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.
- 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?
(Page 485 of your text)