{"id":1663,"date":"2017-05-16T15:27:57","date_gmt":"2017-05-16T20:27:57","guid":{"rendered":"http:\/\/truthinaddison.com\/?page_id=1663"},"modified":"2017-05-16T15:27:57","modified_gmt":"2017-05-16T20:27:57","slug":"municipal-finance-is-different-from-family-finance","status":"publish","type":"page","link":"http:\/\/truthinaddison.com\/?page_id=1663","title":{"rendered":"Municipal Finance is Different From Family Finance"},"content":{"rendered":"

Municipal Finance is Different<\/strong>
\nFrom Family Finance<\/strong>
\nBy Susan M. Halpern<\/strong>
\nFormer Addison Councilmember (1992-1999)<\/strong><\/h3>\n

During the election season, a negative handout was circulated regarding Addison\u2019s debt. The author stated that Todd Meier told him that in 2000, Addison\u2019s debt was only $1 million.\u00a0 The handout then suggested that this figure had ballooned significantly in the intervening years.\u00a0 The handout was political and tried to tie all this to certain candidates, although I didn\u2019t follow the logic. \u00a0In any event, the $1 million figure is incorrect.\u00a0 According to Addison\u2019s staff, the principal of Addison\u2019s debt in fiscal year 2000 was $49,382,371.00.<\/p>\n

The handout played to our fears, painting municipal debt in a bad light. After all, we\u2019ve always been taught that debt is a bad thing, right?\u00a0 In our personal lives, we borrow judiciously and work to pay off loans so that we can own assets outright.\u00a0 We try to stay out of debt.\u00a0 So, we\u2019re conditioned to think of debt in a negative light.<\/p>\n

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.<\/p>\n

Think about it this way. We as individuals accumulate assets.\u00a0 They provide us with financial security.\u00a0 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.\u00a0 Our assets are personal to us, and are used for the purposes we intend, whatever they may be.<\/p>\n

Municipalities are different. They don\u2019t die. They don\u2019t retire. Quite to the contrary, municipalities endure for generations. So, municipalities don\u2019t 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.<\/p>\n

So, the question becomes: Is it fair to burden current residents with the entire bill for infrastructure that will be enjoyed by future residents? <\/strong><\/p>\n

The answer for me is a resounding NO. And this highlights a key difference between municipal debt and personal debt.\u00a0 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.\u00a0 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.\u00a0 Municipal debt accomplishes that, by spreading the cost over years, very much by design.\u00a0 It is a policy decision to ensure that benefit is better matched with burden.\u00a0 Otherwise future taxpayers receive benefits for which present taxpayers share an inordinate part of the burden.\u00a0 And that\u2019s why we must view municipal debt in a different light from personal debt.<\/p>\n

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.\u00a0 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.\u00a0 Now, in the toxic political climate of the last six years, that decision was spun as \u201cliving within our means.\u201d\u00a0 Sounds so inviting and benign, doesn\u2019t it?<\/p>\n

BUT WAS IT A GOOD POLICY DECISION?<\/strong><\/p>\n

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.\u00a0 Future residents will enjoy the benefits of the project (if it is built), without shouldering the burden of paying the $6.5 million.\u00a0 Indeed, we know from the staff\u2019s presentation that Addison\u2019s return on this investment will take 23 years, and that\u2019s ASSUMING A FULL BUILD OUT.\u00a0 So, unless you plan to live here for another 23 years, you won\u2019t see a full return on your current payment of $6.5 million.\u00a0 That means we are being burdened without receiving commensurate benefit.\u00a0 And in my view, that\u2019s poor policy.<\/p>\n

This concept is not new. It was always a consideration for the councils on which I served.\u00a0 Indeed, the issuance of debt is part of how Addison was able to develop areas like Addison Circle and Vitruvian.\u00a0 It\u2019s how Addison built new roads and installed drainage and maintained infrastructure and built parks and our trail system and our health club.\u00a0 If you enjoy all these amenities, you should share in the burden of building and maintaining them.\u00a0 Municipal debt helps to make it all possible, and allocates the burden more equitably.<\/p>\n

Let\u2019s come back to the issue of Addison\u2019s debt, and focus on Meier\u2019s tenure, since the author of the handout identifies Meier as the source of his information. I reviewed Addison\u2019s Comprehensive Annual Financial Reports (CAFR) for several years. According to the CAFR\u2019s, at the end of FY 2010-11, Addison\u2019s total debt was $66,470,000.\u00a0 Meier was elected to his first term as mayor in May 2011, which was the middle of that fiscal year.\u00a0 By the end of FY 2015-2016, Meier\u2019s second-to-last budget cycle, Addison\u2019s total debt was $106,241,000, an increase of 84%.\u00a0 During that period, the total debt was as high as $118,913,000 (end of FY 13-14).\u00a0 And, while there may have been great reasons for the increase, it\u2019s hard to connect the dots on the handout that prompted this article.<\/p>\n

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\u2019s 2015-16 CAFR: \u201cThe Town of Addison maintains an underlying bond rating of \u201cAAA\u201d from Standard & Poor\u2019s and \u201cAa1\u201d from Moody\u2019s<\/strong>.\u201d\u00a0 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.<\/p>\n

Let me close by saying that I am NOT advocating an irresponsible level of municipal debt. But, we must recognize that part of Addison\u2019s future means building and maintaining a level of infrastructure that makes sense.\u00a0 That we can afford.\u00a0 That we need in order to build our Town out responsibly.\u00a0 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.<\/p>\n

All of which means that municipal debt is a fact of life for towns like Addison. To think otherwise is foolish and na\u00efve.<\/p>\n

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