Local governments’ tough choices between payrolls or bond payments?
Harrisburg walks the well worn path
The capitol city of Pennsylvania, Harrisburg, is functionally if not legally bankrupt. Yesterday the City council voted against the mayor’s rescue plan which would have brought them a small reprieve but would not have fixed their core financial issues. The city’s main problem is a grossly expensive incinerator project which has burdened the city with way too much debt. Their situation is similar to the sewer system woes of Jefferson County, Alabama on about one tenth the scale. Like Jefferson County, anger about bondholders being prioritized ahead of the needs of citizens was on display at yesterday’s city council meeting. From Reuters:
“Wall Street gets paid and Main Street gets the shaft,” Councilman Brad Koplinski, who voted against the plan, said during the angry, packed council meeting.
At the root of Harrisburg’s troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning incinerator that left the city saddled with a $300 million debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt. Harrisburg Authority is investigating how its debt load mounted up.
The municipal bond market has long been aware of the fiscal problems in Harrisburg. And like Central Falls, RI and Jefferson County, AL it’s been a struggle for public officials to try and make bond payments and continue operating government functions. There is just not enough money to go around. Because Harrisburg is the state capitol it is likely to be taken over by the governor. Stay tuned.
Regressive state taxes
In a Los Angeles Times opinion piece entitled “An undeserved attack on the ‘undeserving poor’” Michael Hiltzik battles back against the conventional wisdom that low income people are not helping support the government since they pay little or no federal income tax. He rightly points out that those in lowest income brackets pay higher amounts of their earning in local and state taxes. So they are helping carry the shared burden. From The LA Times:
The institute’s figures show that the poor are hardly objects of envy. In its most recent survey, the institute found that in 2007, the lowest 20% of income earners (earning less than $18,000 and averaging $10,700) paid an average 10.9% of their income in state and local taxes. The biggest bite was sales and excise taxes, which took 7.1%, followed by property taxes, which even renters pay through their rent, at 3.7%. Income taxes come in last, at 0.2%. If you apply the theory that tax exemptions make the poor uninterested in tax policy, these figures should dispel that. They pay plenty.
Selling forward cash flows
Many municipal bonds are issued to raise money for infrastructure projects like roads, bridges and sewer systems. But there are also many municipal bonds that are sold to take advantage of future cash flows. This is where a state, or municipality, prefers to sell off the income for future years for a lump sum payment now. There is a whole class of municipal bonds called “tobacco bonds” where states sold off future cash flows from the Tobacco Master Settlement Agreement.
Another class of these bonds are “lottery bonds” where future proceeds are securitized and sold to bond investors.
Yesterday Florida issued $247 million of bonds backed by future proceeds of their state lottery. Florida issued the bonds to take advantage of current low interest rates and refund older, higher interest rate bonds. From Bloomberg:
Florida’s Board of Education, which finances school construction, sold the lottery bonds and will use the proceeds to refund existing issues. The deal produced $24.5 million of net present-value savings over the life of the bonds, said Ben Watkins, director of the state’s Bond Finance Division.
In low interest rate environments a lot of activity in the bond markets is issuing new bonds to repay older, higher interest rate bonds. In essence, state and local governments use the bond markets to borrow and manage future cash flows. I expect we will see a lot more deals like the Florida lottery refinance if we continue having low interest rates.
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