The Opioid Epidemic and Local Public Financing: Evidence from Municipal Bonds

Abstract

This paper examines the impact of the opioid epidemic on the financing costs of local governments. We find that a higher county-level drug overdose death rate raises offering yield spreads for local municipal bond issuers, while lowering their debt capacity. A causal interpretation is suggested by a 2SLS approach, using the distances between counties and their closest opioid manufacturer as instruments. Additionally, counties in states that introduced must-access prescription drug monitoring programs (PDMP) experienced a reduction in borrowing costs afterwards. The opioid crisis hurts issuer creditworthiness by reducing future governmental revenues and increasing police and criminal justice expenditures.