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Apr 06, 2010


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I was surprised, after previously reading authoritative assurances that they are not, to see the bonds described as "essentially IOUs issued by local government bond authorities."

Ed Cone

Issued by, but not backed by, as the article takes some pains to explain.

"A letter of credit is an assurance from a lender saying it will repay the bonds if the project fails or doesn’t make enough money to repay investors...The bonds are not government money or government loans...Institutional investors — mostly banks and mutual funds — buy the bonds."


Geez, Ed. Could you be more lame?

Ed Cone

Perhaps I misunderstood your comment, Roch, but it looks to me that you are saying the article contradicts previous statements that the public is not on the hook for repaying the bonds.

That's the observation to which I responded, by pointing out the statements in the article that explain that the public is not on the hook for repaying the bonds.

I agree that the IOU quote, taken on its own, is confusing, but it's not offered on its own.

If that was not the point of your comment, I apologize, and hope you will explain it further.

Joe Killian

I've been out of town for a week attending a funeral up north, but there's a larger-scope story about all the bond projects and the process on tap for this weekend's N&R.

When I got back it had been announced that the authority meeting -- the last scheduled before the April 15 deadline and where it was hoped that the hotel issue would be dealt with specifically -- had been canceled. Again. So it was a daily to get that out there as I'm still getting a lot of e-mail and some phone calls about where this project is in the process.

The short answer on all of these seems to be, as I believe I quoted Mary Nash Rusher as saying in the story today: the rules were confusing or non-existent in the first round, everyone was making it up as they went along, many people weren't prepared for the process and will probably need to re-apply.

Ed Cone

The original item on Deep Roots, complete with quotes from the developer and the manager, ran almost two weeks ago. The Biz Journal had the story on Friday.

Seems like a daily newspaper could have at least managed a blog post by now.


The article contradicts itself. Government bonds are never "government money" or "government loans." They are, traditionally, private money borrowed BY the government, with a government promise to repay -- one might say, an IOU.

But these bonds are not government IOU's, or are they? This article says they are. I would have though that the way to describe these are privet IOU's underwritten by private corporations. The government merely authorizes their issuance as tax exempt. That's the way I had come to understand it, the latest reporting not withstanding.

Ed Cone

Right -- issued by, but not backed by, public authority.

As in, "A letter of credit is an assurance from a lender saying it will repay the bonds if the project fails or doesn’t make enough money to repay investors...The bonds are not government money or government loans."

I agree that the IOU sentence is confusing, but the overall article is pretty clear on this topic.

Joe Killian


I don't necessarily disagree with you that we could have had something by now. But the story on Deep Roots seems to be, as far as I can tell, that nothing's definite yet but they don't think they're going to continue to pursue the financing, at least in this round, but are open to things still working out.

Since they're not in that boat alone it's something we're going to write about this weekend taking a number of projects into account and looking at an overall, what's going on with the process story. Not unlike what the Business Journal did last week, when Amanda and I were both our of town.

Someone could have covered it as breaking news last week I suppose -- but it would seem to me that something would have to, you know, break.

I found what Joel and the developers said to be interesting, which is why when I came back I thought Dick Barron and I should do a story for the weekend -- but as they haven't officially folded it up and no meeting that was supposed to decide the thing was canceled and no one's suing anyone it seemed to me like it didn't need to be in the paper as soon as we could get it in. Would I have felt differently if I'd been here last week? Maybe.

Frankly, even continuing to write stories about the hotel thing, which people seem very interested in, has been sort of difficult to do in an interesting way as the story keeps being: deal not off, but might not be going forward, could still happen, people are wondering.

That seems to be the case with a lot of these projects.


I've written about this a lot now and I think I varied the language this time a bit because there are, inexplicably, still people who do think that bonds are sometimes government money or government loans -- or that these are, specifically. The answer continues to be -- as I probably overexplained in this morning's piece -- that the taxpayers won't be on the hook for it.

You're right -- the bonds will, as we've reported previously, only be ISSUED by government bond authorities.

Sorry for not making the language as clear as it should have been -- my tendency with this sort of thing is to say way too much to make sure I'm not leaving anything out, which doesn't always make things clearer.


Ed, an explanation of a what letter of credit is and the superfulous explanation of what no bond ever is do not mitigate the misleading statement that the bonds are "IOUs issued by local government bond authorities" -- no matter how often you keep repeating.


Joe, thanks for the clarification. I know it's complicated and a challenge to explain accurately.

Ed Cone

Not sure what you're saying here, Roch -- that "no bond ever is" an obligation by the government to pay back bond-holders with public funds?

Because that's what a lot of bonds are, which is why it's important to differentiate these bonds (which are, as the article says, to be paid back out of project revenue and secured by a letter of credit) from those bonds.


The last time I checked the interest on these bonds was tax exempt and the total amount of Recovery Zone Facility Bonds allocated by the federal government was $15,000,000,000.00 (fifteen billion dollars). So to say that the taxpayer isn't on the hook is not accurate at all. You are paying for it at the federal level in the form of a subsidy.

Dave Ribar


The subsidy is essentially the tax break on the interest. Are you actually arguing against lower taxes (i.e., tax subsidies) for business investments?

Somehow I suspect that if the President and Democratic Congress were proposing to repeal such an exemption, you'd be all over them about raising taxes and stifling business.


Is the question who pays if the recipient of the funds defaults?

My guess is the taxpayer.

Therefore the Fed is the guarantor of the bond...ie...us.

Is this right Joe?

Ed Cone

There's an obvious difference between tax-exempt status and a public obligation to repay bond debt; the latter is the source of some confusion around this project, where it does not apply.

I do think that the tax-exempt status, which requires the bonds to be approved by various governmental bodies, gives the public a right to know more about this deal than a typical deal.

Marshall: the bank issuing the letter of credit is on the hook to the bond-holders if the project fails to cover its obligations.

Joe Killian

I am not a lawyer or a financial expert -- but I've been told by both that the bonds are structured in such a way that Guilford County taxpayers cannot possibly be liable if the bonds or the projects they fund fail.

This story, inspired by repeated questions on this from Roch Smith and other curious readers, may help clear things up a bit.


Thanks Joe.

...now Ed...about stinky stinking stenchy saying ugly things about you.... :-) You have very thick skin...compliment intended.



Dave, we can argue about the merits of tax exempt bonds but that isn't the point I was making. Instead, I was pointing out that there is a cost to the taxpayer at the federal level because of what is essentially a subsidy.

Here is where I agree with Ed that greater scrutiny is necessary because it is a governmental decision to allow the financing of a few private enterprises (as opposed to all private enterprises) to occur with a tax break. The goal is to make the projects more feasible. So we have to ask why THIS project? We have to question whether it is right for the government to take such an active role in what private enterprises are developed. Is there political favoritism occurring?

I'm all for as many tax breaks as possible- so long as they are fairly employed and available to everyone. Otherwise, they amount to using the tax code to direct behavior and I don't agree with that.


Really, Sam? Do you really believe that tax breaks should be available to everyone and not used to direct behavior or is that an unthoughtful platitude? Are you against mortgage interest deductions, child tax credits, higher education tax deductions and other tax breaks like these that are available only to certain qualified people and exist precisely for the purpose of directing behavior?

Ed Cone

Concerns about favoritism, cronyism, etc. should be taken seriously, which is another reason the process should be highly transparent.

The case for these particular tax breaks is two-fold: economic stimulus in the face of huge recession, and the targeting of that stimulus toward areas that might need help even under better circumstances.

It strikes me as a sensible strategy, and one that minimizes public cost -- private investment and tax revenue are stimulated, at the price of reduced tax revenue on some amount of investment income (which might have gone into some other tax-exempt issue anyway).

Steve Harrison

Sam, it might be parsing words a little bit, but I'm not sure the term "subsidy" is appropriate. That connotes money flowing from the government to a specific target, when (I believe) the reality is a lack of money flowing from the target to the government. Since the projects (and the bonds) are new, the interest paid on the bonds is also new, meaning no existing revenue streams will be lost by the government.

But I'm still having a hard time accepting that a failed project won't (somehow) put taxpayers on the hook. Supposedly, a private bank must issue a letter of credit to the developers and associate itself with the bonds. Does anybody know which bank is involved in this project? Does the County or City have to sign anything with said bank?

Ed Cone

No bank is yet associated with the project, at least publicly -- that's part of the story here, that they have not yet produced the financing. Or, for that matter, a new new plan for the project itself.

I guess you could construct a scenario where a lender goes broke because of a failed project and gets a gov't bailout, although that would involve a lot of ifs and draw direct connections where indirect ones might be more accurate, but even so it's not the same thing as the government being on the hook for the bond debt.

"Subsidy" strikes me as the wrong word, too. As discussed in a previous comment, it may be the case that people buying these tax-exempt bonds won't buy a taxable investment instead, thus reducing future potential tax revenue, although one would think that someone in the market for tax-exempt bonds would just buy other tax-exempt bonds if these don't happen.


Steve, you and Ed make some good points and you are correct in that what I was referring to was essentially opportunity costs to the US Treasury. Your concern about banks is something I have also addressed before. Considering what we have been through with bank speculation in shaky investments and the taxpayer bailout that followed, I think much scrutiny is required.

Roch, I don't think your examples are what I was referring to. People don't buy houses or have children because of the tax code. However, they might NOT buy houses or have children because of the tax code. Your examples don't highlight the government using the code to encourage behavior rather they are more like exemptions to help people with their living expenses.

My concern about the tax code being used to manipulate behavior is when taxes are raised to discourage behavior (as opposed to being raised to needed revenue) or as in this case, providing exemptions may be favoring one form of business over another. There may be examples of when that might be justified such as when there is an obvious nexus between the business and a public purpose. I just don't see it with the hotel project as proposed.

Ed Cone

"People don't buy houses or have children because of the tax code."

Agree on the second example (kids), strongly disagree on the first -- mortgage deduction seems likely to encourage home buying and also the type/value of homes bought -- that's why the housing industry likes it so much.

Steve Harrison

Well, since I started this hypothetical scenario, I might as well take it a little farther:

ARRA requires that a bank be involved, and it also sets some standards for said bank to follow before issuance of an LOC, such as the project having minimum start-up capital, ability to service the debt, etc.

What ARRA doesn't do, unless I'm missing something, is limit the bank's ability to require other (additional) steps be met before issuance of the LOC. Steps like having the City sign documents to shoulder some of the risk, maybe.

I know it's hypothetical, but it's also not a rare occurrance for banks to lean on city governments like this, either.

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