Governments keep borrowing on a shaky credit card spree
By Michael Lewis
Why do governments act like retail addicts on credit-card shopping sprees, spending with the prayer of someday finding cash to pay the bills plus interest?
The latest victim of the syndrome is cash-strapped Miami, which just took a two-year, $50 million loan with no sure way to pay it off.
The city is borrowing until it can issue long-term bonds to borrow the same amount to repay the first loan, the equivalent of shifting unpaid balances from one credit card to another.
That works only if the city can sell bonds. But, former big-time banker and ex-manager Carlos Migoya warned before leaving city hall at year's end, it could take two years to sell bonds if anyone challenges them.
That could put the city on the razor's edge, with no bond cash in time to repay the loan and no other funds in sight. Still, the city moved ahead without a backup.
Yet bonds, the Community Redevelopment Agency's first ever, might not be issued — then or ever.
Any court challenge might bar use of $50 million in city redevelopment funds at county-owned Port of Miami to bore truck tunnels far from poverty areas.
That should send officials hunting for a backup, but it hasn't.
"Having had numerous conversations with the City of Miami [chief financial officer], we've been assured that is not something that needs to be considered," Pieter Bockweg, redevelopment agency executive director, told Miami Today.
His sole fallback plan: "We'll try to make sure that projects come under budget."
Any talk of a backup, he told us multiple times, is "premature."
He might get away with it: chance of failure to sell bonds in time might be just 25%.
But in a city that cut $115 million to balance this year's budget and where ballooning wage and pension obligations now lack solutions, such odds aren't reassuring.
They're downright menacing. Even a 10% chance of a $50 million hole in a $499 million general fund budget would be.
Apparent lack of concern on how to repay mounting debt, as with credit card addicts, isn't just a city hall issue. Look at Washington.
Or take Miami-Dade County, where bonded debt now is $3.2 billion — $1,264 for every adult and every child. Include interest and the total hits $7.57 billion, with each of us burdened by $2,990, nearly a tenth of per capita income.
And that's before the latest wave of borrowing, $367 million, up for a vote this week.
The load just keeps rising. General obligation bonds alone carried a per-capita burden of $93.40 in 2004. By 2009, even as population grew, it had more than tripled to $324.73.
Most of us won't pay it all. The huge interest burden is on the later years of many bonds. Our children are the ones stuck to pay our bonding credit-card debt.
Indeed, of those county debts totaling $7.57 billion, the largest repayment year is in 2035, more than $238 million. That's before we pile on new debt now on the agenda.
Just for bonds with a special funding source, moreover, the biggest payout is way off in 2047, above $180 million. More than $170 million of that is interest. We're making minimum credit card payments and letting debt pile up.
But then, most officials who created that massive debt won't be paying their shares 36 years from now. Let the kids and their kids pay for what we spend today.
Even that only works, however, if revenue we'll spend on those debts is there. What if miscalculation keeps compounding year by year?
For example, future tourist taxes are to repay some debt, milking outsiders in the future for what we spend today.
But, like the city's distressed area bonds, what if the tax stream shrinks?
Not to worry, County Manager George Burgess reassured commissioners in 2009 as they targeted more than $2 billion in tourist taxes to help fund a baseball stadium, those flows keep rising each year.
In fact, Mr. Burgess predicated stadium funding on tourist tax income rising 3% to 5% a year over four decades.
But now, instead of rising annually, even with tourism recovery ongoing those proceeds are flowing about $600,000 a year under levels of two years ago.
The long-run fallback becomes general funds that operate government. Residents may well help tourists help pay stadium billions.
Where does this credit card mentality stop? That past growth continues forever is a nice dream. But not all dreams come true.
Take Japan, where growth soared 40 straight years. Buyers piled up massive real estate debt to be repaid by continuing increases. But for 20 years growth has halted. Disaster.
As stock brokers warn in small print, past performance is no guarantee of future success.
So, when will government build a safety net into its credit-card-funded capital spending growth?
Now would be a very good time to start. It's certainly not premature.