Respect the Taxpayers

As a freshman city council member, I watched in horrified fascination and complete helplessness as a few strokes of a pen added another $8,000,000 to Canton’s already staggering 50+ million debt. This was necessary, I was told, to complete the Canton Reservoir which was going to cost the Taxpayers six times the original “estimate”.

That was almost 4 years ago and was my introduction to the shadowy world of the “Backdoor GO Bond”. GO means General Obligation and Backdoor means bypassing the Electorate. The bonds, or “public debt”, are issued without the consent of the Taxpayers; the very people who are on the hook to pay the debt back.

Georgia law expressly prohibits cities from long term borrowing unless the Taxpayers approve it in a referendum. “Long term” is defined as a period of more than one year. This seems like very reasonable and responsible financial practice; don’t use the Taxpayer’s credit card without their permission.

For many years the law worked pretty well. If the city fathers saw a need to borrow money for a major project they went to the Taxpayers, made their pitch justifying the need for the project and then conducted a referendum where the Taxpayers would either approve or disapprove the project.  Unfortunately somewhere along the way someone figured out a very clever (and legal) way to circumvent the will of the people and the Backdoor GO Bond was born.

Here’s how it works. A city government forms a body called an “Authority”. The Authority, by law, has the ability to borrow money to build projects for the city. The Authority is made up of regular city residents. By itself, the Authority is financially helpless because it has no credit of it’s own. Now here’s the tricky part. The Authority’s financial backer is the “full faith and credit” of the city. So the Authority actually owns the project and owes the debt on the project but it cannot do anything financially such as borrowing money without the permission of the City Council. So presto, with some fancy legal maneuvering, the city is now able to borrow huge amounts of money long term without the Taxpayer’s permission, thereby circumventing and completely destroying the intent of the law prohibiting cities to borrow long term without a referendum.

This has become such a common practice that most people don’t pay it much attention. The regular folks who make up the Authorities are usually well meaning volunteers who innocently have no idea that they are taking place in a scheme to force the Taxpayers to go into debt without their permission while circumventing the intent of the law prohibiting such practice. Many well meaning elected officials simply forge ahead borrowing more and more money via an Authority issuing Backdoor GO Bonds without asking the Taxpayers just because that’s the way their predecessors did it.

The results speak for themselves. Bloated out of control government boondoggle projects are rampant. Because governments are able to borrow without the Taxpayer’s permission, there is a reduced sense of duty to responsibly manage costs; hence we get reservoirs that exceed the budget by six times.

In Canton’s case if the city leaders had bothered to ask the Taxpayer’s permission to borrow money for the reservoir, we would have gotten a much better and more cost effective project. Because the leaders would have had to justify the cost to the Taxpayers, we would have been presented an accurate budget, a much smaller gravity fed reservoir without costly pumps,  less costly real estate and legal fees, a smaller and simpler dam, and we would have been 100% owners and not a 25% minority partner. The fact is that even with a population triple our current size, Canton will need less than 10% of the capacity of the reservoir.

But as they say, “it is what it is” and we will make the best of it. We are fortunate to have a good partner in Cobb/Marietta Water Authority and it is a beautiful lake. We will eventually pay back the debt and move on, but hopefully having learned a valuable and costly lesson.

So what is the solution? Go back to basics. Learn from the mistakes of the past and don’t repeat them. Simply don’t borrow money without the Taxpayer’s permission. It’s their money and it’s their credit. If a government sees the need to borrow for a major project, it's leaders should RESPECT the taxpayers by asking their permission before issuing bond debt. It’s that simple.