The 8% Gorilla That Nobody Is Talking About


Photo credit: pxhere.com

The topic of the Sewerage & Water Board of New Orleans is a contentious one. In the past two years, people have lost their homes and their vehicles due to the flooding of portions of the town. Yet, when it comes to understanding the root cause of why these floods occurred, the official stance starts and stops at “the pipes and equipment are old and need to be replaced.”

It seems as if the media isn’t willing to dig deeper either, mentioning nothing about three investigations by the FBI into the S&WB and leading to the convictions of two senior members [1][2]. Also missing from the recent “investigations” by various journalists is the five-year period between 1999 to 2004 that saw multiple attempts to privatize the water system. Yet these details are freely outlined in the reports provided by the Bureau of Governmental Research and the questions posed then remain still today. [3][4][5][6][7] In trying to provide a history, the trouble begins. Where to start before it becomes too complex to understand?

Given the current ballot propositions, it’s appropriate to start with the first question I asked, “why are these bonds being issued as subject to state and federal taxation?”

For those not familiar with the exciting world of municipal financing, most bonds issued by a city, called “munis”, are not subject to state and federal taxation. In simple language, because muni bonds are issued to fund projects in the public interest, municipalities are given the opportunity to raise money at much cheaper rates of interest. [8] For example, if a taxable bond interest rate is 5.00%, the after-tax return for a taxpayer in the 30% income tax bracket is 3.5%. A detailed direct comparison is shown below:

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Taxable Rate

100,000,000 x .05 = $5,000,000/yr in financing costs.

Municipal, Non-Taxable Rate

100,000,000 x .035 = $3,500,000/yr in financing costs.

= The Municipality in this example would pay $1.5 Million/Year by issuing the debt as taxable rather than non-taxable.

This may not seem a lot at first, but when you take a look at the wording of the ballot proposition:

Shall the City of New Orleans, Louisiana (the “City”), incur debt and issue up to $500,000,000 of bonds, in multiple series, each series to run not exceeding thirty (30) years from the date thereof and bearing interest at a rate not exceeding eight percent (8.00%) per annum

According to FMS Bonds Inc, the most recent yield for A-rated 30-year Municipal bonds is 2.40, but I’ll use 3.5% to give a safer range.[9]

$500,000,000 x .08 = $40,000,000/yr in financing costs.

vs

$500,000,000 x .035 = $17,500,000/yr in financing costs.

= savings of approximately $22,500,000 / year for 30 years

Or rather, the taxpayers would save $675,000,000 over a 30 year period.

Granted, this is a rough estimate and not to the penny, but the argument is valid: just why are these bonds being issued as taxable? Why is this bond issuance being rushed and attacking the pockets of the people? Most importantly, why is NO MEDIA protecting the public? Not one article produced, even though Council Member Giarrusso has questioned the use of taxable interest rates several times.

So far, the official reason put forth by the Mayor’s Chief Financial Officer, Gilbert Mantano is the poor utilization of funds gained through issuing debt. In plain English, this means that the City raised a bunch of money by issuing debt, but didn’t spend it fast enough, so if the City tries to raise more debt, they need to pay more. Make sense to you? No, not to me either.

Even worse, the money that is supposed to be to pay for the drainage problem is now including:

(ii) public buildings, affordable housing facilities, libraries, and parks and recreational facilities;

(iv) public safety equipment, including acquiring all necessary land, equipment, and furnishings for each of the foregoing

While the proposition states, “with no estimated increase in the millage rate to be levied in the first year above the 22.5 mills currently being levied to pay General Obligation Bonds of the City?” there is no guarantee written into the contract for any year past the first. Truthfully, there is no guarantee for the first year, since the contract is based on an “estimate.” For comparison, the original estimate for the Bourbon Street reconstruction was $2.2 million in April of 2017. By the end of August 2017, the estimate was already over $13 Million. [10]

There’s more to this story, but this much is clear: raising $500,000,000 to an S&WB that has not been audited for over two years by a third party [10], is an act that can only be described as taking critical funds from overburdened taxpayers and flushing it “down the drain.”

Sources:

  1. “Wastewater Treatment Company to Plead Guilty to Bribery, Former New Orleans Water Board Member and Former Corporate Officials Indicted for Roles in Fraud Scheme”, May 31st, 2001, http://www.puc.state.nh.us/Regulatory/CaseFile/2004/04-048/TESTIMONY/Attachment%20DCL-12.pdf
  2. “Ex-S&WB Member Benjamin Edwards Sentenced to Over 21 Years in Prison”, June 24, 2010, https://archives.fbi.gov/archives/neworleans/press-releases/2010/no062410b.htm
  3. April 2001, https://www.bgr.org/wp-content/uploads/2000_04-Privatization-of-SWB-operations.pdf
  4. June 1, 2001 https://www.bgr.org/wp-content/uploads/2017/07/SWBReportPDF.pdf
  5. February 2, 2002, https://www.bgr.org/wp-content/uploads/2017/07/CharterAmendment.pdf
  6. June 2002, https://www.bgr.org/wp-content/uploads/2017/07/swbreport2002.pdf
  7. October 14th, 2002, https://www.bgr.org/wp-content/uploads/2017/07/FullReportSWB10-14-02.pdf
  8. “What are Municipal Bonds?”, Jared Cummans, June 24th, 2015, https://www.municipalbonds.com/education/the-basics-of-municipal-bonds/
  9. A RATED MUNI BONDS https://www.fmsbonds.com/market-yields/
  10. “In Bourbon Street work, costs for 1st block near $1 million, raising questions about project” Beau Evans, July 26th, 2017, https://www.nola.com/news/politics/article_5762bcbb-cc5d-5a53-b338-b36a9d301cf2.html

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