Uncle Sam helps cities keep using plastic to stall collapse
We've been looking over some of the heretofore unpublished deal documents regarding the $160 million that the City of Portland quietly borrowed from Bank of America on March 31. This is a bridge loan to get the city to a much longer term, and much larger, borrowing for the sewer system over the summer.
It turns out, the city is going to apply to the federal government to have the loan subsidized under the new "Build America Bonds" program. Under that system, the federal government will send the city a check for 35% of whatever interest it pays to the lender. As a tradeoff, the lender will have to pay federal income tax on that interest, even though the bonds would traditionally have been tax-exempt. The idea is that the new deal will provide states and cites a greater boost than the tax exemption, which the feds say was only about a 20% subsidy on the interest rates that the lenders charge.
Here in Portland, where the city's long-term debt now tops $6 billion, the last thing we need is a greater incentive for the local government to go further into hock. But that's what's happening.
Meanwhile, knowing that these subsidies are coming, you can just see the Wall Street overlords jacking up their interest rates even higher than they might have been for taxable bonds, thereby soaking up the additional federal subsidy that's supposed to be helping the locals. "They can afford it -- the feds are paying the extra." Our Congress apparently never learns that when it hands out subsidies, they inevitably go to people other than the intended recipients.
| Posted at 4:32 AM | Permalink |
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Comments (10)
All part of the strategy to buy more votes. Almost every city/state/county has spent itself into the hole on all kinds of frippery.
So now, the regime can write one big check and wipe it all out.
If you can re-fi at a better rate, do it now.
Posted by Steve | April 26, 2010 7:37 AM
It is my understanding that the point of these bonds are that (1) they allow mutual funds and pension funds that do not pay income taxes to buy municipal debt because they can get interest rates that are better and (2) they reduce the amount of tax exempt bond interest out there, which Democrats have disliked for years because the buyers are generally affluent and Republican. BAB bonds take care of this. Cities like them because the audience for these bonds is much larger, so selling them is easier.
Posted by robert | April 26, 2010 7:39 AM
Popping the seed corn.
Posted by Abe | April 26, 2010 8:13 AM
Rather like professional sports teams and arenas.
Posted by godfry | April 26, 2010 8:28 AM
Having just read Michael Lewis's book "The Big Short" I know just how much all those bonds are worth...
ZERO dollars
Posted by portland native | April 26, 2010 8:49 AM
There are real downsides to the federal subsidy gravey train Portland and Oregon have been living on for decades. One very serious downside raised by a Portland bureau chief at a meeting I attended recently is federal subsidies usually involve building new infrastructure and require a certain amount of local matching monies. What happens to paraphrase the chief is it makes it easier to build new things than to maintain existing facilities and infrastructure. As a result, Portland city has a growing maintenance back log of some hundreds of millions of dollars, approaching if I recall correctly some half billion dollars. And the new stuff being built with federal subsidies has to also be maintained.
Another bad thing is the federal subsidies cause misallocation of investment dollars. Things like roof top solar systems, sporting a total all in cost of more than 50 cents or KWH or more (against the going wholesale price of 5 cents), would never see the light of day without ludicrous subsidization. These novelty type utopian projects rob monies from things like basic human capital building like education (something realized with Oregon's BETC credits).
Yet another bad thing is local governments become accustomed to these federal dollars, and some day soon, the federal government is likely to have to cut back on its local infrastructure subsidies (our national government faces some $50 trillion dollars in unfunded medicare and social security liabilites plus the cost of the recent healthcare blob).
As for Wall Street, I would be equally mistrusting of government. The Bama administration is making uncertain as to how much and whom is going to get tagged for new taxes. If I am a business person, I am going to charge for the risk of uncertain governance. And we also have to pay for government employees being asleep at the regulatory switch, or watching porn. So, I find Mr. Jack's politics internally inconsistent. Local government, sharing much the same philosphies as the current U.S administration, should be considered bad, Wall Street bad as always; but the current national government good? Buyer beware always is a better philosphy.
Posted by Bob Clark | April 26, 2010 9:19 AM
(1) they allow mutual funds and pension funds that do not pay income taxes to buy municipal debt
FYI, there are dozens of mutual funds that hold tax free muncipal debt.
A big selling point is that Build America bonds will attract foreign investors such as foreign banks and pension funds -- shades of SEC v Goldman Sachs. I wonder if all the appropriate disclosures are being made?
Or is this more like Freddie and Fannie, where the Federal Government's role will, downstream, lead to an explicit bailout/guarantee? Time will tell.
Posted by Grady Foster | April 26, 2010 9:26 AM
"What happens to paraphrase the chief is it makes it easier to build new things than to maintain existing facilities and infrastructure."
Eastside streetcar anyone?
Anyone else here have to regularly navigate the construction on MLK/Grand? Or where major cross-streets have to cross them, like Burnside/Couch or Broadway/Weidler? What a mess.
Posted by Snards | April 26, 2010 9:54 AM
the current national government good?
GONG! Thanks for criticizing me for something I never said. But I do note that what we have now is infinitely better than the drunken chimp and his sadistic keeper that we had in the White House a few years ago.
Posted by Jack Bog | April 26, 2010 10:13 AM
http://www.smirkingchimp.com/
One of today's threads:
The Lunatics Who Made a Religion Out of Greed and Wrecked the Economy by Matt Taibbi
Posted by clinamen | April 26, 2010 12:53 PM