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.
<ultimately the bonds are being subsidized by cuts to public services.>This is an excellent point.Clearly, a scrutiny of municipal bonds should be on the list of factors to consider when choosing a place to live.Wendy
Wendy,I think certainly looking at a community's indebtedness and approach to development has become a factor in choosing a place to live, even though I'm sure it wasn't something most of us used to think about. Beware of anywhere with a downtown development authority or the like, with earmarked tax revenues, unless you have a vested interest in downtowns at the expense of police and emergency and neighborhoods. And beware of officials who pump public-private development as a win-win. We get told these things will generate new tax revenues, only we aren't told it will take 30 years before the added taxes will go for anything but the development. Inevitably they say public expenditures (usually bonds), will be paid for by the added taxes, as if all developments succeed (just from the communities in my immediate vicinity, there are a half dozen public-private projects that have been aborted or cut short and twice that many private only developments that have gone under before completion). The possibility that taxable values will fall short for tax capture plans seems never to have occurred to anybody but me. I estimate, smoke and mirrors financing aside, the pursuit of public-private development (including planning for developments that so far remain on the drawing board and economic development initiatives that have brought neither jobs nor new revenues) has drained at least $1 million a year for the last decade from public services, with drainage rising. And that assumes we kill the beast that seeks to eat us all.As to muni bonds, historically munis don't default much. We know communities have unfunded pension obligations and that state governments have cut way back in revenue sharing (I think we're losing another 20% to the general fund this year). I presume grants and sharing from the feds will be high up on the budget cutting list. So, communities that have been borrowing on hope are going to get squeezed. Will it lead to default? Hard to tell. But I'd want a lot higher return for these project bonds than the ratings suggest.
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