Jackson Jambalaya

The Wall Street Journal published an op-ed piece by Steve Malanga on how state and local governments have fallen for the easy seduction of municipal bonds. Its so easy, just like a credit card. Pass a bond issue, award the contracts and lucrative fees to your political friends, get a huge chunk of cash up-front, and then make easy payments every month, right? Well, yeah but not so fast. Mr. Malanga points out what happened to the Meadowlands:

"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."

Got that? Began at $302 million, run it up to $830 million, and make interest payments of roughly $100 million a year. Oh, and if they had followed some discipline, the bonds would have been paid off 15 years ago. Mr. Malanga continues:

"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." Column

Why is Kingfish spending time on something as arcane as muni bonds? Its a boring subject. It won't generate any traffic. It doesn't get the attention Irby posts will. Its over the heads of many people. Well, I'm spending some time on this because this is where cities go bankrupt. Jackson narrowly dodged a bullet last year when it backed out of an interest rate swap scheme cooked up by then city finance director Rick Hill, Sarah O'Reilly-Evans (She would've walked out with $60,000 alone.), and the nephew of Hinds County Supervisor George Smith. In my opinion, the interest rate swap would've done to Jackson what it did to Jefferson County, Alabama: bankrupt it. Period. Make a bad deal on bonds and like a homeowner facing foreclosure because his adjustable rate skyrocketed, suddenly the city can't afford police officers, teachers, and other services we take for granted as Jefferson County discovered.

Unfortunately for Jackson, Rick Hill just can't quit playing with the numbers:
"City Deputy Director of Administration and Finance Rick Hill said the city, by refinancing its general fund debt, is delaying debt payments that are currently due, to free up excess cash that the city can use toward its deficit by 2015 if the city does not make drastic cuts to its expenditures or raise revenue through tax increases.

Hill added that the move comes with two disadvantages: "You're moving the debt payments out, but paying more interest. (Also), on out in the years, you'll be paying that money back, so you'll have to have money then to make that payment so the city's millage will be going back up out into the future. We've got to plan how we're going to figure out how to cover that millage increase out into the future."

Hill said the city would be responsible for an extra $1.6 million in additional interest payments by delaying its debt payment, but hoped the city would be in a position to benefit from upcoming projects within the next five years that will generate new sales tax to counter the delayed debt.

"What this does, is it buys us some time to get the new Convention Center Hotel built, buys us some time to get the Farish Street Entertainment District development online, and gives us time to get out of this economic downturn we're all in," Hill said. "Hopefully the Capitol Green Project can also be online to get our sales tax back to where it needs to be." JFP article

Makes you feel warm and fuzzy all over, doesn't it?