Rising Borrowing Costs Squeeze Wisconsin Cities, But Tax Hit Stays Modest

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In recent years, the city of Brookfield — located just west of Milwaukee with about 40,000 residents — has been looking at building a new police station or renovating and expanding its current facility.

Built in 1990, the station is too small for the department and needs major improvements. Depending on which option city leaders select, it could cost $40 to $50 million. It’s a massive project with a lot of moving parts — including inflation, fuel costs, a stagnating economy.

Brookfield officials can add one more uncertainty to the mix — a volatile bond market. The bond market has been pushing up the cost of borrowing, affecting credit card rates, mortgages, private development and government projects. For municipalities in Wisconsin, it means that buying a new fire truck or building a new library is likely to be more expensive.

“We’re all living with more and more uncertainty,” Robert Scott, Brookfield’s finance director, told “Wisconsin Today.”

For now, the increased cost for borrowing is relatively small and unlikely to delay a major project like the proposed police station. But he said the country could be leaving the era of cheap borrowing that has become the norm.

“We’ve been in a weird interest rate cycle for the last 10 to 15 years. It’s been low by historical standards,” he said, adding that higher interest rates “could be here to stay.”

Selling bonds in the market

When most municipalities in Wisconsin need to borrow money for a large purchase, road reconstruction or building project, they don’t usually go to a bank. Instead, they turn to the obscure, but massive, bond market.

“We get much better rates in the bond market, because large institutions are competing to buy bonds. They’re coming from all over the country,” explained Dave Godek, Janesville’s finance director. “I don’t know that banks have the capacity or desire to do $100 million in (combined) loans to a single entity. That’s speculation on my part.”

Worldwide, the bond market totals more than $140 trillion and is dominated by the United States, which has more than $50 trillion in bonds.

When borrowing through the bond market, municipal, county and school officials work with financial advisor firms, which help structure and advertise a request for bonds. Investment firms from around the country then bid on these, Godek said. The city will pick the one with the best terms.

“We typically have six to 12 companies bidding on our debt, so we’ve been able to get some good interest rates,” Godek said. “When the bond market was a little more stable, we were getting below 1 percent.”

The investors often resell the bonds to other investors.

Now that inflation is growing, investors are demanding higher returns from investments. For example, if a bond earns 3 percent interest, but inflation is 4 percent, investors are going to lose money. So they’re demanding higher returns.

Many local projects can’t be delayed until interest rates come down. If the city needs a new fire truck or a road is crumbling into potholes, delaying could put residents at risk and project costs will only keep going up. “You can only defer new purchases for so long, and unfortunately, that’s just a reality,” Godek said. “And the hidden cost of doing that is those items tend to go up in cost.”

But local officials have some flexibility for when they borrow.

For Brookfield’s proposed police station, the city will borrow in stages — starting with architectural designs, through construction and furnishings.

Impact on taxpayers

When cities pay more for capital projects, that cost is inevitably passed on to taxpayers. But Scott said that the impact will be minimal for most people.

“The difference between 4 to 5 percent over 20 years, divided among taxpayers, is relatively minor. I’m not trying to make light of it,” he said. “A $40 million project would cost $150 to $175 a year for the average homeowner. In comparison to the homeowner’s total tax bill that is not that much.”

High interest rates also come with an upside for many cities. Their investments are suddenly earning more money.

“This year, we expected rates to trend down and they didn’t, so we have money we weren’t anticipating to do repairs and capital work,” Scott said.

Wisconsin municipalities face rising borrowing costs   was originally published by Wisconsin Public Radio.