Yesterday I posted a basic definition of what bonds are (http://grandrapidsvoice.com/2014/01/20/what-are-bonds/). Essentially, they are a form of loan commonly used by government entities to borrow money.
The mechanics of how they work are not relevant to us now, so I am going on to write a little bit about why they are used and the effects of this use.
To keep things simple, I will just refer to the use by a “city,” although we must remember that bonds are used by all levels of government, right down to school districts.
There is really only one reason why bonds are used. The city wants to spend money, but does not have the money on hand or coming in from taxpayers to pay for everything that they want to purchase, whether it be goods or services. They issue a bond to acquire the money, so they can spend it now instead of waiting until they get it.
Now the city can get the project done, or make the purchase, and have the bragging rights to say that it was done on time and fully paid for. The problem is, though, that “fully paid for” does not mean what it appears to mean. It simply means that the city used the money from the investor to fully pay the service provider. Cities all too frequently neglect to publicize that the investor must now be paid back with interest. These payments are the responsibility of the taxpayers in the city.
Fortunately, usually only the interest has to be paid, at least in the short term. For an example of how this works, we’ll say that 10 year bond is issued for which the principal is not due until the end of the 10 year period, but the interest must be paid every year. In this case, what the city hopes to do is to have the taxpayers make the interest payments every year, then, at the end of the term, roll the bond over to avoid having to pay the principal. If the city can continue to be successful in doing this, the principal potentially never has to be paid, but the interest still does. An ongoing taxpayer expense so that the city could spend the money today instead of tomorrow (or never).
This kind of sounds like a credit card. As long as the monthly payments are made, we never really have to pay our cards off, do we? Except how many off us have found ourselves in serious trouble by maxing out our cards and trying to pay only the minimum payments? This is kind of what bonds are like in many cases. To avoid paying the principal, they are rolled over and re-issued, perpetually, if possible. That’s right, let the kids pay it later.
A fact that most are unaware of is the amount of money the City of Grand Rapids owes. According to Moody’s, Grand Rapids was in debt to the tune of $61.1 million in 2012. (https://grandrapidsvoice.files.wordpress.com/2012/08/researchdocument.pdf), To put that in perspective, that is about $6000 for every man, woman, and child in Grand Rapids. Just in city debt alone. This is only the principal.
Sure, there are those that will say that as long as we can roll it over, we will never have to pay the principal off. What happens if we can’t? Bankruptcy? Worse? At this point we had better hope that we can continue to roll at least part of it over. Even worse, in the meantime we have to pay for being in debt every year. From the information found in the State Auditor’s site (http://www.osa.state.mn.us/Search/CitySearch.aspx) We can see that in 2011 alone we paid $4,842,557. That was $445.13 per person.
So the city borrows money, and we have to pay the bill. Can it get worse? Go back to the article, “Is This Taxation Without Representation?” (http://grandrapidsvoice.com/2013/12/31/is-this-taxation-without-representation/) I’ll cite the example of the fact that school districts can now issues bonds without a voter referendum. That kind of sounds to me like a credit card company allowing us to raise our own credit limit without asking them. How much of this is going on behind our backs? By this I mean, how many bonds are actually issued that we would not even know about if we didn’t spend much of our time looking through the records?
How many of you who live in Grand Rapids were unaware that you are in debt due to city bonds (yes, just in city bonds) an average of $6000, or that you are being charged hundreds of dollars per year because of this debt?
This is something to pay attention to.