When a community needs to build a new school or a jail, it sells bonds on the municipal bond market. The bonds are a city’s promise to pay. But if one city doesn’t pay up in full, does bond money dry up for everybody else?
“I think it depends a lot on the city,” says Kim Rueben, a public finance economist at the Urban Institute.
Rueben says some Michigan cities have to pay a premium in the bond market because they’re in the same state as Detroit. Many of them have the same problems. Ditto for some rustbelt, Midwestern cities:
“So, other places that are seeing similar demographic trends, in terms of aging populations and declining populations,” says Rueben.
What about cities without these problems? They can still sell bonds, but they have to work harder, according to Lisa Washburn, managing director of Municipal Market Advisers, a bond research company.
Washburn says investors are justifiably skeptical: “So you want to know ahead of time what kind of risk you’re taking on.”
Still, Washburn says, there is a lot of demand for municipal bonds. Once investors decide they’re safe, that is.
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