Regular readers know that I HATE borrowing money. Several months ago I had a number of choice words about the Tax Anticipation Note that the City took out to tide us over until property taxes arrive in March. I voted in favor of that deal (because we had no choice) but invoked the specter of a certain town that will go unnamed.
For more than a year now, we've been trying to do a deal that would give us the funds necessary to do some bigger ticket infrastructure repairs. It looks like we're finally at the point where that deal will come through (next step is city council approval of taking this deal before the Mississippi Development Bank).
Let me walk you through what's being proposed, why I think it's good, the timeline, etc..
As a matter of first principles, let me get this off my chest.
It's expensive being poor.
When you have money, you can make cost-saving moves like replacing the old hot water heater in your house BEFORE it breaks and you have to fix the damage caused by a catastrophic leak and you don't have the time to get a couple of quotes.
When you have money, you can buy toilet paper in bulk and grab extra shampoo when it's on sale.
When you are poor, you put off things like preventative maintenance. You buy just what you need at that moment rather than getting the bulk discount or the off-season price. You don't have a choice.
What I've described at the individual level holds true for cash strapped cities like Jackson.
I wish that 20 years ago, the leaders of Jackson said "hmm, we can't keep up with preventative maintenance, lets ask the legislature to let us set up a special sales tax and we'll use that money to pay for repairs as we go along."
We didn't do that.
Instead, we ignored the change oil light and now we have to replace the whole engine.
Which brings me to the deal being considered.
First off, we are not borrowing $90 Million from the Mississippi Development Bank.
We are not issuing a general obligation bond (although that might be a wise follow-up move 3 to 5 years down the road).
If you think what's about to happen is that $90 million dollars will be sitting in Jackson's bank account ready to be wasted with no oversight, you're wrong.
What's on the table is a kind of transaction called a "direct placement."
A direct placement would be like if a construction loan from a bank had a baby with a home equity line of credit.
The entity lending the money is JP Morgan.
Unlike a regular bond deal where there is an underwriter and a bunch of lawyers and red tape and fees because you are selling bonds to the market as a whole, in a direct placement, only one bank (here, JP Morgan) is lending its money to us. There are no third party buyers and so a LOT less regulation and hoops.
We gave a list of potential projects and their price tag to JP Morgan and they in turn will give us the money to do them on an as requested basis up to the total amount. JP Morgan thus exercises oversight on the spending by the City (in fact, part of what they will look at before each draw is whether the 1% commission has approved the particular infrastructure project).
JP Morgan does this at a very, very low interest rate because they know they are getting paid back from the 1% sales tax money (it's a secured debt, like a home equity line of credit, why does a home equity line of credit have such a lower interest rate than a regular credit card? Because it's secured by an asset, the house).
The City doesn't get one big pool of money, we draw this line of credit down as we need it based on actual use.
We are bringing in 15 -20 million per year on the 1% tax. We've got critical projects that individually cost more than that. We could do no work for a few years until we had enough cash in the till to pay for these projects outright . . . or we can borrow money today to do these projects and pay back the debt over time with the subsequent income from the 1% sales tax. (KF: Wrong, it's $12-13 million per year)
You've made it clear that you want us to get to work already with some big ticket projects. So we're going to borrow the money.
Now, as I said before, I hate borrowing. BUT, there are situations in which it makes sense to borrow. For example, if you borrow money to invest in one time capital projects that will have benefits that last longer than the time you spend paying off the debt, then ok, borrow the money.
Conversely, you shouldn't borrow to cover your regular operational expenses or to smooth out cash-flow (which is why I don't like tax anticipation notes, but I'm debt averse, others I respect disagree with me on the Tax Anticipation Note).
It makes sense to borrow when it allows you to achieve savings that outweigh the transaction cost of borrowing. For example, if buying in bulk is such a big saving over buying by the onesies that it outweighs the finance charge of putting it on your credit card for a month or two and making installment payments, heck, buy a years worth of diapers/baby formula/etc. on-line or at Sam's.
At the end of the day, this deal makes a lot of sense for the City. We need to finance a few big ticket purchases. The interest rate is top-notch. I like the fact that JP Morgan will be providing oversight on the spending when we make requests to use this line of credit.
This transaction's structure keeps us from having to use all of the "underwriters counsel" and other folks who add to the transaction costs of borrowing.
I will cobble together a list of projects and a timeline that works for facebook and will follow up with more on this later.
Kingfish note: Mr. Priester is probably pushing this because the size of the proposed Tiger grant doubled and the city's match will shoot up from $4 million to around $16 million - more than the annual revenue collected from the sales tax. That area just happens to lie in Ward 2 and covers North State Street, West County Line Road, and Tougaloo.