The Municipal Debt Bubble

On September 20, 2010, William Cleaveland, a Mesa attorney, sent the Gilbert Town Council a letter outlining his concerns about a “$90,000,000 debt-fueled spending spree that the Gilbert Town Council approved in a series of meetings held in January and February of 2009.” Mr. Cleaveland allowed Gilbert Watch to publish his letter. Download letter.

Three sitting Town Council members, up for re-election this spring, voted to approve that spending spree: Linda Abbott, Dave Crozier and Les Presmyk. After the spree, they began to beat the drum for more taxes.

Why is this significant? Because, even during a recession, the spending didn’t slow down. In fact, it increased. It has increased at the federal level, at the state level, and at the municipal level. Why can’t elected officials stop spending? More critically, how long can this go on?

Recently, an article appeared in Reason Magazine titled “The Municipal Debt Bubble.” In it, author Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, states that, “Municipal bonds are perceived as safe investments because, like U.S. Treasury bonds they are backed by the full faith, credit, and taxing powers of the issuing governments. Investors know that states and localities can always raid taxpayer wallets to pay off their debts.”

Indeed. In Gilbert, “growth pays for growth.” So, when a residential permit is issued and a new home is built, a System Development Fee (SDF) of about $20,000 is collected from the builder, which goes toward paying for growth. "Growth" includes new projects like infrastructure, streets, and parks. The problem is, the heyday of 350 residential permits per month has been over for some time, with no clear indication of a recovery any time soon.

Former Town Manager George Pettit noticed that residential permits had dropped to 50 by February 2008. (Source: 2/27/2008 Minutes of Gilbert Town Council Special Meeting.) They have bounced up and down since then, stimulated for awhile by the federal government’s “stimulus.” But they are back to around 75.

So, what happens if the Town of Gilbert doesn’t have enough money from SDF’s to make the bond payments, plus interest? They raid the General Fund. That’s the Fund that is replenished by tax revenues. It’s the Fund that’s used to operate the Town, including Public Safety. As stated by William Cleaveland, "Mr. Pettit explained to all of the members of the Town Council that if this transaction goes forward and the economy does not recover, the new bonds could ultimately hit the General Fund for $6,000,000 per year."

Eddie Cook, candidate for Town Council, agrees with William Cleaveland and considers the problem serious. He recently stated, “The biggest concern I have is the amount of outstanding debt the Town of Gilbert has accumulated over the years. The Town has increased its debt from $384 million in 2008 to $613 million in 2009. That equates to a Gilbert resident in 2008 owing $1829 per person, and in 2009 owing $2824 per person.” Put another way, not including interest, a family of 4 owes $11,296.

Here is the link to article “The Municipal Debt Bubble”: http://reason.com/archives/2010/12/14/the-municipal-debt-bubble

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