Does Government Pay Too Much To Borrow?

March 3rd, 2008 at 03:00am Aaron Chambers

State and local governments routinely borrow money to support long-term infrastructure programs. They borrow by selling bonds — notes purchased by lenders, guaranteeing them a fixed interest rate on their investment.

But do governments pay more than they should interest to secure such loans? This story, by the New York Times, says that maybe they do. Taxpayers, of course, get the bill.

The Times reports:

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.

Municipal bonds, often considered among the safest investments, sank along with stocks last week, darkening the already grim mood in the markets. Several big hedge funds unloaded bonds as banks further tightened credit to contain the damage from mounting losses on home mortgages and other loans.

States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt.

This is just one more point to watch when Illinois finally gets around to approving a long-awaited capital construction plan. The state has not implemented a major capital plan since 1999, the first year of former Gov. George Ryan’s administration. There is much talk about approving another capital plan this year, just as there has been each year since Rod Blagojevich became governor in 2003.

There’s also the obscure but potentially significant matter of reinsurance associated with government bonds — an issue that’s driving up the cost of borrowing.

The state has also inflated its costs just by waiting so long to implement another infrastructure plan. The longer the state waits, the more expensive construction becomes. A road or bridge in a greater state of disrepair obviously costs more to fix. Plus, inflation each year drives up the cost of labor and materials.

Entry Filed under: Illinois Budget, illinois economy