Back in 2001, Iowa decided to securitize its portion of the multi-state tobacco lawsuit settlement. â€œSecuritizeâ€ means to borrow against it. They issued almost $700 million in bonds through the Iowa Tobacco Settlement Authority, with the settlement money itself as the asset backing the bonds. Most of them are even tax-exempt.
Such is the nature of public finance; the settlement was a windfall of revenue that didnâ€™t have to be taxed from the citizens, but instead of just riding the wave, the government used it as collateral to borrow money. Never put off spending that can be done today.
More than seventy percent of the money Iowa receives from the tobacco settlement goes to debt service on those bonds – these, like most government bonds, are coupon bonds, meaning that the accrued interest is paid periodically, usually every six months. The remainder goes to health-related things such as smoking cessation, but the bonds themselves financed â€œvarious capital projects.â€ Iâ€™m not sure what that entails, so far I havenâ€™t found any list of specific projects.
If the tobacco industry finally succumbs to things like smoking cessation programs, those bonds will find themselves unsupported. Not to worry though – they are state-issued securities and failure to deliver will negatively impact Iowaâ€™s credit. Because of this, the legislature would almost certainly pick up the tab with taxpayer money.
So, smoke up – there are bonds to cover.
In the meantime, you canÂ click here to track the sale of Iowaâ€™s Tobacco Settlement Authority Iowa Asset-Backed Series C bonds, my favorite resource for municipal bond information. Of course the fact that I have a favorite resource for such information suggests that I need a more fulfilling career, or perhaps a meaningful relationship.
Ash Trays and Slot Machines
Should you choose to smoke inside a casino, you will be supporting other types of bonds as well. The Iowa Events Center, for instance, was constructed with funds obtained from the sale of bonds that are supported with revenue from the casino at Prairie Meadows.
All of Iowaâ€™s casinos – how many are there now? – contribute revenue in some manner to state and local government coffers through various direct and indirect means, everything from taxes, licensing, and even leases for facilities, not to mention sales and fuel taxes from the nearby communities, although casinos run by indigenous peoples can be an excellent source of untaxed cigarettes.
Casinos have become the first, last, favorite, and perhaps only tool in the box of economic development officials, and cities across the state still want more of them.
There was a time when every person with the sniffles was given antibiotics, despite the fact that while antibiotics fight bacteria, they are useless against viral illnesses. Today, casinos are the alleged cure-all of choice: Factory closes down, build a casino; young people move away, build a casino; county supervisor dozes off during a meeting, build a casino.
Some jobs will be created, some taxes will be collected, and some concerts and shows will be held to keep people busy, but the underlying problems will remain unresolved. No goods or services are created in a casino, and no assets are being bolstered. Money is simply changing hands.
It is also hard to imagine large numbers of people coming to Iowa for the casinos. Iâ€™m sure some people do, but I would think that most of the patrons are from the areas near the casino itself, and thus the money is really just churned around the community, with government taking a healthy chunk after each rinse cycle.
Gambling has traditionally been treated as a vice, and one that was more often illegal than it was celebrated. This vice has now been legitimized as a source of revenue – the beast must have flesh to survive – and it is hard to imagine a serious push to reverse course, although there might be some resistance if the Iowa Finance Authority tries to open a cathouse.
Image Â© gavran333 – Fotolia.com
In 1975, Iowaâ€™s elected so-and-soâ€™s felt inclined to establish the Iowa Finance Authority, giving it the mission of assisting the people of Iowa in acquiring affordable housing.Â I guess Iowans tended to live in mud shacks prior to 1975, but no matter, the government is here to help.
Except, it doesnâ€™t help. The Iowa Finance Authorityâ€™s own website (http://www.iowafinanceauthority.gov/) tells the tale, and affordability is not the goal of our state-level state corporatists. According to the talking points, IFA helps low-income Iowans, the disabled, and the otherwise strained in the task of obtaining affordable housing, which is simply not true. Nothing the IFA does is aimed at helping citizens afford anything, all they do is encourage easy credit.
Getting easy credit is not the same as being able to afford something. What IFA is doing is helping people borrow too much money for assets that are priced too highly for them to otherwise afford, thus allowing more people to overspend on housing. With more people able to arrange the credit for higher priced assets, the prices of the assets (in this case, housing) are able to stay higher than they otherwise would. They even provide direct cash subsidies for down payments. Â Imagine the housing market as a giant auction. If the bidders are on a budget, the winning bids will trend downwards. If the bidders are flush with cash and anxious to buy, bids will trend upwards.
Thus, IFA is working to make housing expensive, not affordable. So, pat yourselves on the back, IFA, for making it easier for the disadvantaged to borrow too much to purchase assets that are overpriced; thatâ€˜s compassion in action.
There has also been some mission creep at IFA over the past thirty seven years, with the agency taking on financing of apartment blocks, renovations, and a shadowy, ill-defined activity called â€œeconomic development.â€
Considering that we donâ€™t have one any more, efforts to develop an economy are uniquely popular among voters, and this popularity allows government to push any issue it wishes under the guise of being an economic development initiative. Economic development, then, is anything politicians say it is, period.
Considering the vague nature of economic development programs, the Iowa Finance Authority is surprisingly straightforward with its role in the economic development process. On the IFA website, by clicking a tab marked â€œEconomic Development,â€ we can get the clear picture:
â€œThe Iowa Finance Authority (IFA) issues tax-exempt bonds for a wide range of projects.â€
Well, there you have it. Not content with helping to arrange mortgages for people who canâ€™t afford them, IFA has branched into the tax-exempt bond market. They also arrange revenue bonds for private projects, and although the State of Iowa isnâ€™t legally on the hook if the project fails, any default would affect the credit ratings of future revenue bonds, and it is a virtual certainty that the state would opt to pay in the end.
So, IFA arranges bonds for economic development projects, diverting your taxes and userâ€™s fees towards providing tax-exempt income to rich people in the process.
The Authorityâ€™s defenders will say that it is self-sufficient. Thereâ€™s a reason to keep an odious program. Might I suggest the immediate establishment of the Iowa Cocaine Authority; that will be financially self-sufficient.
IFA isnâ€™t really a line-item on the state budget, but the state is the ultimate guarantor of the debts being incurred by this program, and while perhaps not legally obligated to make good, the state will do so in a pinch, lest the ratings of future bonds be damaged. Thus, there is potential downside risk which the Authorityâ€™s champions in the legislature have not bothered to consider.
The Iowa Finance Authority is a detrimental, utterly unnecessary political boondoggle and economic white elephant. Its rhetoric and its effects do not match up, and its only redeeming feature – financial self-sufficiency – belies potential risks that have not been properly explored. It is an agent of expanding municipal bond debt, and Iowaâ€™s own contribution to the ongoing assault on thrift that is being conducted by governments at all levels.
Therefore, the time has come that we do away with this middle-aged, miniature HUD. Iowa did without it for better than one hundred years, and we can do so again.