‘Private’ Projects with Taxpayer Bailouts
When states, counties, cities, and other governmental entities need money, they can levy taxes or they can sell bonds, namely “municipal bonds.” One of the attractions of muni bonds is that they are often tax exempt and are seen as less risky than stocks. Unlike stocks, bonds are a type of debt. In the fourth quarter of 2016, the muni bond market in America totaled $3.8337 trillion. That’s $3.8T of debt. Munis are sold to pay for capital improvements, such as for roads, sewers, airports, and other infrastructure. Such legitimate functions of government could also be funded by raising taxes, but raising taxes carries political risk.
In addition to the usual functions of government, municipal bonds are also sold to raise funds for “private” development, such as for shopping and entertainment, like the Zona Rosa shopping district here in Missouri.
On March 20, the Kansas City Star ran “Zona Rosa in default on mortgage; Platte County residents may be on the hook” by Steve Vockrodt:
The Platte County Commission has set aside $500,000 in anticipation of having to cover debt payments to bondholders, which is due in December.
Dagmar Wood, a Platte County Commissioner, said the county's options include covering debt payments with taxpayer money, not making the debt payments to the detriment of the county's credit rating or using a portion of a three-eight cent transportation sales tax to cover payments.
"All of that is basically bailing out bondholders, is what it is," Wood said.
In the case of the 2009 auto bailouts, the government screwed the bondholders, but with Zona Rosa the government is screwing the taxpayers to keep the bondholders whole. When an enterprise is in default, it should go through bankruptcy and the investors should take the losses, not the taxpayer. If, due to Amazon and other Internet vendors, the nature of retail has dramatically changed since the advent of Zona Rosa, then let those who made those miscalculations take their lumps. Zona Rosa needs to go through bankruptcy for the sake of the taxpayer, and the county’s credit rating should be downgraded. (Disclosure: I don’t live in Platte County, but in that great county to the southeast.)
Back in 2002, the original reason for pushing the Zona Rosa project was “to transform Platte County from a net exporter to a net importer of sales taxes.” So Platte County went into debt to grab sales tax revenue from adjoining counties. How neighborly. For just across the county line, in Clay County, there existed a large enclosed shopping center, the Metro North Mall. The entry of Zona Rosa doomed that mall, as the K.C. northland couldn’t support both. However, with this newfangled e-commerce, Zona Rosa may also fail. Unless, of course, there’s a bankruptcy or a sale whereby the project is bought on the cheap and retailers’ rents are dramatically reduced.
America has been “overstored” for years; we just have too much retail space. So, projects like Zona Rosa should never go forward unless they are entirely financed with private money. Projects that can’t proceed without taxpayer backstopping simply aren’t feasible. If the taxpayer is going to be continually called upon to bail out private concerns, investors will never learn how to assess risk because there’ll be no price discovery in a real market: they’ll never know true prices.
The Star reports that Zona Rosa Development LLC is the business in default; it is an affiliate of Olshan Properties out of New York. Olshan classifies Zona Rosa as a “regional center.” I emailed the Star’s Vockrodt and asked for an update on Zona Rosa, but haven’t received one. I also phoned Olshan Properties, but to no avail. Here’s some data on certain Zona Rosa bonds.
The debt created by the “creative financing” used for projects like Zona Rosa shouldn’t be seen in isolation, but as a part of a larger mosaic of debt. Lump the debt of municipal bonds in with other government debt, business debt, credit card debt, student loan debt, mortgages, and all other debt, and America would seem to have a looming debt problem on her hands. America’s long-forecast “debt crisis” is not just about sovereign (i.e. federal) debt, but is much wider.
A sobering fact is that most of the federal debt consists of Treasury Notes. Stocks swooned the other day when interest rates for the 10-year T-note topped 3 percent. But 3 percent may be a fond memory when the 10-year T-notes sold during the Obama era start coming due on October 1, when the feds begin rolling over unprecedented trillions in debt. The U.S. bond market will be flooded with “product,” causing interest rates to rise, which will impact municipal bonds.
In January, Barron’s ran “The Ticking Time Bomb in the Municipal-Bond Market” by Mary Childs, who writes of “a looming disaster in the market for municipal debt.” She considers the crisis in New Jersey’s public pension system, which will force the Garden State to either “pour in more from tax revenues, take on more debt -- or default.” Sounds just like Platte County, Missouri, no?
It is past time for government at all levels to reduce their borrowing, including municipal bonds. That would entail reducing their spending. Other than the failure (or refusal?) to repeal ObamaCare, the slide back to Democrat levels of spending and debt may be the biggest disappointment of this Congress. It would help members in the midterm elections if they’d back out some of the spending in their recent omnibus bill by passing some serious rescissions.
Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.