Credit risk

Hybrid working poses credit risk to cities looking to issue debt

(Bloomberg) — Remote work can be a boon for many Americans. But that could lead to higher borrowing costs for some cities tapping into the municipal bond market.

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Fitch Ratings earlier this week affirmed its negative rating for Kansas City, Missouri, flagging remote work as a credit risk. The city expects a slow recovery in income taxes — which is its main source of general fund revenue — due to the increase in remote work, Fitch noted.

While cities have received federal aid to stay afloat, many could risk demotion if they burn through pandemic stimulus money without finding other ways to fund deficits, Bloomberg Intelligence strategist Eric Kazatsky said. in an interview. And those facing a downgrade might have to issue bonds with higher yields to compensate for the increased credit risk. This makes bond issuance more expensive and makes repayment less optimal, said Eric Friedland, director of municipal research for Lord Abbett & Co.

Downgrading Factors

Remote work can impact a city’s revenue in many ways, from payroll taxes that are levied based on where workers work their hours, to sales taxes that commuters pay in a local cafe on the way to the office. Some states may require you to pay income taxes if you work there for just a day or two and for other states it may be 60 days.

A handful of Ohio cities, such as Cincinnati, Toledo and Columbus, which rely heavily on income taxes, could also see a weakness in their sources of income from remote work and potentially be subject to a demotion. , Kazatsky said.

Cincinnati, for example, derives 73.5% of its revenue from the general income tax fund, according to a Bloomberg Intelligence report released Thursday. The average income tax reliance for municipal issuers is 8%, according to data from the Metropolitan Policy Program at the Brookings Institute.

Cities that rely more on commuter taxes are the most responsive to work-from-home arrangements, according to Bloomberg Intelligence’s report.

Richmond, Va., has the highest share of jobs held by workers commuting from out of town at 77%, according to data from Pew Charitable Trusts. New York’s share of commuters is 28% and Philadelphia’s is just under 50%.

While remote work isn’t the only credit driver, it’s a factor that rating agencies and investors are increasingly considering, said Dora Lee, director of research at Belle Haven Investments. Cities looking to issue debt shouldn’t view remote working as a risk, especially as flexible working becomes a longer reality, said Tom Kozlik, head of municipal research and analysis at Hilltop Securities.

“The uncertainty is the biggest thing because it’s a once-in-a-generation kind of change that we see and I think there’s a lot of people not playing,” he said.

Navigate risk

Big cities may be able to anticipate a potential downgrade because their economy is often not focused on a single industry, Lee said. These cities could use their diverse economy to reinvent themselves, she added. And their income could be quite isolated due to the higher cost of living.

On Thursday, S&P Global Ratings revised its outlook for San Francisco from negative to stable, despite adding remote work as a risk. San Francisco-based businesses have asked for a reassessment of their property taxes as they increasingly embrace flexible working, which could reduce the city’s revenue. But the city’s “economically sensitive” revenue streams will be able to rebound in the long term, credit analyst Chris Morgan said in the report.

“Maybe people aren’t working full time in the office, but if sales tax numbers and hotel tax revenue are still going up due to some other factors like tourism, then it’s not may not be so bad,” Li Yang, a credit analyst with S&P Global Ratings, said in a phone interview. “We don’t necessarily need to see office workers back 100 per cent.”

Small towns outside of big cities could also see economic growth as hybrid work becomes more permanent, Lee said. With people not traveling to big cities for work as often as before the pandemic, smaller suburbs could see their economy boosted.

About a third of San Franciscans see permanent remote work (1)

President Joe Biden, governors and mayors have pushed workers back to their offices to help revive the city’s economies. Local businesses that relied on commuters to the office could see a respite.

Workers who traveled to the office in 10 of America’s largest business districts reached 42% of pre-Covid-19 levels in the week ended March 30, according to data from Kastle Systems.

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