Public Debt Redux

When New York City nearly defaulted on its own debt in the 1970s and looked for a federal bailout, it inspired the classic New York Daily News headline referring to the U.S. president of the day: “Ford To City: Drop Dead.”

Some 35 years later, Americans are starting to say the same thing about bailouts – but it may be too late for the cities and states that forgot the lesson of the ’70s and have again begun amassing bond and other debt to finance construction of arenas, stadiums, convention centers, museums and even shopping malls.

New Jersey officials recently celebrated the award of the 2014 Super Bowl to the new Meadowlands stadium in East Rutherford. But the cost of getting there may be more than the state will ever get back in revenue.

It’s been nearly 40 years since New Jersey borrowed $302 million to begin Meadowlands construction, with the intent to have the bonds paid off in 25 years. In that time, public officials refinanced the bonds – over and over again – siphoning the complex’s revenues for the state budget and using New Jersey Sports and Exposition Authority’s good credit to borrow even more.

Now, NJSEA is on the hook for $830 million that it can’t repay, according to the Wall Street Journal. The state, like many in the down economy, is struggling with huge budget deficits from dwindling tax receipts but is now making interest payments estimated at $100 million this year alone.

In California, localities have the right to create public agencies, funded by property taxes, that can issue debt to finance redevelopment. There are now 380 such agencies, collecting 10 percent of all property taxes for nearly $6 billion annually but that have also amassed $29 billion in debt never approved by voters, according to the WSJ.

Downtown redevelopment was the goal in Fresno, Calif., when it approved $46 million in bonds to construct a baseball stadium for the Triple-A baseball Grizzlies. Revenue has fallen far short of expectations, and the San Francisco Giants farm team has demanded a break on rent, threatening to move and leave taxpayers holding a bag worth $3.4 million. The team now receives a $700,000 subsidy to stay put.

Adding insult to injury, two other Fresno developments went belly up in the last year: a publicly backed renovation of the city’s metropolitan museum went wildly over budget and bankrupted the institution, costing taxpayers $750,000 annually in debt payments. And the Granite Park sports and entertainment complex, already stung by the controversial closure of a Cabo Wabo club, collapsed to the tune of $5 million in public money.

Charlotte, N.C., used public debt to finance a bidding war to benefit private business, winning the bid for the Nascar Hall of Fame with a $154 million offer that was funded by a new hotel tax dedicated to servicing bonds for hall construction. But the venue only employs 115 people and the increased tourism equals about what a single Nascar race would generate.

There are exceptions to the rule. Dallas expects to pay off its debt on American Airlines Center next year – and years ahead of schedule – according to the Dallas Morning News.

The city issued $140 million in bonds toward the arena’s construction in 1998. The last of the bonds was to be paid in 2027 but higher-than-expected tax receipts allowed Dallas to redeem the bonds.

But taxpayers, in general, are wising up to the fact their states and cities face long-term obligations that are getting harder to meet. And one analyst warns the result won’t be pretty.

Rick Bookstaber, a senior policy adviser to the U.S. Securities and Exchange Commissions, says the municipal market has the characteristics of a crisis that might play out with “a widespread cascade in defaults” thanks to a political addiction to debt.