Sunday, October 16, 2011

That Damn Tax Levy and Those Pesky Municipal Bonds

City government administrations and city council ask residents to approve levies every now and then (usually dealing with schools and safety departments); and  they will also take out loans (for big projects) by issuing bonds.

Did You Know?
"A levy gives a local government a claim on a specific property; and if the taxpayer does not repay the levy, the government can foreclose on the taxpayer's house and sell it to pay off the levy. If the taxpayer sells his house, the new home owner will have to make the future levy payments. Existing levies can make properties in an area more difficult to sell."(1)

Scary ... right?

There can be sound reasons for levies and sound reasons for issuing bonds; however, I ask you ... why do they always come to the property owner for help in times of fiscal trouble?  And further, how do you justify asking property owners and other tax payers to fix past mistakes, or fund things, when residents are losing their homes and their jobs, sometimes because of those past mistakes? 

What to think about before issuing a bond: What's the bond for?  Is the community stable? Can the project wait til the community is financially stable before issuing a bond? What kind of bond will it be? Is the bond insured (if it is, by whom, and who is responsible for the insurance payments?)  Who will be the bondholders? With what are the bonds securedWhat happens if your city defaults? (Think back to 2008)

If you're going to say "yes" on some tax levy your city administration and school system ask for, ask them (mayor/city council/school superintendent/ whoever is asking) to take a cut in salary and/or benefits first.(2)

Also consider: 
Are property values stable?  Is the community stable, and the population and number of homes stable and growing?  What are the projections for property values?

Whatever the city administration and city council (or superintendent of a school via mayor) ask you (tax payers) to do, ... as stated before, ... those levies will usually be paid on the backs of property owners. And with bonds, tax payers will pay the interest until the bond matures.  When it does mature, and if you can't pay, you may be able to refund; however, you can't refinance the loan forever.  

(2)Superintendent Keenan in 2011

This post is not meant to give investment advice, it just points out risks to bond issuers.

1 comment:

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