Can We Still Afford Global Agreement Amidst Bond Chaos
Written by Michael Lewis on March 13, 2008
By Michael Lewis
Unprecedented bond market chaos could cost Miami-Dade County billions extra to finance the grandiose scheme of projects lumped under the heading Global Agreement.
Further, those billions might come out of the same revenue stream that funds all county services.
Municipal debt that until recently could be repaid at only about 80% of the interest rate of federal treasury bonds — lower because municipal bonds are tax exempt — as of last week was bringing about 125% of treasury rates. That forces cities and counties to pay far more interest to finance big projects.
In the $3 billion agreement to build a Florida Marlins stadium, port tunnel, Bicentennial Park infrastructure for museums, city trolley and so forth, the past month’s bond market upheaval might add a staggering $3 billion to Miami-Dade’s interest fees, perhaps bringing total true spending to above $9 million. Put in perspective, that debt would total half again as much as the county spends in a year on everything it does.
If you’ve been following Lou Ortiz’s front-page reports the past few weeks, you’ve seen bond market disruptions already hammering the county. First, $136 million in Aviation Department bonds got no bids in the auction-rate market. Then, the county revealed that $76.5 million in other Aviation Department bonds and $579.7 million in loans to the Port of Miami in the commercial paper market could face a similar fate. Officials were looking at paying double the projected interest or more on these securities in higher-interest fixed-rate bonds. On 30-year loans, this could raise interest on just these three securities $700 million.
Sadly, interest that jumps a percentage point or three or five seems relatively unimportant to elected officials enmeshed in what they view as really vital: whose cops, city or county, will get lucrative off-duty pay to police a ballpark?
You can see how thousands in tangible police pay can trump intangibles like billions in interest payments that might send county finances reeling — especially when the disaster might not come to full bloom for years, when new commissioners hold office.
Maybe that’s why commissioners aren’t demanding of County Manager George Burgess a thorough report, right now, that spells out what various interest scenarios might do to the cost of major projects and the ability of the county to repay bonds without having to tap general revenues. We’re estimating $9 billion — but what do careful scenarios show, and how realistic are they?
If the county isn’t thoroughly crafting such studies, it’s derelict. If officials are assuming we’re in a blip that will disappear in weeks, they’re far too cavalier. If the county is indeed making hardnosed studies, commissioners need them now.
Because basing financing on the old paradigm in which municipal bond interest will be very low because of high demand is like planning to pay off your home mortgage with future lottery winnings — it’s a gamble you shouldn’t take, and neither should the county.
The developing crisis nationally stems from the uncertain future of insurers who have been staggered by losses from mortgage-related bonds they insured, leading dealers to refuse to buy municipal bonds at auction. As municipal debt auctioned for 28- or 35-day spans fails to lure buyers, municipalities have turned en mass to long-term borrowing at far higher rates.
It is, of course, quite possible that the crisis will quickly abate and all will return to what we once knew as normal. But it’s also entirely possible that we now are living through the new "normal" and will be for decades. Experts see no quick end to municipal bond chaos, so why would the county?
Meanwhile, as interest the county must pay soars, planning to cover any share of it by tapping general revenues is perilous as tax-cut sentiments waft through Florida that could slash general revenues. Cutting revenues just as the need develops to use them to fund bonds would create the perfect storm.
What could happen to us? Look at the Port Authority of New York and New Jersey, which just discovered it must pay about $300,000 extra bond interest every week, totaling five times what was expected. Five times the original share of port revenues must be used to pay off the bonds as interest suddenly leapfrogged from an annual $4.3 million to $20.2 million. On 30-year debt, that would increase interest nearly half a billion dollars.
Apply that to a stadium here to be financed mostly by tourist taxes and you can see the problem — tourist tax revenues aren’t going to multiply fivefold, which means most interest would come from general revenues — taxes that run the county.
Even commissioners who firmly support every project in the Global Agreement’s $3 billion package should step back and ask how much those projects are really going to cost, interest included, and where we can find all those added interest funds.
It’s fine to want to do everything now. But commissioners must insist on full disclosure from the manager on projected costs and revenues sources if the bond market were remain in flux or even get worse. Only then can they decide how big a risk to take with this county’s future.