Millennials and Municipal Bonds — Some Avocado Toast For Thought

Let’s start with the basics. Who is a millennial? Definitions vary but based on Pew Research, it is anyone born between 1981 and 1996 (ages 23 to 38 in 2019). Here is a refresh of the generational cohorts:

Millennials receive a lot of coverage in the media for many reasons:

1. The Millennial generation numbers just over 70 million, and will surpass Baby Boomers as the nation’s largest living adult generation this year
2. Millennials are seen as a more vocal generation than Gen Xers and Boomers, and disproportionately influential in the media
3. Millennials are thought to bundle contradictory traits. They are considered highly individualistic, but are also more tolerant of individuals different from themselves. As Forbes puts it, millennials like to do things differently.

Over the past years, the financial press have written extensively about the impact of the millennial generation on investing. However, there has been fewer observations about the direct impact of millennials on municipal bonds. Below are some of my thoughts, which I hope you will enjoy reading with a millennial-style avocado toast.

Millennials Are Disrupting Longstanding Industries

Much of municipal finance is grounded in a simple formula: raise capital, build an asset, improve utilization of the asset to generate revenues, repay the capital providers and repeat. While millennials are not always at the forefront of entrepreneurship (in fact, studies show they are more risk adverse and prefer secure jobs), as a cohort they are most comfortable with technology and adopting new user experiences that have disrupted countless industries from media to publishing, retailing to real estate, automobiles to education.

The impact of millennial habits on specific sectors of the municipal bond industry is too broad a topic to be discussed in a short paper but the value destruction (and sometimes, value rehabilitation) on existing industries has been transformative.

Investors need to put on their creative caps to imagine a United States with smaller but more racially diverse families, larger cities, fewer self-driven cars, greater desire for public transit, greater automation, fewer owner-occupied homes, greater acceptance of home schooling, older workers and more “gig” economy employees.

Many Millennials Are Less Prosperous Than Their Parents

The St. Louis Fed undertook a study of wealth accumulation for generational cohorts, and concluded that the 1980s cohort is at greatest risk of becoming a “lost generation”. By how much? According to the study — 34% below the level predicted based on earlier generations at the same age. As the oldest of millennials enter their 40s, most are nearing the peak of their earnings ability, but many are burdened by historic levels of student debt.

Income inequality, if not minimized over the the next two decades through economic expansion or distributive public policies (or mix of both), would dramatically reduce the pool of buyers for munis over the longer term.

America’s richest man for a generation — Warren Buffett — is not a fan of municipal bonds, so issuers cannot rely on the ultra-ultra high net worth to purchase the trillions of bonds that will be issued in the next decade.

On the budgetary front, Governmental issuers seeking to expand physical and social infrastructure will be tempted to contemplate ever-progressive tax rates, but as politicians know, such efforts tend to drive ultra-wealthy individuals into pursuing aggressive tax management strategies to arbitrage between investment structures, states and localities, even countries. Thus, governments will face the challenging task of balancing social equity and realistic execution, and may be forced to seek creative solutions like public-private partnerships or adjust tax policies to shift the tax burden to non-residents or businesses.

Millennials Will Drive Politics, Priorities and Policy

The 2018 midterms provided a glimpse of a changed America. Six states including purple Colorado and Nevada became all-Democratic states, with a single party controlling the Governorship, State Senate and House. Arizona elected its first woman (and openly bisexual) U.S. Senator. Women of color broke barriers and created history everywhere: in Massachusetts, Connecticut, New Mexico, Texas, Michigan and even in New York, whose voters elected a millennial — the youngest Congresswoman in history more well known by her initials, A.O.C. for Alexandria Ocasio-Cortez.

Hot of the press, last week’s report by Pew Research on voters’ changing policy priorities between 2019 and 2011 revealed a strong overall shift towards areas thought to be Millennial-friendly issues: +18% for dealing with climate change, +16% for environmental protection, +12% for improving transportation and +8% for reducing healthcare costs and +8% solving problems for poor and needy Americans. Millennial confidence in the Federal Government’s ability to manage the economy and create jobs seems to have waned. See the table below for details.

Where politics go, finance will follow. Millennial priorities will translate to public policy, which will translate to budgetary, taxation and financing policies.

Financing Practices Need To Be More Millennial-Friendly

Purchasing a municipal bond can seem complicated to new investors. Broker dealers and/or investment advisors need to explain, and investors understand, complicated concepts like premium/discount bonds, call options and tender/step dates.

Marketing municipal bonds in the millennial era will require ever-greater transparent approaches. In addition to standard communication tools like an investor relations website (or credit-specific website), customer service hotline and continuing/material events disclosure, the most sophisticated of issuers and their distribution apparatus (banks, brokerages and investment managers) will have to execute innovative strategies on social media, in-person community outreach and other educational efforts. Regulatory guidance may be needed so marketers understand the parameters and limits of prospective bond purchaser outreach.

There is a lot of low hanging fruit. Current financing/marketing practices can be disjointed — with issuers, broker-dealers and fund managers performing distinct tasks. In order to deliver a high-quality and consistent experience to prospective and existing bondholders, issuers and their partners will need to find ways to collaborate more efficiently.

Millennials also value simplicity. I personally believe many will be receptive to a more simplified version of municipal securities, structured to look more like a CD or mutual fund, preferably tied to an automatic savings plan. These products, sometimes called Mini-Bonds, are not common in today’s market and may never reach sufficient scale to become the lowest cost of borrowing, but they represent an opportunity for issuers to partner their constituents in a direct and transparent fashion to fund projects and capital improvements. During tougher market environments, a stakeholder-style source of fundraising may well be more capable of weathering short-term volatility.

Millennials and Environmental, Social & Governance (ESG) Bonds

A recent BondBuyer article on ESG bonds garnered considerable attention. Quoting research by Morgan Stanley (for full disclosure, my former employer) and The Global Impact Investing Network, the report concluded that millennials were likely so seek investments in affordable housing, education or sustainable energy.

This is certainly good news for issuers who can tout specific projects especially projects with a high social impact, but issuer beware, what a good public relations campaign giveth, it can taketh away.

I sit among what is probably a silent majority in the industry who are of the opinion that virtually all tax-exempt municipal bonds ARE social impact bonds, after all issuers are not-for-profit and bond proceeds are used to build sustainable public projects.

But how does the industry get that message out?

There are attractive opportunities for entrepreneurial firms to help the municipal industry tell a more compelling story through bonds. Over the next few years but within the decade, I suspect we will have a roster of firms developing and marketing issuer-specific scorecards, sustainability ratings and innovative marketing tools to help bridge the informational gap between current issuer disclosure (which incidentally, will incorporate more ESG metrics over time) and the millennial investors’ world view that they not only want returns, they want purposeful returns. The equities and international bonds markets have made some progress in developing such metrics and tools, but municipal finance players will need to develop the granular details because Muniland participants always does things a bit differently.

Just like a millennial.

Disclaimer: The opinions expressed are my own and do not express the views or opinions of my employer, past or present, or any other organization with which I may be affiliated.