April 5, 2013

Notebook Entry: "Secretary of Commerce vs. RICWFA paradox"

Carroll Andrew Morse

A brief exposition of an entry put down in an actual dead-tree notebook, referring to a news-subject worth watching, at a time where there is certainly no shortage of subjects vying for public attention...

Secretary of Commerce vs. RICWFA paradox -- A group of Rhode Island leaders led by General Treasurer Gina Raimondo announced a plan in late March to help Rhode Island municipalities secure low-interest loans for infrastructure projects through the quasi-public Rhode Island Clean Water Finance Agency. At about the same time, the Rhode Island Public Expenditures Council pitched to the House Finance Committee its plan to move a chunk of the the quasi-public Economic Development Corporation's function to a Secretary of Commerce position situated inside of the Governor's office. This seems, at least on the surface, to have things a bit backwards, with a quasi-public organization assuming a significant role in providing a public good, i.e. maintenance of roads and bridges, while the government-proper devotes more energies to "economic development", most of which ultimately must happen outside of government.

According to WPRI.com's Ted Nesi, "the treasurer's office estimated communities could save $1 million on every $10 million in loans thanks to the lower rates they'd get by borrowing through the AAA-rated [RICWFA]", but the ability of a city or town to pay off debt doesn't change because it takes a new route to get a loan, and adding a new middleman isn't a guaranteed method for lowering the cost of something. It is fair to ask if there's a more fundamental issue with RI cities and towns paying more than they need to for lending, if someone else will be assuming risk of default in RICWFA routed loans, or if there's some other cost to this plan that's not immediately obvious.

(Bumped upwards, from an original April 4 posting date)

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Will they be hiring any new people to facilitate these loans? If they hire a few new people, then the savings have been erased.

Posted by: Dan at April 4, 2013 11:29 AM

In a typical infrastructure bank, loans are given from a pool of money donated by the state to fund the bank (sometimes they can get the Feds to pony up a little), so there is no actual "borrowing" in that sense -- the state is the lender. Of course, if that were the case here, I can't see why the AAA rating of the agency is germane, you could just start a new agency.

Also, in a typical infrastructure bank like the one Raimondo touts in Virginia, money isn't used for maintenance, which is an improper use of debt even when the state is the lender, and the source of repayment (tolls or special assessments, usually, for the area being improved) are submitted along with the proposal.

Even in the best case scenario, where the bank is entirely funded through found money and no outside borrowing takes place, this is still a bad idea. Debt should never be used to cover an operating budget.

Posted by: Mario at April 4, 2013 12:55 PM
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