Tom Sgouros: Short Takes

Tom Sgouros: Short Takes

Where's the bond risk?

I see Ernie Almonte, once the state Auditor General, has issued a scathing report about the Central Falls private prison, the Wyatt Detention Center. The Wyatt has stiffed the city three years in a row for more than a half-million dollars per year, something that certainly helped make a big hole in the city's $16 million budget. But I also see that not only has the jail never defaulted on a bond payment, but the bondholders are -- once again -- elevated above virtually all other creditors. Wyatt owes them over $8 million per year, but that's a debt to put ahead of the half million it owes the city.

The bonds in question were issued by the state, so it's our credit rating at risk. So you could look at this as yet another example of a place where the state's interest supersedes the city's, once again to the city's detriment. But I'm interested in another aspect of this today: why is it that we give these bond investors a risk premium if there is no risk?

When you ask one of the credit rating agencies why this town or that state deserves its high rating, they will say something about the risk of loaning to that town. But the reality is that the risk is near zero, and the contortions we go through in fear of angering bondholders show that. After all the financial turmoil you've been hearing about -- the closed library, the teacher contract renegotiation, the devastated retirees, and all the rest -- Central Falls still hasn't missed a single debt service payment, and likely won't. The high interest rates on its debt are one big reason why Central Falls is in trouble. Those investors demand a big risk premium for investing in Central Falls debt, but honestly, where is the risk?

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As I reported a few months ago, this is why the state of Connecticut is suing all three of the big bond rating agencies over the way they've been overrating the risk of default in the municipal bond market. Overrating the risk means we pay a higher interest rate than we should. At this point, we know we're being overcharged and the discovery phase of the Connecticut suits has uncovered documents implying that the rating agencies also know we're being overcharged. This is little more than an elaborate form of legalized extortion, and the wonder is that people in responsible offices put up with it. Sadly, so far as I know, finding alternatives to being overcharged in this way isn't on anyone's agenda at the state house.

(I invite people who know otherwise to tell me about it.)

Let's not forget

As the plans to "reform" the state pension system take shape, there is a fact that seems never to surface, which is a shame. If we are going to insist that the state pension system be run on an actuarial basis, we should also insist that it be run on an actuarial basis. That is, there are many people who received special pension favors in years past. These people -- largely state legislators and others with "connections" -- received credit for years in which they did not pay into the system, or bought credit for cheap. It's not even quite correct to say that everyone was just playing by the rules. Certainly the vast majority of teachers and state employees played by those rules, and simply paid what was taken from their paychecks each week. But not everyone saw the rules as an obstacle, and the law books were once littered with exceptions and changes to the rules, many of which were made on behalf of some specific individual.

In an investigation done 20 years ago, the Providence Journal reported that several hundred legislators and state employees had been allowed to buy pension credit at a deep discount over the previous four years. These laws have mostly been repealed (and the pension chapter of the law books is now littered with "repealed" sections instead) and the abuses are in the past. Their legacy lingers, as does this question: if we're going to mess with current retirees' pensions, does fairness demand that a teacher who paid a hefty chunk of her salary for 30 years in a row be on precisely the same footing as a 25-year legislator who paid a small fraction of the same amount?

Contractors aren't cheap

The Project on Government Oversight (POGO) has put out an interesting report about contractors in the federal government. (POGO is the descendant of the Project on Military Procurement, the original source of such military spending phenomena as the $7600 coffee pot.) The report shows, well, I'll just quote it:

"POGO's study shows that the federal government approves service contract billing rates ”deemed fair and reasonable" that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services." [my italics]

Most of the realistic efforts to reduce the state's payroll over the years I've studied our state government have involved replacing employees with contractors. There have, of course, been unrealistic ones, where the Governor just watches a bunch of people randomly retire from this or that department and announce that they won't be replaced, without considering whether that's a good idea or not. But the realistic efforts involved replacing employees with contractors in order to cut payroll. Now here's some evidence to say that, at least at the federal level, this is not such a hot idea, at least for people who want to spend less money.

See the whole study here.

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].

 

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