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Community Commentary: Getting to the truth about project

August 10, 2010|By Keith D. Curry

John Heffernan went to the pages of the Daily Pilot with a critical assessment of City Manager Dave Kiff's thoughtful Newsletter discussion of the Civic Center project ("Sounding Off: Letter left questions unanswered," Aug. 7). In his opinion piece, Mr. Heffernan offered, "I could well be wrong." Indeed he is.

Let's begin with his curious opposition to the use of Build America Bonds, also known as "BABs." Heffernan suggested that these bonds will make the federal deficit larger, and therefore the city should pay higher borrowing costs to help the Feds out.

Heffernan is apparently unaware that BABs were invented by the U.S. Treasury specifically to reduce the impact of municipal borrowing on the treasury. He has it exactly backward.

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Consider this example: Typically, local governments borrow in the tax-exempt markets. A package of $100,000 in bonds, at 4.50%, would generate $4,500 in annual interest that would be tax free to the bondholder. If that person is in the 35% tax bracket, the "loss" to the federal treasury (from Treasury's perspective), is $1,575 in avoided taxes.

BABs are taxable bonds so the interest rate is higher. The same bond as above would be sold at 6.00% interest and the bondholder would receive $6,000. However, he would pay $2,100 to the federal government in taxes. To offset the higher interest costs, the federal government has agreed to subsidize the borrowing rate of local issuers by 35% to entice them to sell BABs. Taxing the interest offsets the subsidy and thus the impact to the federal deficit is substantially less than with traditional tax exempt bonds, exactly the opposite of the point made by Heffernan.

More important, however, is that the cost to the city to sell the bonds is reduced from 4.50% to a net 3.90%, lowering our debt service costs by approximately 13.5%. This is why, despite Heffernan's opposition, we will sell BABs if market conditions warrant.

Next, Heffernan muses about how the project estimated at $50 million four and a half years ago, before he quit the city council, is now higher. In fact, the cost to construct the city hall itself is remarkably close at an estimated $55 million to $60 million. Despite knowing better, Heffernan, like some other self-styled "pundits," offers the false and misleading comparison of one project, the city hall, vs. five — the city hall, park, parking structure, library expansion and disaster preparedness center.

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