Baylor Helps Reflate Economy With State-Sponsored $13 Million In Red Ink

Friday, December 26, 2014 - by David Tulis
A government body’s creation of F$13 million in bonds for an exclusive private school in Chattanooga is a picture of commercial government writ rich.  

This week a city board issued a bond to support capital improvements and debt retirement at Baylor School, nestled along the north shore of the Tennessee River. The issuer of the freshly minted dollars is the city’s health, educational and housing facility board.

But the actual injection of credit that incidentally helps reflate a moribund U.S. economy comes from a fractional reserve lender, SunTrust Bank, operating through a subsidiary, STI Institutional and Government Inc.  

The bond draws liquidity from 20 years into the future to be spent today “in immediately available funds” on HVAC equipment and supplies and wages of contractors toiling at the school library, admin building and dorms. A bank creates credit based on a minimal or fractional reserve, its deposit liabilities. Through the lending process, the credit is created ex nihilo by SunTrust and paid back by the borrower. Baylor, a Tennessee-chartered nonprofit company, repays interest for a decade, then pays the principal of F$1.3 million a year for 10 years. The deal’s interest rate is 3.14 percent per year, according to documents in the agreement.

State law lets the city board negotiate the loan and oversee the debt under provisions of state law that allow the state to favor private and corporate businesses for “the general welfare, prosperity, health, education and living conditions of the people of the state of Tennessee,” as one document puts it. The note is made attractive to investors by being tax free. 
48-101-312.  Exemption from taxation -- Payments in lieu of taxes -- Reporting. (a) The corporation is hereby declared to be performing a public function in behalf of the municipality with respect to which the corporation is organized and to be a public instrumentality of such municipality. Accordingly, the corporation and all properties at any time owned by it and the income and revenues therefrom and all bonds issued by it and the income therefrom shall be exempt from all taxation in the state of Tennessee. *** [B]onds issued by the corporation shall be deemed to be securities issued by a public instrumentality or a political subdivision of the state of Tennessee. [Italics added] 


Not only are the bond profits tax exempt, but the property in question becomes tax exempt. Baylor has “granted, bargained, sold, conveyed, assigned, transferred, mortgaged, pledged, set over, and does by these presents hereby grant, sell, demise, convey, assign convey, transfer, mortgage, pledge and set over” to the board the property in question as collateral.
In the event of a default, the bank can rush past the board to demand full and immediate payment and begin proceedings to seize its Baylor collateral. 

This property belongs to the board until the debt is paid. The board holds title to Baylor property, and its assets are tax exempt. How might the city collect taxes against Baylor in the meantime? The city board makes “payments in lieu of taxes” on the Baylor assets to which it takes title.

State’s ban on use of its credit by others
We must ask if the subsidized loan for Baylor violates a constitutional ban that forbids the state from lending its credit to any company or from being a shareholder or stockholder in any company?  

The state constitution forbids the state from guaranteeing anybody’s debt. The idea of this provision is for state government to avoid playing capitalist and investor and favoring the well-connected rich and speculator classes

The credit of this state shall not be hereafter loaned or given to or in aid of any person, association, company, corporation or municipality; nor shall the state become the owner in whole or in part of any bank or a stockholder with others in any association, company, corporation or municipality. (Article 2, section 31). 


So how do Baylor, the bond board with its city attorney staff counsel and the bankers get around this ban? By simply declaring it to be so in ALL CAPITAL LETTERS (see below) 
Are the people of Chattanooga or the state of Tennessee in any way liable for the IOU if Baylor comes onto hard times two decades out and cannot make the payments? No. Tennessee encourages such debt by not taxing it and by implying a favor for it. But it denies any support for it by operating through proxies such as Chattanooga’s board. If any doubt exists about the declamations in the paperwork above, state law eliminates it by saying Chattanoogans are not liable for the IOUs of a wealthy private school. 


The municipality shall not in any event be liable for the payment of the principal of or interest on any bonds of the corporation, or for the performance of any pledge, mortgage, obligation or agreement of any kind whatsoever, which may be undertaken by the [the health, educational and housing facility corporation] and none of the bonds of the corporations or any of its agreements or obligations shall be construed to constitute an indebtedness of the municipality within the meaning of any constitutional or statutory provision whatsoever. (TCA 48-101-313) 


A public good in the ideasphere
What sort of dollars are being created in the loan? And what is required to be paid back? Don’t be thrown by a statement in the paperwork that says the “[p]rincipal of, premium *** and interest on this bond shall be payable in lawful money of the United States of America at the designated office of the registered owner.” Lawful money might imply that sacks of 90 percent silver dimes, quarters, half-dollars and dollars — or notes representing constitutional coin — are in view in this transaction. But SunTrust deals not with lawful dollars. 
It trafficks in a medium of exchange of unknown substance, the unbacked and nonreferential Federal Reserve “dollar” note (your green rectangle) and its electronic equivalents. From the bank Baylor borrows thirteen million bucks and pays back thirteen million bucks plus interest in buck form. It would be unfair for Baylor to have to repay the lender lawful dollars in consideration of a loan extended in fluctuating and inflation-riddled Monopoly money. 
At today’s silver price of about 12 paper dollars to 1 lawful dollar (of silver), payback would total about F$156 million. The asking price from a moneychanger for a bag of 1 thousand dollars in silver is F$12,398 in bank paper (my “F” referring to Fed banknotes). No, Baylor is not required to pay back in lawful dollars. 


— David Tulis hosts 1 to 3 p.m. weekdays at Hot News Talk Radio 1240 910 and 1190 AM, covering local economy and free markets here and beyond.

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