Dallas' bond outlook

Admittedly I was driving at the time so I wasn't paying as close attention as I might have otherwise, but I distinctly remember hearing from last week's Dallas City Council hearings a discussion revolving around Dallas getting ready to sell the next round of bonds that were part of the most recently passed record General Obligation Bond package.

Now comes this story from today's New York Times, which begins:

"Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening."

I guess the good news from that paragraph is contained in the words "the last two weeks," which I interpret as meaning Dallas might not be able to sell those bonds today or even tomorrow, but perhaps they will be able to toward the end of the year. And waiting might be preferable to offering the high interest rates that certainly would be required if those bonds were marketed today. Those types of interest rates certainly would foil any plans not to raise property taxes this time next year.

But wait, later in the Times story, came these dire predictions:

"Analysts said the dysfunction in the municipal bond markets appeared to signal the end of an era of relatively cheap money for governments and, probably, the start of an era of tough choices for communities. When the market starts moving again, they said, it will look a lot like the municipal bond market of 10 years ago, before the arrival of financial wizardry in the form of structured-finance products, which lowered borrowing costs but added big new risks. Instead, governments will probably be issuing plain-vanilla bonds with fixed rates of interest, higher than they are accustomed to.

"And higher rates suggest some degree of belt-tightening, especially difficult in places where tax revenues are being squeezed because of falling real estate values and the slowing economy.
Municipalities will probably be able to function, but may not expand services, said John V. Miller, chief investment officer at Nuveen Asset Management, a municipal bond investment firm. 'For some, the level of service they provide will decline.'

"Some governments, already straining to balance their budgets, will have to cut payrolls, he said, and others may decide to raise taxes."

Already, a significant portion of Dallas' operating budget goes to debt service; i.e., repaying the money borrowed through the issuance of bonds. And Mayor Tom Leppert went before the Regional Chamber of Commerce yesterday promoting such projects as the Trinity River Corridor and the downtown convention center hotel which will be financed through the sale of bonds. This is the same mayor who, two weeks ago, forecast "good things ahead" for Washington Mutual, which, of course, just became largest bank failure in U.S. history.

I would like to share the mayor's optimism, but my crystal ball looks a lot more cloudy than his.