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One City's Intriguing Experiment With ‘Social Bonds’

With a bond issue earmarked for community projects and marketed to individual investors as well as institutional buyers, Chicago is trying to move the needle on social equity. Is it the start of a durable trend, or just a cute public finance anomaly?

A city crew plants a tree along a Chicago parkway.
A city crew plants a tree along a Chicago parkway. Among other projects, the city plans to use social bond proceeds to plant 15,000 trees. (Patrick L. Pyszka/City of Chicago)
The municipal bond market is dominated by large institutional buyers like insurance companies, banks and mutual funds. Individual investors usually get the leftovers. But the city of Chicago broke through that glass ceiling last month with a $160 million “social bond” issue that attracted a swarm of individuals and households who want their money to do more than just earn tax-free income. In this case, the bonds’ proceeds are earmarked for a variety of urban social goals, including affordable housing, vacant-lot cleanup and the planting of 15,000 trees.

For a city with a checkered history of fiscal self-deception and perennially fragile bond ratings to pull off this sale is noteworthy in itself. That it could sell 20-year bonds at rates under 4 percent — below that of even today’s super-safe U.S. Treasury bills — was itself a remarkable accomplishment.

Can and will other cities follow Chicago’s lead? Or was this just a blip on the radar — a cute anomaly but not durable enough to move the needle in urban redevelopment and social equity?

First, let’s not overlook that the size of this megamillion-dollar bond issue is still a drop in the bucket in comparison to the city’s outstanding debt, which exceeds $5 billion — a number that to the city’s credit has declined materially in recent years. With a population of 2.7 million, this bond issue works out to about $3 per year per capita, hardly a big deal statistically. But conceptually, it’s a paradigm shift in traditional municipal finance, where professionals and investors shun borrowings for what are usually considered operating expenditures, even if they have a multiyear shelf life or long-term benefits.

Clearly, there is a nationwide pool of socially conscious investors seeking ways to put their money to work for the greater good. The increasingly controversial environmental, social and governance (ESG) movement has proven elsewhere to be a potent source of investment capital for a variety of purposes. Public finance theory would say that local governments are clearly providers of social and public goods that should qualify as ESG investments when the expenditures have long-life characteristics.

So that tells us that the demand is there, if municipalities can find ways to package debt issues that appeal to ESG investors while still meeting fiduciary standards for the institutions that will still be most likely to buy over half of the bonds. Here are some considerations for those intrigued by the idea:

Useful life. The muni bond community learned the hard way from New York City in the 1970s that borrowing for operating expenses is a pathway to fiscal hell. So it’s a fundamental precept in debt finance that the projects to be funded must have a useful life that exceeds the payback period. Otherwise, the debt will outlive the benefits and future generations will bear an unfair cost burden, violating what we call intergenerational equity. So stable housing for the homeless could qualify, but tents and feeding them would not. Eliminating urban blight might qualify, but only if long-term value to the municipal tax base can be demonstrated; the benefits must be long-lasting, not transitory.

Promotion. ESG investors, especially retail muni bond buyers, are hard to reach. Maybe in time there will arise social media networks where do-good investors will congregate and pounce on new deals, but for now the burden is on the issuers and their underwriters to market themselves to a wide base of diverse smaller-ticket investors. Local CFOs have striven for decades, with only limited success, to find ways to promote “mini bonds” and direct retail purchases. Social bonds as an asset subclass will require a broader market appeal than just local investors buying their hometown bonds.

If social bonds are to prove more than a passing experiment, the public finance community needs to step up and provide a communications platform that fosters effective promotion nationwide. Let’s award gold medals to the first team that spins up a viable national ESG investors’ club with its own website, where muni social bond issues can be announced and described in generic regulatory-compliant terms, with links to the regulated issuers and underwriters. Maybe the Public Finance Network should take the lead?

ESG backlash. While all this presumably good work is underway, there is now lurking in the background a solid core of anti-ESG politicians who are increasingly vocal in their opposition to social investments. Much of this kerfuffle centers on the petroleum industry, with a few oil-rich states boycotting bond underwriters that support ESG investing, but it doesn’t stop there. The anti-ESG crowd also includes antagonists who oppose governmental activities that focus on social agendas, and it’s going to take some serious public education and lobbying to convince the culture warriors and their allies in state legislatures that muni social bonds are not “woke” demons in disguise.

Professional discussions. This is a great topic for the municipal and professional associations to incorporate in upcoming conferences and webinars. The Chicago staff and their underwriters will undoubtedly be delighted to share their experience, but the speaker teams should also include some experts who can outline the pitfalls, limitations and best opportunities for this intriguing but potentially controversial idea. Sprinkle in an adversary or two, and you’ve got the recipe for a spicy session. Only time will tell if Chicago’s gambit is the start of a long-term trend or a flash in the pan.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Girard Miller is the finance columnist for Governing. He can be reached at
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