When something seems too good to be true it usually is, which is a lesson that the Pulaski County government keeps learning, ruefully, over and over. Now it has found that municipal bonds are not the risk-free answer to everything.
You may remember that press conference in Little Rock’s River Market five years ago when a buoyant County Judge Buddy Villines and other swells announced that the county was issuing $43 million in municipal bonds, which was going to put 400 to 600 low-income families into homes that they would own.
They would be deserving families who simply could not get loans in the normal mortgage market because they were credit risks. Borrowing $43 million in the taxpayers’ name was not going to put one dime of the public’s money at risk because private groups would handle the program, the judge pointed out.
The county was merely lending its good name so that the groups could borrow the money more cheaply since investors would not have to pay income taxes on their bond-interest earnings.
Not long afterward, President Bush touted the program at the White House by introducing a couple who had acquired one of the modest homes.
The Arkansas Democrat Gazette reported this week that the program had quietly crashed, but not before private interests in California and France that put the deal together and a phalanx of bond dealers and lawyers made off with a cool $2.5 million.
And what about those 400 to 600 new homeowners? The Pulaski County Public Facilities Board put exactly six families in modest dwellings at a cost of $2.1 million. That’s it: six families, $2.1 million. And President Bush’s proud examples? They were out of the house within months, leaving debts and needed repairs.
The county government — and you, the taxpayers — may end up suffering more than humiliation for this boondoggle. The federal government wants the county or the bond investors — someone — to compensate it for the government’s losses.
While the bonds did not cost the county anything, the federal government — and that also is you — was subsidizing the whole enterprise. That’s what municipal bonds are — a federal subsidy for public projects.
The government exempts from income taxes the interest that investors earn from municipal bonds so that the investors will accept a lower interest rate on the investment.
This stimulates private investment in projects that have public benefits, like highways, hospitals, libraries, schools and universities, and reduces the borrowing costs for the agencies or private groups undertaking the program because interest rates are lower.
It is clear now that the principal beneficiaries of the $43 million bond issue was not the public but private entrepreneurs — a French bank, a Beverly Hills, Calif., brokerage, and brokers and lawyers in Little Rock — so the Internal Revenue Service now wants the income taxes that it gave up.
The French bank got $1.9 million for its troubles. And, oh, a Little Rock outfit created by a church received $50,000 for a 14-page report on the feasibility of the project. The church’s leaders had prayed and got God’s clearance to undertake it.
The Dream to Own program was not a bad idea. Throughout the South and elsewhere, community development corporations are struggling with similar programs that help low-income people overcome their credit issues and become homeowners.
They don’t get $43 million handed to them. This was a program undertaken by people who knew little about how to do it; it was principally a way to make some easy money.
The county government is guilty not of corruption but naïveté in surrendering its imprimatur so casually to private groups about whom it knew nothing. The county had no accountability and demanded none.
The County Public Facilities Board and the Quorum Court do this routinely for a variety of enterprises of questionable public benefit.
They authorize government bonds to be issued in the county’s name for private school interests — $31 million in refinancing for the Pulaski Academy school for the children of the well-to-do in Little Rock, which apparently helped the academy buy the abandoned Fellowship Bible Church property (the church was building a new facility and needed to sell the old one), and $2.5 million to allow Arkansas Baptist School to build a junior high at a savings.
In a sense, it’s your federal and state income tax dollars at work.
We’d like our county government to be more stinting, more demanding and, yes, smarter.
