accounting

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Brevard County needs a new county government building that would cost $24 million dollars. The politicians feel that voters will not approve a municipal bond issue to fund the building since it would increase taxes. They opt to have a state bank issue $24 million of tax exempt securities to pay for the building construction. The county will then make yearly lease payments to repay the obligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on the county and, therefore, require no voter approval.

Do you think the actions of the politicians and the bankers in this situation are ethical?

How do the tax exempt securities used to pay for the building compare in risk to a conventional municipal bond issued by Brevard County?

  • accounting -

    The rule that allows the county government to authorize tax exempt securities is not secret. Additionally, since the lease payments are not binding on the county, there is some other entity that is accepting the risk that the county voters will object to the deal, elect new representatives, and terminate the lease. therefore the decision is ethical as long as everyone tells the truth about it.

    Since the securities are not backed by the county and there is no binding obligation to continue leasing the building, they are of higher risk than a bond issue and will have a higher yield to the investor to compensate for that fact.

    The citizen is provided a lower long term risk of having excessive costs by this alternative. If county revenues decline in the future, the county can move to less expensive space and the citizens will be saved money that otherwise would have to have been paid under the bond issue.

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