When the state began to feel the financial pinch of a sluggish economy several years ago, lawmakers turned to all sorts of creative means of providing funding for their favorite projects or constituents.
One practice that alarmed all taxpayers is the practice of issuing general obligation bonds – borrowing the money – to pay for capital projects of private, nonprofit organizations in the state. State general obligation bonds are the major borrowing tool of the state and these bonds provide tax-exempt earnings for the holders of the bonds. There are two types of general obligation bonds, reimbursable and non-reimbursable.
Reimbursable bonds are usually used for state or county projects where the facility for which the bond moneys will be used is expected to generate revenues that will be sufficient to repay the principal and interest for that bond. An example of a project that might warrant reimbursable general obligation bonds as a means of financing would be a public parking facility where parking fees might be able to cover the cost of servicing the bonds. In any case, should the facility not be able to generate sufficient funds to cover the repayment of the bonds, the bonds would default to non-reimbursable bonds.
Nonreimbursable general obligation bonds, on the other hand, are usually used for public projects for which little or no revenue is anticipated to be generated by the project. An example would be a school or a state office building designed to house state programs and services. In this case, the repayment of the debt service is paid out of the general revenues of the state, your state and county tax dollars. In fact, what is known as the full faith and credit of the state is pledged for these bonds and the repayment of these bonds becomes the first charge against the state’s resources.
Thus, the alarm should be rung when lawmakers start using general obligation bond debt for private organizations. While lawmakers may be well-intended in providing this subsidized capital financing for private nonprofits, they are putting all taxpayers on the hook to repay these monies over the next twenty years. Further, because the state does not own the property or have any right to use the property being funded, there is no recourse should the state need to liquidate assets to pay off its borrowed obligations.
Some may argue that these organizations serve a public purpose by providing services that the state would otherwise have to provide. After all, in many cases the state is already funding contracts for the provision of public services with many of these organizations. Funding operating programs which provide services on a current basis is one thing as each legislature can determine what the priority is for the moment. Deciding on long-term financing for a private nonprofit that will obligate the next twenty sessions of the legislature and therefore taxpayers for the next twenty years is another thing.
However, it is not like the state should be hard-hearted and deny these worthy nonprofits some sort of subsidy, but it should not require that all taxpayers foot the bill for these chosen few. The state has another debt financing vehicle available that extends extremely low interest rates on these borrowings yet does not obligate taxpayers. This mechanism is called special purpose revenue bonds.
Special purpose revenue bonds (SPRB) are extended to activities which are considered to be of a public purpose, where the service provided serves the public at large. And like general obligation bonds, the interest earnings realized by the bond holder are also tax exempt. Thus, the interest rates afforded these bonds are also likewise lower than one could find in the conventional market.
However, the difference between general obligations bonds and SPRBs is that the organization or company is responsible for the repayment of the debt. The taxpayers are not on the hook for the repayment of this debt and these bonds are not charged against the state’s constitutional debt limit. True, because the state is not standing behind these bonds, the interest rate on SPRBs may be higher than that which might be secured for a general obligation bond. On the other hand, not funding these private, nonprofit organizations’ facilities with general obligation bonds frees up general obligation bonds for facilities that are truly owned by state government such as schools.
While the number of authorizations of general obligation bonds for private nonprofits has dwindled in the past few years, it is a practice that should be halted altogether.