Recent news about bringing the Sonics back to Seattle offers a lesson for young people about bonds. We’re not talking about “bonds” as in relationships. Like the relationships between athletes and fans – or the NBA and teams – or politicians and taxpayers. We’re talking about “bonds,” as in fixed income investments where an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.
In many of our posts about kids and money, we recommend that parents use day-to-day conversations to help their children pursue knowledge and to nurture curiosity about financial matters. Here’s a possible topic for the dinner table – bonds to bring the SuperSonics back home.
Chris Hansen, a successful San Francisco hedge fund manager and Seattle native, is leading a team of private investors in bringing the Sonics back to Seattle and housing them in a new arena. Needless to say, local fans (who are still recovering from the 2008 loss to Oklahoma City) are pretty excited about this initiative. That said, the financing of a new arena is a touchy topic. Not as touchy as fans are toward Howard Schultz, but almost. Not all Seattle tax payers want their dollars to go toward this goal. Still, those that do have been quick to point out that Hansen’s investor group is privately raising the majority of the funding, $290 million, to build the new stadium and that tax payers shouldn’t be alarmed. As it stands in recent news, the proposal is that the rest of the funding would be financed through a $200 million bond issuance.
Now that you have an overview of Hansen’s proposed ‘Super Sonic Bonds,’ here are a few bond basics and arena tidbits to discuss during your conversation:
- Fundamentally, there are two parties to bond issuance – the issuing organization and bond investors.
- Bonds are issued by an organization (typically a government body or company) to raise money for operations or projects.
- Bond investors are lenders who provide the upfront funding for the operations or project by purchasing bonds.
- Bond investors mainly make money by receiving interest payments on the bond during the term they’re invested and receiving their initial investment (called principal) back at the end of the term.
- Depending on the type of bond, typically the interest and principal are paid back to investors with dollars generated by revenue or taxes.
- Video introduction to bonds
Arena (taken from King County’s Website)
- A new arena must be self-funding, and not rely on new taxes;
- Existing City and County funds and services would not be adversely impacted;
- Private investors would bear risk against revenue shortfalls;
- Any project cost overruns will be the responsibility of private investors; and
- Private funding should be provided for a study of ways that Key Arena can be modified to keep it a financially successful part of Seattle Center.
In the case of the Sonics arena bonds, the principles above indicate that taxes used to pay back investors would only be taxes which are generated by the stadium and that the bonds would “not rely on new taxes.” If revenue falls short of what is needed to pay the principal or interest on the bonds, “private investors would bear risk against revenue shortfalls.” For your lesson, be sure to point out that other types of public projects financed by bonds are roads, public schools, and sewers. In the case of municipal bonds (like this one would be), a revenue bond is supported by revenue derived from the operation of the facility, while a general obligation bond is supported by the issuer’s general taxing powers. It seems that the controversy over the Sonics arena financing could hinge on whether the bonds end up as revenue bonds, which some fear will eventually be issued as general obligation bonds. If this happens, all citizens of the issuing municipality (Seattle/King County) would be on the hook to pay back the bonds and interest.
If you attempt this conversation and it meets blank stares, we assure you that your efforts are paying off. We often meet with youngsters whose parents or grandparents think they’re not absorbing any of their attempts at financial education, but these young people are always more knowledgeable than those who aren’t getting the same exposure to financial topics. Whether the conversation is an air ball or a slam dunk, the important thing is to offer financial coaching.
One of the most universal symbols of motivation, except maybe the carrot, is cash. The cartoon character with enormous dollar signs for eyes is an image we all know. Scrooge McDuck aside, the reality is that while money may be a fine motivator for mechanical tasks, studies prove that it’s not for many of the tasks that contribute to successful lives. Creative and cognitive skills are not motivated by reward. In fact, monetary reward can actually impede performance for these types of tasks.
Dan Pink, a well-regarded career analyst and best-selling author, spoke about this very subject at TEDGlobal in Oxford. Focusing on the disconnect between science and business, Pink makes the case that because ‘the destination’ is not necessarily clear in the 21st century, society needs more ‘Results Only Work Environments’ (ROWE) rather than financial incentives: “Rewards work really well for those sorts of tasks where there’s a simple set of rules and a clear destination to get to. Rewards by their very nature narrow our focus and concentrate the mind.” In ROWE, employees are not held to a strict schedule or even required to attend certain meetings, but are expected to accomplish their job nonetheless. According to Pink, this work model has yielded positive results and ultimately fosters more engaged employees with lower turnover. In this type of environment ‘autonomy, mastery and purpose’ are the values of business’ problem-solving future.
Now, apply this employee-work-ROWE theory to an inheritor of personal wealth. Is there a better description for the trust fund baby stereotype than Pink’s picture of someone who lacks ‘autonomy, mastery, and purpose’ … someone whose performance is actually poorer, despite financial backing, than the counterpart who relies on intrinsic drive to pay the bills?
So, how can one prevent this from happening to their progeny? One proposed solution is Jon and Eileen Gallo’s Financial Skills Trust, which aims to create an environment similar to Pink’s ROWE. In theory, we love this idea and how it incorporates financial skill benchmarks butwe would like to have more anecdotal evidence about the implementation of such a trust. From the perspectives of the trustee and beneficiary, there is still one (big) unanswered question: How can you avoid the incentivizing nature of trusts at their core?
If the goal of the generation passing on wealth is for an intrinsically motivated next generation, then the parents, grandparents, aunts, uncles and family advisors are all responsible for actively modeling and communicating this objective. The financial responsibility program of the Laird Norton family is a great example of how to make this work – annual family summits that mix business with pleasure. They usually take place at a nice resort and give family members an opportunity to meet with and learn from the boards that govern their foundations, their core wealth advisors, and from each other.
If you are now thinking about starting such a family tradition, please know that you might feel a little worried that the communication taking place won’t be ‘right’ at your first retreat. If this happens to be the case, remember to not let perfect be the enemy of good. These multi-generational conversations aren’t always polished. But they really contribute to the engagement, creativity and motivation of the next generation.