Tuesday, May 03, 2011

Financial Genius By The Sea

The City of San Diego is at it again. Perhaps I should say the city is still at it. In 2009 the city sold $109 million in bonds for the purpose of catching up on “deferred maintenance” items, including repaving streets and repairing crumbling buildings. Collateral is not normally mentioned in terms of municipal bonds, but we’re talking about San Diego here, otherwise known as “Enron By The Sea,” and selling the bonds required putting up two libraries and the police headquarters as collateral.

Now the city wants to sell another $100M in bonds for the same purpose.

“Think of it as your house,” said Ashfin Oskoui, a city engineer, “The roof has a certain lifespan, and after that it must be replaced. It’s similar to what happens with our assets. You need to keep up with changing the oil and prolonging the life of the engine to make sure the car goes as far as it can.”

Aside from a seriously mixed metaphor, one doesn’t change the oil on a roof for heaven’s sake, why is the reporter talking to an engineer about city finances? Why is he not talking to someone in the finance department? That was a rhetorical question: no one in the finance department would talk to him.

Reality is that long term borrowing to perform routine maintenance is a sign of serious financial problems. No one is going to question borrowing the money to replace your roof, but if you are taking out a long term loan to change the oil in your car you have a serious budgetary issue.

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