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Page 4-Hometown

Hometown's Problem - Continued

Finally, the Fire Chief has suggested that his department is already short handed and the increased crime rate has increased the number of ambulance calls and fire calls beyond the capacity his department can handle. He is very concerned that his department will be the subject of civil liability suits because response times to fire and rescue calls have increased dramatically due to lack of equipment and manpower. The fire chief has provided you with estimates of the additional manpower and equipment he expects will be necessary to keep response times within acceptable limits (see Appendix C).

Because these problems have occurred so suddenly, the city board has decided that it cannot not wait to fund the projects either one at a time or in incremental stages. Thus, before this meeting it has been decided that the sale of municipal bonds in amounts adequate to solve all three problems must be undertaken. The city board was unanimous in its agreement that the sale of municipal bonds is appropriate given the urgency of the problems. Bonds can be issued for periods of 10, 15, and 20 years at 5 percent interest. Interest is to be paid quarterly to bondholders and the principal paid at maturity.

At previous meetings it became clear that the current 1% percent city sales tax is insufficient to cover the additional expenditure of maintaining services, debt service payments, and eventual bond retirement. Concerned about the level of tax already faced by the population (20% percent of the federal liability is assessed at the state level and there is a 6 percent state sales tax) you must now decide how much revenue is necessary to resolve the current problems and how the costs will distributed across the citizens of Hometown. Remember that revenues generated from the citizens must be able to maintain services, make interest payments and retire the new debt.

You have been asked as a citizen of Hometown to develop a plan to distribute the costs across citizens in Hometown. There are no limits imposed on the type of system you might develop. The only limit you face is that Hometown does not have the option of selling a new bond issue to retire the bond issue currently contemplated. Remember that Hometown is not allowed to sell tax-exempt securities and engage in arbitrage profit-taking through other investment vehicles.

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