Monday, June 21, 2010

Municipal Debt

As our local governments struggle with debt, this timely article in the Wall Street Journal bears a close read.

An excerpt.

“New Jersey officials recently celebrated the selection of the new stadium in the Meadowlands sports complex as the site of the 2014 Super Bowl. Absent from the festivities was any sense of the burden the complex has become for taxpayers.

“Nearly 40 years ago the Garden State borrowed $302 million to begin constructing the Meadowlands. The goal was to pay off the bonds in 25 years. Although the project initially went according to plan, politicians couldn't resist continually refinancing the bonds, siphoning revenues from the complex into the state budget, and using the good credit rating of the New Jersey Sports and Exposition authority to borrow for other, unsuccessful building schemes.

“Today, the authority that runs the Meadowlands is in hock for $830 million, which it can't pay back. The state, facing its own cavernous budget deficits, has had to assume interest payments—about $100 million this year on bonds that still stretch for decades.

“This tale of woe has become familiar in the world of municipal finance. Governments have loaded up on debt, stretched out repayment times, and used slick maneuvers to avoid constitutional borrowing limits. While the country's economic troubles have helped expose some of these practices, a sharp decline in tax revenues has prompted more abuse as politicians use long-term debt to kick short-term fiscal problems down the road.

“It hasn't always been this way. Government debt has long fostered the expansion of the American republic, helping to build roads, bridges and water works to serve a growing population. But there have also been spectacular failures. In the mid-1970s, New York City almost defaulted on its debt after it used borrowing to fund an aggressive and ultimately unaffordable expansion of services (like the nation's most generous Medicaid program) inaugurated by Mayor John Lindsay. Gotham was bailed out by New York State and the federal government. But Cleveland, whose spending outpaced tax revenues thanks to borrowing, did default on $14 million in bonds in 1978.

“The 1970s debt crises woke politicians up. Over the next 20 years the municipal fiscal picture improved, with debt rising only slightly. But memories of past busts have since faded, and outstanding debt has soared to $2.2 trillion today from $1.4 trillion in 2000. State and local borrowing as a percentage of the country's GDP has risen to an all-time high of 22% in 2010 from 15%, with projections that it will reach 24% by 2012.

“Even more disconcerting is what the borrowing now often finances. One favorite scheme for muni debt is giant and risky development projects.

“California's redevelopment regime is an object lesson. Starting in the 1950s, the state gave localities the right to create public agencies, funded by increases in property taxes, which can issue debt to finance redevelopment. A whopping 380 such entities now exist. They collect 10% of all property taxes—nearly $6 billion annually—and they have amassed $29 billion in debt never approved by voters for projects ranging from sports facilities to concert venues to retail malls, museums and convention centers.”