.... market due to their perceived risk. “There is just no institutional demand of any size,” he says. As a result, interest rates have become prohibitive for all but the top-rated municipal borrowers.
Fabian says there is an unprecedented backlog of long-term project-related municipal debt waiting to come to market, but the market remains frozen. He estimates there is a backlog of more than $120 billion of long-term bonds waiting to come to market, more than $38 billion of which has been on hold since September.
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Municipal issuers are waiting for the market to stabilize, but in the meantime, projects are being put on hold. The burning question for municipalities is, How long can this go on? Fabian says the market fundamentals suggest the prohibitive scenario could go on for six months, if not longer. “The situation we have could be permanent,” he speculates.
As a result, projects from Maine to California are being delayed due to the inability of states and municipalities to issue new bonds. In Florida, for example, new funding for city and municipal projects has ground to a halt. “Right now, nobody can issue new bonds,” says Jeannie Hagan, director of financial services for the Florida League of Cities. The cost of long-term project bonds has become prohibitive for cities with less-than-perfect credit, she says. “It’s pretty dire. Projects are definitely being put on hold,” she adds.
Cities in Florida hope they can wait for a solution, but Hagan acknowledges that the traditional bond markets may never come back as they were. “We really need some new solutions, but we’re not sure what they are,” she says.
Other examples of project delays in the last few weeks include:
- A vote by the the Board of Commissioners in Chatham County, N.C., to delay $113 million of projects due to unfavorable bond markets. The delayed projects include a new middle school in northeast Chatham County, a judi-cial center and a joint project with Central Carolina Community College that involves new classrooms and a new library.
- A decision by the Highland Hospital Group, Charleston, W.Va., to indefinitely postpone an 80-bed replacement hospital in Kanawha City, W.Va. “With the bond market so unstable and interest rates jumping by more than 2% in the past few weeks, the project cannot be financed at this time,” says a Highland spokesman. “Construction was literally ready to go. We’re going to do this [project]; it’s just been pushed back.”
- A decision by the North Carolina Turnpike Authority to delay plans to issue $600 million of bonds for the $913-million, 18.8-mile Triangle Expressway in western Wake County and southeastern Durham County. Wake County Schools in North Carolina also postponed a $21-million renovation project at the aging Wilburn Elementary School
- An announcement by Stanford University that it will delay unspecified projects in 2009 and possibly into 2010.
- A vote by officials of Athens-Clarke County, Ga., to indefinitely delay a $221- million wastewater-treatment-plant bond issue. The bond would fund upgrades at three wastewater-treatment plants built more than 40 years ago.
Big Push
Hagan, with the Florida League of Cities, is among the growing list of supporters for federal assistance. In an Oct. 15 letter to Federal Reserve Board chief Ben Bernanke, Florida Chief Financial Officer Alex Sink said local governments have been frozen out of the credit markets and asked that they be included in the Fed’s new Commercial Paper Funding Facility (CPFF). That facility, created in early October, is designed to help improve liquidity by funding a unit to purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.
FORECAST 2009 | |||||
$ billion (constant 1996 dollars) | |||||
TYPE OF CONSTRUCTION | ACCOUNT 2007 | ESTIMATE 2008 | FORECAST 2009 | PERCENT CHANGE | |
07-08 | 08-09 | ||||
TOTAL CONSTRUCTION | 709.0 | 641.7 | 552.6 | –9.5 | –13.9 |
TOTAL RESIDENTIAL BUILDING | 307.7 | 222.7 | 182.9 | –27.6 | –17.9 |
TOTAL NONRESIDENTIAL BUILDING | 163.2 | 172.4 | 132.6 | +5.6 | –24.0 |
Industrial | 26.9 | 33.3 | 24.1 | +23.8 | –27.6 |
Office | 34.8 | 35.4 | 27.5 | +1.7 | –22.3 |
Hotels, Motels | 17.6 | 21.4 | 14.3 | +21.6 | –33.2 |
Hospitals, Institutions | 16.8 | 16.9 | 16.3 | +0.6 | –3.6 |
Religious and Miscellaneous | 4.6 | 4.0 | 3.7 | –13.0 | –7.5 |
Educational | 10.0 | 10.6 | 9.7 | +6.0 | –8.5 |
Commercial | 46.2 | 44.1 | 31.3 | –4.6 | –29.0 |
PUBLIC UTILITY1 | 52.9 | 59.0 | 59.5 | +11.5 | +0.9 |
PUBLIC CONSTRUCTION | 180.7 | 183.1 | 173.2 | +1.3 | –5.4 |
Buildings | 71.9 | 74.8 | 70.0 | +4.0 | –6.4 |
Highways and Streets | 47.8 | 46.7 | 45.0 | –2.3 | –3.6 |
Conservation | 3.5 | 3.4 | 3.3 | –2.9 | –2.9 |
Sewer Systems | 16.6 | 15.7 | 15.0 | –5.4 | –4.5 |
Water Supply | 9.8 | 9.9 | 8.9 | +1.0 | –10.1 |
Military/Miscellaneous | 6.3 | 7.4 | 7.1 | +17.5 | –4.1 |
SOURCE: PORTLAND CEMENT ASSOCIATION SKOKIE, ILL. 1= INCLUDES FARM BUILDINGS. |
“The tax-exempt municipal bond market represents an investment of more than $2.3 trillion in our country’s infrastructure,” said Sink in the letter. “The credit crisis has caused the tax-exempt bond market to cease...
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