Thursday, July 18, 2013

The debt beast

Detroit's bankruptcy filing today has brought renewed comparisons of the Motor City with the Queen City, with many commentators (including COASTers) suggesting that Cincinnati is fiscally a mere five-to-ten years behind Motown.

But how did Detroit descend into the abyss resulting in bankruptcy?  In a word, debt.

If you think about it, cities are difficult to bankrupt.  They take a percentage of the earnings of everyone living or working within the city limits, and then lump property taxes, and other fees, fines and assessments on top of that.  They have plenty, plenty, plenty of income to pay their current obligations for police and fire, trash collection and street maintenance.

The problem emerges from years and decades of over-spending, i.e., spending or committing more money each year than the municipality takes in and the assumption of debt paid by future generations to pay for that indiscipline.

And a reader might ask: how could that happen?

It happens because rapacious bankers, bond issuers, bond attorneys, union leaders, community boosters and others come up with myriad ways to take on debt, i.e. obtain goods, services or the use of money today, in exchange for monies to be paid in the future, with -- of course -- a generous rate of interest.

In some cases this over-spending is simply self-serving greed, such as overly generous union contracts, and in other cases "men of good will" earnestly believe that the municipality must invest in economic development projects to grow ourselves out of the downward spiral.  Finally, following decades of continuous growth, municipal administrators, consultants and politicians became accustomed to papering over yesterday's mistakes with tomorrow's growth.  All of this debt assumption is "leverage."

But, the problem with leverage -- in private industry as well as for public entities -- is that a slight dip in fortunes that in an unleveraged environment is a mere inconvenience becomes a major calamity.  This is what millions of debt-laden American families endured in the recent recession as they descended into bankrupcy.

Bankers and bond peddlers are smart and creative.  But instead of applying that intelligence and creativity to the good of America's cities, they have crafted innovative, politically palatable ways to undertake more and more demon debt, debt that condemns later generations to servitude to repay.  Many times, even the markets are "fooled" by the creative undertakings somehow suspending disbelief that the debt will ever be repaid.

We saw this with the attempted sale of Cincinnati's Water Works to ourselves -- it was just a creative way to take on hundreds of millions in new debt.  We have seen this with the annual massive under-funding of the City pension plan -- it's just deferral of financial obligations that invariably will someday come due.  And the Parking Plot in the end is simply the acceleration of $92 million in revenue to the City today that is repaid out of decades of reduced parking meter collections -- at a phenomenally high rate of interest to borrow that money.

And, of course, those smart and creative bankers, using the leverage of loaning (rather than borrowing) money and (as with the Parking Plot) charging fantastically high rates of interest that are difficult to discern because of the complexity of the deal (see, for example, the Jefferson County, Alabama municipal bankruptcy), make oodles of money from the either lazy, greedy, or foolish municipalities that sign their deals.

And with these techniques, the financial fortress that should be America's cities, are reduced to rubble under the oppressive weight of decades of debt layered upon them by public officials who came before them.  By the time municipal bankruptcy rolls around, it is simply too late to right the ship.

The main reason that COAST opposes the Parking Plot is that it is the unnecessary assumption of debt at a sky-high rate of interest, and in this case for no good reason.  It is one more bandaid to cover over the City's fiscal indiscipline, and postpone the hard decisions the City needs to make.

The debt beast will consume Cincinnati if we don't radically change how we do business.  Let's put money away for future generations rather than spending their inheritance and then some.

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