Question

Traverse County needs a new county government building that would cost $10 million. The politicians feel that voters will not approve a municipal bond issue to fund the building because it would increase taxes. They opt to have a state bank issue $10 million of tax-exempt securities to pay for the building construction. The county then will make yearly lease payments (of principal and interest) to repay the obligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on the county and, therefore, require no voter approval. Required Do you think the actions of the politicians and the bankers in this situation are ethical? In terms of risk, how do the tax-exempt securities used to pay for the building compared to a conventional municipal bond issued by Traverse County?

Answer 1

Traverse County's politicians are using tax-exempt securities to fund a new building, which bypasses the traditional municipal bond process and potentially sidesteps voter approval, leading to ethical concerns. Tax-exempt securities present a higher risk compared to municipal bonds because they do not constitute a binding repayment obligation.

Step-by-step explanation:

The scenario in Traverse County raises ethical questions because the politicians are circumventing the usual voter approval process for raising funds via municipal bonds, potentially undermining the democratic process. Instead, they are using a lease-repayment plan that does not bind the county to make payments and therefore does not need voter approval, which could be considered a loophole. Such actions must be carefully considered against the backdrop of transparency, voter trust, and governance.

In terms of risk, the tax-exempt securities that are being used to pay for the new building present a different risk profile compared to conventional municipal bonds. Typically, municipal bonds are backed by the full faith and credit of the issuing entity, which usually includes the power to tax residents. In this case, the lease payments are not a binding obligation, which may make them riskier for investors, as there is no guaranteed repayment mechanism. This could result in a higher interest rate to compensate for the risk, or in a lower price if the securities are sold on the secondary market.

Answer 2

Please see explanation below.

Explanation:

1. Yes. The actions of the politicians and the bankers in the above case are ethical. While there are no ethical issues regarding their actions, there should however be a standard procedure and provision that would be included in the set rules for the country which will give directions on where to borrow, how to borrow and necessary documentations for future reference.

The options available could require voting in a locality while voting might not be required in the other locality which are dependent on the urgency of the situation and how the current state of indecision would eventually be.

As in the above scenario, the country may however choose whichever option that is suitable under the current situation inoder to meet up with timeline. In as much as voting will not be held in the other municipal hence requires no voters approval, the process will be straight through but not convincing.

2. With regards to using the tax exempt securities to pay for the building, such tax exempt is the same for most municipal bonds. However, the tax exempt securities are more riskier when compared to a conventional municipal bond issued by Traverse country. Moreover, since the lease payments are not binding obligations on the country, there maybe no security available to investors in these securities.