46 JANUARY / FEBRUARY 2023 DIRECTORS / SENIOR MANAGEMENT In early 2020, municipal credit concerns were abundant and tax revenue plunged due to pandemic shutdowns. Since then, average state and local tax revenue has not only recovered from those declines but has grown significantly. Total state and local tax revenue reported by the U.S. Census Bureau was up 13.9% in the first half of 2022 compared to the first half of 2021, and by over 30% compared to the first half of 2019. Federal stimulus funds, coupled with prudent expense management, also helped to improve municipal finances, all of which led to record budget surpluses and large increases in reserves in many cases. Current high inflation and increasing interest rates could impact municipal finances in several ways, however. First, the cost of supplies and labor is increasing rapidly, in some cases at an even higher rate than the Inflation’s Impact on Municipal Finances Municipal credit update overall inflation rate. Consequently, operating expenses and the cost of capital projects are climbing. Issuers that are highly reliant on skilled labor for operating activities, such as hospitals and other healthcare-related entities, are vulnerable to a tight labor market. Moody’s reports that personnel costs account for over 50% of expenses for the hospitals they rate. Some issuers have had to pay over eight times as much in 2022 as they did in 2019 for agency labor. Rural hospitals are particularly susceptible as they generally have a hard time with adequate staffing under normal circumstances. Second, not only are capital projects more expensive than what was estimated for current budgets, but borrowing rates have also been rising. This could result in delayed or canceled projects, or it may lead to higher debt levels and increased interest expense if municiDana Sparkman Senior Vice President/ Municipal Analyst The Baker Group Dana@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member.
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