Public Finance 101

Today's trivia question about Western Civilization:
Who was the President of the USA during WWI?
Who was leader of Germany?
Woodrow Wilson / Kaiser Wilhelm II

This little blog is about Municipal Bonds. If you were an investor and wanted a little tax-free interest you could buy a Municipal Bond. Our schools and libraries are usually built with debt issues in the form of municipal bonds. When the school or library builds a building, it sells a bond to investors. The investor that offers the lowest interest rate buys the bond and collects tax-free interest that the school or library pays.

There are different types on Municipal Bonds. Lets talk about the difference between a Revenue Bond and a General Obligation Bond. A General Obligation Bond means that the taxpayers are responsible to pay the interest and principle. These payments are added to your property tax bill. The schools call this debt-service. It has happened on occasion that governments can issue so much debt that property taxes become so high that property owners abandon their homes rather than pay the tax bill. Thankfully this is a very rare occurrence. The risk of default by the government is the risk that investors bear and it is the reason some bonds have higher rates than others.

Taxpayers are not responsible to pay back Revenue Bonds. Revenue Bonds are issued on projects that are projected to make enough money to pay off the debt without involving the taxpayers. For example, a new terminal at an airport might be rented to an airline and that Municipal Debt would be paid for by the Revenues from the airline's rent. The inventors in this case would estimate the quality of the project and demand interest rates that are in line with a risk that the project won’t make enough money to pay them back. These debt payments are not added onto your property tax bill.

When the Knox Community center was proposed, the then Mayor Dembowski said that the project would be paid for by investors, clearly implying that the bond would be a Revenue Bond. Originally the hospital was involved in the project and indeed there was a prospect of a health club and physical rehabilitation facility anchoring the project, so it was possible that it could have been a Revenue Bond. Of course all that fell through, but the project went forward. The then-owner of local paper, “The Leader” pushed hard for the project. He refused to print negative letters to the editor and helped sell the idea that “investors” were going to pay for the project. Coincidentally, he had some decrepit property in the area of the proposed project. So the project was sold to the public on the premise that there were “investors” behind it, implying a Revenue Bond not a General Obligation Bond.

So let’s cut to the chase. We have a Community Center and there was no investor willing to bet that the revenues from renting it out for meetings could possibly pay back the debt. So it was financed by a General Obligation Bond. Those payments are right there on your property tax bill. Maybe it was a good project, maybe not. It was sold under false pretenses with the local paper aiding and abetting. Sure there were the required public notices, meetings, etc. Nothing illegal.
I am hoping that with the existence of little blogs like this one that this sort of local newpaper cover-up won’t ever happen again. Support your local blogger!