By Bob Korbach
February 22, 2002
[note: Bob Korbach is a Professor Emeritus of Economics at the University of North Dakota. He currently resides in Minnesota. His essay below is in response to the following:
Bob Korbach can be emailed at korbach@eot.com]-Tony Palmeri
Around the time of the New Year I ventured into Oshkosh to visit with the only person who Chief Oshkosh talks to. Soon into my visit Dan suggested going to talk with locals. I had visions of an afternoon freezing my tush off on a park bench waiting for words of wisdom from a statue. Fortunately we went to Oblio's to sample the flavor of the month. After a discussion on Russian classical music the conversation moved to local politics and what was my opinion on whether or not Oshkosh has a "debt problem." In what follows is my take on it.
Who am I, an obvious "ausländer," to comment on your hometown? If you saw me when I was in Oshkosh I was the man wearing the paper bag over his head that I had obtained from a Chicago Bear fan who no longer needed it. Translated, I am a retired (Is that twice tired?) economist living in Minnesota. When the confidant of Chief Oshkosh was employed in a university setting we were colleagues/friends but I won't admit to being either of those when he was in the newspaper business.
Let's start with the simple stuff, those things called GOB's. The term conjures up visions of portly politician handing out our hard earned tax dollars to their friends. Do GOB's cost less than Revenue Bonds? At first glance the answer is YES. When you change the source of repayment from the revenue off a project over to taxes coming from the much broader general property tax base default risk is less hence the interest rate is lower. Slipping a Revenue Bond over to a GOB will save money. But what happens when all the Revenue Bonds become GOB's? As the supply of Oshkosh GOB's goes up, down goes the price (higher interest rates). The most obvious reason for this is one is using up the property tax base in Oshkosh and the investors know it. As Mr. Palmeri pointed out last October, Taxes as a % of the Statutory Limit for Oshkosh is only surpassed by LaCrosse. Oshkosh has a high debt load (e.g., Oshkosh - 63.9% vs. Appleton - 35.1%). Translated this means Oshkosh's bond rating on GOB's goes down relative to Appleton's (A1 vs. AA1). This, in turn, means ALL Oshkosh GOB's now cost more than Appleton's. Hence it is not clear if the initial saving by switching from Revenue Bonds to GOB's is enough to overcome the fact that all of Oshkosh's GOB's now cost more. Sorry Councilor Hintz, those are the principles of economics.
Let me move to the question of who pays for a GOB? As Councilor Hintz correctly inferred, if earmarked payments from the utility can pay for the GOB, distributional consequences are avoided. The more you use of the utility the more revenue you pay in and the more of the GOB you pay for. The "Benefit Principle" is working and as long as utility revenue is sufficient there are no problems. However, Councilor Hintz should not have given the impression that revenues always equal or exceed bond payment requirements in instances of earmarked payments. The United States is loaded with examples of failed parking ramps, downtown shopping malls, stadiums, event centers, and others where revenues fell short and local taxpayers have had to pony up the difference. I agree that water utilities very seldom present problems but whether or not wide-spread substitution of GOB's for Revenue Bonds will have distributional problems depends directly on the type of project.
As for Mr. Palmeri's call for an audit one hopes he is not prescient. With Enron and Arthur Anderson in the news our trust of financial statements and accountants has certainly gone south. Is Oshkosh another Orange County? While the typical audit of city finances is done by an accounting firm with deep ties to local officials it would be extremely rare to find them "covering up" gross irregularities like Anderson did. But I did not read that Mr. Palmeri questioned the legality of what was happening; I took his statement to be a call for a "performance audit." This would not necessarily have to be done by accountants but rather by informed citizens who would examine policies, goals, and objectives of various forms of city financing and evaluate as to how well the present form of financing in Oshkosh meets the needs of the taxpayers and those policies.
Mr. McGee brings up yet another point on the use of GOB's, a point that indirectly supports the need for a performance audit. The use of bonds should also be examined against other forms of financing, be they user fees or increasing general property taxes. While schools, sidewalks, and sewer treatment plants are long term (20 year+) what about those $15,000 pickups? To put it bluntly, cities generally finance on-going expenses, including pickups, through cash-flow. While salaries and supplies should, obviously, be funded as incurred, what about the gray area of chattels where objects have an over-one-year life expectancy but are not perceived to be long run. Mr. Palmeri's performance audit committee could be charged with the responsibility to examine just this issue. I come down on the side that those "tweener" expenditures should, as almost every municipality does, be financed as incurred. To finance these with GOB's seems to me to be a failure to be honest with the voters. The councilors did not want to deny the expenditure nor did they want to raise taxes so they shifted the costs to future taxpayers.
Finally what about the TIF's that Mr. McGee mentioned and, more recently, Mr. Noah wrote about? My position is simple: TOO WIDELY USED & TOO WIDELY ABUSED! Suppose a city has an old opera house that sets empty and is about to be turned over to the city for back taxes. This usually results in it being torn down and turned into a city mini park. In this instance the use of a TIF to get someone to remodel an old opera house not only does not result in a tax loss, it may even help to revitalize the downtown, hence having an indirect positive effect. But to give a TIF to attract a retail business, say a Wal-Mart, probably has just the opposite impact. Small businesses, especially those downtown, end up closing and the local banks lose deposits (Wal-Mart probably deposits receipts at the close of business and transfers them to Bentonville, AR the next morning.). Net job effects are often negative since small businesses are the largest job generators per dollar of sales. The bottom line statement about TIF's is the same as above: A performance audit would take a close look at what has been done.
Instead of saying: "Open up your hearts and let love shine in!" maybe it should be: "Open up your books and let truth shine out!"
Bob Korbach Professor Emeritus of Economics