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 since 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?
• How do the tax-exempt securities used to pay for the building compare in risk to a conventional municipal bond issued by Traverse County?

 

The county government is allowed to authorize tax exempt securities but the politicians actions cannot be termed as ethical as there was no transparency . So in this case their actions are not ethical.

Step-by-step explanation

The county government is allowed to authorize tax exempt securities but the politicians actions cannot be termed as ethical as there was no transparency . So in this case their actions are not ethical.

Furthermore, the financial effect of leasing arrangement would be the same as that of bond financing in that the county would under a debt obligation requiring the principal and interest over time.

There is also possibility taxes being raised to pay the lease just as they would have.

The tax exempt security carry a higher risk when compared to the convectional municipal bond issued by the county.

The municipal bonds have direct revenue source that is the taxes approved by the voters whereas securities would not have direct revenues source