1.Government as Hotel Financier
By Edward N. Robinson
My Sutherland colleague Alexis Young recently created a video about the decision by West Valley City to act as the lender on a $30 million hotel project. The issues she uncovered are important enough that I want to repeat them here. For those of you who would like to see the video, it can be found here.
The basic story is that West Valley City has a redevelopment project in which a private developer wants to build a hotel. Because of the tough economic times, the developer said that the only commercial loans available were on terms it couldn’t afford, with a huge cash equity requirement, and a very short repayment term. In light of the unwillingness of the private sector to finance the hotel, West Valley decided to use its good credit to borrow the money itself, and then lend it onwards to the developer on more accommodating terms.
Let’s think about the issues here. Commercial lenders, whose full-time job it is to make money by lending to projects in which the risk is adequately compensated by the terms of the loan, would either not lend to this hotel, or would only lend on stringent terms. So West Valley City stepped up to make the loan on less demanding terms.
I understand that lenders sometimes get overly cautious and won’t lend even to very good projects. But even if that’s the case here, does it make sense for any non-expert, and especially a government with no hotel or lending expertise, to do what the expert marketplace refuses to do? Does the city really understand the risks better than the commercial marketplace? Does West Valley City know what to do if the developer defaults on the project and the city has to take it back and either run or sell it?
How about a different question: Is it fair for West Valley City to be favoring this hotel developer over the owners of all the other hotels in the city, and over prospective developers of other hotels, by making cheap money available to this entity, and not to all similar entities?
I think that governments often let a seemingly desirable goal overcome common sense and fairness, as well as financial reality. Governments have no money of their own; they have only what they get from their constituents through taxes and the like. When they spend that money on projects that benefit only a subset of their constituents, they are effectively asking one group of citizens to subsidize another.
While there is nothing necessarily wrong with such actions (most of us are probably comfortable with public libraries benefiting readers at the expense of non-readers, given the social positives that can result), every governmental decision ought to weigh this subsidization issue carefully before going forward.
And the subsidization issue ought to be considered even more carefully when what is being created isn’t a program with monthly expenses that can be relatively easily reduced or eliminated if necessary in the future, but rather a program that commits the taxpayers to putting a huge sum of money into a project that, by its nature, is very illiquid, and has a meaningful chance of not succeeding.
Good goals aren’t enough in political decision-making. The actualities of the project in question ought to be subjected to rigorous common sense, fairness and financial analyses before taxpayer dollars are committed. Spending other people’s money ought to carry higher standards than spending one’s own money.
The author, Edward N. Robinson, is director of Sutherland’s Center for Limited Government. He has been a financial adviser to corporations, a senior executive, and a management consultant. Prior to retiring in 2006, he operated Robinson Partners, consulting CEOs on corporate strategy and mergers and acquisitions. Before that, he was an executive vice president of Texas Commerce Bank (later Chase Bank of Texas and now JPMorgan Chase), where he ran the investment banking business, and then created and ran The Private Bank; was an executive director at Azurix, an international water utility business, responsible for corporate strategy and M&A; and was a managing director at First Boston (now Credit Suisse), running the firm’s Los Angeles office and the regional M&A practice. Mr. Robinson has a B.A. from the University of Michigan and a J.D. from New York University School of Law.
2.James Anthony Giometta, 1947-2011
With sadness and gratitude we announce the passing of our respected colleague and dear friend, Jim Giometta. During his association with Sutherland Institute over the past several years, Jim assisted with our legislative efforts on Capitol Hill and coordinated policy forums and similar programs. All who knew Jim will appreciate the fact that he passed away on July 4. We invite you to read Jim’s online obituary at this link.
3.Sutherland Forum Tuesday: Economics of Nuclear Power
Sutherland Institute will host the last of three nuclear energy forums Tuesday, July 19, beginning at 10:30 a.m., on the economics of nuclear power generation.
Paul Mero, Sutherland president, will interview three experts during the first hour of the forum, which will be streamed live here.