traverse county needs a new county government building that would cost 10 millio
ID: 2468300 • Letter: T
Question
traverse county needs a new county government building that would cost 10 million. the politicians feel that voters will not approve of municipal bond issue to fund the building since it would increase taxes. they opt to have a state bank issue 10 million of tax-exempt securities to pay for the building construction. the county then will make yearly lease payments (of principal and interest) to repay the obligation. unlike conventional municipal bonds, the lease payments are not binding obligations on the county and, therefore, require no voter approval.
1. Do you think the actions of the politicians and the bankers in this situation are ethical?
2. In terms of risk, how do the tax-exempt securities used to pay for the building compare to a conventional municipal bond issued by Traverse County?
Explanation / Answer
The regulation that permits the county government to approve tax exempt securities is not secret. In addition, since the lease payments are not compulsory on the county, there is some other article that is accepting the risk that the county voters will purpose to the contract, choose new legislature, and conclude the lease. Therefore, the decision is ethical as long as everybody informs the fact about it.
Since the securities are not reversed by the county and there is no compulsory obligation to keep on leasing the building, they are of higher risk than a bond issue and will have a higher yield to the investor to reimburse for that fact.
The citizen is afforded a lower long term risk of having extreme costs by this alternative. If county revenues turn down in the future, the county can move to less expensive space and the citizens will be keep money that or else would have to have been paid under the bond issue.
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