The “watch dogs” keeping an eye on local politics are disappearing and that is resulting in higher borrowing costs for small issuers. A recent study entitled “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance” details the costs associated with issuing debt in small towns that have lost their local newspaper.
Many small town newspapers are closing due to a decline in subscribers and local advertising. Traditionally, these papers invested time and resources in following local governments, and dedicated print space to keeping citizens well-informed regarding the activities of city officials, while holding those officials accountable for their decisions. A Pew Research report indicated that a 27% drop in newspaper subscribers from 2003 to 2014 resulted in a 35% drop in State House reporters. These reporters had been gathering information on local governments and reporting their findings. There is concern that a reduction in, or lack of, reporting may lead to increased government waste, less effective schools, and an increase in incidents of corruption. When local governments are not held accountable for their decisions, investors in the debt issued by these governments are likely to require a higher rate of interest to offset the perceived risks.
There are many examples around the country that highlight the value of political reporting by local newspapers – here are a few that we find interesting. A city in Utah decided to construct a new City Hall, and the construction plans included demolishing a school building and closing a portion of a main road. When the local newspaper reported on the decision, the city’s residents opposed the decisions made by local leaders. After months of pressure, city officials decided to rescind the decision to build the new City Hall.
Local reporting also made a difference when a city decided to allow a real estate developer to revitalize a very run down section of town. Tax-exempt bonds were issued to fund the project, even though the revenue from the project would not be enough to cover the debt service. The city would not guarantee the interest payments but did say that excess general funds could be used to make up the difference. The local newspaper reported on the situation, and local business people, realizing that the project would benefit them, invested in the bonds.
Local newspapers are an essential source of information that is capable of saving taxpayer money and improving the community. We believe that, where possible, citizens should be supportive of their local “watch dog”. In areas where local newspapers have closed, community development and bond issues may be affected. In these circumstances, in-depth local credit analysis becomes critical.