March 24, 2008

A Valentine Note from Eliot Spitzer to Jim Doyle

By George Lightbourn

On February 14, Governor Doyle sat in his downtown Madison office knowing he was faced with a looming budget deficit.  This challenge was enough to make even the seasoned, two-term governor tense.

Meanwhile, in Washington D.C. on a day usually set aside for flowers and candy, an unusually relaxed Eliot Spitzer slid into a chair before the House Financial Services Committee.  The message the soon-to-be former Governor Spitzer delivered that day was meant, not only for the committee, but for investment bankers and government leaders across America.  In effect, he was passing a Valentine note directly to Governor Doyle.

What Spitzer was telling Governor Doyle and Congress was that the municipal bond market was in trouble, that the credit crisis had reached the front door of government finance.

Spitzer warned that investors had begun to abandon municipal bonds; those bonds issued by state and local governments. 

That the credit crisis had reached government bonds wasn’t Spitzer’s secret – although the man loved a good secret.  No, the word had been out for awhile.  The Christian Science Monitor had written about the wariness of buyers of government bonds.  In fact, the Monitor wrote that by early February, the volume of bonds was down 80%.

State and local governments throughout the country were pulling back.  The customer pool for the bonds was drying up sending the cost of borrowing through the roof.  Now was no time to be borrowing.

Wisconsin state government too was feeling the sting.  In its portfolio of debt, the state participates in auctions to secure short-term financing.  As such, it is in the market regularly.  Last summer and all the way through early February, the state was able to secure short-term rates of 41/2% to 61/2%.  Since then the rates have shot up.   Governor Doyle’s administration is now regularly seeing rates of 10% and, on March 20 – 14.75%.

This is not the time to be selling bonds.

The municipal bond market will eventually calm down.  However, the current conditions are more than a blip.  In the staid world of public finances, the current credit crisis stands to be transformational.  It might take a long time to return to “normal.”

Governor Doyle must have known about the shaky nature of the municipal finance market.  Yet, he chose to look the other way when it came time to fix the state budget.  Interest rates be damned, he went back to his old playbook and used debt to cover operating losses. 

That’s right, the Governor’s budget repair bill included $257 million of borrowing – to backfill cash taken from the transportation fund.  This was the last thing he should have done.

Rather than to actually cut spending, the Governor’s budget drives the state deeper into debt at a time when all other governments are battening the hatches in order to weather the storm.  

Maybe Governor Doyle should have paid attention to that Valentine  from Eliot Spitzer.