specific financing projects, Frey said she’s seeing more “new and innovative financing mechanisms” being pitched. The bottom line reminder for cities, however, is at the end of the day the revenues are what they are unless some new stream is being adopted, so it’s a matter of “prioritization” on how you spend the revenues.
Disclosure
The materiality of an issue on a borrower’s fiscal well-being or a project being financed takes center stage when deciding on what is to be disclosed in offering statements or through voluntary or ongoing filings. However, settling on what is “material” isn’t so simple when assessing future risks.
“Borrowers face a tough task. It’s always going to be a discussion point and it’s always evolving,” said Kimberly Magrini, partner-elect in Ballard Spahr LLP’s New York and Philadelphia offices. “The goal is to make sure you are disclosing everything that would be material to an investor’s decision to purchase the bonds. What’s material can differ depending on the type of borrowing and the geographic location. It’s a facts-and-circumstances analysis and that will be different for every issuer or borrower out there so a lot of analysis goes into what the material risk is for investors.”
In offering statements, it’s a “group discussion and decision” that includes the borrower whose responsibility it is to provide material information and the disclosure, bond and underwriter’s counsel whose job is centered on due diligence.
Tensions exist when an issuer is too broad or the disclosure may be too generic, as that’s discouraged by the Securities and Exchange Commission. The lack of precise information drove debate over what should be disclosed about the coronavirus by governmental, healthcare, and higher education borrowers. “It was a real challenge for issuers and borrowers to figure out just what to disclose,” Magrini said.
The same holds true for other hard-to-predict resilience issues, and again there’s disparity depending on the borrower and the topic. A borrower can’t predict a wildfire or a natural disaster but depending on the region, they are risk factors. Cybersecurity is tricky, as too much disclosure that reveals information about prevention measures or insurance could put a borrower at greater risk of an attack.
The National Federation of Municipal Analysts in a July white paper offered best practices for enhanced disclosure because cyberattacks against state governments, local governments, 501c3 organizations, and conduit borrowers are becoming more commonplace. The costs to both defend against and remedy the damages caused by cyberattacks can be material, and present credit, fiscal and operational issues for issuers.
“If you find someone in the market that has great disclosure, you take that as an example and guide,” Magrini said.
Guesswork
Few are willing to place a bet on how planning for resiliency challenges will fare once cities emerge from the COVID-19 health and fiscal crisis.
The pandemic could delay other action, White said, because a recovery could take two years, so the emphasis may remain on the immediate, with the exception of some resilience areas, such as workforce development.
“Given that we’re in the midst of a pandemic without fully understanding the long-term impacts it may have on populations, healthcare, housing, transportation, and the core budgets, it certainly clouds the issue of dealing with resiliency overall,” PFM advisors said. “At the same time, it has highlighted the need to address issues such as housing, transportation, economic development, and criminal justice. Timing may have shifted, but the issues remain and perhaps are brought to the forefront.”
Pagano said, even “should the pandemic cease tomorrow, the damage to city budgets is horrific.
“Data I’ve accumulated on cities’ general funds over the last four decades indicates that rebuilding is slow,” he added. “The General Fund of cities returned to its pre-Great Recession level in constant dollar terms just last year, in 2019. If it took a decade to rebuild General Funds, I can only imagine that the COVID-19 rebound will not be much faster” and that will influence planning across the board.
