Akron Recall: Debt Perspective

The question about Akron's indebtedness is clearly over the heads of the Mendenhall Gang. The recall savants made a mistake by wading into the unfamiliar waters of public finance during their kitchen sink approach to unseating the mayor. A constructive argument could be had on the merit of individual investments funded by City debt but, not on the nature of borrowing money alone.

The analysis by CSU professor Ned Hill that was featured in an above the fold story in Sunday's ABJ made this point for us. I’m sure Warner has already been chirping away on the comment section at Ohio.com about how biased the ABJ has been.

Information provided by Professor Hill and the subsequent reporting in the Beacon story separated the uninformed outcry about the destructive force of municipal debt from the accepted practice of using bond financing for capital improvements and development projects.

Often times people who mean well, sound the alarm over a city’s borrowing habits. This a common criticism levied at public official’s who have already gone through a thorough evaluation of a specific project or capital improvement. The debt (or borrowing though issuing bonds) is the final step to getting a project underway. Under competent leadership the evaluation of affordability, credit risk and legal limitations should already have been completed. In the case of Akron it appears these steps where part of the decision to take on additional debt.

Part of disconnect comes from the negative connotation that the term "debt" has when paired with the words increase, municipal and large amounts. The lay person may not be familiar with the positive and enabling role that utilizing the bond markets to fund capital investments has. When it comes to analyzing the use of long-term debt by cities and counties, critics tend to hang on the word debt. That's to be expected because that word has a negative implication when associated with our personal finances.

So instead of focusing on the underlying projects financed by bonds this woefully uninformed bunch attacks the idea of city taking on debt. What's that mean? The increase in municipal debt has grown since the massive tax law changes of the mid 1980's which allowed local governments to use long-term bonds to fund expansion.

Consider this fact about the creditworthy nature of municipal debt. Moody's Investor Service (the same Moody's mentioned in the article) conducted a study of the default rate of municipal issuers over the last three decades. The study concluded that municipal issuers are very unlikely to default on their bonds. In fact the comparative ten-year default rate of all investment grade issuers was only 0.1%. This is much lower than the defaults on investment grade corporate debt over the same period.

What’s my point? Well, my point is that the stigma against using debt financing to fund major investments in infrastructure and economic development is wholly unfounded. Thousands of cites, counties and other governing entities have show prudent use of debt issuance to implement a strategic vision. Merely screaming the word debt is not a useful critique of a public official’s financial stewardship and it’s definitely a reason to run someone out of office. Considering Akron’s debt ratings the City’s management has been graded very favorably.

Of course each project should be evaluated on its own costs and benefits to the citizens of Akron. Maybe we didn’t need Inventure Place or Canal Place. That is a discussion that was finished years ago. We’re still waiting for a solid fact-based refutation of the various investments made by the City under Mayor Plusquellic. The recall committee has been largely incoherent on that front.