The next financial meltdown – state & municipal debt bombs
This is a long but very worthwhile article (from the City Journal) on the pending debt tsunami of state and municipal governments. It describes in meticulous detail how these government hacks have subverted their fiduciary responsibilities, grossly violated the public trust and left the taxpayers holding the bag.
In the early 1970s, New Jersey officials decided to build a sports facility in the Meadowlands, the state’s wetlands just outside New York City. To help pay for it, they formed the New Jersey Sports and Exposition Authority (NJSEA), a quasi-governmental agency with the power to issue debt. The authority floated $302 million in bonds, used the proceeds from the bond sale to construct Giants Stadium and a Meadowlands racetrack, and planned to pay off the debt in 25 years, largely with proceeds from the track but also with some help from the stadium. Horse racing proved a big hit, and the plan seemed bound for success.
But the pols couldn’t resist soaking the Meadowlands. They siphoned track proceeds into the state budget; repeatedly refinanced the NJSEA’s bonds, pushing repayment dates far into the future; and relied on the authority’s good credit rating to launch other building schemes, including a costly but unsuccessful aquarium in Camden. Today, 35 years after its first bonds, the NJSEA is $830 million in hock. Worse, it can’t repay that debt because business has cratered at the racetrack, still the Meadowlands’ principal revenue source. As for Giants Stadium, it was demolished this year, and its replacement won’t be contributing much to the debt repayments. The state, facing its own cavernous budget deficits, has had to assume the authority’s interest payments—about $100 million this year on bonds that now stretch out to nearly 2030. “The sports authority is paying the consequences for politicians using it for their pet projects,” observes Steve Lonegan, former mayor of Bogota, New Jersey.
Stories like that have become frustratingly common around the country. State and local borrowing, once thought of as a way to finance essential infrastructure, has mutated into a source of constant abuse. Like homeowners before the housing bubble burst, states and cities have gorged on debt, extended repayment times, and used devious means to avoid limits on borrowing—all in order to finance risky projects and kick fiscal problems down the road. Though the country’s economic troubles have helped expose some of these unwise practices, the downturn has brought not reform but yet more abuse. Even as Tea Party protesters and taxpayer groups revolt against excessive government spending and taxes, they are paying too little attention to the gigantic state and local debt bomb. If it can’t be defused, we’re all at risk.
The creation of public agencies, not accountable to the taxpayers (but paid for by them), to fund projects unsupported by the public is a gross violation of the public trust. Yet it goes on despite the downturn in the economy.
California’s redevelopment regime is an egregious case. Starting in the 1950s, the state gave localities the right to create public agencies, funded by increases in property taxes, which could issue debt to finance redevelopment in blighted areas. A whopping 380 such entities now exist in California. They collect 10 percent of all property taxes—nearly $6 billion annually—and have borrowed $29 billion to pay for projects ranging from sports facilities to concert venues to subsidized shopping malls. Originally designed to expire after they have improved an area, the agencies go on forever by claiming that blight never disappears. Consider San Jose’s redevelopment agency, one of the state’s biggest, which filed an application last year to increase its allocation of property taxes. Blight was getting worse in the city, the agency argued—52 years after it was created to eliminate it.
Recall that many states sensibly require all bond offerings to be approved by voters—who have often defeated new borrowing aimed at financing grand, politically inspired projects. But the requirement has led to a rise in maneuvering by officials, who have created quasi-governmental authorities that can issue debt without voter approval. Such backdoor borrowing has become the most common kind of state debt. In New York, which has 230 of these independent entities, voters have approved only $3 billion of the state’s $60 billion of bonded debt outstanding. California’s army of redevelopment agencies can likewise borrow without the approval of the voters whose taxes they ingest.
Please read the whole thing – it’s fascinating. It will have you looking at your local government in an entirely new way. Bend Over, Grab Your Ankles, Here It Comes Again!