Local Budgets, The Bond Market, & Winning the Future

The protests in Wisconsin and Ohio have made us even more aware of the difficult choices that lie ahead when it comes to America’s fiscal challenges. Nowhere is the problem more real than at the state and local level, where according to the Center on Budget and Policy Priorities, 45 states and the District of Columbia are projecting budget shortfalls totaling $125 billion. Failure to repay these debts not only has huge implications for jobs and public services, it also presents severe implications for the municipal bond market.

The US municipal bond market is a $3 trillion part of the global credit markets where state and local governments can borrow funds to support the building of schools, bridges, and hospitals. Without access to these funds, local communities would not be able to support vital community development projects. In the face of stark economic challenges, state and localities may be forced to slash spending and increase taxes to repay debts or restructure their debts entirely which would force bondholders to swallow huge losses with their citizen public sector union counterparts.  

With these tough choices, state and local leaders need to engage in a pragmatic debate about best ways to ensure fiscal solvency without undermining the future competitiveness of their local economy. Every one has to make sacrifices. Raising taxes alone won’t solve the problem. Eliminating collective bargaining and destroying America’s middle class won’t also help restore our fiscal woes either. It will take political will, courage, and trust for local communities to deal with the unpopular choices that lie ahead. As President Obama said in a recent speech:

“To win the future, we have to out-innovate, out-educate and out-build the rest of the world, tapping the creativity and imagination of our people. We have to take responsibility for our deficit, by investing in what makes America stronger and cutting what doesn’t. And we have to reform our government so that it’s smarter, leaner, and better able to take on the challenges of the 21st century.”

I hope our leaders can heed this message sooner rather than later.