AN OPEN LETTER TO REPUBLICAN AND
DEMOCRATIC PRESIDENTIAL CANDIDATES:
DON'T DISCOURAGE MUNICIPAL FINANCING

By GERALD E. PELZER, President
and Chief Executive Officer, Clayton Brown & Associates, Inc.

Our highways are crumbling. Our bridges are on the verge of collapsing. Our prisons are overcrowded. Our railroads and sewer systems are breaking down. Once a source of national pride, the American network of transportation, public buildings and service systems has received only patchwork maintenance over the last 50 years and has now reached a point of profound deterioration. In the case of recent turnpike and bridge collapses, this deterioration has resulted in loss of life.

It should be clear that we can no longer take our public works for granted. To do so would only be inviting disaster. The question is: How do we finance the massive improvements that are necessary to keep our municipalities functioning. The sad fact is that most state and local governments do not have adequate capital reserves to cover these costs, and in these budget-conscious times, the prospect is not good for federal support. To find a solution, we should look back at how America built itself up in the past.

Much of our nation's network of public systems, or infrastructure as it is sometimes called, was originally funded through municipal bonds. Communities financed the construction of public projects by offering municipal securities, the civic-minded equivalent of common stock, purchased most often by institutions and individuals looking for safe, tax-free investments. This means of raising money made it possible to quickly finance schools, bridges, highways and other vital projects.

The sale of municipal bonds has succeeded in serving the public good in the past, and we can expect public financing to make it possible to rebuild our infrastructure today — as long as government does what it can to keep municipal bonds an attractive investment.

A vital factor in the marketability of public securities is the tax-exempt status of municipal bond investments. Presidential candidates in 1988 must take a hard look at this issue. When they do, they will see that the tax-free incentive for municipal bond buyers is not something to tamper with when seeking another means to raise taxes.

Further shrinkage of the tax-exempt muni market as a result of additional taxation would be self-defeating. Taxing currently tax-exempt municipals would only succeed in discouraging potential bond buyers, and that would mean less money for public projects. In that situation, both the investor and the public lose.

Public financing provides the answer for municipalities that need to address infrastructure problems today. Without it, cities and states would be forced to wait until taxes could be raised or some other means of funding a project could be devised. However, as witnessed in recent months, many public buildings, transportation systems and other components of our infrastructure cannot afford such delays.

If it is true that government must raise taxes to roll back the deficit, areas other than tax-free municipal securities should be targeted. We need this form of investment to rebuild our country, and we need it now. Taking steps to encourage public financing — or at least refraining from measures that would hinder it — is both good business and good citizenship. •

March 1988 / Illinois Municipal Review / Page 17