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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