One piece of the fiscal stimulus bill signed in February appears to be taking off quickly. It’s the Build America program. What’s that you ask (as did I)?
Build America is a subsidy program for state and municipal borrowers. It allows them to issue taxable bonds, something they could always do if they so chose, and picks up 35% of the interest expense. Effectively, that gives them a lower cost of funds than tax exempt bonds. The advantage to the borrowers is that it opens up a lot of investment pockets that are not subject to income taxes and hence have no need for tax exempt issues.
Government borrowers throughout the country are planning to use the Build America program. For example, New Jersey plans a $1 billion issue and California is planning to sell $3 billion of the bonds. California even plans to market the bonds in Europe.
What’s wrong with this plan. Well, to start with it’s another means of helping the states and municipalities put off the day or reckoning. Have a yawning fiscal gap, plug it with borrowed money. Don’t think about cutting programs or raising taxes. The good times will be back soon enough and when the revenues start rolling in again, you can use that to pay off the debt. Honestly, it appears that the American consumer has figured out that the whole thing was a shell game but the government is still delusional. The states dug themselves a hole that is hard enough to climb out of when they overspent in anticipation of ever increasing revenues. Now that the faucet has been turned off, they borrow.
Arguably the stimulus is needed, but putting the liability on strapped state balance sheets is absolutely the wrong way to attack the problem. It properly belongs on the federal government’s books. Realistically, that is probably where it ends up anyway as the states’ return for another bailout. In the meantime Washington can create the illusion that it is committing the country to less indebtedness than it actually is.
One has to wonder if the Europeans and other potential investors might not take notice of the fact that Moody’s assigned a negative outlook to all U.S. local government debt. Probably not. Too big to fail applies to municipal debt as well, at least in the minds of investors.
The Moody’s move did not go unnoticed in Washington, however. Barney Frank said he was “troubled” by the move. If you guessed that means a committee hearing you’re right. One is planned for May to review the decision by Moody’s. Of course, if they don’t call attention to risk and something goes wrong, Congressman Frank is “troubled” as well. Maybe we need to just turn the whole thing over to a new government department that can rate debt based on the desired outcomes of the Congress and administration.
Oh well, just another day in this increasingly dysfunctional world.