- Local governments in areas with epidemic opioid abuse face added costs that are hard to quantify, but new UGA research has begun to count the costs down to the county level.
- The costs for publicly funded services and medical care go up, even as property tax revenues go down.
- Municipalities have greater difficulty obtaining bonds and low-cost capital to finance the services that will help a community recover.
- Without federal assistance, these towns will be trapped in a cycle that further harms residents.
Communities at the epicenter of the opioid crisis, particularly in states along the Rust Belt, need new hospitals, substance abuse treatment centers and additional law enforcement to stop the epidemic, but they may not be able to fund them, according to Terry College of Business finance professor John Hund.
Stuck in a real-world Catch-22, these local governments can’t gain access to low-cost capital when they need it most, Hund and colleagues at Pennsylvania State University concluded after two years of in-depth statistical research.
“This may accelerate a downward spiral in areas affected by the opioid crisis,” Hund said. “Prior research has explored costs at the state and national levels, but this is a first close look at the effects of the crisis on a more granular level.”
The misuse of opioids — including heroin, prescription pain pills and substances such as fentanyl — leads to nearly 50,000 overdose deaths per year, according to the Centers for Disease Control and Prevention. Beyond that, 10 million people misused prescription opioids in 2018, and 2 million had an opioid use disorder.
Opioid abuse costs the U.S. about $504 billion per year, according to the U.S. Bureau of Economic Analysis. This includes direct costs such as substance abuse treatment, health care costs associated with overdoses, and drug-related injuries in emergency departments, as well as additional law enforcement, corrections and child protective services. Indirect costs include a loss of income tax revenue as workers become unemployable and productivity drops and a loss of property tax revenue as property values decline.
This financial burden influences credit risk and reduces access to capital. This could affect financing for schools, hospitals, utilities, roads and other public infrastructure projects.
“Someone has to pay for the effects of the opioid crisis, and federal grants aren’t going to fill that gap,” Hund said. “New facilities require new bonds at some point.”
In a new paper, Hund and the team analyzed county-level data about the effects of the opioid crisis on municipality tax revenues, law enforcement costs, credit risk and access to capital. They collected data from several sources, including previously unexamined information from the Centers for Disease Control and Prevention about the precise cause and location of deaths in the U.S., as well as opioid prescribing rates. They also looked at a Drug Enforcement Administration database that tracks the path of each pain pill sold by manufacturers and distributors to specific pharmacies and physicians in the country. They then manually pulled together information about local government finances, demographic information and economic indicators from Census Bureau surveys, as well as several government agencies.
They found that the “hardest hit” counties with a significant increase in opioid deaths have reduced property tax revenues of about $2.4 million and a need for expanded police forces. For instance, the number of police officers in these counties increased from 25 in 2000 to nearly 78 in 2016.
“Even more than the revenue side, the costs of the opioid crisis can rip a community apart,” Hund said. “The effects are even worse when it’s hard to fund borrowing in places where new capital would do the most good.”
To evaluate whether municipal bond credit rating analysts consider the crisis as part of their credit risk assessment, Hund and the team looked at the presence of a “pill mill” in these counties and the opioid deaths there. Although it can be difficult to disentangle opioid deaths from other socioeconomic factors, they controlled for income, unemployment, population and taxes. They observed a statistically significant but small effect on credit ratings.
At the same time, they found that more deaths significantly reduced the quantity of bonds issued. One extra death per 100,000 residents reduced the quantity by about 5%, which could be significant. With an average $167 million issued per year per county, that could equate to $8 million less in annual funding, or about the same as the average price of a new elementary school, they wrote.
“Everything we observed is likely an underestimate,” Hund said. “The effects are worse now as the epidemic grew in 2017 and 2018.”
Finally, they analyzed the adoption of state-level prescription drug monitoring programs to observe links between intervention efforts and access to capital. If these programs are created to curb opioid abuse, they reasoned, the adoption of such programs should improve access to capital. They focused on counties with shared state borders, which allowed them to compare counties with similar economic and demographic factors but different state regulations. Importantly, they found that adopting a monitoring program reduced borrowing costs and improved the ability of municipalities to issue new bonds.
“A policy implication is that federal government bond insurance could provide a much-needed and somewhat low-cost method of addressing the real costs of the opioid crisis,” he said.
The paper, titled “Opioid Crisis Effects on Municipal Finance” is available on SSRN. Hund co-wrote the piece with Kim Cornaggia, Giang Nguyen and Zihan Ye at Pennsylvania State University. The research team has presented the research several times and plans to publish the manuscript in a peer-reviewed finance journal in 2020.