Bonds

Figuring out the long-term effects of the pandemic on public finance issues attached to the urban cores of major US cities still requires a dartboard and a crystal ball, especially while municipalities are currently flush with cash.

The comments came during a Thursday panel discussion hosted by the Volcker Alliance to explore the still unfolding implications of working from home versus a return to the office. In addition to probing the future of office space, changes to the tax base, and the lingering effects on mass transit came under the microscope.

“There are a lot of questions from a financial point of view in the bond market that have been papered over from very generous federal monies and higher than anticipated revenues,” said Howard Cure, director of municipal bond research, Evercore Wealth Management. “It could require drastic changes and that’s what I think people in my industry are going to be focusing on more and more.” 

Cure also brought up the continuing effect of politics on bond issuance. 

“I keep coming back to the federal government because I’ve never focused so much in my 30-plus year career of analyzing municipal bonds, and municipalities, the importance of who is running the federal government and how generous or what emphasis they put on helping cities and mass transit systems,” he said. “It used to be assumed that regardless of the administration, or the party leading Congress, you’d have a regular natural flow of monies that may not be tampered with. And that’s no longer the case.”  

Census data confirms a great outmigration from city centers, showing that from July 1, 2020, to July 1, 2021, 56 major metropolitan areas in the US took a population hit while smaller cities grew. Returning to urban normal is underway at different levels in the country with movements tied to documented population shifts.

“In the United States cell phone location data indicates that a few downtowns are at or very close to their pre-pandemic levels of activity, such as San Diego” said Tracy Hadden Loh, fellow, Anne T. and Robert M. Bass Center for Transformative Placemaking, Brookings Metro. “A few are even busier, such as Salt Lake City.”  

In cities where downtown office space is still vacant and new leasing is slow, a cloud of financial doom hangs low. The news from San Francisco where tech jobs are disappearing is especially troubling.

“The city is projecting a budget deficit over $728 million for two years,” said Romy Varghese, politics editor, Bloomberg News. “Part of that is because they have to downgrade their revenue forecast. Business taxes, which are the second biggest revenue source is structured partly by the number of people actually working in the city borders.”   

Empty office towers hemorrhaging property tax revenues combined with lower mass transit ridership could pull some cities and systems into financial calamity.

“When the community disappears, local sales revenue falls, local sales tax revenue falls, the commercial property tax shrinks, transit revenues fall, and the labor income shrink for people who provide goods and, services to those workers,” said Steven J. Davis, senior fellow, Hoover Institution. 

Proposed solutions include exploring regionalism to expand tax bases, pushing central business districts into a broader mix of uses and more office to housing conversions, a problematic remedy. “I think governments should at the very least try to make these conversions easier. Rezoning commercial districts, relaxing rules about what constitutes a bedroom. A bedroom does not need to have a window,” said Stijn Van Nieuwerburgh, Earle W. Kazis and Benjamin Schore, Columbia University’s Graduate School of Business. 

If the proposed solutions don’t work and workers never come back to the office a major culling may be in the works downtown.

“For the owner of a totally obsolete Class C office space who is underwater on their mortgage, they don’t have to do anything with that,” said Hadden Loh. ”They can just give it back to the bank and walk away. And then the bank is really going to do nothing with that. That’s not going to be a good outcome for cities that could drag this out for decades.”  

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