Municipal Finance 101 for a dullard city council


November 22, 1998|By Brian Sullam

IT'S A SHAME that the Annapolis city council never understood how municipal revenue authorities worked.

If the eight-member council had, it would not have voted unanimously two weeks ago to relinquish its power to create revenue authorities.

The council's rush to remove this power from the city of Annapolis' charter reveals a shocking level of ignorance about -- municipal financing. That is shameful for officials whose jobs are to determine policy for the city. It is also shocking that they made no effort to educate themselves before voting.

Different types of bonds

Members of the council obviously did not understand the difference between a general obligation bond and a revenue bond. They did not understand the difference between a bond backed by the city's full faith and credit and one backed by an asset or revenue stream. They also did not understand the impact of their decision on Annapolis' debt limit.

The council members compounded their poor performance by claiming that they were taking this action in the interest of the Annapolis taxpayers.

If that's working in the public interest, we must be living in the Twilight Zone.

By any objective measurement, the council acted against the better interests of community.

As a result of their ignorance, the members of the council ensured that city taxpayers will have to foot the bill for all future public works construction. Had the city retained its ability to create revenue authorities, the users of certain projects -- not the taxpayers -- would have paid for their construction and maintenance.

Not rogue organizations

Revenue authorities are not rogue organizations that operate without public scrutiny. They have been around for decades and are used by the most conservative state, county and municipal governments across the nation.

Revenue authorities are simply organizations that use a public enterprise or public asset to raise money to finance its construction and operation.

These authorities have supported everything from the building of toll bridges and tunnels to public university dormitories, community hospitals, parking garages and municipal utility systems. Revenue authorities operate public golf courses, ice rinks, riding stables, stadiums and convention centers. In rural Western states, revenue authorities operate telephone, electrical and natural gas distribution systems.

These public enterprises can issue debt, usually in the form of revenue bonds. The revenue generated from parking garage receipts, golf course fees or dormitory rent services the debt.

Contrary to what was said at the council meeting, revenue bonds are not backed by the full faith and credit of the government. The bonds are secured by the physical asset -- much like a house secures a mortgage -- or by a revenue stream -- much the same way some borrowers will lend against future sales.

Since the revenue bonds aren't backed by government, they generally have higher interest rates than comparable general obligation bonds.

Citizen benefits

Citizens benefit from revenue authorities in two ways:

They are able to get a public service they otherwise might not be able to afford.

Their taxes don't pay for operation or debt service.

Many cities use revenue authorities to operate parking garages.

If Annapolis wants to build another parking garage, the city would have to authorize general obligation bonds to pay for it. If the garage were to cost $3 million, that would count against the debt limit and mean that $3 million of other public works projects -- from building a new City Hall to another fire station would have to wait.

In addition, for the next 20 or 30 years, a portion of each residents' property tax bill would be used to pay the interest and principal on the $3 million debt.

With a revenue authority, the $3 million bond would not count against the city's debt ceiling. Taxes would not be used to pay off the bonds issued to build the garage. Instead, parking fees, presumably paid primarily by tourists, workers and some nonresidents -- would repay the debt.

Burden for taxpayers

Instead of having flexibility in paying for certain public improvements, the Annapolis council has unnecessarily locked itself into financing that puts the entire burden of public construction on taxpayers.

What is really amazing about the council action is that no one has ever suggested that Annapolis create a revenue authority. The power was there to be used if an opportunity presented itself.

Thanks to this short-sighted council, that opportunity won't happen. It's a mess another council will have to clean up.

Politicians like to crow that they have created "win-win" situations.

What the Annapolis city council did in its ignorance was create a "lose-lose" for their constituents.

Brian Sullam is The Sun's editorial writer in Anne Arundel County.

Pub Date: 11/22/98

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