Detroit to Bond Scammers: “There Will Be Blood”
Bill Quick

Detroit’s Message to Investors by Steven Malanga, City Journal Spring 2014

Orr’s gambit strikes at the heart of municipal finance. Though most states have laws or constitutional restrictions on borrowing, governments (and their financial advisors) have found ways to sidestep them. At least two-thirds of all municipal borrowing in the $3.5 trillion market now takes place outside the scope of debt limits, according to an estimate by Columbia University law professor Richard Briffault. He calls these transactions “non-debt debt.” In 2009, in one example, Arizona closed a budget gap by borrowing $1 billion, even though its constitution prohibits such debt. The state simply claimed that the transaction wasn’t borrowing but instead a sale of government-owned office buildings. Yet no real sale took place: the state retained control of the properties and instead sold certificates of participation for them. Arizona is repaying the certificate holders out of tax revenues but calling the payments “rent” (see “State Budget Bunk,” Winter 2011). The Goldwater Institute, a Phoenix-based think tank, estimated that Arizona will spend $1.6 billion to pay off the $1 billion sham sale.

The entire state and local bond scheme is in large part a scam predicated on the notion that no matter how lousy the borrower is, the hapless taxpayer can always somehow be forced to pony up.

Of course, that’s the national debt scam, too, but the states and municipalities will go down first because they can’t print fiat money.

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Bill Quick

About Bill Quick

I am a small-l libertarian. My primary concern is to increase individual liberty as much as possible in the face of statist efforts to restrict it from both the right and the left. If I had to sum up my beliefs as concisely as possible, I would say, "Stay out of my wallet and my bedroom," "your liberty stops at my nose," and "don't tread on me." I will believe that things are taking a turn for the better in America when married gays are able to, and do, maintain large arsenals of automatic weapons, and tax collectors are, and do, not.

Comments

Detroit to Bond Scammers: “There Will Be Blood” — 1 Comment

  1. The states can’t print fiat money, but they can borrow it from the federal govt. At least the blue states will be able to.

    Let’s see. It won’t be called borrowing. Those states will sell participation notes to the fed govt based in state park land, then pay rent to the fed govt until the feds get back 130% of the initial payment. It won’t show up as borrowing by the state, and the fed govt will show a profit! Socialism will be shown to work.

    What about the red states? No borrowing for them. Instead, the fed govt will just buy those states, with delivery in 20 years, so the deal is “old news” and can never be undone.

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