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Municipality Failed Borrowing

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February 12, 2008 – Comments (3)

The developments in this market are fasinating...

So, debt was easy to sell because it was insured, right?  Or at least investors thought it was insured.  Now with concerned over whether the debt will be paid back, debt isn't so easy to sell.   It could also be that investors want wider margins.

It now appears that municipalities are being hit, http://www.chron.com/disp/story.mpl/ap/fn/5536272.html

 $6 billion of municipal debt wasn't bought...

 Personally, I think it is a good thing seeing this happen.  It forces municipalities to be more responsible.

Around 96 I had a friend running for City Counsellor under the Green Party.  I tried to get him to switch to a party that would actually give him a chance of being elected.  Anyway, it was during that time as I was helping him with his campaign I did some research on Vancouver's municipal finances and I did not like what I found.  They need a vote to increase debt, but once they have it they can roll it over forever.  The city had about a half billion of debt at the time and the level of debt was showing a pattern of constantly rising. 

The party in power launched the "tax payers are really stupid" campaign where they had a referendum to borrow an extra $100 milion and they had a platform for lowering taxes by 5%, which they did...  It seems to work all the time, borrow to give tax payers things that ought to be paid for as you and reduce taxes so the budget has zero chance of balancing in the future and will be more debt impaired.

Anyway, it prompted me to check out Burnaby and there was a $200 million contingency fund.  We paid roughly the same amount of taxes as Vancouver, but the services were way better and we were paying for them as we went along as we had an extra 15% to spend because of not having debt servicing costs. 

Not paying for services being used today simply download the cost to future generations and it is high time something stops this constant downloading of today's costs on those we ought to be leaving a better world for. 

I hope the next round of Canadian municipalities that try to get debt fail as well and have to work on an alternative plan, like paying for it as you go and even paying the money back.  

The other thing that borrowing to lower taxes does is it enables home prices to go up more than they should, not by much compared to how out of line home prices have gotten.   But, if you have qualifying income for mortgage, taxes, utilities and strata fees that can't come to more than 32%, and taxes are suppressed by say $50/month, or $600/year, well that means qualifying income to the mortgage artificially goes up by $50/month because the property tax is artificially low by $50.  Well, at 6% interest $50/month will qualify for about $8,500 of mortgage, so that's $8,500 less of speculation

 While I am on the topic, the developer fees are also a pass the buck and off load to the next generation policy.  If a developer has say $50k of municipal fees to build a new home, well, the stuff I've read suggests that muncipalities have had a "cash cow" with bull on the housing market and all the extra development fees they got.  We, guess what...  Now that revenue is falling off a cliff and they have to raise the money from where it ought to have been raised in the first place, the whole tax base.  Actually, they've also had a cash cow on how much the housing market has gone up.

So, the first time buyer pays twice, first because all homes in the market went up $50k.  The $50k only had to be priced into the new home, but markets as they are, homes are priced relative to each other, so as those developer fees went up and up and up, all existing home owners magically got that showing up in their home equity.  So, the new home owner had to pay $50k more because that the cost to build a home, and now they get to pay again as taxes are adjust so that declining builder's fees are spread out through increasing taxes.  If everyone paid probably no more than $100/month more in taxes those development fees could probably pretty much disappear and housing would become more affordable by $50k.  So, you'd qualify for $17k less of mortgage at 6% by having to pay $100/month more in property tax.

I'm just pulling numbers out of air here in terms of how much of of being paid is actually debt servicing and how much is be downloaded onto developers, but I think I've given a good enough example to show how these two things have pushed housing price up more, one simply giving more room for speculation and the other giving real cost increases to home prices because of the developer's fees.  The fees also suppress the rate of taxes the tax base ought to be sharing.  And guess what, the shift of tax burden now goes back to home owners because with less homes being built there isn't as much revenue here.  So, new home owners end being hit with higher priced homes and now they will also be hit with more property taxes.

 

3 Comments – Post Your Own

#1) On February 13, 2008 at 10:43 AM, GS751 (27.50) wrote:

I ran across this also on Calculated Risk this morning.  That is not good that they can roll it over.  Markets are up on retail numbers but structured finance is just falling apart today.

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#2) On February 13, 2008 at 7:45 PM, StockSpreadsheet (71.61) wrote:

Yeah, states and municipalities love putting off for tomorrow what they should pay for today.  They also love to assume that windfall profits are the norm instead of the exception.

A few years back,  California was raking in huge profits due to the dot.com bubble with millionaires literally being made overnight and in great quantities.  California's legislature and governor saw all this money coming in and started spending like crazy, new programs for any and every cause under the sun.  When the dot.com economy turned into the dot.bomb economy, then the state suddenly was getting a lot less revenue and they had doubled their expenditures in the past few years, so we had a fiscal crisis.  (Some states and municipalities have a rainy-day fund where they save some money for just such an emergency.  Such thinking is anathema to California's legislature.)  Since California technically has a constitution that states that the budget must be balanced at all times, they were facing draconian budget cuts.  To get around this, they passed a huge bond measure to pay for the state budget, borrowing over a 30-year time span, (and paying interest on that money for 30 years), to pay for the expenditures they wanted to do that fiscal year.  I haven't seen one of these bond measures on the ballot recently, so I'm assuming that they finally got that mess somewhat straightened out.

Another thing that is often on our ballot is bond measures to pay for school maintenence.  This to me is ludicrous and so I always vote against the bonds.  School maintenence should be a standard budget item, (like painting your house, getting your car serviced, changing the oil regularly, buying new tires, etc.).  This is not an extraordinary expenditure and so should be budgetted for.  Sure, maybe bond measures if an earthquake destroys a bunch of schools or causes them to need a lot of maintenence, as severe earthquakes aren't that common in California, but standard maintenence????  Come on!!  That should be a standard budget item.

Things like this drive me nuts.  It is one of the reasons that I have been very frustrated with our legislature over the past several years and why I have considered many times about leaving this state and moving to another state.  Almost any of them have to be more sensible than California is.

Craig 

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#3) On February 13, 2008 at 9:06 PM, dwot (60.71) wrote:

Craig, reading what you said about what California was wanting to borrow for, I don't remember the details for that referendum in Vancouver, but I do remember thinking a huge chunk of what they wanted to borrow for was routine maintenance.

I think as long a politicians control budgets, they will always use them to try and buy votes. 

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