Councilor Hintz: There is no spin. You simply do not understand the principles of municipal finance

November 9, 2001

Dear Tony,

There is no spin. You simply do not understand the principles of municipal finance.

1. Municipalities (and other organizations) borrow to pay for assets that will be used by people for at least the life of the asset. If this were not the case, you and I would have to pay now the full price for something that others, including our children, would be able to use without paying for it. Common examples are water treatment plants, sewer treatment plants, and streets. Many assets paid for by borrowing last much longer than it takes to pay off the bond.

2. There are two major types of municipal bonds: general obligation bonds and revenue bonds. The essential difference between them is that general obligation bonds are backed by the "full faith and credit" of the city whereas revenue bonds are backed by a specific stream of revenue. The money borrowed is exactly the same. Your question "Is the quality of utility work in Oshkosh substantially better than utility work in cities using revenue bonds" simply does not make sense. Money is money. There are other kinds of bonds and notes as well, backed by different sources of money such as tax anticipation notes.

3. Because general obligation bonds are backed by the "full faith and credit" of the city, that is, the authority to tax, whereas revenue bonds are backed by a specific stream of revenue, dependent on the source of the revenue, general obligation bonds sell for a slightly lower rate of interest than revenue bonds.

4. Please note that up until this point I have simply talked about what "backs" the bond, that is, what the city says is the ultimate guarantee that the bonds will be paid. I have not said anything about the actual source of the payment. A common strategy of a municipality in financing projects that generate a stream of revenue, such as a water utility, is to borrow money by issuing general obligation bonds rather than revenue bonds because it can obtain the money at a lower rate of interest. THE GENERAL OBLIGATION BOND IS ACTUALLY PAID BY REVENUE GENERATED BY THE WATER UTILITY. The only difference is that in the virtually impossible situation that the water utility revenue was not sufficient to pay the bond, a city would be obligated to use tax revenues. This would not be the case with a revenue bond. This has never happened in Oshkosh or, to my knowledge, in Wisconsin.

5. You ask if the city has been well served by the policy of issuing general obligation bonds when it could have issued revenue bonds. The advantage to the city and its residents is that several hundred thousand dollars a year are saved in interest payments. IF YOU BELIEVE THAT THE CITY HAS AN OBLIGATION TO SAVE MONEY IN THE SALE OF BONDS, AS I DO, THEN SURELY YOU WOULD AGREE THAT THIS IS A VERY GOOD EXAMPLE OF PROPER STEWARDSHIP OF PUBLIC RESOURCES.

6. The only disadvantage is a public perception problem fostered by people who do not understand public finance. The disadvantage is that general obligation bonds count against the statutory debt limit established for municipalities by the state. Revenue bonds do not count against the debt limit.

Let us consider Oshkosh. For utility borrowing, the city can sell either general obligation or revenue bonds. Both will be paid by the revenue generated by the water utility. Both will incur the same amount of debt. But the city can save several hundred thousand dollars in interest by issuing general obligation bonds rather than revenue bonds.

The only problem is that it may "look bad" in terms of the higher statutory debt. If Oshkosh had used revenue bonds for all revenue generating assets, then the general obligation debt would be at 62% of the statutory limit, which is a very reasonable number.

7. As a council member, I consider it my duty to save taxpayer money even if it means choosing a bond type that looks like it is creating higher debt.

8. You called for the city to have a full independent audit of city finances. All municipalities are required by state statute to have a full independent audit of finances every year and Oshkosh is certainly no exception. You can obtain the city audit conducted by an outside auditor either at the Oshkosh Public Library or at City Hall.

Sincerely,

Stephen Hintz
Oshkosh Common Council
 
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