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Fallout: The Financial Crisis

Cities can’t afford loans for basics

Marketplace Staff Oct 15, 2008
Fallout: The Financial Crisis

Cities can’t afford loans for basics

Marketplace Staff Oct 15, 2008


Kai Ryssdal: While the bailout works its way through the credit markets, money’s still pretty expensive. That is, the interest rates you have to pay to borrow are pretty steep. State and local governments are not immune from that. They have to issue bonds to finance public works projects, if they can afford the high price of debt.

Kansas City, Missouri’s got some pressing sewage problems, but the city treasurer says he can’t afford the debt. From KCUR in Kansas City, Sylvia Maria Gross reports.

Sylvia Maria Gross: I’m in a fenced backyard with Barbara Jenison and her neighbor Dolores Hatton. There’s a lawn, some tomato plants, a clothes line and just 10 feet away from the house a plastic pipe sticking out of the ground. Jenison lifts the lid.

Barbara Jenison: OK, this is your septic tank. See, this holds all your waste. It’s supposed to seep into the ground, but if the ground’s so wet, it can’t.

Gross: Ugh, so what happens?

Jenison It starts to back up, back up into the house.

Jenison and Hatton live in Maple Park. It’s a neighborhood of Kansas City, but it’s not hooked up to the city sewer system. Instead, Maple Park residents use obsolete septic tanks, many of which have failed. Dolores Hatton shows me where there’s seeping raw sewage into a nearby creek.

Jenison: The so-called creek runs down right through here. That should be running clear water. When they’re not functioning right, yes, you’re gonna get some stink.

Maple Park’s residents say they desperately need the city to fix their sewer issues, but down at city hall, Treasurer Randy Landes is more worried about the clogged credit markets. He has a plan to raise $280 million for sewer and water projects by selling bonds, but he says the time isn’t right.

Randy Landes: We’re not under any pressure to issue these bonds currently, so, you know, that pressure will build over time, but at this point in time, we’re able to sit on the sidelines and wait ’til things get sorted out.

When they are sorted out, Landes will likely find himself in an unfamiliar market. Tom Doe is CEO of Municipal Market Advisors, which tracks municipal bonds. He says the easy lending environment of the past five years was unprecedented.

Tom Doe: Issuers across the country have had incredible ease in terms of borrowing money. Not only have banks been willing to lend it, but also they’ve had favorable interest rates, extraordinarily low, historically low rates.

Those low interest rates got government hooked on debt. Instead of raising rates or taxes to pay for new projects, they borrowed.

Landes: And, when you have that dependency on debt, just we see as individuals, all of a sudden you’re not as fiscally prudent as you might be.

Kansas City will probably have to pay for that imprudence now. Its next bond issue will need a fat interest rate to attract investors in this market. Deb Hermann is a city councilwoman. She says that $280 million won’t be enough to pay for needed upgrades. Citizens will likely to end up on the hook, as water rates are likely to skyrocket.

Deb Hermann: It will certainly be unwelcome, but what we have to do, we have to match our services to the level of financial support provided, which hasn’t always been done.

In towns and cities all across the country, taxpayers are discovering the credit crisis isn’t just about Wall Street. Municipalities have a choice: They can wade in now and pay more for the money they need or, like Barbara Jenison and Dolores Hatton, they can hold their nose and wait, hoping for things to improve.

In Kansas City, I’m Sylvia Maria Gross for Marketplace.

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