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Forget Pension Obligation Bonds. Two Cities Are - No Joke - Leasing Their Streets To Fund Pensions.
Forget Pension Obligation Bonds. Two Cities Are - No Joke - Leasing Their Streets To Fund Pensions.
It sounds preposterous, and the headline of a recent article here at Forbes by Marilyn Cohen is certainly eye-catching: “The Lunacy Of Using City Streets To Collateralize New Municipal Bond Deals.” And these aren’t just any municipal bond deals — two cities in California are issuing bonds with their own city streets as collateral to pay down their unfunded pension liabilities.
New novel ideas perhaps...others may find unique ways to pay for continuing increasing cities debts
In Baltimore since forever, homeowners have paid land-rent upon which their homes sit. Ya, pretty effing crazy. Just like the Excise Tax on the car. So, you have the right to buy a car if you can afford it. And you most likely will park the car in a space provided, if you rent, or on your own property, if you own a home. So, for the privilege of parking the car, you have to pay the tax, every year. I call it the Extortion Tax. Dunno if there's one in my new State, after the move. ...Oops, just looked. And of course, THIS crap is really HELPFUL: (LAUGH!) https://tax.hawaii.gov/geninfo/get/
Another reason why I'm not interested in owning muni bonds. Taxfree or not, there are too many goofy ideas, shenanigans, and funding flow issues these days (ie, lowered sales tax revenues due to Covid) for my tastes.
I have one muni fund in my long-long term account which has sat there quietly reinvesting since I was a kid in the 80s, but otherwise, I'm sticking with equities, and perhaps some balanced/allocation funds.
Forbes should know better than to say the streets are "collateral". It's picking up this word from an article in BondBuyer.com, but it's not in the bond descriptions.
Lease-purchase bonds (a type of lease revenue bonds) operate the way one would expect. A nonprofit government entity issues tax-exempt government bonds for the purpose of buying/building something, such as a bridge or a prison. The property serves as collateral for the bonds. The nonprofit leases the property to the city (or state) and uses the revenue to service the debt. Effectively a rent-to-own arrangement for the government.
Sometimes the government simply needs to borrow money and can't get the necessary public support for it (many municipalities and states require voter approval to float bonds). It circumvents this "problem" by structuring the borrowing as a (sub)lease.
It leases some property (here, city streets) to an entity. Taxable bonds are floated. The money from the bonds is used to pay that lease in the form of a onetime payment. Financially, it's as though the government itself just floated the bonds.
The government subleases back the property, and its rent payments are used to service the debt. Financially, it's as though the government is servicing bonds that it had floated directly.
Because the entity that's subleasing the property back to the government doesn't own it, the entity can't pledge the property as collateral. This is largely a shell game to get around borrowing restrictions.
I wouldn't be surprised if all bonds of this type had to be taxable, so they wouldn't show up in muni bond funds.
In Baltimore since forever, homeowners have paid land-rent upon which their homes sit. Ya, pretty effing crazy. Just like the Excise Tax on the car. So, you have the right to buy a car if you can afford it. And you most likely will park the car in a space provided, if you rent, or on your own property, if you own a home. So, for the privilege of parking the car, you have to pay the tax, every year. I call it the Extortion Tax. Dunno if there's one in my new State, after the move. ...Oops, just looked. And of course, THIS crap is really HELPFUL: (LAUGH!) https://tax.hawaii.gov/geninfo/get/
Outside of some superficial similarities, ground rent is something completely different from lease revenue bonds.
In theory, if I own a house and the land beneath it, I could sell you the house and retain ownership of the land. For example, from 1953 until the original Yankee Stadium was renovated in the early 1970s, the land it sat on was owned by the Knights of Columbus. The Yankees paid $128K/year rent for the land.
The virtue of this arrangement is that you do not have to pay as much to buy a home, especially in places where much of the property value lies in the land itself and not in the improvements (house).
In the present day, ground rent is commonly viewed as a dying, yet no less legally binding, vestige of Maryland’s colonial past. Almost all of the remaining national instances of ground rent are confined to the Greater Baltimore area, isolated areas of Pennsylvania, and most of Hawaii.
These are little more than basic lessor/lessee private contracts, involving private parties, not the government.
As with the Yankee Stadium example, religious institutions may be one of those parties. "All land in Ocean Grove [NJ] is owned by the Ocean Grove Camp Meeting Association and leased to property owners. The Camp Meeting Association is a Methodist group. Every homeowner in Ocean Grove pays ground rent to the Camp Meeting Association, a Methodist group. There are still many tent homes on the camp grounds. "Tent inhabitants do not have to be Methodist, but they do have to support the association’s spiritual mission." https://thecoaster.net/wordpress/no-increase-planned-for-ocean-grove-land-leases/ https://njmonthly.com/articles/jersey-shore/ocean-grove-nj/
I don't see the connection between excise taxes and ground rent or revenue bonds. An excise tax is similar to a sales tax (percentage of value, one time). Hawaii draws the distinction as being the fact that the excise tax is assessed on businesses, rather than customers. Though as we all know, it's the customer who pays it in the end.
Comments
https://tax.hawaii.gov/geninfo/get/
Another reason why I'm not interested in owning muni bonds. Taxfree or not, there are too many goofy ideas, shenanigans, and funding flow issues these days (ie, lowered sales tax revenues due to Covid) for my tastes.
I have one muni fund in my long-long term account which has sat there quietly reinvesting since I was a kid in the 80s, but otherwise, I'm sticking with equities, and perhaps some balanced/allocation funds.
Lease-purchase bonds (a type of lease revenue bonds) operate the way one would expect. A nonprofit government entity issues tax-exempt government bonds for the purpose of buying/building something, such as a bridge or a prison. The property serves as collateral for the bonds. The nonprofit leases the property to the city (or state) and uses the revenue to service the debt. Effectively a rent-to-own arrangement for the government.
Sometimes the government simply needs to borrow money and can't get the necessary public support for it (many municipalities and states require voter approval to float bonds). It circumvents this "problem" by structuring the borrowing as a (sub)lease.
It leases some property (here, city streets) to an entity. Taxable bonds are floated. The money from the bonds is used to pay that lease in the form of a onetime payment. Financially, it's as though the government itself just floated the bonds.
The government subleases back the property, and its rent payments are used to service the debt. Financially, it's as though the government is servicing bonds that it had floated directly.
Because the entity that's subleasing the property back to the government doesn't own it, the entity can't pledge the property as collateral. This is largely a shell game to get around borrowing restrictions.
I wouldn't be surprised if all bonds of this type had to be taxable, so they wouldn't show up in muni bond funds.
In theory, if I own a house and the land beneath it, I could sell you the house and retain ownership of the land. For example, from 1953 until the original Yankee Stadium was renovated in the early 1970s, the land it sat on was owned by the Knights of Columbus. The Yankees paid $128K/year rent for the land.
The virtue of this arrangement is that you do not have to pay as much to buy a home, especially in places where much of the property value lies in the land itself and not in the improvements (house). https://www.peoples-law.org/understanding-ground-rent-maryland
These are little more than basic lessor/lessee private contracts, involving private parties, not the government.
As with the Yankee Stadium example, religious institutions may be one of those parties. "All land in Ocean Grove [NJ] is owned by the Ocean Grove Camp Meeting Association and leased to property owners. The Camp Meeting Association is a Methodist group. Every homeowner in Ocean Grove pays ground rent to the Camp Meeting Association, a Methodist group. There are still many tent homes on the camp grounds. "Tent inhabitants do not have to be Methodist, but they do have to support the association’s spiritual mission."
https://thecoaster.net/wordpress/no-increase-planned-for-ocean-grove-land-leases/
https://njmonthly.com/articles/jersey-shore/ocean-grove-nj/
I don't see the connection between excise taxes and ground rent or revenue bonds. An excise tax is similar to a sales tax (percentage of value, one time). Hawaii draws the distinction as being the fact that the excise tax is assessed on businesses, rather than customers. Though as we all know, it's the customer who pays it in the end.