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Unanticipated Ticking Time Bomb

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March 13, 2012 – Comments (0)

Board: Macro Economics

Author: notehound

This post is about an unanticipated ticking time bomb that I believe is facing an unknown number of municipalities whose water/sewer and other types of bonds were issued in the last 10 years using now fallacious assumptions.

Anyone who knows me knows I think the Fed's holding rates ridiculously low for 5 years at a stretch always - without fail - produces serious mal-investment, distortion, erroneous projections, moral hazard, complacency, and any otherperjorative term one might apply to the now-firmly-established practice of turning "temporary emergency measures" into long-term policies.

That said, I have personally discovered a consequence of Greenspan's holding interest rates too low for too long during the 2002-2007 timeframe, as follows:

A small Florida city in which I own a residential lot enjoyed a minor building boom during the early part of this century, courtesy of Mr. Greenspan's low interest rate policies.

During that time, the city had to purchase/improve the water and sewer system to accommodate the increase in demand for capacity. In order to do that, they issued bonds, as have an untold number of cities and counties all over America.

The bond issuance size and payment terms were based on projections that are now-obviously wildly optimistic, given the real estate collapse that Mr. Greenspan and his compatriots in Congress, on Wall Street and on Main Street created.

The projections used by said city included anticipated cashflow from water/sewer fees and building permits that, at the time (and in the then-projections) averaged about $6,000 per residential unit added to the city.

Post-collapse, building applications fell by more than 90%, leading to a severe shortage of cashflow from fees to support the bond payments.

Still, the bond payments must be made, right?

A builder just checked on the cost to permit my lot and - lo and behold - the city fees that were $6,000 in 2008 are now $17,200 (not including electrical hookups) for a 1,200 square foot cottage with a single car garage.

These fees now represent approximately 20% of the cost to build a modest house in this small Florida city. For a larger home, the costs are increased even more, expanding according to the square footage under a roof. This is a city that is in desperate need of new residential units to support the existing infrastructure and municipal functions.

When asked why the city would raise the water/sewer and permit fees so astronomically when the city is in dire need of new building applications, the permit manager advised the builder as follows:

The city is making up the loss in anticipated fee revenue by increasing the fees paid by new applicants.

This is just one small city with a severe revenue-to-bond-obligation mismatch that simply cannot be made up by attempting to foist the results of its mal-informed income projections upon a shrinking number of potential new residents.

I expect that there are many other municipalities with similar revenue-to-bond-obligation shortfalls that cannot be made up without severely discouraging growth and recovery.

One might ask what too-low-for-too-long interest rates has to do with this situation. Well, for one thing, if the Fed had not turbo-charged the last building boom with low interest rates, the above-mentioned Florida city would have used much more modest growth & income projections. Neither would they have taken on so much debt.

It is reasonable to assume that there are many other such cities and counties all across the nation who are now - and will in the future - suffer significant unanticipated consequences of the wildly manipulative government and monetary policies of the 21st Century.

Don't even get me started on government employee pensions, which are a whole 'nother source of municipal budget destruction.

Jefferson County, Alabama and Stockton, California are just the tip of the iceberg.

Muni bond holders be forewarned.

:-o

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