The GO Bond Doesn’t Risk Your Home-Just Your Wallet

Posted on by Patrick Tuohey

Citizens for Responsible Government (CFRG) have circulated emails claiming that if Kansas City defaults on the proposed GO Bond payments, creditors will seize the homes of Kansas Citians. That’s a scary prospect, and thankfully false.

CFRG points to Detroit as a model. According to the Detroit Free Press,  creditors left in the lurch by the city’s 2013 bankruptcy negotiated to take over city owned property to settle debts. General obligation bonds issued in Kansas City tax property to raise the money needed to repay the bond debt. But even in the worst-case scenario, no one is going to be driving up and down Ward Parkway picking out homes to seize.

GO Bonds are backed by the “full faith and credit” of the City. According to a statement from the City (emphasis added):

The security for the bonds is the City’s ability to tax real and personal property, not the property itself. Bondholders have no direct connection to property owners and do not have the right or authority to seize property in lieu of general obligation bond payments. 

In the extremely unlikely event the City did not make its debt payment from property taxes collected, the City could use other legally available funds of the City to make the payment.

The city may use a property tax to raise the funds, but even in the very unlikely event of a city default, creditors would sue to recoup their investment. A judge could then order the city to raise taxes. The City might also try to sell assets to generate the funds. Or, as in Detroit, the city would negotiate to settle the debt by giving creditors city property such as City Hall itself, assuming it isn’t being used as collateral for the convention hotel. Again, this is not the same as creditors taking privately owned property.

That the GO Bonds are necessary in the first place is the result of years of poor policy and financial management. And the bond plan is itself bad policy. Those two items are serious enough considerations without the fanciful notion that creditors will seize individual taxpayer assets.

No, the City Does Not “Drive a Hard Bargain”

Posted on by Graham Renz

Do you smell that smoke? It’s from the hole your money is burning in the pockets of Saint Louis City officials.

Last Thursday, city officials advanced two bills full of questionable spending. One bill proposes that the city’s already high sales tax rate (10.054% on average) be increased by 0.5% to help fund a section of a planned North–South MetroLink route. (Read about MetroLink’s poor track record here and here.) The other bill would raise the city’s use tax by 0.5% to help fund the construction of a Major League Soccer stadium downtown. The use tax increase is supposed to raise some $60 million.

The widespread economic consensus is that public spending on stadiums is a terrible use of taxpayer dollars. But even more troubling is the way in which the bill advanced out of an Aldermanic committee in the first place.

When it was first considered, the bill abated an amusement tax that would have been levied on ticket purchases, diverting revenue from the city. It also would have given tens of millions of dollars to developer Paul McKee, no stranger to subsidies. Why? Well, that’s the troubling part: no public officials knew why the bill abated the amusement tax or gave funds to a developer unrelated to the stadium project. As the Post-Dispatch’s Tony Messenger aptly notes, “This is the story of development in St. Louis. Assets are given away and nobody even knows why.”

But even after one alderman proclaimed that he wasn’t elected to “rubber stamp bad proposals for a City that is already on the financial brink,” the board arguably rubber stamped a bad proposal for a city that is on the financial brink. After closed-door discussions between the board and the ownership group behind the stadium proposal (SC STL), the bill emerged with amendments that abated half the amusement tax and still gave Paul McKee several million dollars in tax-increment financing subsidies.

After passing a vote of the committee, the amended bill was heralded as a win for the city and for taxpayers. Compared to the original bill (which abated all of the amusement tax), the amended bill is estimated to bring in $17 million to the city over 30 years. But does this really constitute a win for taxpayers? For one, although it is described as “new revenue,” this $17 million (and more) is what the city should have been slated to collect if not for the abatement in the original bill that no one could explain. Also, the city will contribute $60 million over that same 30-year period. That makes the stadium deal a loss for the city. Some claim (without providing any financial evidence) that the proposal was originally revenue-neutral for the city, and now will turn a $17 million profit for municipal coffers. Assume, for argument’s sake, that these rosy projections are true. That means the city will net $17 million on a $60 million, 30-year investment. Even if those figures are presented in what’s known as net-present value (which takes inflation into account), that hardly makes this a lucrative investment.

After the bill received approval, SC STL executive Dave Peacock said “The city drives a hard bargain, but they should.” It’s difficult to see how agreeing to this deal constitutes “driving a hard bargain.” But, Peacock is correct—that’s what the city should be doing, which is why recent developments with the stadium bill are so troubling.

Bombshell: The GO Bonds Will Last Until 2055

Posted on by Patrick Tuohey

The City is describing the general obligation bond (GO bond) placed before voters on the April 4 ballot as a 20-year effort. The city website reads as follows:

For a household with a $140,000 home and a $15,000 car, the property tax would average an additional $8 in the first year, rising to an [sic] $160 average additional payment in year 20, the final year of the bond program.

The Kansas City Star described the machinations at City Hall thusly:

The council is trying to craft a plan that can win voter approval to borrow $800 million over the next 20 years to address the city’s huge infrastructure needs.

This suggests that what is before voters is a 20-year effort. It isn’t.

The city is suggesting not a single 20-year bond for $800, but a series of twenty 20-year bonds for $40 million each, with the last one being issued in 2036 and paid off over the subsequent 20 years. The first bond would be issued in FY 2017 and the last one in FY2036. Property owners would not finish paying off the final bond until FY 2055.

If City leaders want voter support for a 40-year tax increase, the best way to get it is to make clear to the public exactly what they’re asking for. This is a multi-decade commitment!

Taxpayers’ General Obligation Bond Gamble

Posted on by Patrick Tuohey

With an $800 million infrastructure bond package likely to go before voters in April, Kansas City Mayor Sly James recently told KCUR that when he took office, the city had $6 billion in deferred maintenance. He told The Kansas City Star that, “Basic infrastructure has to be paramount. We have to take care of some immediate needs.” James has been in office for more than five years. Why has it taken so long to address these needs?

Mayor James resists making commitments on how a proposed $800 million bond issuance will be spent. In a December 16, 2016 radio interview, Mayor James said the following (starts at 17:34):

I don’t know how [the proposal is] a blank check when you can sit and look at the stuff that we’re planning to do. You can’t sit down and specify what’s going to happen in 2029. You can say, “we’re going to be fixing roads and here is a list of road that we’re going to be fixing.”

So there is a list of projects city leaders want to address; they just don’t want to commit to which projects will get first priority (18:10):

We can give them a list; we have the list. The list is available. But to sit around and say we want absolute specificity—that’s not going to happen; it’s an impossibility. And here’s the problem with it, because the same people that are complaining that it’s not specific enough–if we put it in a list and say, “we’re going to do this, it’s going to cost X number of dollars and we’re going to do it in 2018,” and then we have to come up with $50 million for the Buck O’Neil Bridge, then what we’re going to be hearing is, “Oh, the city broke its promise because they said they’re going to fix the road that near my house and they’re spending the money on this bridge.”

Kansas City voters can understand the need to address unforeseen circumstances. But what Mayor James and city leaders seem to want is a fixed, concrete commitment from voters for 20 years of tax revenue without providing a fixed, concrete commitment on how they’ll spend it. The recent debate in the Council about roads, sidewalks and animal shelters is evidence of this. (The companion resolution the Council has offered is nonbinding.) If the goal is to maintain flexibility given an uncertain future, why not ask for smaller, shorter-term tax increases to address the spending needs that can be specified?

Kansas Citians are very aware of how poorly the city has maintained infrastructure; they have reason to be skeptical of city promises of fiscal restraint. After all, the crisis we are in now occurred because leaders did not address immediate needs or make basic infrastructure maintenance paramount—including for the first five-plus years of Mayor James’ tenure. Why should voters now believe that that city leaders will act any more responsibly? Are taxpayers willing to gamble with another $800 million on the city's roulette wheel of debt?

A Sober Look at Development Subsidies

Posted on by Graham Renz

Marketing professionals and politicians alike will tell you that framing is everything. A half-carat diamond ring looks huge if you zoom in close enough. Tom Cruise looks tall on camera. And a public policy looks successful if you focus on the benefits but not the costs.

Things are no different when assessing the city’s massively expensive economic development programs.

A report released last year turned an objective and critical eye toward the city’s incentive practices and found that “[w]hile there may be disagreement about the value of some [incentive] packages, it is clear that the city gains no net benefit from an extremely costly program with no real economic development impact” (pg. 6). That’s about as damning as any finding could be. But, remember: framing is everything.

Otis Williams, Director of the city agency which administers development subsidies, wrote that the “study was conducted to show us what we’re doing well and where we can improve.” When framed this way, things don’t sound so grim.

But don’t be fooled. When the bigger picture shows that the city spends hundreds of millions of dollars—more than $700 million from 2000 to 2014—for naught, a bleak reality emerges. Incentive policies don’t need to be improved; they need to be jettisoned or comprehensively reformed.

When we look beyond the ribbon cuttings, temporary construction jobs, and consultant reports, we see that development subsidies like tax increment financing and tax abatement do not strengthen our economy. If they did, St. Louis would have a thriving downtown and there wouldn’t be a growing operating budget deficit. At worst, these subsidies are a flat-out waste of taxpayer dollars. At best, they meddle with the market, getting developers hooked on taxpayer handouts. When we see prime property at the busiest intersection in the Delmar Loop declared “blighted,” can’t we agree that our policies are missing the mark?

At their core, St. Louis’s incentive policies suffer from two fatal flaws. First, they assume politicians and bureaucrats know which investments are better than others. Second, the pols act as if they are spending “free money.” when in fact a dollar spent on quixotic economic development projects becomes one less dollar that is available for public safety and other purposes.

But how will St. Louis stay competitive when surrounding jurisdictions use incentives? Well, before policymakers worry about how to lure companies from just over the county line—which is about all that incentives accomplish—they might do well to focus on, say, improving schools and basic infrastructure, maybe even retiring the City’s debt and thereby improving its credit rating?

And if policymakers really want to attract business, why not incentivize everything—i.e., cut everyone’s taxes—instead of just the projects of politically-connected developers? If city officials and staff are right, and incentives truly grow the economy and boost tax revenue in the long run, just imagine what a broad-based tax cut for all residents would do!

From 2009 to 2016, the tax revenue annually handed back to developers has more than doubled from $17.9 million to $38.1 million. Yet, today, most of our economic, social, and governmental woes persist. The answer is not more of the same. It’s time to reframe the discussion on incentives.

MOSERS Wisely Reconsiders Past Assumptions

Posted on by Michael Highsmith

In elementary school I learned about the power of compounding from a book titled One Grain of Rice. The story is about a king who promises to give a girl one grain of rice, and to double his gift every day for thirty days. Initially the gifts seem small, but by the end of the month more than one billion grains of rice have changed hands.

Similarly, an investment that initially seems negligible can go a long way given enough time to compound, and this lesson applies when saving for the future. In June, the Missouri State Employees’ Retirement System (MOSERS) decided to reduce its assumed return rate from 8% to 7.65%, meaning that altogether, the amount members will need to contribute next year will increase by almost $50 million. This extra cost today is hardly ideal, but in the long run it helps avoid a much larger bill.

Even though MOSERS made a mere 0.35% change to their expected return rate, the long-term impacts are huge. With a lower rate of return on its assets, a pension plan’s initial contributions must go up in order to keep benefits constant. In other words, a plan compensates for slower investment growth by putting more money in initially.

This change in funding highlights the risks associated with promising high investment returns. If a pension plan’s actual returns are lower than predicted, the result is a gap between available funds and the amount that has been promised to retirees. In the case of a guaranteed public employee retirement fund, taxpayers can be asked to cover this difference, and as the gap grows, so does the burden on taxpayers.

With a current funding ratio (current assets divided by the net present value of liabilities) of 67.8 percent, the plan (according to a Columbia Tribune report) will require $394.5 million this year to cover promised benefits.  But this contribution amount will only be sufficient if investment returns match the 7.65% expectation.  If investment growth is lower (in FY 2016 MOSERS generated a time-weighted return of only 0.3%), then the funding gap will widen over time. It’s easy to project high investment returns today, but making those predictions come true tomorrow is another story.

Slight adjustments in return assumptions can have tremendous impacts over an employee’s lifetime, so properly estimating investment returns is essential to a plan’s sustainability. (This essay by Andrew Biggs provides a comprehensive discussion of public employee pension funding for readers who want to explore this topic in more depth.) If pension benefits are guaranteed to employees, then the cost of these promised future benefits should be priced using returns on very low risk assets like government securities, which are currently far below 7.65 percent. Lowering the assumed return is a step toward greater transparency regarding the true costs of pension liabilities.

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