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Interest rates threaten municipal projects

Parisi Construction Co. Inc., Verona, is rebuilding Main Street in Sun Prairie. Parisi won the city project in March with an $8 million bid. Sun Prairie borrowed money for the project last month.  Photo by Henry A. Koshollek

Parisi Construction Co. Inc., Verona, is rebuilding Main Street in Sun Prairie. Parisi won the city project in March with an $8 million bid. Sun Prairie borrowed money for the project last month. Photo by Henry A. Koshollek

Sean Ryan
sean.ryan@dailyreporter.com

Sun Prairie eluded jacked-up interest payments when it borrowed $8.7 million last month to reconstruct Main Street.

Other cities and villages might not be so fortunate if the skittishness afflicting the national municipal bond market catches on in Wisconsin.

Sun Prairie is in good shape to borrow money because the city has a high rating with bond agencies, said Finance Director Bill Burns. But if bond market predictions hold true, even such healthy communities as Sun Prairie could end up paying higher interest rates for projects.

The city will pay a 3.92 percent interest rate — or $3.2 million during the life of the 15-year bonds — for the money it borrowed to pay for Main Street. That’s roughly on par with past years, Burns said.

“We feel that, currently, we’re still able to borrow and not have real significant interest costs,” said Burns, who is also Sun Prairie’s assistant administrator.

Yet municipal officials who use bonds to borrow money for projects are worried market changes will force them to spend more on interest and less on actual construction, said Dan Thompson, executive director of the League of Wisconsin Municipalities.

Municipalities borrow money for construction work by issuing tax-free bonds. Investors give municipalities money for the bonds and collect interest from the governments until the bonds are repaid.

But investors are turning away from municipal bonds because the rate of return is dropping and fears are mounting that municipalities with budget problems will not repay the bond money.

If national problems in the bond market make it more expensive for municipalities to borrow money, there likely will be fewer public projects, Thompson said.

“We don’t know how much yet, and it’s going to be tough to quantify,” he said.

But the National League of Cities is trying to head off the interest rate problem. Municipalities can lower interest rates by buying insurance to guarantee investors will be repaid, but national companies that provide such insurance have not been doing well, said Milwaukee Alderman Joe Davis, a member of the National League of Cities board of directors.

Companies that insure municipal bonds had their credit ratings lowered during the past year. Insurers with low bond ratings cannot provide the security investors want when buying bonds.

So the National League of Cities is asking the federal government for $5 billion to create a public company to provide bond insurance. Davis on Tuesday will submit a Common Council resolution supporting the league’s request for federal money.

The city of Milwaukee borrows between $20 million and $30 million a year for public works projects, Davis said, so a shift of a few percentage points on interest rates “could be a very significant savings.”

Burns said Sun Prairie offers the bond insurance to investors. As a city with a growing population and a growing need for public works projects, it’s important to keep borrowing costs low, he said.

“Anything that allows us to borrow at less expense,” Burns said, “just makes it easier for us to do those projects.”

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