Cities paying more to borrow money

The Duluth waterfront is humming with heavy equipment behind the city's harbor front convention center. The facility is undergoing a $78 million expansion.

Duluth sold $40 million worth of construction bonds in July. But the bonds came in with a higher interest rate than expected, pushing up the project another $3 million over 25 years.

That was surprising, according to Dan Russell, executive director of the complex known as the DECC.

"At that time we were a little disappointed that rates came in higher -- about a half percent higher than we had projected just a few weeks before," said Russell. "But looking back, I guess we were just lucky to get the bonds sold at all."

"Communities can still undertake those projects. It just means they're going to pay a little bit more."

The credit crunch was already developing last July, even if it hadn't hit the headlines yet. If Duluth had waited then, Russell says, it might have been tough to sell the bonds at all, so he's happy to accept the slightly higher rates.

It's manageable. At least this project's well underway," he said.

Not every project was getting underway. A municipal bond market showing signs of trouble all year looked like it was drying up altogether by October. According to the financial information service Bloomberg, total bond sales in Minnesota this far into the year, are at the lowest levels since 2003.

Most projects could still get funded, according to Mark Ruff with the Roseville financial advisory firm Ehlers and Associates, but not for cheap.

"We still are able to get financing, but interest rates are probably a percent and a half higher than they were maybe three or four months ago," said Ruff. "Those communities can still undertake those projects. It just means they're going to pay a little bit more."

The problem with the market was several fold. Banks and underwriters already suffering from the mortgage and credit crisis didn't want to take risks.

Any instability in the bond market makes people nervous, Ruff says, and they pull back. He adds that a big source of demand for municipal bonds was missing -- insurance giant AIG.

"They have now exited the market. So we've lost, in many cases, almost one-third of the market," said Ruff. "That's one of the reasons that you see the interest rates going up, is because there's just not as many buyers as there were previously. And, in addition, some of those places like AIG are selling all of their inventory because they need cash."

Ruff says a typical $5 million general obligation bond could have cost a government with a strong credit rating an additional $10,000 to $20,000 a year, if that bond was sold in October compared to just last August.

A lower rated agency could pay $30,000 to $40,000 more a year -- enough to pay an employee's wages.

The tight market prompted the state of Minnesota to postpone a $443 million package for capital projects like road construction. It hit smaller projects too, like the city of Hutchinson's plans to refinance an eight-year old wastewater improvement bond.

"The market moved and actually the rates went up," said Ken Merrill, the city's finance director. "The amount of savings that we were hoping for did not occur, and so we postponed that sale."

Last week's bond activity began to show remarkable improvement. Monday, the city of Chanhassen sold $8.8 million in bonds to pay for a new public works facility. City financing director Greg Sticha said afterward he was pleased with how it went.

"It went really good, actually. We had nine bidders, which in my experience is actually pretty amazing," said Sticha.

The low bid came in at 4.384 percent interest, which he says is as good or better than the city might have gotten a year ago.

Sticha says he thinks investors are beginning to turn from volatile stocks to relatively safe municipal bonds, especially from well-rated sellers like Chanhassen, which has a double-A plus rating.

There's clearly been improvement, but experts say the bond market recovery is not across the board. According to Ehlers and Associates Mark Ruff, the market is still holding its breath.

"There's great uncertainty out there. Elections always make the market a little nervous," said Ruff. "We are seeing, still, for the smaller communities much less interest than we've seen in previous years. So, there certainly is the issue of credit quality, and I don't think that's going to be going away anytime soon."

Ehlers' latest newsletter says the market will continue to change, and sometimes very quickly. As we've seen in the volatile stock markets, those changes could swing either direction.

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