RevenueLoan Blog

January 24, 2011

Financially doomed municipalities… and RBF to the rescue?

Filed under: Uncategorized — rlucas @ 9:54 am
Tags: , , , , ,

The naysayers — call them “bond market vigilantes,” call them “Cassandras,” call them “Chicken Littles” — have turned their attentions away from the nation’s banks and insurance companies to focus on the beleaguered state of our states (and cities and counties).

Financial blogger and sometime FT columnist Felix Salmon opines that very real (if, ultimately, indistinguishable from perception) circumstances could lead to states being “shut out” of the credit markets, as the specter of federally-countenanced state bankruptcy looms.  (In fairness, Salmon doesn’t think that the bankruptcies will happen, but he acknowledges that perception is reality here, when it comes to credit spreads, liquidity, and new issues.)

What does all of this have to do with RevenueLoan or Revenue-Based Finance? the gentle reader might ask.

Well, simply put: the states have two problems, and one of them is a financing structure problem.  Namely, they have fixed coupon debt that must be repaid on schedule.  Times will get better for Illinois, and California, and every other muni issuer who’s in a world of hurt right now.  But the fact that a new economic up-cycle may leave state coffers flush in a decade is cold comfort today when creditors face receiving scrip or other ersatz paper.  (The other problem is fiscal, with too much spending and not enough taxes, but that’s a whole other kettle of fish.)

But don’t think that we’re the only ones saying Revenue-Based Finance could have averted the muni woes we’re seeing today.  Last year, econo-guru Robert Shiller and his colleagues came up with the ultimate RBF instrument: the “trill.”  Simply put, the “trill” would be one one-trillionth of the GDP of the issuer (nation, state, etc.) — in effect, a small percentage of topline revenue.

Would it work?  Could it work?  Only, I think, if the issuer has significant potential for either sustained topline growth, or windfall / bumper crop years.  That could mean corporate taxes on boom-bust industries (commodity extraction? agriculture?), high marginal personal income tax rates that kick in during bubble tops as people sell appreciated assets, or simply extremely strong population and industry growth prospects.

An interesting aside for a Monday morning.  Alas, we won’t be solving this problem top-down — our contribution will be helping finance and grow those small businesses who will provide the backbone of a muni and national recovery.


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