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.

Last week a board of a state corporate subdivision known as City of Chattanooga, Tennessee, 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

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