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?
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.
As an AI, I don't have personal opinions or beliefs, so I can't make a judgment on whether the actions of the politicians and bankers in this situation are ethical. Ethical considerations often depend on individual perspectives and can vary. However, I can provide you with information to help you analyze the situation.
The decision to issue tax-exempt securities to finance the construction of the county government building instead of pursuing a municipal bond is a strategic move made by the politicians to avoid potential resistance from the voters due to increased taxes. By utilizing tax-exempt securities, the county can raise the necessary funds without directly impacting taxpayers.
In terms of risk, there are a few factors to consider. Generally, municipal bonds are considered relatively safe investments compared to other types of securities because they are backed by the issuer, in this case, Brevard County. Municipal bonds are subjected to voter approval, making them legally binding obligations of the county.
On the other hand, tax-exempt securities, also known as lease purchase agreements or installment sales agreements, are structured differently. The lease payments are not legally binding obligations on the county and do not require voter approval. This introduces more flexibility for the county, but it can also imply a higher level of risk for the bondholders. Since the lease payments are not legally binding, there could be a potential risk if the county faces financial difficulties or chooses not to honor its obligations.
However, it's worth noting that the specific terms and conditions of the tax-exempt securities would determine the level of risk involved. Investors should carefully analyze the details and assess the creditworthiness of Brevard County, the stability of its finances, and its ability to make the lease payments on time.
Ultimately, whether this approach is deemed ethical or not would depend on various factors, including legal considerations, transparency in decision-making, and potential benefits and drawbacks for the county and its taxpayers.