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Wednesday, May 30, 2012

Prop. Y - Question - Why does "pay as you go" sound more costly?

It sounds more costly because we start paying right away whereas the bonds will be issued by MSD one at a time--which back loads the interest payments. Make no mistake, passing Prop Y means paying an extra $1 for every $1 MSD borrows--essentially paying twice--but not until like 2020.

Here are the questions I got on twitter.

egrant24 Erin Grant
@ruthcarlson does MO have funds to pay up front? If not, would interest rates on loans for an up-front payment be lower than pay-as-you-go?
@ruthcarlson okay; I get that we pay up-front in taxes. I also agree w/you on prop Y. Just wondering specifics on why the alt is more costly 
Prop. Y is for St. Louis City and County voters because it raises money for the Metropolitan Sewer District used by St. Louis City and County residents.
No, interest rates are no lower for up-front payments. There are no interest payments for the pay-as-you-go route--that I'm aware of. 

MSD is limited by law as to how much cash it can have "on hand." If Prop. Y passes, MSD will issue bond one at a time to raise the total of $945 million. MSD estimates that by the end of the 2010s/beginning of the 2020s, rates will exceed $80 due to the interest expense that must be sustained as the bonds are repaid.

Remember, this is not about taxes but MSD rates. The "Clean Water STL" wants it to sound like it's more costly to pay-as-you-go because the payments is front loaded. However, the total amount paid is more because of interest payments.

Even more, paying off these bonds is not like taking out a mortgage where the payment is stays the same over 30 years because they bonds are taken out one at a time. The interest payments will cause MSD rates to continue to climb up past $80 whereas pay-as-you-go will push up the rate to the mid $60s, and it's like to stay there. 

Frankly, it sounds like there are a lot of "what ifs" for the actually rate amounts but there is no "what if" about the fact that at current interest rates and the MSD bond rating, that for ever $1 MSD borrows, we will pay an extra $1 in interest--essentially paying double. But why? We can vote "NO" and pay once.

*I got this info from MSD. You can call too if you want. Lance LeComb 314-768-6237

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