Tag Archives: Steven Malanga

Build America Bonds: Eliminated or in Suspended Animation?

On December 31 state and local governments will no longer be able to issue Build America Bonds (BABs), federally-subsidized, taxable bonds created as part of the American Recovery and Reinvestment Act (ARRA) to fund infrastructure projects. The idea, in addition to creating construction jobs, was BABs would stimulate the municipal debt market which had contracted after the housing bubble/financial market crash in 2008. At that time investors moved away from tax-free municipal bonds since bond insurers stopped insuring debt.

The attraction of BABs is that the program allowed cash-strapped governments to continue issuing debt. The federal government picked up 35 percent of the interest cost. As taxable bonds BABs were marketed largely to overseas investors, who typically don’t buy tax-free municipal debt.

Who’s been issuing the bonds? The most cash-strapped and fiscally profligate states: California, New Jersey, Ohio and New York. Steven Malanga reported in The Wall Street Journal, that in addition to subsidizing big-spending states to take on more debt BABs were used to finance a convention center complex in Dallas, Texas when no private investor was willing. BABs have allowed the most indebted states to effectively ignore market signals concerning risk and increase their debts thanks to the subsidies provided by a very over-extended federal government.

But don’t expect BABs to fade quietly. They have a constituency. Florida Republican, Rep. John Mica, who will chair the House Transportation and Infrastructure Committee aims to find a way to reincarnate the program.

The Real “Anti-Stimulus” – The Nation’s Growing Debts

The Washington Post reports how municipal governments in the U.S. are under great strain: state and local governments have doubled their debt loads in the past decade to $2.4 trillion. Factor in state (excluding local) unfunded pension liabilities for another $1 trillion (a figure that is likely closer to $3 trillion).

The future is debt-laden and the question is how will state and local governments respond. Trade-offs will have to be made between money for current services, bond payments, and pension benefits. Taxes will be raised and it’s likely that states will seek more bailouts from a debt-saturated federal government.

It’s hard to see how more federal spending (i.e. debt)  is the way to stimulate cash-strapped states. Yet, that’s the argument made by Ezra Klein in this Sunday’s Post.

Before issuing debt to cover debt it might be worth asking what have state and local governments been doing with all the economic development/infrastructure debt they’ve issued these past years?

Harrisburg issued debt for an incinerator that was supposed to make money. Now called a financial ”fiasco,” the incinerator threatens to sink the city’s budget. Steven Malanga discusses the debts incurred by what should be a profit-making enterprise — the 40 year old New Jersey Meadowlands, as well as the long-running “redevelopment debt” odyssey of California.

There is no magic in debt-financed infrastructure and economic-development, only a deferred tax bill to pay for the government’s gambles.

Furloughs v. Bankruptcy: The New Unionism

New Jersey continues to stare straight at bankruptcy.  Revenue projections indicate that this is not an ordinary crisis . A shortfall of $2 million is projected.  Income tax revenues have fallen 40 percent. It is going to be painfully tough for Governor Corzine to balance the budget by June 30th. His latest proposals to cut spending include a furlough for union employees, a request for a $2 billion line of credit, less aid for colleges, and a $125,000 cut in aid to 12 independent living centers for the disabled. But program beneficiaries are not happy. There is a protest against the latter today at the Trenton statehouse.  Union workers are threatening to take the governor to court over his proposed furloughs.

Part of the driving force behind New Jersey’s imminent bankruptcy is the growth in salaries, pensions, and health benefits for unionized workers, including teachers. The state’s income tax is 100 percent Constitutionally dedicated to providing “Property Tax Relief.” This is a misnomer. It actually goes mainly (70 percent) to supplementing school budgets, and most of that take goes to 31 Abbott districts. Administrative  costs for teachers have skyrocketed in these districts over the decades.

Another source of trouble – the state’s pension system – negotiated by unions, agreed to by the state, with the costs passed through to municipalities, which are responsible for paying for fire and police benefits.  Result – the second highest property taxes per capita in the nation.

The mark of  public sector unions in directing New Jersey’s state and municipal budgets has been strong and devastating. And New Jersey is by no means alone. Steven Malanga of the Manhattan Institute,  writes in today’s Wall Street Journal about a very important distinction that bears repeating:   these are public sector unions – not private sector,  heavy industry unions

This phenomenon – the decline of the private sector union and the rise of the public sector union was identified and developed by my  economics professor, Dr. Leo Troy of Rutgers.  See his book, The Twilight of the Old Unionism.  His work on this subject is worth reading.