Outlook: A Future Municipal Bond Crisis

The consequences of the COVID-19 pandemic continue to affect investors, consumers, and municipal bond issuers across the US. In April, the Consumer Price Index hit 8.3% — a significant spike in inflation. When combined with supply chain disruptions, high energy prices, and budget allocated to COVID-19 relief for individuals, municipalities are now facing a crisis in their yearly budgets. 

In this article, we will walk through how this combination of factors may affect municipal budgets and consider the impact that this will have on their future and the future of municipal projects and bonds. 

Municipal Government Wages

Rising costs due to inflation will put even more pressure on municipal budgets than before. The 8% rise in inflation means that workers will effectively lose 6% on their real wages this year. Therefore, new employment contracts will include negotiations to increase pay in line with inflation. This will mean unexpected and unanticipated costs for the workforce, which will affect municipal operation budgets throughout the year. 

Municipal Government Pensions 

Many municipalities are also obligated to make employer contributions to their employee’s state pension fund. As pension contributions in a given year are based on the state pension returns of the last five years, and the fact that the stock market is having a tough year will also impact municipalities. As a result, they will need to increase their pension contributions – another hit to the budget.  

Rising Costs Across Services

COVID-19 raised healthcare costs for everyone, and municipal workers are no exception. With health care premiums skyrocketing, local governments can expect increased costs of around 10%. 

When it comes to municipal projects funded by municipal bonds, these may also go quickly over budget. Supply chain costs continue to affect the prices of services and goods across the US. Any planned municipal projects affected by the supply chain disruption will go over their expected budget for the year. Beyond this, the gasoline price crisis and rapidly increasing energy and water costs will surpass 2022’s budgeted costs for municipalities, meaning further pressure on the budget. 

The Consequences

With municipal budgets remaining the same while being severely impacted by rising costs, this may mean significant cuts to municipal services and employees. New projects may be put on hold and will very likely go over budget. So, how to respond? Municipal budgets remain the same while being severely impacted by the rising costs. This may mean significant cuts to municipal services and employees.