The Sisyphus Comments

Local Governments Should Not Mind Their Own Business

The older I get and the closer I get to retirement, the more concerned I have become about hanging on to my money. I have been working since I was sixteen so I have paid my share of taxes. However, I never really paid too much attention to what that money was being used for until recently. They say ignorance is bliss and that may be something to keep in mind if you want to keep your blood pressure in check.

One disturbing trend that I have noticed over the past few years is the willingness of local governments to take on debt for luxury items. I have always been of the opinion that government at all levels should provide essential services like public safety, education and transportation but luxury services should be provided by private industry. This type of arrangement allows businesses to provide services and generate revenues to build the tax base the government needs to provide the essential services. Pretty neat system, isn’t it? It’s called capitalism.

Over the years, I have made an interesting observation – people who work in private industry generally strive to build fortunes while many of our public servants focus on building monuments (buildings may actually be a little more accurate). Unfortunately, it takes money to build these monuments – lots of money – so our government officials do what a lot of us do when we “just have to have” something that is beyond our means – they borrow money.

Most working adults realize that debt is a necessary evil if we want to own a home and drive an automobile to work. Having a responsible amount of debt is just a fact of life in our economy. However, problems can quickly arise when we begin to confuse our “wants” and our “needs” and take on debt that exceeds our means. The same is true of governments, although they use a little different vehicle to borrow the money, the end result can be just as bad.

Usually, when cities and counties need to finance a capital item they issue municipal bonds to raise the funds (or borrow the money). Municipal bonds are issued by states, cities, and counties, or their agencies to raise funds. The methods and practices of issuing debt are governed by certain laws and regulations that vary by state. These bonds can pay either a fixed or variable rate of interest.

A bonds is simply a loan to the municipality and the issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors over time. Repayment periods can be as short as a few months but they are usually stretched over a period of 20 or more years.

The issuer (county or city) typically uses the proceeds from a bond sale to pay for capital projects, such as erecting a new building, or for other purposes for which it cannot or does not desire to use the funds they have on hand or through the annual operating budget. Tax regulations governing municipal bonds generally require all money raised by a bond sale to be spent on one-time capital projects within three to five years of issuance. Certain exceptions permit the issuance of bonds to fund other items, including ongoing operations and maintenance expenses, the purchase of single-family and multi-family mortgages, and the funding of student loans, among many other things.

Many investors find the special tax-exempt status of most municipal bonds to be an attractive investment option and they are willing to accept a lower interest payment. This makes the issuance of bonds an attractive source of financing to many cities and counties since the borrowing rate available in the open market is frequently lower than what is available through other borrowing channels.

Municipal bonds are one of several ways states, cities and counties can issue debt. They also use other mechanism such at certificates of participation and lease-buyback agreements, like the one used to build the new Roanoke County Public Safety Building. While these methods of borrowing differ in legal structure, they are similar to the municipal bonds and are essentially just another way for a municipality to buy now and pay later.

The risk of a municipal bond is a measure of how likely the issuer is to make all payments, on time and in full, as promised in the agreement between the issuer and lender. There are several different types of bonds, each carrying a different type of security, based on the promises made in the bond documents. The most common types of bonds include:

• General obligation bonds promise to repay based on the full faith and credit of the issuer; these bonds are considered the most secure type of municipal bond so they carry the lowest interest rate.
• Revenue bonds promise repayment from a specified stream of future income, such as income generated by a utility from payments by customers.
• Assessment bonds promise repayment based on property tax assessments of properties located within the issuer’s boundaries.

Remember, the primary revenue vehicle for the operation of government is taxes so, if a municipality overextends itself financially, they are often forced to raise taxes on individuals and businesses. This why it really bothers me when I hear government officials talking about building recreation facilities that directly complete with the tax paying businesses that provide the tax base for the operation of local government. Why would a local government want to get in the business of operating a fitness center or build a library that is “just like a Barnes & Noble” instead of providing incentives to private industry to provide these services if they are needed. No business can compete with a government operated enterprise since the government doesn’t have to pay taxes to itself and a private enterprise does.

If we would take a few minutes to set down and do the math, we would see that these “free” government services and facilities come with a pretty hefty price tag for us and our children, since they will inherit the debt that we are creating. It doesn’t take a CPA to figure out that it isn’t a good deal when the taxpayers have to pay the debt service to build a building and then pay to operate it. I think we would all be better off if we could convince our government officials to concentrate on making our essential services the best that they can be and leave the entrepreneurship to the entrepreneurs. They work a lot harder to meet the needs of the consumers since they are using their own money to build their business – not the taxpayer’s money.

This may come as a surprise to some folks but there are very few “free lunches” in this life. As most of us have found out the hard way a couple of times, if it seems to good to be true – it usually is!