With the President-elect putting together his administration, it is a good time for state and local government finance officials to develop a technical agenda.
Pork-barrel politics and unrealistic economic programs will eventually backfire through mismanagement, scandal, higher taxes, or inflation. What follows is therefore a pragmatist's program, one designed to link the real needs of local constituents and the strategic ambitions of the new administration with the realities of public finance.
Dear Santa Clinton,
We know that this must be a busy time for you. By now, you must have thousands of letters asking for everything under the moon. We know you don't have enough money to go around this year, so we won't ask for much. Based on what you told us during the campaign, we thought that you'd like some hints to help you stretch your budget. Then your elves can make more toys for the other children in the world.
Top of our list: infrastructure bonds. You'll like these as much as we do, because you already told us that infrastructure is the hot toy this year. It's supposed to be better than Nintendo because it's made in America. We're asking for a very special infrastructure bond, one that keeps on working after the other toys die out. Here's what we want.
We know that you want to stimulate the creation of jobs, and we're all for that. But we remember the administrative mess that Santa Carter created when he handed out the countercyclical construction employment program toys back in the 1970s. By the time we filed our grant applications. waited for the bureaucracy to approve them, finished our engineering work, awarded contracts and spent the money, inflation was already flashing faster than Rudolph's nose. That's why we don't want infrastructure toys that require new federal bureaucracies. We'd rather do the work ourselves - it's faster and cheaper.
Believe it or not, we'll pay for most of the infrastructure toys ourselves, and just need for you to change the way you control our allowance. We're even willing to put up our own money if you'll just help us get started.
We want you to let us sell a special kind of infrastructure bond, from which the proceeds must be spent within a short time period, say 18 months. These projects will quickly create construction jobs, so we know we'll put people to work, at least temporarily. You have made it very clear. however, that you are looking for permanent jobs that will still be around in 1996, when you plan your next big bus tour across America. So we're willing to be really grown-up and offer you a deal.
We'll sell our special infrastructure bonds only for projects that your leanest and meanest elves declare in advance to be directly linked to industrial and commercial jobs creation. For example, primary transportation systems, airports, industrial development, communications networks and new environmental technologies. So that you don't have to keep track of too many boys and girls, it would be all right with us if you require that the bonds be sold by the states, or guaranteed by a state or an insurer. To avoid inflationary stimulus, we'll issue infrastructure bonds only if unemployment in our state exceeds 5%, as long as we can ignore those tiny little volume caps that Uncle Rosty keeps putting on our heads.
By now we know what you're thinking. You're asking "who's going to pay for this, and who's going to buy these bonds?" That's where the good part comes in.
After all, if our special infrastructure bond projects truly create jobs, then there will be more people working who can pay taxes. So we're willing to pick up the tab to pay off the bonds after a few years, when all the business we promise you will have actually materialized. We just want you to pick up the interest payments in the early years, net of our reinvestment income. If you want, you can even put a limit on how much interest you'll reimburse to us; for example, the average Treasury bill rate in the previous year.
If you think about it, this will cost you much less than making grants up front, and you can spread out your costs over three or four years. Talk about leverage. Instead of spending directly the $20 billion annually you have proposed, you'll get lots more productivity with a three-year interest reimbursement to states and local governments for our infrastructure bonds. They would provide the capacity for us to triple our current rate of construction bond issuance and multiply our actual infrastructure spending even more than that.
We don't want a pork-barrel program, Santa, because we're not silly little children anymore. We know that if these projects don't produce jobs, we will end up holding a bag of coal. Mom says this is what it means to be grown-up: we have to pay our bills (and our debt service).
To broaden the market, we'll enable our state and local government pension funds to voluntarily buy large blocks of infrastructure bonds if you pay the pension funds an extra allowance to supplement our bonds' lower tax-exempt interest rates. This will allow our bonds to compete with corporate bonds as investments for pension funds.
If you're really smart, which we know you are, you'll even allow private pension plans the same opportunity, because you know that whenever a tax-free municipal bond ends up in an investor's portfolio, your tax elves don't get to collect any income taxes. You'll take tax-exempt bonds out of the private marketplace and thereby collect more federal income taxes, if pension funds are paid an interest supplement - say, the federal marginal tax rate times the interest we pay on the bonds, but not more than 2% annually.
The budgetary result should be a wash. Pretty neat, huh? And if a pension fund wants to sell off its infrastructure bonds, the new investor just buys them at a tax-exempt market price and you can stop paying the allowance.
Santa, we also want your bonds! Just to prove that we really want to be partners in this New (Bond) Covenant we heard you talk about, we also want to buy more of your bonds. You just need to put them in special packages for us.
You see, our state and local treasuries often have money we hold in reserve for future projects and purposes. Some of us have rainy-day funds, but we never know exactly when in the future we will need to spend the money. We'd love to invest in Treasury bonds or notes to help you finance the deficit and reduce the cost of long-term capital, but we can't take the risk that you and the congressional elves might do something that kicks interest rates higher, like inflationary spending. That would cause the vigilantes in the bond market to slash the prices of our bonds. If that were to happen when we need cash, we might have to sell at a loss, which our taxpayers don't want us to do.
To get around this problem, some of us have resorted to buying adjustable-rate mortgage securities and related investment products paying interest at rates above the one-year Treasury bill. Unfortunately, many of us lack the legal authority to do likewise, and mortgages are complicated and messy. We'd all be a lot better off if you let us buy adjustable-rate Treasury notes, with an interest rate above Treasury bills fixed by the market through competitive auction. We think many of the other kids would like these too, because lots of boys and girls are still having inflation nightmares. By the way, these should be open market toys, so that we could trade them with somebody else at a reasonable market price (hopefully, close to par) if we need cash. They would be like bonds with training wheels.
Your elves are looking for ways to cut your deficit-finance interest costs, particularly in the next four years. So everybody wins. You get cheap money, and we get peace of mind and a better interest rate than our short-term investments. Children in the private sector would like these too, because they could ask for them in their trust funds. Maybe you could call them the Inflation-Proof T-Notes - which sort of sounds like a jazz group.
We also have a little request that nobody else will care about, but it's important to us. Those of us who sell municipal bonds often are required to invest in a special series of Treasury securities that their elves grudgingly created years ago. They're called Slugs, for State and Local Government Securities, which is appropriate enough because they're ugly and slow.
They pay us very low interest rates so that we don't make a profit on our investments, which is an idea that the Grich cooked up when he didn't have anything better to do with his time. Our problem is that the Slugs don't work in many cases; they're just not user friendly.
We'd like you to talk to the elves and tell them to make the Slugs easier to use or else just let the private sector offer investment products that would pay all the extra money, we earn to your infrastructure fund. One of the brighter elves came up with a similar toy idea last month, but he can't figure out how to produce it.
We want a better Christmas club. Finally, we have a bone to pick about the way you make us save our allowance. Everybody else gets a neat employee savings plan. At Mom's company, it's called a 401 (k) plan and at Dad's hospital it's called a 403(b). We're stuck with this old 457 model that Scrooge gave us years ago, and we want an upgrade. Our employees don't own the 457 assets in their name, and this year one of the local political elves actually took some employees' money back and used it to pay their bills. It's kind of scary to think that the money we save could be ripped off someday. Also, we don't get to save as much as the other kids, and we know that you want us to be saving more. Further, we'd like to be able to use our savings for retirement health care when we get old, and we can't do that now. If you can't fix the 457 model, then just let us set up a 401 (k) like everybody at Mom's company, but with a health-care attachment.
Well, that's it, Santa, We could ask for more, but we know that you have lots of other lists to read. Just remember that we aren't asking you to spend money that you don't have, or haven't already promised. Instead, we're just hoping to help you stretch your budget so that you and your reign-dears can have a happy new year and make as many people as merry as you can.
P.S. Will you be wearing shades when you come down our chimney?
Girard Miller is senior vice president of the government services division at Fidelity Investments Institutional Services Co. in Boston. His wishful thinking does not necessarily represent the policies or opinions of the firm.
