Public Finance Note



Public Finance Note

“Public Finance Note” is the inaugural newsletter of the Milken Institute’s new Program for Excellence and Equity in Public Finance (P-FIN). Facing the unprecedented twin health and economic crises from COVID-19, the nearly $4 trillion state-local-municipal finance space, employing over 20 million Americans, faces an uphill battle to recover. Helping this critical sector of our economy rebound strongly and equitably is and important goal of P-FIN. 

Future deficits in the state and local sector are estimated to be as high as $1 trillion in the next several years, about four times the hole created by the 2008 Great Recession. As a result, traditional financing for essential services, let alone new investments in equitable community development and post-COVID needs like community broadband, could be impeded without innovation and intention by policymakers and investors.

Housed at the Center for Financial Markets, the Milken Institute’s Program for Excellence and Equity in Public Finance aims to serve as a networked center of gravity and outcomes acceleration platform for policymakers, market practitioners, investors, issuers, and academics committed to: 

  • developing public finance innovations and value-add solutions;

  • addressing the challenges of diverse market structure; and

  • creating strong, equitable, and resilient results for all stakeholders in public finance.

 By The Numbers

20 MILLION 50,000+ $1 TRILLION
Americans work for local and state government, making it the largest sector of employment Separate jurisdictions, units of government, and special purpose authorities issue municipal bonds in the US One estimate of the 2020-2023 projected budget shortfall for state and local governments due to COVID economic downturn

 Out Front: An Interview with Lois Scott

Lois Scott

Q & A with Lois Scott

Chair of the Milken Institute’s Public Finance Advisory Council

Lois Scott is a senior finance executive with more than 30 years in the public finance industry and serves as chair of the Milken Institute’s new Public Finance Advisory Council. Scott has served as a bond issuer, underwriter, financial advisor, banker, and investor and is on the board of directors for Kroll Bond Rating Agency and MBIA. At the forefront of the industry, Scott was one of the founders of Women in Public Finance, Municipal CFO Forum, Center for Municipal Finance at the Harris School of the University of Chicago, Equable Institute, and Retirement Security Initiative. She also served as the chief financial officer of the City of Chicago from 2011 to 2015.

Q. One of the interesting developments of the COVID crisis has been how it has shined a light on the importance of the nearly $4 trillion state and local sector, its role in providing basic services like public health and emergency services, and the challenges it faces in the months and years ahead to deliver new, post-COVID basics like remote learning. How is the public finance sector doing in your opinion as Congress and President Biden take up the mantle of building a post-COVID-19 economic recovery?

In every crisis, the public is reminded of how critical our state and local governments are to maintaining our quality of life. This time, governments are confronting three simultaneous crises: a global pandemic, civil unrest, and an economic implosion. We’ve never seen a tsunami quite like this. Government workers are literally on the front lines every single day, facilitating the work of the entire community. Health care workers need to get to work? The public sector makes sure the roads are paved and plowed, and transit systems are operating. Protests planned over the weekend? Police and emergency crews must keep the peace, and sanitation crews must clean it up. Massive layoffs in the hospitality industry? Unemployment checks must flow from the state, and policymakers must devise new economic development strategies. The burden of getting us through these challenging times ultimately falls heavily on the backs of all 89,000 units of state and local governments in this country.

But those governments face a budgetary “double whammy.” When jobs are lost, many tax revenues shrink at the same time that demand for services rises exponentially. In prior crises, the federal government stepped in to provide state and local governments with resources to assure the continuation of certain essential government services and avoid layoffs from the public sector compounding unemployment in the private sector. In contrast, the response to COVID-19 seems to have ignored the very real impact on state and local government budgets and not sufficiently supported core services like police, fire, transportation, education, sanitation, etc. To date, federal funding has been primarily focused on expanding public health resources, such as establishing testing and vaccination sites, and economic stimulus, such as the PPP loans for local businesses. The CARES Act provided substantial resources for direct COVID-related expenses but nothing to replace lost tax revenues from the steep decline in economic activity. While useful, this funding does little to assure that state and local governments have the resources they need to provide essential services that have only grown in importance.

What state and local governments really need right now are financial programs and incentives to enable them to bridge to new systems of service delivery. The public is desperate for governments to catch up with our rapidly changing world. But we have not yet created the framework to enable them to do that.

And with every crisis, the inefficiency of government takes center stage. When computer servers cannot handle call volumes, the public is aghast that there is no central database to facilitate public benefits, and services no longer reflect the world we live in. What state and local governments really need right now are financial programs and incentives to enable them to bridge to new systems of service delivery. The public is desperate for governments to catch up with our rapidly changing world. But we have not yet created the framework to enable them to do that. We need to stop telling governments how they “should” be doing things and start helping them find the resources to innovate. I’d love to see a National Innovation Fund, where the federal government advances funds for service innovation that can be repaid through efficiencies in future years and shared with other governments nationwide.

Some have suggested that the health of the public finance sector is essentially dependent on three systems working well together—a stable muni market, local and state fiscal health, and a growing level of public infrastructure investment to support local economies and revenue growth. Given your experience as a muni market “doctor,” how would you say the patient is doing?

I would say that our patient is in fair to serious condition. Without direct intervention, things could go south. But we know what to do to treat the patient and restore good health. The only question is whether the patient can get its prescriptions filled at the federal pharmacy!

After the turbulence in the Spring of 2020, the municipal bond market has been stable and attractive for most state and local borrowers. The Federal Reserve’s Municipal Liquidity Facility, while only used by two issuers, assured governments of access to emergency funds at reasonable levels and acted to calm the markets. With 30-year tax-exempt bond yields in the 1.5 percent range and the Fed signaling a sustained period of very low-interest rates, the fundamentals of the muni bond market have never been better. Kudos to the Fed for using its limited range of tools to do what it could to help state and local governments. We will see how resilient the market is now that the Municipal Finance Facility has expired.

That said, the fiscal health of state and local governments reminds me of a Jackson Pollack painting. Many governments are locked into long-term bonds at rates 2-3 times higher than current interest rate levels. Debt service, pension costs, and other fixed costs are squeezing out many governments’ ability to fund core services and putting enormous strain on budgets. At the same time, a wide range of government revenues are getting hit by the economic crisis. Cities that rely upon tourism are facing massive revenue hits as hotel taxes, restaurant taxes, and income from service workers dry up. Cities with dense office corridors, such as New York City, are confronting sweeping changes in the demand for commercial real estate with corresponding hits to property values as the pandemic blazes on. Cities like Los Angeles, with economies concentrated in specific industries such as entertainment, must rethink their budgets. And as work-from-home morphs into work-from-anywhere, state income tax revenues are shifting in unplanned ways. To date, state and local governments have been left on their own to address budget gaps that researchers peg at 10-15 percent through 2022.

I like to dream about what a Marshall Plan for our country would be, with funding to fuel a national economic recovery. Structured properly, a federal infrastructure program could create jobs, modernize government services and reduce the future cost of government. The easiest way to commence such an initiative may be to build upon highly successful transportation loan and guarantee programs like TIFIA and RRIF. They are proven ways to jump start investment with limited impact on the federal budget. 

With a cohesive federal infrastructure strategy, favorable bond markets and greater understanding of state and local budget realities, the vital signs of this patient will improve substantially. 

There are approximately 50,000 different municipal bond issuers. Is this level of fragmentation a problem? If so, how would you propose to address it? 

While there may be 50,000 different municipal bond issuers, there are over 1 million separate securities! The question of whether this fragmentation is a problem depends on your perspective. As a government issuer, I certainly treasured the ability to carve out, say a 29.75-year maturity with a call in 6.5 years, to reflect a specific, projected revenue stream. But it can be a nightmare for investors trying to compare one security with another. Attempts to limit the flexibility state and local governments have enjoyed for decades have not been welcomed by government issuers or the tax-exempt market. So what is the problem we are trying to fix, and for who?

The reality is that tax-exempt issuers rarely get the full value of the tax exemption through sufficiently lower rates. The investors keep a bit more than they should. State and local governments also don’t capture the full value of their credit quality. Corporate bonds with the same rating as a municipal bond have 5-10 times the risk of default. Federal credit and lending programs have targeted these issues, benefitting governments and the public alike.

COVID has exposed systemic inequities that have further impacted underserved communities and populations, perhaps most dramatically for frontline workers with limited transportation options and limited access to broadband for remote learning and telehealth for 21 million urban households and 7 million rural households. What does equity look like in the public finance arena moving forward? 

There simply cannot be a discussion of equity for our communities without recognizing that state and local governments are the primary instruments of distributing that equity. Facilitating their access to capital lies at the very heart of creating greater equity in our communities.

First, let me say that municipal bonds may be the most important ESG investment any investor can make. They fund public schools, criminal justice, transportation systems, affordable housing, clean water, and other environmental infrastructure that benefits us all. And I’d note that last year, municipals were one of the best performing asset classes. There simply cannot be a discussion of equity for our communities without recognizing that state and local governments are the primary instruments of distributing that equity. Facilitating their access to capital lies at the very heart of creating greater equity in our communities.

I’d love to see investors recognize and reward municipal securities for the social impact they provide. The most acclaimed ESG funds cannot compare with the impact of bonds to provide clean water in Flint, Michigan, or fund new classrooms for pre-school education in our lowest-income communities. So let’s place a big gold star on the cover of every municipal bond prospectus highlighting the good it is doing for that community and setting it apart from investments in corporate bonds to buy back stock.

Beyond that, I’d say there are two sides to the equity issue in public finance. One is “what” communities are doing with public funds to enhance equity for the public. Are communities buying a big stadium to be used for professional sports teams hosting games with tickets that cost $200 each? Or are they building a new transit line connecting underserved neighborhoods with job-rich areas? The other question is “who” is doing the public finance work. Are the people selling the bonds reflective of the communities they’re serving? Or are they the stereotypical Wall Street financiers that may have little connectivity with those communities? As an issuer, I prioritized women and minority-owned firms whenever possible, representing more than half our total spend on such services. For majority-owned firms, I sought out professionals within those companies that may not have had as many opportunities to shine as others. 

Twenty years ago, I was one of the founders of Women in Public Finance. What began as a simple networking organization has now changed the shape of the entire industry, with women throughout the ranks of most firms and issuers. That’s what I call equity. We need that same sort of progress for people of different cultural and racial backgrounds. When the folks that work in public finance—the “who”—eflect the communities they serve, we’re going to see a lot more attention to the question “what” public funds are being used for.

I also note that equity is now very increasingly a credit consideration for state and local governments. Governments that are perceived to be inequitable need to spend more on police, lawsuits, crime, etc., so equitable practices directly enhance community stability, a credit positive.

Many communities are looking at new investments in infrastructure to drive long-term recovery. Besides the old basics like roads and bridges, there are new post-COVID infrastructure needs like broadband and community emergency centers. To help catalyze this new pipeline of community-scale projects, what are the key public investments and policies that you would recommend?

I never ceased to be amazed at how little has changed in the world of infrastructure from 30, 50, and even 100 years ago. Asphalt was invented in the 1870s and is pretty much the same product used for our roads today. Many communities still have lead-lined water mains. In 2021! It certainly makes you wonder why that is the case. Having served in government, I know that this is not what most government leaders want. Rather, it reflects the absence of incentives and funding to plan for innovation and change. Leaders know how to rebuild what they already have and cannot be criticized for maintaining it; leaders do not have the resources to plan something entirely new and different, nor the public support to innovate with precious tax dollars.

New studies from the Milken Institute and the International Council for Sustainable Infrastructure point to the importance of predevelopment funding as critical to growing a better pipeline of shovel-worthy and investment-grade projects. Such support has long been part of the federal government’s toolkit when addressing challenges to global development through agencies like the US Development Finance Corporation, yet there is no equivalent for funding the predevelopment needs of our own units of state and local government. That needs to change. 

Infrastructure investment is a time-tested way to strengthen our economy. Predevelopment funding would be the best place to start. But traditional bond investors have no way of estimating and pricing the risk associated with innovative, high impact projects. Philanthropists have dipped a toe into the space but often are not equipped to deal with the range of issues such projects entail. Governments themselves are hard-pressed to accumulate and invest public dollars in what some citizens will invariably decide is too risky to consider. A well-conceived federal program for predevelopment funding could jumpstart many projects across the country for a modest investment.

Across all asset classes, investing with environmental, social, and governance (ESG) goals in mind continues to gain momentum. In the municipal bond market, the concept of “municipal green bonds” has caught the attention of investors, issuers, and regulators. How do you see the municipal green bond market evolving over the next few years? What are the key issues that the various stakeholders (investors, issuers, and regulators) will be dealing with?

Green bonds enable governments to showcase the environmental impact of their projects and potentially drive down the cost of borrowing. Since interest is almost always the #1 cost of any capital project, reducing interest rates, even marginally, can have a significant impact on project feasibility and overall cost. To date, green bond issues have largely been seen as trophy projects for government issuers, and many question whether they really deliver savings for governments, especially after factoring in any additional project requirements, including long-term monitoring of environmental impact. It seems that investors still look primarily at the issuer’s credit quality when pricing bonds. I believe that issuer interest in issuing green bonds will be limited until there is a more quantifiable and predictable benefit.

In the coming years, the competing demands on a limited tax base will suppress governments’ ability to finance infrastructure, green or otherwise. The focus really needs to be fast-tracking infrastructure in all its forms.

Policy Watch: The Push for Predevelopment

The Value of Predevelopment: What’s Needed to Build and Sustain US Infrastructure

As Congress debates new proposals to fund and finance critical infrastructure across the United States, the need has never been greater for incentivizing best practices to ensure that the future pipeline of federally funded infrastructure projects are shovel-worthy, well-maintained, equitable, resilient, and high-performing.  

For distressed communities struggling to jumpstart their economies and create investment-ready projects, recent studies from the International Coalition for Sustainable Infrastructure and the Milken Institute have found that the critical funding gap isn’t usually planning grants or the availability of low-cost financing but catalytic predevelopment capital. This is the funding that pays for tasks to be completed before project construction can occur, such as economic feasibility studies, site/lease acquisition costs, and architectural and engineering work. Based on past economic studies, each $1 spent on predevelopment has generated $16-20 in total economic outcomes. As a result, a growing chorus of bipartisan groups are now calling for federal action.

The following groups are calling upon Congress to allocate a small portion of federal funding to maximize the long-term impact of future federal investment in infrastructure to:

  • Provide predevelopment capital to close the funding gap that prevents projects from moving from concept to construction

  • Create a Federal Predevelopment Fund for technical assistance grants and loans focused on critical community infrastructure and inclusive economic growth

  • Ensure access to the fund is based on a commitment to long-term performance improvements

  • Utilize a nationwide network of regional acceleration centers focused on capacity building and resilience best practices

Accelerator For America

Milken Institute

American Flood Coalition

Moonshot Missions

American Society of Civil Engineers

National Association of Counties

Build America Strong Coalition

National Association of Development Organizations

Building America's Future

National Association of Manufacturers

Center for Rural Innovation

National Institute of Building Sciences

Center for Sustainable Energy

National League of Cities

Chambers for Innovation and Clean Energy

Natural Resources Defense Council

Coalition for Green Capital

The Nature Conservancy

Council of Development Financing Agencies

New Partnership on Infrastructure

Economic Innovation Group

Purpose-Built Communities

Enterprise Community Partners

Quantified Ventures

Farm Conservation Alliance

Results for America

Greenlining Institute

Rural Community Assistance Partnership

International Economic Development Council

Strive Together

Living Cities

The Trust for Public Land

Local Initiatives Support Corporation

US Chamber

LOCUS: Responsible Real Estate Developers and Investors

William Julius Wilson Institute at Harlem Children’s Zone

To learn more, contact Matthew Aleshire, director, Government Affairs.

Public Finance Advisory Council: Meet the Members

The Institute’s new Program for Excellence and Equity in Public Finance aims to shore up a fragmented municipal securities market, lift public-sector capacity for financial innovation, and develop next-gen policies, partnerships, and financial products to support essential and equitable public services that will help accelerate post-COVID-19 economic recovery and job creation. 
The P-FIN Advisory Council is composed of executive-level leadership involved in the public and muni finance sectors. Members provide guidance on public finance developments and research needs to address persistent challenges related to financial inclusion, equity, access to capital, transparency, and compliance. 

  • Elaine Buckberg, Chief Economist, GM

  • Natalie Cohen, President, National Municipal Research, Inc.

  • Andy Dillon, Executive Director, Conway McKenzie 

  • Dominic Garcia, CIO, New Mexico Public Employee Retirement System

  • Gary Hall, Partner, Siebert Williams Shank & Co., LLC 

  • Kent Hiteshew, Senior Policy Advisor, Federal Reserve Board

  • Lynnette Kelly, Former President and CEO, Municipal Securities Rulemaking Board

  • Chris Mier, CEO & Founder, Rosebud Strategies LLC

  • John Miller, Head of Municipals, Nuvee

  • David Narefsky, Partner, Mayer Brown

  • Hector Negroni, Partner, Foundation | Credit

  • Mike Parker, Americas Infrastructure Leader, EY Strategy and Transactions

  • Lois A. Scott, President, Epoch Advisors, Advisory Council Chair

  • Brian Septon, Principal and Actuary, The Terry Group

  • Courtney Shea, Managing Member, Columbia Capital Management

  • Lisa Smith, Managing Director, MUFG

Upcoming Events


  • 10-14: Infrastructure Week

  • 17-21:  National Association of State Treasurers' Treasury Management Training Symposium


  • 8-11: National Association of Bond Lawyers - The Essentials

  • 22-24: American Bankers Association Regulatory Compliance Conference


  • 9-12: National Associaiton of Counties Annual Conference

  • 10-14: Council of State Governments (CSG) Southern Legislative Conference

  • 11-14: CSG Midwestern Legislative Conference

  • 12-23: Government Finance Officers Association Virtual Conference

What We're Reading, Listening To, and Watching

"As economists and Congress debate the immense need created by the COVID-19 recession, the next round of relief should include direct aid and expanded public finance tools that enable state and local investment to restore base levels of public services and address historic inequities in public investment in distressed communities with intention, innovation, and equity-informed fiscal strategies.”

— Lourdes Germán, public finance professor at Boston College’s Carroll School of Management and special advisor to the Lincoln Institute

Equitable Recovery

Podcast: Equity and Workforce Diversity with Nefertiri Sickout, Philadelphia, PA (ELGL)
“Q&A with Lourdes Germán on COVID-related Financial Recovery for Cities” (The Kresge Foundation)

Best Practices

American Rescue Plan Federal Investment Guide” (Accelerator for America)
Understanding the Fiscal Health of Your Community: An Elected Official’s Guide 2020” (Government Finance Officers Association)
Measuring Stakeholder Capitalism” (World Economic Forum)

Fiscal Impact

“How Much Is COVID-19 Hurting State and Local Revenues?” (Brookings)
Muni Low Down: State of Play” (Debtwire and Emily Brock)
10 Common Outcomes of COVID-19 on Local Government Budgets” (ICMA)
Pandemic’s Impact on State Revenues Less Than Earlier Expected But Still Severe (Center on Budget and Policy Priorities)

PFIN Voices

Want Alpha, Get Alt Data” – Chris Miers on the need for better data to support municipal analysts 
The 3 Billion That Can kickstart US Infrastructure Spending” – Dan Carol presents the case for the EDA to supplement the existing predevelopment programs to kickstart the infrastructure innovation engine in a Barrons op-ed. Carol also testified to the House Transportation and Infrastructure subcommittee on Economic Development, Public Buildings, and Emergency Management to highlight the need for predevelopment dollars. 
Examining the Role of Municipal Bond Markets in Advancing – and Undermining – Economic, Racial and Social Justice” - Gary Hall testified on behalf of the Securities Industry and Financial Markets Association to share proposals to expand the ability of states and localities to finance their infrastructure needs, including expanding opportunities for HBCUs to access the capital markets.

Published May 10, 2021