Opinion
Every day, local governments borrow money to provide services for their constituents. Whether a particular item of spending is necessary will always be debatable and is not within the scope of this editorial. This article is meant to start a discussion about how local governments do business, specifically how government leaders approach the budgetary process, which includes setting the tax rate. I believe the existing system is flawed.
Currently, the budgetary process is one where government leaders assess what necessary expenditures exist at that time and then determine what the tax rate needs to be in order to pay for those expenditures. That method can cause cash needs to change significantly year to year and create needs to borrow because it is not ever politically expedient to raise taxes.
Instead, government leaders should be proactive. They should plan a number of years ahead to determine what anticipatable expenditures will exist, and then plan for those expenses so that issuing debt is not necessary. Let me use as an example the manner in which the city of Pulaski is currently addressing the purchase of a new fire truck.
Yesterday, the Pulaski Board of Mayor and Aldermen approved its budget for the upcoming fiscal year. Contained in next year’s budget is the purchase of a new fire truck. It is unquestionable the Pulaski Fire Department is in need of this piece of equipment as three of the five fire trucks in the fleet are more than 30 years old. One of the trucks will be 50 years old this year. With the purchase of the new truck, the city will be selling two fire trucks, one a 1971 model and the other a 1976 model.
While I am not questioning the necessity of purchasing a new fire truck and ridding ourselves of two older models, the city will be relying on issuing capital outlay notes in order to fund its purchase. This new indebtedness begs the question, is the borrowing necessary? Or is it simply the result of poor business practices and planning?
Why do we not already have the cash to make purchases that we should anticipate? When 60 percent of the fire department’s fleet has an average age of greater than 40 years, it is certainly foreseeable that some of the equipment will need to be replaced in the near future. Issuing debt to purchase a piece of equipment that you have known for many years needs replacing seems foolish, not to mention that it results in taxpayers paying more than is necessary. Further, planning to repay these borrowings with future tax dollars does not take into account the liability of citizens for their share of federal debt, which already will raise future taxes of those same citizens.
Most local government borrowing is done through instruments called municipal bonds. The municipal bond market is a nearly $3 trillion market, relied on by state and local governments to raise capital for projects such as roads, sewer systems and water treatment facilities. Traditionally, investors have seen municipal bonds as a safe investment; the bonds are typically guaranteed by the taxing authority of the governments who issue them. However, due to recent economic conditions, tax revenues of many governments have decreased (although for some inexplicable reason, it seems that Pulaski has, so far, been able to avoid such a decrease in revenue). The decrease in tax revenues of local governments who issue municipal bonds will result in an increase in defaults, since raising taxes to meet those obligations is neither politically expedient nor, in some cases, possible. The Wall Street Journal reported June 14 that “Numerous municipalities are struggling financially” and Warren Buffett has warned of a “terrible problem” ahead for municipal bonds.
The result of an increasing rate of default is an increase in risk to the bond holders, who will undoubtedly expect to be compensated for the increase in the risk of their investment. That compensation will come through an increase in the rate of interest that local governments will pay when issuing municipal bonds, increasing the cost of expenditures governments undertake through debt. Tax dollars will not go as far as they have in years past, resulting in higher tax rates in order to maintain the same level of service that voters have come to expect. Inflation already has this impact.
The fire truck is just one example in one department. A large amount of infrastructure is required to operate a city. That infrastructure requires large amounts of capital to maintain it. These infrastructure demands will never be any smaller and will continue to grow as will the required maintenance of it.
Knowing that truth, we have two options. Option one, which is risky and becoming increasingly expensive, is to continually turn to the issuance of debt, including the municipal bond market to fund needs that we should anticipate in advance and save for. Considering that borrowing only delays payment by taxpayers, as well as increases the cost, borrowing is not the most prudent option.
Option two, which requires no added risk or expense, is to plan well ahead. Setting aside funds in committed accounts that can only be used for their intended purpose allows local governments to more frequently avoid borrowing and its related costs. This is how the city should handle necessary replacements like the fire truck, thus allowing the city to stretch tax dollars further.
The city should budget by looking ahead, anticipating ordinary expenses and saving for unexpected expenses. Will such a process be perfect? No. Will it be better for taxpayers? Absolutely. If we allow expenditures to be prioritized any differently, we will not create an environment that allows the citizenry to prosper and grow. We haven’t borrowed and spent our way into prosperity yet; therefore, I have no reason to think that continuing down that path will create a different result.
As election time draws near, I would encourage you to be clear with those candidates to whom you pledge your support about how you think they should address budgetary issues, and be mindful as to which candidates share your ideas. If municipal debt is an issue that you are concerned about, then your candidate should be concerned about it as well. If you believe that local leaders should understand the difference between good planning and borrowing as a way of overcoming shortfalls that result from an absence of such planning, then so should the candidate you endorse. If we expect our local government to create an environment where we can grow and prosper, then our leaders should look to the future and plan, rather than rely on borrowing for the here and now.