Municipal Finance is Different
From Family Finance
By Susan M. Halpern
Former Addison Councilmember (1992-1999)
During the election season, a negative handout was circulated regarding Addison’s debt. The author stated that Todd Meier told him that in 2000, Addison’s debt was only $1 million. The handout then suggested that this figure had ballooned significantly in the intervening years. The handout was political and tried to tie all this to certain candidates, although I didn’t follow the logic. In any event, the $1 million figure is incorrect. According to Addison’s staff, the principal of Addison’s debt in fiscal year 2000 was $49,382,371.00.
The handout played to our fears, painting municipal debt in a bad light. After all, we’ve always been taught that debt is a bad thing, right? In our personal lives, we borrow judiciously and work to pay off loans so that we can own assets outright. We try to stay out of debt. So, we’re conditioned to think of debt in a negative light.
What we must realize is that municipal debt is different, and not all municipal debt is bad. To understand why, we consider the underlying policy of matching burden to benefit.
Think about it this way. We as individuals accumulate assets. They provide us with financial security. We use our assets to live, to fund our retirement, and to secure the future for our families by passing (unencumbered) assets on to others when we die. Our assets are personal to us, and are used for the purposes we intend, whatever they may be.
Municipalities are different. They don’t die. They don’t retire. Quite to the contrary, municipalities endure for generations. So, municipalities don’t accrue assets to pass them along, they accrue assets to keep them. Municipalities build for a future that has no expiration date and a constantly changing and evolving populace. In other words, municipalities build infrastructure with the anticipation that the infrastructure will be used not only by current residents, but by future residents as well.
So, the question becomes: Is it fair to burden current residents with the entire bill for infrastructure that will be enjoyed by future residents?
The answer for me is a resounding NO. And this highlights a key difference between municipal debt and personal debt. By allowing for the cost of building and maintaining infrastructure to be paid over time, municipal debt better matches the burden of that infrastructure with the benefit of that infrastructure. In other words, if future residents of Addison will be using these roads, then they too should share in the burden of building, maintaining and improving them. Municipal debt accomplishes that, by spreading the cost over years, very much by design. It is a policy decision to ensure that benefit is better matched with burden. Otherwise future taxpayers receive benefits for which present taxpayers share an inordinate part of the burden. And that’s why we must view municipal debt in a different light from personal debt.
Consider the notion of matching burden and benefit in the context of the Addison Grove project. The council committed $6.5 million of public money to the infrastructure needed to support the development. Then they met to decide where the money would come from, and ultimately decided to take the money from CURRENT maintenance and operations budgets, rather than incurring debt. Now, in the toxic political climate of the last six years, that decision was spun as “living within our means.” Sounds so inviting and benign, doesn’t it?
BUT WAS IT A GOOD POLICY DECISION?
The answer for me is clearly NO. The reality is that current residents will fund the Addison Grove infrastructure, taking money away from current operations and maintenance needs. Future residents will enjoy the benefits of the project (if it is built), without shouldering the burden of paying the $6.5 million. Indeed, we know from the staff’s presentation that Addison’s return on this investment will take 23 years, and that’s ASSUMING A FULL BUILD OUT. So, unless you plan to live here for another 23 years, you won’t see a full return on your current payment of $6.5 million. That means we are being burdened without receiving commensurate benefit. And in my view, that’s poor policy.
This concept is not new. It was always a consideration for the councils on which I served. Indeed, the issuance of debt is part of how Addison was able to develop areas like Addison Circle and Vitruvian. It’s how Addison built new roads and installed drainage and maintained infrastructure and built parks and our trail system and our health club. If you enjoy all these amenities, you should share in the burden of building and maintaining them. Municipal debt helps to make it all possible, and allocates the burden more equitably.
Let’s come back to the issue of Addison’s debt, and focus on Meier’s tenure, since the author of the handout identifies Meier as the source of his information. I reviewed Addison’s Comprehensive Annual Financial Reports (CAFR) for several years. According to the CAFR’s, at the end of FY 2010-11, Addison’s total debt was $66,470,000. Meier was elected to his first term as mayor in May 2011, which was the middle of that fiscal year. By the end of FY 2015-2016, Meier’s second-to-last budget cycle, Addison’s total debt was $106,241,000, an increase of 84%. During that period, the total debt was as high as $118,913,000 (end of FY 13-14). And, while there may have been great reasons for the increase, it’s hard to connect the dots on the handout that prompted this article.
Nonetheless, Addison continues to hold excellent bond ratings, which reflect an assessment of its financial health and favorably impact the cost of its borrowing. This is from the Town’s 2015-16 CAFR: “The Town of Addison maintains an underlying bond rating of “AAA” from Standard & Poor’s and “Aa1” from Moody’s.” Those ratings have improved over the years, including during and after the 2008 downturn, which speaks favorably of the level of debt in Addison, among other things.
Let me close by saying that I am NOT advocating an irresponsible level of municipal debt. But, we must recognize that part of Addison’s future means building and maintaining a level of infrastructure that makes sense. That we can afford. That we need in order to build our Town out responsibly. And, it is sound, prudent policy to ensure that the cost of that infrastructure is borne equitably by all who benefit from it, not just current residents.
All of which means that municipal debt is a fact of life for towns like Addison. To think otherwise is foolish and naïve.