Here's a piece I co- wrote with Karl Deeter for the Limerick Leader this week on Muncipal Bonds in Ireland. It's the first part of a larger project we're engaged in. Comments are most welcome.
Limerick faces a funding crisis. The recent Comptroller and Auditor General report highlights that, in the long run, Ireland faces two seemingly unrelated challenges. First, our infrastructural deficit will grow due to repeated government cutbacks. Second, as our population ages, our society will struggle to pay for pensions of a greyer society. Over a 50-year time horizon, the costs of pensions provision are staggering.
Currently, net public service pension payments absorb 0.5% of our national output, and as a result of demographic changes it will be necessary to devote 1.8% of the nation’s output to meet the net cost of pension payments by 2058. The two problems of pensions provision and infrastructural investment are intertwined. They can both be alleviated using municipal bonds. In essence, individuals buy bonds issued by the government—or even a local authority—which the government will honour in, say, forty-five years or longer, when the individual retires. The government uses the flow of funds from the bonds to build roads, bridges, and levies today.
Limerick’s citizens should not trust the bulk of their retirement incomes, and indeed their wealth, to come from stock markets. Stocks and shares are inherently risky investment products. While stocks may generate a higher return for the retiree than bonds, the reduction in uncertainty that would perforce come from a continued investment in a guaranteed payback mechanism like a municipal bond would compensate for that potentially higher return.
Two facts convince us of the need for a structure like municipal bonds to be implemented in the next five years. First, our society will get older in the next forty years. By 2036 there will only be two people working for every pensioner. By 2050, 1 in four workers will be over 65, 1 in 10 workers will be over 80. Regardless of the year of retirement of these workers, and the replacement rate of the old by the young, the implications of this demographic shift for our pension and health care systems are enormous. Pension provision may bankrupt the state unless private provision is instituted on a mandatory basis. Cash-strapped local authorities and governments can use funds generated by these bond issues on a yearly basis to reduce our infrastructural deficits in transport, water provision, port equipment, broadband provision, and community initiatives, to name a few. Second, Ireland’s infrastructure ranks as one of the worst in the industrialised world. Out of the OECD-30 nation group, Ireland ranks 26th. A systematic over-investment is required to bring Ireland up in these rankings, given that other countries are forging ahead in modernising their infrastructures, while we lag behind. The present ‘tax and transfer’ system for the provision of funding for infrastructure means that potential willing investors are not included. This error of omission is further compounded by the level of money lost in extraction costs, because getting money off the taxpayer and into these projects is a costly exercise. It would make more sense to have a government-lead web based clearing house (along the lines of treasurydirect.gov), where individuals or pension funds can participate in various proposed projects such as broadband fibre rings, tram lines, or roads, and in return receive a future cash-flow from the operation of the project in addition to the guaranteed payout from their retirement bonds once those bonds mature.
Dublin’s Luas project could have been funded in this manner. Instead, the state spent more to get a tram on a track in Dublin than it cost to put the Beagle Spacecraft onto Mars 400 million kilometres away. We simply have no way of closing the infrastructure gap using our present funding methods, in the current economic climate of fiscal retrenchment. Municipal bond issuances are one of the few ways we can change that. Bond issuances would also allow significant private savings to be utilised for the public good, with positive spillovers from the built environment to the real economy via increased investment and jobs created because of world-class infrastructure.
The number of non-resident stocks the average pension fund invests in today ensures that the bulk of private Irish saving is not spent on capital creation within our own borders, and while our article is far from a call for protectionism, it must be noted that we need inward investment in order to become the ‘knowledge economy’ we claim to be aiming for. If the income from a municipal bond is tax free, as it is in the USA, it would make for lower funding costs, as higher yields wouldn’t be required by investors. Well-run bond issuances by Limerick’s County Council would attract additional non-pension savings as well, perhaps drawing international capital to them as well. We could simultaneously address part of our pensions problem and our infrastructural deficit using municipal bonds.
The tools and regulations to issue these municipal bonds exist in other countries, and can be brought into Ireland relatively easily. We currently lack sufficient foresight and the requisite political will to implement them.