Tampa might face higher costs for bond interest payments
TAMPA - When Mayor Bob Buckhorn was assembling his 2013 city budget, he stretched the city's finances by borrowing to help pay for a major computer upgrade. The mayor thus avoided cutting city services or staff to pay for the overhaul, but also added to the city's $829 million in debt. Between its daily operations and self-supporting utilities, Tampa's debt payment this year will be $87.1 million – nearly 11 percent of its total budget. That figure could rise if Congress closes a loophole that keeps local authorities' debt costs down by making interest payments to investors exempt from federal income tax. The proposal has been floating around Washington for nearly a year, part of a laundry list of possible services to cut or loopholes to close in the effort to balance the federal budget without raising taxes.Opponents of the tax exemption on bonds say it amounts a federal subsidy, like the deduction for home mortgage interest. Rather than spend the money directly, as it does with food stamps or Medicare, the government just doesn't collect it. Ditching the bond tax exemption would raise $146 billion for the federal treasury, opponents say. So far, the exemption remains in place. It was dropped from the fiscal cliff negotiations earlier this month. But city officials expect it might reappear in the fine print of a deal over the debt ceiling or the across-the-board spending cuts known as sequestration. "There is a concern that this issue will resurface," Sonya Little, Tampa's finance director, told the City Council last week. "There has been a strong nationwide effort to address this with Congress and the White House." Little said Tampa's lobbyists from the Holland & Knight law firm are pressing the city's case in Washington. "We are moving forward to make sure as these discussions proceed our voices are heard," Little said. If Congress drops the exemption, it would take away a major incentive for choosing this investment option: zero income tax on twice-a-year interest payments. Groups issuing the bonds would have to offer higher interest payments to compensate, Little said. That would hit state and local governments, hospitals, universities, school districts, and regional utilities like Tampa Bay Water. All of them issue tax-exempt bonds to finance construction projects. Little told City Council members that a bump in rates could add tens of thousands of dollars to the cost of even a modest bond issue. For example, a rate hike could add as much as $100,000 to the cost of a $13 million bond issue, she said. That would have two effects: More tax money would go into interest and less money would go into public projects, Little said. Those higher costs will trickle down to taxpayers and utility customers, said Kenneth Artin, an Orlando bond attorney whose firm is leading the fight to preserve the exemption. "This is how they're going to, quote, cut spending," Artin said this week. Those who favor dropping the exemption – a list that includes both Democrats and Republicans – say doing so would pump billions of dollars into the federal budget at a time when the nation is running an enormous deficit. It would also force public agencies to pay closer attention to how much debt they take on, said Peter Schweizer, president of the Tallahassee-based Government Accountability Institute, a think tank. Over the last decade, state and local government debt has doubled from a total of $1.4 trillion to $3 trillion, according to the Federal Reserve. Lately, much of that debt has been taken on to refinance old debt at lower interest rates. That can be good for a city, but still doesn't solve the biggest problem, Schweizer said. That's because, across the country, cities and counties have found themselves caught between falling tax revenue and massive debt payments. The housing collapse – and the ensuing crash in tax revenues – has showcased the risk local governments can face by borrowing too much, Schweizer said. Jefferson County, Ala., filed the nation's largest municipal bankruptcy claim in 2011. At the time, it owed $5 billion for upgrades to its sewer system. Tampa's solid waste department found itself at risk of defaulting on its own debt early last year after a recession-driven drop in revenue. The department will raise trash rates each year through 2015 to bring its books back into balance and keep up the $14.5 million yearly bond payment incurred when the city upgraded its McKay Bay incinerator. Despite higher rates, governments with good credit could still attract investors, Schweizer said. They may just be more judicious about how much they're willing to borrow, he said. "Perhaps it would give them second or third thoughts about how much they're borrowing," Schweizer said. "There are a lot of municipalities that have spent beyond their means."
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