states borrowing money from who?

October 28, 2012 11:38 AM

My state, like many, has referendum on our ballot requesting permission to borrow money. Where does the money come from?

My state, like many, has referendum on our ballot requesting permission to borrow money. Where does the money come from? Who lends money to the state budget?

This has shown up on our ballots before. It's frustrating, because they relate to services that I think are beneficial to the community. Yet, I don't understand the process and if getting money to ballot services takes from another needed service.

posted by Librarygeek to law & government (10 answers total)

They sell bonds to high income Americans, who like to buy them because their interest is tax free and the ability to imposes taxes is a pretty reliable source of repayment.
posted by MattD at 11:44 AM on October 28, 2012

Municipal bonds
posted by animalrainbow at 11:46 AM on October 28, 2012

The bond market. People, just like you and I (though largely, "institutional" investors such as fund managers) will buy shares of that bond. After that, they trade just like a stock, though they do have different underlying mechanics - For example, bonds will either eventually, or over time, yield interest; The issuer can sometimes buy them back ("Callable" bonds). They have strange tax implications (They do not all come tax-free, FWIW) that depend on who issued them and where you live.
posted by pla at 11:46 AM on October 28, 2012

It comes from me. I have a little bit of my savings sitting in a bond fund. For this, I get an investment that's a little safer than the stock market, and (more importantly) is not highly correlated with the stock market (if stocks take a dive, bonds usually do not). Also, I got a $3.56 refund on my federal taxes, which is an uncashed check stuck to my fridge (oops).
posted by miyabo at 11:56 AM on October 28, 2012

Yet, I don't understand the process and if getting money to ballot services takes from another needed service.

Yes, in the long run, it does. The initial money comes from selling bonds and it gets spent immediately. But the government that sold the bonds then has to pay interest to those who purchased the bonds and that interest comes from general revenues.

There are governments which have borrowed so much money over the years that a huge percentage of their annual revenues are used to pay interest on their debt, leaving much less for everything else. At the most extreme, this can lead to bankrupcy of the governmental entity in question, with bond holders being among the creditors who get stiffed.

This is particularly common in California right now. And the state government itself is perilously close to financial failure. Illinois and New York state are also in deep trouble because of past borrowing.
posted by Chocolate Pickle at 12:00 PM on October 28, 2012 [2 favorites]

Yet, I don't understand the process and if getting money to ballot services takes from another needed service.

It's not possible to accurately answer this question without knowing the specific proposal. Issuing bonds for capital expenditures may create some cost savings that could partially offset the cost of the debt.

For example, say a town wants to build a new library building. It could be because they want to expand the services provided by the library, which could require more space, and so they issue a bond so that they can get the money for the building upfront, and they accept that they'll have to pay the interest on that debt over time out of the general fund. Assuming constant revenue, this means that the debt servicing cost would "take away" from another service.

Alternatively, say the library needs to replace an old building, because the cost of maintenance on the old building is becoming increasingly expensive, so each year the repair of the building eats up a larger and larger share of the town budget. It might be cheaper to remove the old building and replace it with a new one that has lower maintenance costs, even once you figure in the cost of servicing the debt. Note that I say may; there are a lot of variables here and the relative cost savings is dependent on all sorts of projections, including the cost of continuing to operate the old building, the cost of the debt, the expected lifetime of the building, the projected utilization of the library over the next ten years, the timeframe over which you evaluate any "savings", etc.

All of this is irrelevant if they are issuing bonds to cover their operating expenses, which is an entirely different matter. I just wanted to point out that debt financing is not automatically a bad thing, but the specifics really do matter.
posted by kiltedtaco at 1:12 PM on October 28, 2012 [2 favorites]

In principle, I think that if they are borrowing money to pay for capital improvements (e.g. a new library) then that makes sense. It might easily be more sensible to borrow the money and pay it back with interest than to fund it out of general expenditure. On the other hand, if they are borrowing money to pay for an ongoing service (e.g. teachers' salaries), it's much less likely to be a good idea.
posted by plonkee at 1:26 PM on October 28, 2012

Every state (except Vermont) has a requirement to run a balanced budget. Most states derive the majority of their income from a combination of sales tax, corporate tax, and personal income tax (there are some exceptions -- states without a personal income tax, states that get a chunk of their revenues from energy). This balancing act makes it hard to "save up" for big projects, as citizens usually need the most government services when the revenues collected from taxes are the lowest. Consequently, every state that I'm aware of issues bonds for long term capital projects like buildings, roads, bridges, that sort of thing. My state has a number of rules in place around that process to make sure the money isn't being used to cover operational expenses and that we will be able to cover the debt service. Also, excessive borrowing works against your state's credit rating, which in turn makes money more expensive to borrow. If your state is actually putting a bond issuance on a ballot, that makes me think this is something outside of the ordinary that is not covered by the rules already in place. I would look for a local analysis of the issues around this ballot question. A good source for this kind of thing is usually your state's chapter of the League of Women Voters.
posted by kovacs at 1:45 PM on October 28, 2012 [1 favorite]

Every state (except Vermont) has a requirement to run a balanced budget.

Unfortunately, a lot of them ignore that requirement and run huge deficits routinely.
posted by Chocolate Pickle at 6:57 PM on October 28, 2012

Yes, the important question is whether these bonds are being sold to finance capital improvements (buildings, equipment, and other "stuff") or operating expenses (staffing and other day-to-day expenses).

Borrowing for capital improvements such as libraries, wastewater treatment plants, etc, can be a good move, as others said. Specifically, government entities can borrow at much lower interest rates than other borrowers, and over longer time periods. In particular, the depressed market of a recession can be a good time for governments to start capital improvement projects, because interest rates are lower and land is cheaper (for projects that require buying or assembling land parcels, which is usually prohibitively expensive for governments). In the long run, assuming the economy will recover, borrowing now makes your library/wastewater treatment plant/whatever less expensive to the taxpayers who will be paying off the bond interest.

But a government that needs to borrow to finance operating expenses is in trouble, and has much bigger problems beyond whatever short-term crisis they're patching up. You mention "services," so this may be your state's situation. Be wary.
posted by epanalepsis at 10:24 AM on October 30, 2012