Contrary to national debt analysis, Elk Grove's finance manager Matt Paulin foresees low interest rates; Will higher rates stop the Elk Grove City Council?

During last week's Elk Grove Zoo financing Zoom meeting, the city's finance manager, Matt Paulin, made a statement that bears examination. That statement, which he also hedged, was about future interest rates (see video below).

"I can't tell you what the future holds when it comes to interest rates, but I think they are going to be lower than they are today," he said. "How much lower it's tough to tell."

So, who's right about the future of interest rates? Wall Street or Main Street?

In defense of Mr. Paulin, how many times have Wall Street, with its hucksters and scammers, misled or just got it wrong about future economic conditions? Main Street people like Paulin are closer to action on the ground, as it were, and have a better idea of conditions and what is happening on the ground.

Notwithstanding the actions of the Federal Reserve, there is another barometer of future interest rates: the national debt. Specifically, what effect does the growing national debt combined with higher interest rates have on future rates? 

With that in mind, it is worth looking at what analysts say about interest rates related to the national debt.  

The basic argument is that without tax increases, unabated government spending will create more debt, pushing all interest rates higher. Here is a sampling of stories that paint a bleak picture of interest rates relative to the growing national debt.

CNN - America’s debt problem is storing up trouble for the rest of the world: "The high and rising level of US government debt risks driving up borrowing costs around the world and undermining global financial stability, the International Monetary Fund has warned."

Axios - The cost of interest on U.S. debt is soaring: "The U.S. government is on track to face debt service costs that, starting in 2026, will be a modern record as a share of the economy — and they are forecast to rise from there, pinching other national priorities." 

CBS News - U.S. interest payments on its debt are set to exceed defense spending. Should we be worried?: "Like American consumers, the U.S. could see some relief when the Fed begins cutting rates, which it is expected to do later this year. But the nation could still be trapped in a cycle of escalating interest payments as the U.S. is on track to take on more debt, Goldwein warned. 'More debt leads to more interest, and that leads to more debt,' he said."

Fox Business - IMF sounds alarm on ballooning US national debt: 'Something will have to give': "The astronomical rise in the U.S. national debt poses 'significant risks' to the global economy and threatens to continue fueling high inflation, according to a new warning from the International Monetary Fund. 'Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,' Vitor Gaspar, director of the IMF’s fiscal affairs department, told reporters. 'It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.'"

Bloomberg - IMF Steps Up Its Warning to US Over Spending and Ballooning Debt: "Washington’s overspending, the report said, risks reigniting inflation and undermining long-term fiscal and financial stability around the world by ratcheting up global funding costs."

Reuters - IMF's Gopinath says high U.S. deficits fueling growth, higher interest rates: "'The high levels of deficits are also supporting growth and demand in the U.S. that have positive spillover to the rest of the world," Gopinath said. 'But along with that growth, you're getting higher interest rates and a stronger dollar and the second two are creating more complications for the world.'"

As noted, Mr. Paulin hedged his statement, saying if interest rates increase, "we would have to rethink what that payment is and if it is affordable to us."

In other words, Paulin said that if the $114 million bond's $7.8 million annual interest payments obligations by Elk Grove and the Sacramento Zoological Society are larger because of higher interest rates, it might not be feasible to issue the bonds. 

Since bonds finance 38 percent of the $302 million project and are the single largest source of funding, the question is, will the project collapse if interest rates increase beyond the 4.25 percent rate used in the city's current financial model?

Will Elk Grove Mayor Bobbie Singh-Allen exercise fiscal prudence and not issue the bonds, effectively killing the project or at least delaying construction until rates decrease? 

Or will the mayor and her four city councilmen be so hell-bent on proceeding they will throw fiscal prudence to the wind and proceed regardless of the costs or risks to taxpayers, push another sales tax increase, or dip into reserves, thereby threatening other taxpayer services?

Predicting interest rates can be a crap shoot. Nonetheless, we believe that the city will proceed with the project regardless of higher interest rates when the time comes to issue the bonds, and if things go awry, the mayor and city council members will have moved on and Elk Grove taxpayers will be left to deal with the flaming bag of dog manure at their front door.


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1 comment

Deejay Blutarsky said...

I'm sure City Hall has their backup finance plans all scripted out. If the bond-and-property-as-collateral Plan A proves unfeasible, the sky is the limit (sorry Sky River casino!) when it comes to alternative financing schemes.
Off the top of my head, I am confident that the alternative plans could include a) incorporate the zoo into the City's park system, thereby making it a part of the "Mello-Roos" CFD supplemental property tax assessment district; or b) place a small sales tax increase on the ballot for the zoo; or c), a combination of a) and dip into the budget reserve.

More concerning to me has been that most of the discussion has been about the City's funding share of the zoo construction. But relatively little discussion has been on the Zoological Society's commitment/capability to kick in their $70 million towards the initial construction and their ability to assume the entire annual operating and maintenance costs going forward. 

While the Wall Street bond investors will certainly undertake a qualified, detailed analysis of the City's credit worthiness, was such a detailed painstaking analysis done on the Zoological Society's fiscal house? Based on the overly confident and somewhat flippant comments by some of the key players during the recent zoom meeting, I doubt it. No disrespect, but our local public finance personnel are not in the same league as Wall Street. 

As us old timers will recall Dick Martin's famous one liner from Rowan and Martin's Laugh-In days, "you can bet your sweet bippy" the zoo is going in one way or another! 

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