Outside of Marion County, this is probably unknown. Even inside the county, few are aware of Mayor Bart Peterson’s proposal to issue $450 million in bonds because of shortfalls in the money available for police and fire pensions. These are obligations to those who served before 1977.
The issue seems too complex for most of us to get into. Also, it’s something going on in Marion County. Who cares? If it isn’t the Colts, does it matter?
Despite these feelings, the issue is of real importance to every Hoosier. While the specifics might differ from city to city, the general idea is of great significance. This year, we will elect our mayors. For the incumbents, the question is, “What have you done to reduce or eliminate the problems you inherited?” For those who seek the office, the question is, “What do you plan to do about the problems you will inherit?”
Each office-holder at every level of government inherits problems from predecessors. Some issues go with the job and often are the effects of cumulative neglect. Some problems are the direct result of inappropriate or misdirected policies of the predecessor. Few new problems come along in any administration, but they are often neglected, left over for the next poor soul.
If we had non-partisan, good-government watchdog committees in each jurisdiction, they would keep score of the problems and what has been done to correct them. Then we might have an educated electorate and more responsible candidates.
Mayor Bart Peterson inherited many severe problems. He has tried to address them and has made respectable progress in several areas, but much remains to be done. Because his predecessors did not fund the pensions of retiring police and fire department employees, the mayor faces a big problem. How does Indianapolis pay what it owes these men and women?
The simple answer: Raise taxes to meet the city’s obligations. But find 10 people in the city who would support that idea and you will win a trip to the next Super Bowl.
So the mayor, or his financial advisers, came up with an idea that sounds like Gov. Mitch Daniels in reverse. The governor is cashing in on the value of current assets (the Indiana Toll Road and the Hoosier Lottery) and using those funds for today’s needs. The mayor wants to borrow money and use it to pay the pension obligations neglected by his predecessors.
The idea is charming, if I understand it. The city gets about $450 million and uses this money to pay pension obligations as they come due. The rest of the money is invested in securities that are hoped to yield more in returns than the city has to pay in interest on the funds invested. Since the city can borrow at lower rates than others, it lends out its funds at higher rates and makes something on the transaction. It’s called arbitrage.
The taxpayers of Marion County remain obligated for the bonds (principal and accrued interest amounting to $1.3 billion over the life of the bonds). There will be higher taxes in the future to repay the bonds since the financial wizardry of this proposal is not likely to be so successful that all the principal and interest can be paid by taking advantage of the city’s ability to borrow at one rate and lend at a higher rate.
But those will be future taxpayers. Once again, today’s taxpayers/voters will be gratified that their problems are being solved for the present without any current reduction in their ability to spend what they will as they will.
What and how are the problems in your city being addressed? That’s the issue for the campaigns of 2007.
Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. To comment on this column, send e-mail to firstname.lastname@example.org.