PAST PREDICTS FUTURE? COUNTY DEBT LOOMS

September 29th, 2016

Sometimes the past could predict the future. Or at least raises warning signs. This warning is about DEBT.

From time to time, when it seems appropriate, I will revive something I wrote years ago if it has a relevance to the present. The following was written in Point of Viǝw newsletter in April of 1976.

If Dennis Kucinich had paid attention after he became mayor there might never have been a default, especially since it was a phony bank contrivance. (Perk indebted the city despite sale or transfer of many assets, including the stadium, the port, the city sewer system, its public transit to RTA with a Muny Light sale planned. He squandered the receipts).

The following piece shows what happened. It is also a warning to Cuyahoga County as it appears to have indebted itself recklessly too. A CSU report on Cleveland’s debt in the 1970s suggests a similar need for a study of Cuyahoga County’s debt now. The warning signs are there.

The 1976 piece follows:

The impending sale of the Municipal Light Plant to the gouging Cleveland Electric Illuminating Co. may have less to do with Muny’s incompetence than with the fiscal irresponsibility of the Perk Administration.

The rapid sale of city assets that have been accumulated over decades feeds the apparently inexhaustible thirst of Mayor Ralph Perk and his cronies for more funds.

While the thirst remains unquenchable, Perk confuses the public into giving him high marks for fiscal integrity. The one guideline: He doesn’t raise taxes.

But he continues to borrow them into the poor house.

The city’s short-term debt, called notes and refinanced annually, hit $143,606,000 with the renewal of $9,125,000 in notes in February.

What now is amazing about that debt is that a full half of it becomes payable or transferable into bonds within a two year period. Some $72 million of the above total will have been rolled over (refinanced) for the fifth and last time in two years. By May of 1977 some $6 million in notes for Airport improvements will have run its legal course for short-term refinancing.

The choice for the city at that time would be to try to refinance the borrowings by issuing bonds or by new taxes. Both may be impossible, however, since the city will have then to go to the voters who have been carefully educate to say “no” to taxes.

Ah, but there’s another choice before that time.

Sell a few more city assets. The list can’t be too long anymore but there remains the Port Authority (up for sale, in fact, this year if the County taxpayers can be manipulated into taxing themselves in November for the sale price), Public Auditorium and the Muny Light plant.

A look at page 358 of the 1976 Mayor’s estimated budget shows how satisfying the sale of an asset can be to parched politicians.

In 1973, the Regional Sewer District Sale Account had a receipt item of $32,221,345 (sale price presumably). By the end of that year the account balance was only $13,489,173.

In the next year the City Hall sponges had sopped up another $13 million, leaving a balance of only $71,509, which completely evaporated last year.

Thirty-two million dollars gone! In less than three years not only was the sewer system gone but the city hadn’t a penny to show for it.

This year in short-term notes alone it will pay more than $9 million in interest (rough estimate based on 7 percent interest since most notes range about at that figure.)

A year ago a study by the Government Research Institute summarized the city debt, revealing not only that the debt was high but that a significant change had taken place from the early 1970 (Carl) Stokes years to the Perk years, after 1971.

As we all know by reading the newspapers and listening to Perk, the name “Stokes” equal fiscal irresponsibility and the work “Perk” means fiscal responsibility.

But the GRI figures showed that as of Jan. 1, 1970 the city debt was as follows:

DEBT 
Unvoted$29,667,000
Voted$106,088,000
And then four Perk years later the debt was as follows:
Unvoted$126,256,000
Voted$61,292,000

Obviously, Perk has steered forthrightly around the voters and has mortgaged them and their children without consultation.

Not quite without consultation. He did consult with George Forbes, Council President, and these figures show how well the Perk-Forbes marriage has been doing. Council approval has been necessary for all the unvoted debt.

As GRI says, “Unvoted bonds and notes are issued according to the city’s statuary authority to incur debt without a vote of the people, through action by the City Council.”

Even with Council’s approval, however, there is a limit established by the Ohio Constitution above which unvoted taxes are not allowed, aside the city laws.

“As of late 1974, Cleveland’s leeway under this indirect limitation calculation was 2.2 mills, but it is expected the more recent computations will show the margin reduced to approximately one mill,” GRI said last March.

There have already been hints that maybe the city can’t effectively operate Public Auditorium and that “private enterprise” can do it better. There have been dire forebodings that a great community asset may be lost by arm-twisting (as Art Modell had to be to take over the Stadium) into assume responsibility for Public Auditorium.

Ironically, the newest city budget shows that even when the city gets rid of an asset the city apparently can’s save the budget money. Having turned over the Stadium to Modell, the budget account -Division of Public Auditorium and Stadium – actually increased from $2.9 million to slightly more than $3 million.

The budget increase to $3 million compares to the 1971 budget of nearly $1.7 million. But in 1971 the city expected to serve some 2 million people with these services and now it says it will serve 1.2 million in 1976.

In other words, while the number served has been cut in half, the cost under Perk has doubled.
Another report warning of the profligate note borrowing of the Perk Administration was written by Cleveland State University professors Edric Weld and John Burke for the Cleveland Urban Observator, a federally-funded, city-controlled project.

The study cost taxpayers $35,000 but it will never get on the best seller list. Not that it was ever destined to be. But the authors turned over one copy to the city and it was to be reproduced by the city for proper distribution. The one copy went to Dr. Michael Pap, former head of the City’s Human Resources department, now of John Carroll University.

Pap apparently found it so fascinating that he couldn’t give it up and no reproduction copies have been made. Not even the City Hall library can get a copy, though it has tried.

What Pap and Perk apparently feel might be too heavy reading is Chapter 8 of the report, dated March, 1975:

“In 1968, only 10 percent of the city’s gross debt was due for repayment within one year. By the end of 1973 a full 33 percent was due within one year, while 55.5 percent was due within five years,” says the report.

As of March, 1976, a city prospectus on the $9.125 million note sale indicates that more than half of a larger five-year debt will be due within two years – not five.

The study by Weld and Burke had some other damaging news that the city would like to keep quiet. And other than an article by Ned Whelan in last September’s Cleveland Magazine, the news media have been totally silent about Cleveland’s problem.

“By 1973,” says the report, “Debt due for repayment or refinancing equaled 50 percent of the TOTAL (city) tax receipts. As of Jan. 1974 debt due equaled 121 percent of total revenue expected from taxation during the year. And unless there is a major increase in tax rates in the near future, the problem that will face the city in 1978 and 1979 when the short term notes first issued in 1972 and 1973 can no longer be renewed will be severe, since the amounts that must then be repaid or converted to new bonded debt will approach 50 percent of total tax revenue.

The report also says that “short-term borrowing does offer some flexibility, particularly in times when interest rates are fluctuating rapidly. It does make it possible for the city to issue bond anticipation notes and then gamble that market rates of interest will fall before these notes have to be converted into long term securities, with the possibility of saving the taxpayers money through lower interest rates over the long run, at the cost of high rates for a short period of time..”

This, however, may have been true in the past but the outlook isn’t bright now, says a GRI official.

Further, the $9,125,000 note turned over in February cost the city nearly $30,000 more in interest than it did to borrow the same money for the note last year.

Now, how would the city get into such a bind when it is dealing with cautious bankers and investors? The answer lies in thinking of bankers as not “cautious” but greedy.

The interest paid on city notes and bonds is tax free and also represents a rather safer investment.

Further, for wealthy investors the payoff is not only safe but profitable. For some in a 28 percent tax bracket a 6.5 percent tax free Muny bond or note is equal to slightly more than 9 percent income. And if the investor is in the 30 percent bracket it jumps to 16 percent.

Cleveland, unlike New York City, doesn’t have (that) city’s heavy cost of hospitals, schools, welfare or universities to support.

But even without these costs Cleveland has serious financial problems on the horizon.
It would be fine if we had a situation of the good guys against the bad guys but with the Perk Administration against the banks, there are no good guys.

When the crunch comes, two groups will be asked to pay the price an suffer: the taxpayer will be asked to increase the income tax to pay the banks and city workers will be asked to give up their jobs to save tax money.

But it should be another way: The bankers should be made to give up their interest and the mayor his job.

By Roldo Bartimole…

3 Responses to “PAST PREDICTS FUTURE? COUNTY DEBT LOOMS”

  1. Alan Bachers says:

    What a wonderful an noble gesture to preserve Roldo’s work. A Cleveland expat to MA, I used to celebrate that POV and I.F. Stone’s Weekly often arrived on the same day to straighten out the universe appropriately.

  2. Jeff Hess says:

    Good afternoon Alan,

    First, thank you for stopping in, for reading and, most importantly, for taking the time to enter the discussion by writing a comment. We build our communities with our conversations.

    Second, I am both humbled and honored to be able to do my small part to keep Roldo’s work in the public eye. When I and my fellow bloggers began our work around the time of the re-election of President George W. Bush, I would often think of Roldo as the Blogfather, the man who began the process here in Cleveland. He is a treasure.

  3. Alan: Thanks much for that comment. You put me in very special company with I.F.Stone.

    Jeff: Thanks once more for allowing me to hitch hike on HCWW. I’m especially gratified to be on that ride. And I’m also indebted for your kind words. By handling my copy you make it easier for me and that’s a blessing.

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