Government Debt Bubble Is Based On Credit Theft

Right now there are ten cities in Illinois where all of the property tax payments made by residents are used exclusively by the local city government to pay pensions and municipal bonds, the two biggest types of debt created by local and state government.

Illinois is not the only state that has public pension and municipal bond debt. All states and virtually all units of government have these types of debt. These debts are not trivial.  The total amount of public pension and municipal bond debt was $8.3 trillion at the most recent reckoning. The largest part of this debt, the public pension debt, was created by government, to help only government employees.

In many localities the residents know that teachers, firemen and policemen collect pensions. But until recent years they often did not know how much money was involved in these pensions. What is worse is that they do not know that most of the money these public servants will receive in their pensions has to be paid for by the residents. It is not paid for with contributions made by the government employees themselves.

In fact, in Illinois the Illinois Policy Institute found that while Illinois has over 800 school districts, in over 400 districts the teachers pay little or none of the 9.4% of the salary pension contribution required by state law. In fact, the last time Chicago Public School Teachers went on strike, one of the “benefits” they obtained was for the taxpayers to pick up their personal contribution to their pension, so they ended up paying nothing to their pension.

In order to create this much debt, a financial mechanism had to be devised that in effect enabled the creation of a debt bubble. A bubble is created when the debt created far exceeds the capacity of the assets to pay for the debt. The mortgage bubble fiasco of 2008 was created by the issuance of subprime home mortgage loans. In order to create this situation, the two biggest Federal home loan agencies, Fannie Mae and Freddie Mac, because instruments of political policy and endorsed the creation of non-traditional loans: loans with little or no money down, issued to persons with poor credit ratings.

Remarkably, this concept is still being practiced with regard to public pensions and municipal bonds. The pensions and bonds are being issued with virtually no regard to the ability of the public employees to finance them. 

Social security is an income defined plan. The amount of money someone receives in retirement is directly related to the amount they paid in while they were working. Most public pension plans, however, are defined benefit plans. These plans do not require a sound actuarial connection between what someone pays in and what they get in their pension. This results in public pensioners often paying only one and one half years’ worth of pension payments. If they live for twenty or thirty years after retiring, then the great majority of the pension collected has to be paid for by someone else.

That someone else is the taxpayer. In effect the pension plan was designed to be paid by future taxpayers. There are two major issues with this type of plan. One is that in principle, the voters’ representatives, the legislators, must vote for all appropriations. But if people working today will receive pensions five to thirty years from now, by promising pensions the legislators are in effect appropriating expenditures thirty years ahead. And then today’s voters, as well as those in the future, had no vote in the appropriations process. There is a total disconnect between legislation and the will of the people. This is a violation of the concept that U.S. government is by, for, and of the people. 

It has become a government by, for, and of the public sector unions. The second problem is seen in the issuance of municipal bonds. It’s important to note that today there is an intimate connection between pensions and muni bonds. This is because muni bonds are often being issued to make pension payments. In effect, the pensions place a demand on both taxes and bond issuance.

Now these bonds have to be secured by some sort of future revenues. So what cities do is issue a variety of bonds. Some general obligation bonds are secured by property tax revenues, and some bonds are secured by sales taxes, motor fuel taxes, etc. It’s important to add that the 1935 SEC Act had a separate set of standards for muni bonds: unlike corporate bond issuers, muni bond issuers don’t have to report future liabilities, such as pension debt! This is all connected. 

So when a muni bond is issued and secured by future property tax revenues, the credit rating of the bond is the likelihood that residents will pay their taxes. And since cities collect property taxes and sales taxes already, the bonds are secured by the credit of the residents.

Everyone is familiar with the concept of identity theft. An identity thief may hack into someone’s internet banking account, obtain their account number and password, and steal their money. However, it is also possible that an identity thief may steal somebody’s credit rating and use it to open up a new credit card. This is only possible if they also know the victim’s date of birth, full name, address and social security number. But credit theft has a time limit. The victim will discover, sooner or later, that someone has used their personal information to establish a line of credit.

This brings us to municipal bonds, property taxes, and credit theft. Since municipal bonds are secured by the likelihood that the city will collect revenues based on the future purchases of gasoline and the payment of property taxes; then it may be interesting to consider the idea that city debt is a form of credit theft. They are using the credit, the likelihood that residents will pay taxes, to secure their borrowing. But unlike personal debt, this debt is created without the debtors’ knowledge or permission. Just like future appropriations of money by legislatures. 

So all of these trillions of public debt, which benefit only public union employees, were created through what may be characterized as credit theft. This is because these debts are secured not by the assets of the city or the public union but by unknowing victims; the taxpayers. 

In short, public union workers could never afford to save up enough to fund their retirement plans. And they could never qualify to borrow enough money. Their solution is to borrow the money, using their local city finance dept. and your credit. Then, they force you, upon threat of seizing your house, to make the payments. The fact that Illinois has ten cities where the property taxes go only to pension plans is proof of this. And of course, this was all brought to you by the caring politicians who say they believe in economic justice and income redistribution. It should be called debt redistribution. It’s done as well on the national level through national debt.