Re: Commuter rail bond interest rates?

From: Stephen Sprunk (stephen_at_sprunk.org)
Date: 01/15/05 

Date: Sat, 15 Jan 2005 17:07:51 -0600

"Hans-Joachim Zierke" <Usenetspam007@Zierke.com> wrote in message
news:slrncu04a9.8c1.Usenetspam007@odysseus.Zierke.com...
> Stephen Sprunk schrieb:
> > You may consider it such, but it's normal practice in the US for
> > infrastructure projects.
>
> So the public debt is much higher than the published figures, I assume.

The debt of the US Govt is accurate, I believe.

What you may not realize is that each state and local govt has its own
debts, which are not rolled up to the national level. Note that all state
and local governments are required to have "balanced" budgets, which means
expenditures (including interest) in a given year are required to be covered
by revenues, whereas the US Govt can (and does) borrow money to cover even
its interest payments.

> > If a given public project has a useful life of 30+ years, then it's
normal
> > to spread out paying for building that project over 20-30 years. When
> > paying interest rates in the ballpark of the inflation rate, there is no
> > cost difference between borrowing to build it up-front or building it
> > gradually over the entire time period.
>
> If the interest rate is in the ballpark of the inflation rate, I don't
> say anything about it!

Due to the tax-exempt nature of govt bonds, the interest paid is usually
only a percent or two higher than the inflation rate -- and sometimes lower.
There are certainly abnormal cases where a particular issuer is considered
"risky", like the State of California currently is, and thus they must pay
significantly higher rates -- but still nowhere near commercial interest
rates because it's virtually impossible for a public agency to default.

> > Projects such as transit, however, only increase tax revenues
> > and other benefits after they're actually built, so while the _cost_
> > is the same either way, the economic result is actually better
> > when you borrow to build.
>
> Not that bad for an argument.

Does that mean you're buying it or just that you think it's enough to
convince the public at large?

> > And if the taxpayers specifically vote to endorse borrowing so
> > that they'll have the project done sooner?
>
> In Switzerland, where such projects routinely have to pass such citizen's
> votes, they respect the voting result, but put the project into the
> normal budget. Of course, this means either more public debt, or higher
> taxes, or cuts at other places.

There may be more public debt in the short term, but the building of the
project may result in enough additional tax revenue (without raising rates)
that over the life of the project the effective cost is negative. In
theory, this is the goal of all public-infrastructure projects financed via
bonds.

> I consider it very risky, to have all kinds of public debt outside of the
> budget. Admittedly, an economy of USA size runs less risk in general.

I'm not sure what you mean "outside of the budget". The bond repayments are
put into the annual budget and quarterly/annual financial reports (and the
bonds themselves are listed as liabilities), and the bonds have a lien
against tax revenues so that they _must_ be paid before any other budget
items -- except for the US Govt itself, which follows no known accounting
conventions or principles.

S 

-- 
Stephen Sprunk        "Stupid people surround themselves with smart
CCIE #3723           people.  Smart people surround themselves with
K5SSS         smart people who disagree with them."  --Aaron Sorkin

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