Dear Source,
I am writing to comment on a spending item I noticed in the recent article on the Omnibus Spending Bill. (See Omni-Allocations Exceed $20M in Hour and a Half.) This article cited "interest on bond proceeds" as a source of funds for certain spending.
I would like to explain why spending bond proceeds for operating expenses is stupid and, in fact, equivalent to financing one's life on one's credit cards. Tax-exempt bonds are to be used for capital projects. The interest and principal expense is repaid by either levying taxes, in the instance of a general obligation bond, or through a pledge of revenues derived from the capital project the bond was issued to finance.
In reviewing the Virgin Islands' municipal debt, one will find oftentimes that these bond proceeds are not used at all and sit in investment funds generating interest. While this may seem innocuous, if not wise, it is quite unwise. Federal tax law does not allow an issuer to earn more interest on bond proceeds than the interest rate the money was borrowed at. This would be known as an arbitrage and the Internal Revenue Service has developed a powerful set of laws to eliminate the possibility of this. If this were not so, any municipal issuer would have a money machine by issuing tax-exempt (lower interest rate) debt and investing in taxable (higher interest rate) securities and pocketing the difference.
As a result, I can assure you that the government is losing lots of money on this process, aside from counting the extremely high underwriting fees and issuance fees associated with Virgin Islands municipal debt. Remember the million-dollar tourism department web site? Well my friends, this is just another example of the same. It is time for accountability. It is time to put an end to these Enron-esque games.
Michael R. Dixon
Chino, California
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