Salon has written a great story about the in’s and out’s of municipal borrowing.
When I listen to Tracy Turbak I get this very uncomfortable feeling. There is always something missing in his monthly reports, things are just too pat. Take for instance the fee structures of Dougherty and others bond companies. Remember when Bob Litz stepped into it with the bond consultant in Minneapolis? How about the Augustana deal recently, who was the seller of the bonds? The more open the process, the more we see interesting details making you go Hmmmm . . .
Take the EC bonds for instance. We borrowed $115 million, the pay off amount is around $180 million. That is $65 million in interest payments we will never see again or be able to use on other infrastructure projects. We also are not taking into account the millions that we will spend over the 30 year loan period on maintenance. Do you think SMG, Ovations or the hundreds of promoters who will be profiting from will chip in on those expenses – taking a cut in profits? LOL!
Do officials tend to know that these deals are structured in such a disadvantageous way? Do they think that for whatever reason they’ll make it work or outsmart the banks? Or do they often not know what they’re getting into?
One of the big problems is that often the banks really downplay the risks or misrepresent the likelihood of the risks occurring. Often, government officials are really not aware that the risks could actually materialize. One of the things that’s featured prominently in the report is interest rate swaps. With interest rate swaps, in particular, one of the big problems was that there’s all sorts of risks that were embedded in the deals, and in the paperwork there’s all these disclosures that say these risks exist, but when the banks actually pitched the deals the pitch said not to worry about those risks. Or they would make projections of all the money the city could save but those projections were all based on none of those risks materializing.
I encourage you to read the entire article.
We have to realize as a community, we are over $400 million in debt. I believe almost half of that comes from entertainment palaces, this in a community that has almost half of it’s school children on FREE and reduced lunches and homeless people dying in parking ramps across the street from city hall. We as a city need to reign in our debt.
Wow-a whopping $2500/person of debt. I’ll bet most SFer’s credit card balance is higher. Think you’ll have a problem making the next 3months mortgage/rent?
On the other hand I suppose – unlike the INCORPORATED (lives on in perpetuity) city – YOU don’t have a more-or-less guaranteed monthly income.
Perspective Scott – perspective.
Geez, you’re starting to sound like a Republican TEA-whacker.
I don’t have a problem with borrowing, as long as we do it wisely and on worthwhile projects. And just because our per capita debt is low compared to other cities, I think ANY debt that is incurred by building entertainment palaces and water pipelines we didn’t need are not something to be proud of. It seems our mayor likes to brag about our great borrowing ability, why not be proud of paying for things up front?
The emperor mayor was a credit card loan shark. Most people get plastic and go out on an entertainment binge not realizing (at 35% interest) they can’t afford their future. Huether has deployed the same tactics except it’s oriented at the general population and with public money. Like for private debt, the only answer for insolvency is an eventual bankruptcy.
What’s wrong and what’s right? Bond debt assumes Sioux Falls will continue strong growth and interest rates will remain low, WRONG. National investment is focused on bonds. Sioux Falls can build entertainment venues and there should be more bond debt while there are fools who buy bonds. Eventually, the city will take bankruptcy and all debt will be forgiven, RIGHT.
Investors fled stocks with what they could salvage after the last market fall. They went into bonds assuming they were safe with consistent 5% tax sheltered growth. Wrong, inflation is more than 5% and top level corruption moved into bonds from stocks. Numerous cities in CA, MI, and NV are now in bankruptcy. Bonds are no more secure than stocks. Worse, if you’re invested with IRA’s or SEP’s, you can’t deduct your loss.
Forecast, the next financial meltdown will be bonds.
Coulda built a nice couple of streetcar starter lines to jumpstart some urban, walkable redevelopment along Minnesota, 10th/11th/12th, and maybe 41st. But an entertainment center is way more fun.
WE elected a high interest credit card CEO….WHY ARE WE SO SURPRISED WE HAVE RECORD DEBT!!!
The simplest example of how their bookkeeping works is the “pool cash”. You have to be awfully credit creative to borrow money for levees and call it cash when your paid it back by the government. WE”RE so awesome we can build our mega pool with cash. Oh nevermind those pesky creditors.
We “the voters or debtors” need to be a lot more specific with the language of the bond measures. We need to use some of that fine print that comes with a Premier credit card.
I have no problems borrowing for capital projects; I think the mechanism is actually quite preferable and much fairer than the notion of “paying for things up front.” Here’s why.
Had the City of Sioux Falls “saved” the money to build the arena, for example, the money used to build it would largely have been that of residents who had died or moved away prior to its construction. It would’ve represented years of surplus tax collection, with revenue from residents five, ten, twenty years ago being sequestered for a future purpose. Beyond that, the interest earned on that money would’ve accrued to the city instead of to the taxpayer, effectively punishing that resident in perpetuity.
By bonding for it, government can insure that those paying back the bonds, at any given time, are living, breathing residents of the city who have the ability to make use of the facility. Does that cost a bit more? Depends on your perspective; remember that “saving” the money has a cost to residents as well. But it absolutely creates a situation in which those living in a city are the ones paying for the benefits of living in it.
Also, Dan missed the boat on Meredith Whitney’s armageddon prediction for muni bonds by three years. Me, I’ll keep chugging along with my muni bond ETF at 7-9% a year, thanks.
Do a search on Jefferson Cty. sewer bonds
fraud bribery and whatnot,…no one goes
to Jail and JPM makes out like bandits nothing clawed back.
In Art and Labor and financial chicanery
($6.00 sewer surcharge here now next Jan. for some bond WHAT BOND?)
OBG
Following upon hornguy’s insights; Imagine for a moment what your ranting would be about if you were to discover that the city’s tax rate was creating an annual “surplus” well above and beyond state required reserves for emergencies Scott. How much you wanna bet you and a cadre of TEA partiers would be howling for tax cuts?
Another thing Dan misses – why is the stock market at record highs and climbing – if people are “fleeing” it in favor of bonds??? The stock market is the supreme supply/demand indicator for the value of money. Stocks are HIGH because there is a great DEMAND for them relative to supply.
OR, the stock market is high because trillions of dollars of free money has been flooding the market for the last few years. Maybe, instead of the stock market being “the supreme indicator” for the value of money, it’s just that our market is so distorted that nobody really knows what money is really worth?
Tom has a good point. Rufus, the market is high because of inflation and foreign investment. We’re owned by the Chinese/others because their markets are volatile. Granted, PE’s are low now and most stocks are at least a good gamble. The real problem, domestically, is greed and MBA executive crooks. Stocks are hyped so prices rise. Then, senior executives cash out before the unreasonable optomism becomes apparent.
I’ve done well with dividend growth funds. Dividends are high when there’s a profit or to prevent sellers from cashing out when the stock price tanks. It’s win win. Another good investment is spot silver. Silver fluctuates more than gold from between 15 & 43. It costs 24 to mine an ounce and it’s selling at 16. It must go up when demand resumes (electronics, batteries, solar panels, Tesla). It’s also an inflation hedge considering inflation and dollar decline.