While millions of Americans are in debt or behind on high-interest credit card payments, many trillions of dollars is owed by governments at various levels for money they have already borrowed. At the same time, we know that debt can be a way to way build wealth, or it can help more fairly finance important large-scale public investments. So…Is debt good or bad?
Like almost everything, the answer is more nuanced; it depends on a number of factors, such as whether that money is being borrowed as part of a larger strategic plan that identifies and makes available for public inspection and discussion things such as:
– The total amount that has already been borrowed and associated debt service payments, overall and per taxpayer
– The long term plan for how that government (The local taxpayers) will afford to make the payments for the life of the loan
– What other long-term financial commitments exist, and how those will be paid for (a comprehensive capital plan), and what the priority order of those projects are.
But based on my experience in local government, these kinds of details are not always part of the discussion, and with responsibility shared among several stakeholders, some towns and cities end up borrowing more than they realize, or in worse cases, the public being intentionally misled by those with differing motives. This can happen easily.
For example, this graphic below shows five years of bond ordinances in one of the towns I worked in as the administrator. There was no document that reconciled all of the spending in one place for the Governing Body or public to view. I created this in 2019. In blue is the cost of each ordinance. In red is total debt authorized, meaning, the cumulative total of each bond ordinance. Most people are surprised when they see how much the smaller seeming amounts (blue) add up to to larger amount (red). The more you know!
In this episode, I give an ultra-simple overview of how local government budgeting works, and then discuss several of the consequences of what happens when what I call “runaway ad-hoc borrowing” occurs, some reasons I’ve noticed why we might see this happen, and a few things we can each do about it to help encourage transparent, strategic borrowing. Borrowing that enables communities to harness the power of credit/debt to make responsible investments that help improve their present and futures, rather than burdening future generations with inaffordability, misleading people about the cost of government’s, or not paying for important community investments such that more money will be eventually be needed.
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Join former mayor, municipal manager, professor, consultant Alex Torpey for a new episode of Rethinking where we discuss dynamics around debt from (local) government borrowing.
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- More information:
- Capital budget example documents:
- An example of a “placeholder” capital budget: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Bad-Capital-Budget-Example.png
- An example of a more thorough capital budget (from Leonia):
- Screenshot: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Good-Capital-Planning-2.png
- Screenshot: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Good-Capital-Planning-1.png
- The spreadsheet: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Updated-Planning-and-Forecasting-Tax-Impact-Sheet-Shared-Ext.xlsx
- Additional budget documents and examples:
Slide on how incremental borrowing adds up from Lambertville: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Cost-of-ad-hoc-borrowing.png
Video on how I organized the budgeting for road resurfacing in Leonia: https://youtu.be/sen_unTmWzI
A projection of various scenarios and their tax impacts for Lambertville: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Updated-Planning-and-Forecasting-Tax-Impact-Sheet-Shared-Ext.xlsx
Slides describing the expense of borrowing too much from Leonia: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Shared-Borrowing-Slides.pptx
Goals for a new budget from Lambertville:https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/Lambertville-Budget-Goals.png
- Examples of budget documents (from Lambertville):
- Annual Budget (85 pages): https://www.lambertvillenj.org/government/documents/financial-documents/2020-1/450-2020-adopted-budget/file
- Annual Financial Statement (AFS) (191 pages): https://www.lambertvillenj.org/government/documents/financial-documents/2020-1/449-2019-annual-financial-statement/file
- Annual Debt Statement (ADS) (11 pages): https://www.lambertvillenj.org/government/documents/financial-documents/2017/471-2017-annual-debt-statement/file
- “User Friendly” Budget (14 pages): https://www.lambertvillenj.org/government/documents/financial-documents/2020-1/452-2020-user-friendly-budget/file
- All of the budget presentations that we used in 2019/2020:
- Part One – Introduction and first round of presentation of Operating Requests: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/City-of-Lambertville-2020-Budget-Presentations-Part-One.pdf
- Part Two: Second round of operating requests: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/City-of-Lambertville-2020-Budget-Presentations-Part-Two.pdf
- Part Three – Last round of operating requests and Administration cost savings: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/City-of-Lambertville-2020-Budget-Presentations-Part-Three.pdf
- Part Four – Drilldown in cost drivers: Capital, debt, and professional service contracts: https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/City-of-Lambertville-2020-Budget-Presentations-Part-Four.pdf
- Part Five: Drilldown on revenues https://rethinkingwithalextorpey.com/wp-content/uploads/2021/12/City-of-Lambertville-2020-Budget-Presentations-Part-Five.pdf
- “Top 10” Budget points video: https://youtu.be/iTyLGOie9Rc
- Explanation of new budget process video: https://www.youtube.com/watch?v=CyAieH2JtUs
- Additional budget explainer video: https://www.youtube.com/watch?v=JOTvgFS2jTI
- COVID-19 Budget impact video: https://www.youtube.com/watch?v=g-oAMREhAHE