Should the City of Baltimore Issue More Municipal Debt?
I have lived in the City of Baltimore for 6 months now. The City faces challenges. It needs to hire more police officers and it needs to upgrade the infrastructure of the public schools and upgrade public transit. The City will be expected to also contribute $ to enact the education recommendations embedded in the Kirwin Report. At a time of historically low interest rates, should the city be issuing more bonds? There is a demand for such bonds. The city’s bond rating appears to be pretty good and there isn’t a large risk premium associated with not having a perfect bond rating.
So, why isn’t Baltimore issuing more bonds? One possible explanation is that the City would prefer to engage in a game of “chicken” and allow conditions to deteriorate and wait for the state and the federal government to transfer $ to the city.
If a city must borrow money to do projects, then (ignoring default risk) this provides a strong incentive for such entities to carefully prioritize public goods projects and to implement them in a cost-effective way.
I recognize that raising taxes is a substitute for issuing debt. I also understand that land owners will vote against debt financing of local public goods improvements if they believe that the present discounted value of the new public goods will be less than the PDV of the tax increase. Intuitively, if a government issues debt and uses the money unwisely then land prices in the city will decline because future taxes will have to go up to pay off the debt and the interest owed.
If salience factors preclude new tax hikes and if the projects I list above have a positive PDV in terms of benefits, then issuing bonds in a low interest rate environment would be a prudent strategy for financing these public investments.
Source: http://greeneconomics.blogspot.com/2020/02/should-city-of-baltimore-issue-more.html
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