The fiscal gurus who suggested the Fed bail out cities such as Stockton put their finger on two fundamental problems:
1. “California “must maintain massive education, infrastructure and prison programs with limited ability to raise money.”
2. “Wall Street has consistently helped elected officials mask budgetary problems with complex derivatives that create the appearance of cash flow today by selling years of future revenue.”
Consider Stockton’s $125 million pension obligation bond. It is essentially a loan to cover out-of-control public employee costs.
“The only purpose for these securities is to deceive the public and create fees for the financial firms,” the authors write.
That’s a bit harsh. Had city leaders timed the bond issue right, they could have essentially refinanced Stockton’s public employee costs at a better rate. Instead they bought at the market high and their costs increased: between 2008 and the present, Stockton’s bond debt doubled.
But the point is well taken. In general these bonds are camouflage for fiscal mismanagement. What was needed here was fiscal reform, not the Novocain of a bond issue. The authors recommend reforms to make the bond process more transparent. Hard to argue with that.
Instead of issuing bonds, here’s the right way to fund a city.