Debt Devils in the Details

Money BagsNevada’s state debt load is moderate, but it’s another story when it comes to local government debt — Reno Gazette Journal — “For state government debt, Nevada seems frugal. Nevada ranked 46th in per capita debt by the state, with Nevada’s per capita debt 42 percent of the national average.”

Looking at the local levels of indebtedness is an object lesson in why generalizations are often misleading.

The Nevada Department of Taxation’s report as of June 30, 2012  (pdf) shows that most counties do not have outstanding general obligation bonds: Clark has $38,850,000 outstanding, Nye has $23,935,000, and Washoe has $43,655,000.   Other outstanding general obligation debt spreads more universally.  Carson City has $,142,477,454; Clark $1,913,615,000; Douglas $26,488,026;  Elko $385,000; Lincoln $413,452; Lyon $12,732,955; Mineral $193,483; Nye $2,213,000; Pershing $73,255; Storey $2,338,098; and Washoe $148,063,340.

Patterns one would expect are reflected in the Taxation Department’s report — school districts are likely to have obligations bonds for which they are still paying.  Special districts such as those for libraries or health services have bonds on which they are paying principal and interest.

Some caution should be applied towards conclusions drawn from the data.  (1)  That a county has not incurred any general obligation bond indebtedness may not necessarily be a signal of “fiscal responsibility.”

(a)  The lack of bond issuance by a county may also indicate a government entity which isn’t doing much of anything.  At least one might assert that the county isn’t investing in public projects beyond the immediate requirements and restrictions in its operating budget.  Living within one’s means is a grand thing — but on a micro-level most families have more indebtedness than some Nevada counties — i.e. they have taken on debt for housing in the form of mortgages and debt for motor vehicles, and major purchases.

(b) The lack of indebtedness may also be indicative of a splintered local system, one in which the Hospital Board, the School Board, the Library Board, or General Improvement Districts incur the indebtedness under the auspices of the county.   When perusing data on local indebtedness the reader is advised to look beyond the county data and into the subsidiary entities to get a comprehensive look at the “finances” of the local governing bodies.

(2)  Not all projects are created equally.   There are numerous cautionary tales across the country concerning local governments who took on debt — especially during the Housing Bubble era — who honestly believed the projects would enhance local property values or would generate revenue in the local area.

An example of such cautionary tales is the rapid expansion of minor league ball parks in the Richmond Federal Reserve District.  The best that could be reported by the Richmond Fed as of the winter of 2009 (pdf) was that the benefits were “intangible” (civic pride, etc.) and that property development hadn’t matched the projections made prior to the investments in the parks.

Then there’s the bankruptcy of Stockton, CA which built a hockey arena, a ball park, a marina, and a new public office building — before it had to declare bankruptcy. [DeseretNews 2012] By August 2013 the California State Controller had some harsh words for the Stockton town leaders: “Many of Stockton, California’s fiscal problems can be traced to poor decision-making, weak accounting and fiscal mismanagement, state controller John Chiang said on Monday.” [Reuters] Ouch.

Caution

Caution Sign RevenuesAmericans have a penchant for adopting rhetoric which fulfills the day-dreams of property developers and retailing associations:  “If we build it, they will spend $________ and we can expect $_______ new revenues.  “It” will generate _____ new jobs in our community.”  Not. So. Fast.

Prior to launching into the Project Du Jour  it might be well to investigate whether improvements to local public revenues would be just as easily enhanced by other investments, such as those related to infrastructure, school improvements and maintenance, the delivery of public utilities, and public health and safety expenditures.   Is Stockton better off because it has a “marina” or might it rate more highly in terms of “quality of life” measurements if it could attract and retain police, fire, and emergency personnel?

Was Greensboro, NC better off for having constructed a minor league ball park — or could a revitalization program in the downtown area be the reason behind the increases in the city’s property values?

Movie ProjectorProjections of promoters notwithstanding, the evaluation of public projects in which debt is to be undertaken needs more careful consideration than optimistic appraisals of the enthusiastic.

Who benefits?  Doing the greatest good for the greatest number is usually a fairly decent guideline for local governance.  Will a new hockey arena really provide an immediate boost to local revenues that it will make the property value increase related to repairing broken sidewalks pale in comparison?

Perhaps Stockton, CA might have wondered if money spent building a large boat docking facility could have been better spent on improving existing public parks and sandlot recreational facilities?

Who’s counting?  If you are still among those who believe that property values (the basis for most local revenues) will always go up, then please wake up.  It’s 2013 and the waves from the Housing Bubble debacle are still washing ashore.   Nevada has a debt limit ratio statute in place for local governments — it’s not a fail-safe, but it’s good enough to keep most local governments from going too far out on shaky limbs.   Are projected revenues from public initiatives taking into account worst case scenarios as well as optimistic ones?

Who’s selling?  What kind of debt is the local government taking on? General obligation bonds, based on the incoming revenues? Revenue bonds, using the proceeds from the facility to be built to repay them?  Are there bond sellers pitching esoteric forms of financing (see the sad example in Alabama) which benefit the investment houses and not the houses hooked up to the sewer lines?

Too often we’re convinced that having a low tax system combined with being enamored of public financing for semi-public projects is somehow “Pro-Business.”  Let Detroit, Stockton, Birmingham, Vallejo, and Harrisburg be more than cautionary tales.  Public employees were promised more than the governmental entities could deliver, members of the general public were promised more than system could provide.  Members of the business community promised more than they could manage.

When met with calls for greater investments, local governments, which do not have the power of the Department of the Treasury and the Federal Reserve at their backs, are usually best served by returning to the basics: (1) Do we need it? (2) Can we maintain it? (3) Are we planning for future contingencies?

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