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My community has a AAA rating on LTGO bonds. Almost all of these bonds have been issued for public-private development projects without voter approval. This kind of stuff has been going on throughout the country.

Fitch says our level of debt is high relative to revenues (that's a gross understatement!), but not to worry because these LTGO bonds are all covered by earmarked tax revenues. What is meant by this is tax capture plans (tax increment financing) associated with the bonds for specific development projects.

I seriously doubt Fitch has ever bothered to look at these plans (e.g., one that assumes 3.5% annual increases in taxable value—taxable value is capped at CPI-U until property is sold). As with much else in real estate, recent developments, especially commercial, have seen declines in value, and what is presumed to have been a major success story (not!) from c. 2000 is now seeing a lot of condos, bought at that time, up for sale for less than the original price (ones bought during the bubble are seriously under water and several are in foreclosure).

One development (the one we've been trying to kill) has bonds with no development to pay them off (so far only about 1/7 of what they plan to spend). Two other developments, with lower bond expenditures, have only been very partially completed and will only generate enough tax capture to ever cover bond servicing costs many years down the road if inflation picks up considerably. Others (including parking garages) are supposed to be paid for by a combination of tax capture and revenues, only the revenues are far less than hoped. Other tax capture plans are not generating enough taxes because taxable values have not gone up enough or the taxable values had to be restarted from a lower point after a foreclosure sale (I'd love to see some national statistics on what % of public-private development projects end up in foreclosure compared to private-only projects).

At any rate, the bottom line is that tax capture from developed properties is not coming close to paying for LTGO bond servicing costs. Politically, a lot of this is masked, of course, but ultimately the bonds are being subsidized by cuts to public services.

I don't know how this should be factored in for muni bond investors, but they should be aware that LTGO bonds related to development projects very likely are not self-supporting. I doubt the community would follow my suggestion that we default on all the bonds for development projects and argue we still deserve a good credit rating for GO bonds we vote for and cover with a specified millage.

Tar and feathers is still a good alternative.
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