It has been a big year for municipal bonds. States and cities along with universities and some other non-profits have borrowed over $500 billion this year through the municipal bond market. That’s a record, according to Bloomberg.
These bonds help pay for new school buildings, roads, bridges, and sewers.
Michael Gaughan leads the Vermont Bond Bank, which provides access to the bond market for small cities and towns in the state. He’s working with pretty much the same number of communities this year.
“What is different this year is that the project size is definitely larger, and that’s a continuation of last year’s trend,” Gaughan said.
As in, the amount of money each community is looking to borrow is going up. Because costs of concrete and steel are going up.
“Higher costs now are driving the volume we’re seeing,” Gaughan said.
Higher costs and interest rates from a few years ago are also why more bonds are being issued now. Because a lot of communities put off projects as costs rose, said Abby Urtz at FHN Financial.
“A lot of what we’ve seen honestly this past year and even in 2024 was just catch-up issuance,” Urtz said.
Municipalities are also finally issuing bonds for some projects partly funded by federal pandemic-era aid. Some of that money during the Biden years went to projects that weren’t — as developers say — “shovel-ready.”
“And it took, in many cases, three, four, five, years to do all of the background work to get to the point that you borrow money to actually begin the project construction process,” said Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago.
Cities and states are finally doing the work and taking on the debt. For now, they’re in good financial shape to do so, thanks to stronger economic growth a few years ago. Because, rising incomes and higher property values take a while to translate into tax revenue, Marlowe said.
“I think what we’re seeing, especially in 2025 is the comparatively very strong economy that we saw in 2023 and ‘24 finally appear on state and local government income statements and balance sheets,” Marlowe said.
Making them feel a bit better about taking on new debt. But the feeling might not last, if the economy takes a turn for the worse. Plus, a lot of municipal bonds need to be approved by voters, always a wild card.