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Bond Agencies Take Note

Walter Russell Mead

Vast differences exist in the way American cities manage the infrastructure that keeps water flowing. Some make prudent investments in regular maintenance and updating. Others ignore the problem until catastrophe strikes. The Wall Street Journal reports:

Cash-strapped cities are contending with aging, leak-prone water systems that waste trillions of gallons a year and result in damaging breaks.

The approaches by Hoboken, N.J., and Syracuse, N.Y., show how some cities have turned to Band-Aid fixes to address the costly problem, while others are trying to deploy more permanent solutions.

Hoboken, a city of brick row houses across the Hudson River from New York City, has shelled out $2.8 million since 2009 on emergency repairs to its crumbling pipes. […]

Meantime, the water department in Syracuse, an upstate New York manufacturing city, spent $77 million from 2009 to 2015 to repair and replace pipes and other water-related infrastructure serving 145,000 residents.

This is something bond rating agencies need to prioritize. There are lots of reasons why city politicians will defer vital maintenance—it isn’t glamorous, and it’s more fun and more politically useful to spend the money on politicized projects, tax giveaways to developers, new retirement benefits for union members, and so forth.

But there’s a big underlying between the financial condition of a city that has been doing the tedious work of keeping the infrastructure (roads, bridges, transit systems and other unglamorous but necessary things) repaired, and a city that has been letting deferred maintenance accumulate for decades. The bonds of the prudent city are a much safer investment than the bonds of the foolish one, and that ought to be given substantial weight in municipal credit ratings.

Congress and state legislatures should also take note. When a city defers necessary maintenance for decades, the probability spikes that it will experience a major crisis that requires state or federal bailouts funds. Mandating serious accounting that includes “invisible liabilities” like unfunded pension promises and deferred infrastructure costs is a one of the ways that state and federal government can enforce better governance standards on cities—protecting both the city’s residents and non-city taxpayers from potentially dire consequences.

One of the hallmarks of blue governance is the over-regulation of private business and the under-regulation of government. Decades of bad governance in places like Puerto Rico, Detroit and Stockton have precipitated huge meltdowns. We urgently need more standards and guidelines that make it harder for unscrupulous municipal politicians to kick the can down the road. Transparent accounting that gives bondholders, voters and state and federal policymakers a clear look at the real state of affairs is a good place to start.

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