Government financial illiteracy
The Puerto Rican government just defaulted on a $227 million in bond payments. These payments were part of their $72 billion in government debt. How did tiny Puerto Rico accumulate such an unsustainable amount of debt? As tax revenue fell from their ever weakening economy, Puerto Rico borrowed an ever increasing amount of money instead of prudently laying off government employees and cutting services. This debt grew until it pushed them well beyond financial difficulty and into unsustainability. Investors were blindly attracted to Puerto Rico’s triple-tax exempt bonds (federal, state, and local tax-free) and didn’t pay attention to PR’s unsustainability until it was too late. To the financially literate, this debt default was predictable arithmetic.
The city of Detroit emerged from bankruptcy just months ago, after the judge eliminated $7 billion of its debt. After bankruptcy, Detroit’s bond credit rating jumped up from a junk level to “B”, and even “A” for revenue bonds. Too bad Detroit’s leadership doesn’t appear to have learned financial lessons from being the largest municipal bankruptcy in U.S. history. The city wasted no time in abusing their new asset, a high credit rating, by issuing $245 million in new bonds. This new debt will pay for some blight removal and public safety improvements. However, Detroit has a long history of being unable to maintain any recently improved areas: graffiti goes back up as soon as it is cleaned, scrappers return to buildings like locusts after they are boarded up, torn down homes become sites for illegal dumping, cleaned up parks go back to weeds and trash, etc. So much of this debt is likely to be spent on temporary benefits while the debt to pay for it is a permanent shackle of $12 million in annual interest expense. As additional proof of financial illiteracy, part of the bond sale will be used to to hire more police and give promotions – if you cannot sustainably hire and promote out of your current budget, then you cannot afford them! If you cannot afford to hire some police with your tax revenue, where will the additional money come from to ever pay back $245 million from a city whose population is declining? It appears to me that Detroit hasn’t missed a beat in its irresponsible financial decisions.