Muni-Debt on The Rise

Reading stories like this makes me think of the warning signs on Fannie and Freddie that were creeping into the public realm before the great collapse. The problems are manifold, on the one hand you have politicians who convince themselves that high ticket structures need to be built to create an economic renaissance for their localities. The other problem is politicians simply want to spend money and perhaps even lard their allies coffers and floating a bond seems like the easiest way to do it. Of course with the muni-bond scandal threatening the very heart of the market we could be looking at a series of fiscal time bombs that are scattered all across the country:

(Steve Malanga-City) 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.

It should come as no surprise that some of the most egregious abuses occurred in California as numerous semi-independent agencies were created that could actually raise property taxes and issue debt to restore "blighted" areas. The result has been a series of stadiums and theaters that are of little value and in some cases make less revenue then their actual debt payments. Not that California is alone in such questionable choices. For example Charlotte and Atlanta are now in a hundred million dollar bidding war over who can build a museum for Nascar, its almost as if the municipalities are trying to outdo each other and fiscal responsibility be damned!