By now nearly everyone is aware of the financial debacle created by the Washington Public Power Supply System (WPPSS), or “Whoops” for short. WPPSS is responsible for the largest default in the history of municipal finance, having reneged on payments of $2.25 billion in bonds issued to finance two nuclear power plants in the state of Washington. Few, however, know of the root of the WPPSS default: The spending and borrowing of off-budget enterprises (OBEs) such as WPPSS do not appear in the budgets of the governmental entities that created them. OBEs raise funds not by direct taxation but by ssuing revenue bonds that are not approved by voters. Consequently, OBEs such as WPPSS are detached from the scrutiny and control of taxpayers (at least until serious financial problems arise), and are exempt from many of the checks and balances that exist for other firms in the public and private sectors. The lack of incentive that plagues public enterprises generally because the profit motive and other market constraints are absent is amplified in OBEs because of the further lack of political market constraints.

The main point of this paper is that the root cause of the WPPSS default is neither simply mismanagement nor a series of avoidable mistakes but rather the fact that, as an OBE, WPPSS is inherently inefficient and not accountable to taxpayers. And furthermore, WPPSS is just one of many off-budget boondoggles; throughout the nation are thousands of other OBEs, threatening to bankrupt more state and local governments.