Paul Soglin: Waxing America

Borrowing for The CIty Budget - Limitations and Rules

When Dean Mosiman of the Wisconsin State Journal wrote Agencies' responses to Soglin's budget request would cut deeply, for 2012, this comment appeared:

...interest rates are at an all time low...more borrowing at this advantageous time...

The use of borrowing by governments is one of the most misunderstood aspects of budgeting. While many states and the federal government do not have a coherent set of rules and guidelines for borrowing, most cites, counties, school districts, and other local governments try to abide by the standards set by the Government Finance Officers Association budget practices, particularly debt and debt capacity.

Do Not Borrow for Operating Budget Items

The operating budget covers salaries, routine equipment and supply purchases. These are functions of government that do not provide a benefit after their immediate use.

The capital budget is used for those items that have a long life, usually more than ten years. Borrowing can be used for most capital budget items. Heavy earth moving equipment that lasts more than a decade fits, cars for the city fleet do not. Laptops do not, but enterprise software programs do.

The point is that you can borrow for roads, buses, buildings and those types of purchases that have a life as long or longer than the borrowing.

When you start borrowing for day-to-day needs, the outcome is different. It means next year you have to pay the debt on the money you borrowed for food and the utility bill as well as this year's food and utility bill. Clearly this kind of Ponzi scheme can last only so long.

Do Not Borrow What You Cannot Afford to Repay

The nature of the problem is not much different for our city than it is for your family. If you borrow $300,000 to purchase a home, you have to pay back the principal and interest over a fixed period of time. If your income is $300,000 a year, a monthly mortgage payment of $4000 a month is affordable. If you make $60,000 a year, it does not work. In fact, it still would not work even if you have no interest payments and only have to pay the principal.

If your borrowing results in a house payment that is more than you can manage, you will not have enough money to pay for utilities, food, and other basics.

That is what we did here in Madison.  Our enormous debt service load is taking away dollars to use for snow removal, park maintenance and public safety.

We cannot borrow our way out of this problem. In fact, we had to make two significant changes in borrowing practices:

1. We stopped borrowing for operating budget items.
2. We reduced our borrowing because our debt service is already too high and it takes away dollars we need for current city services. 

 

 

 

 

Some Thoughts on Warren Buffet's "Stop Coddling the Super-Rich"

On Sunday Warren Buffet wrote in the New York Times:

...I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off...

Buffet's observations bring to mind some other interesting observations about taxes and tax policy:

• Throughout American history, the periods of greatest economic expansion were preceded by expansions of private investment, which were always preceded by public spending in infrastructure and human capacity. Take for example what happened in the decades following World War II. There were two nations that led the world in economic growth. They were the same two nations that, because of limitations of their ability to fund a standing army, were forced to spend the greatest percentage of their national wealth on infrastructure, education, and industrialization. Those nations are Japan and West Germany.
• The most progressive of the three major taxes is the income tax. There is no good argument to be made that so long as health care, non-prepared food, and shelter are not taxed, that the sales tax is more progressive than the property tax.
• Wisconsin cities, particularly Madison, have some of the highest property tax rates in the country.
• The advantage of collecting taxes at the federal, or even state level as opposed to the local level is that it more fairly redistributes the revenues over a larger base. That in turn, results in a more equitable distribution of the cost of services that know no municipal or state boundaries. Examples of those services would be environmental controls, housing programs in a mobile society, and transportation where the benefits accrue to those who benefit from others taking the bus, train, or riding their bicycles.
• When the higher levels of government cut spending and reduce taxes, local units of government are forced to suffer the consequences of the reduced services and often greater costs in other areas. A perfect example is the federal government ignoring the needs of soldiers with mental health issues, or the closing of facilities that treat substance abusers.  An individual in need can run up local police, fire, and health costs of over $100,000 annually.

A final thought from Mr. Buffett:

...And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation...

 

Reviewing the Capital Budget - Controlling Debt

I spent a good deal of time this summer with city staff reviewing the City of Madison capital budget for 2011.  When I came into office I treated the existing capital budget as though we were starting over. In some instances there was not much room for adjustments. By time I was inaugurated, in April, commitments were made to spend tens of millions of dollars.

The adopted capital budget totalled $249,153,890. The source of this spending includes grants, special assessments, and most importantly, what is referred to as general obligation borrowing, or GO debt. Our goal was to reduce the GO debt as much as possible. For every million we reduced in borrowing, we would save the taxpayers $130,000 in debt service payments each year for a decade.

After many hours of meetings which included over thirty city staff members who participated in one way or another, and every member of the city council, we came up with a series of recommendations which will be finalized in the next two weeks. Some of the projects were cancelled such as the bicycle station associated with the now defunct high speed rail system. Correction- the blog should have  read “ The 2011 bike station funds were pushed back for reauthorization for next year.” Others were reduced, such as some of the street reconstruction and replacing projects. Others were pushed back for re-authorization next year including portions of information technology projects.

All told it looks like we will reduce the GO borrowing from $140,384,052 to $80,199,750.

This means that we will reduce city costs for debt service next year by roughly $7.8 million. That is $7.8 million that we either do not need to raise in additional property taxes or is available for basic city services such as public safety, snow removal and parks and recreation.

The trend line that shows the rising portion of the city budgeting going for debt service is seen in the chart below. The chart also shows the projection if all of the planned activities were to go forward through the year 2018. It is our goal to bring that line down in stages to first 14% and then 12.5% over the next 5 to 7 years. (In a subsequent post we will show what the line looks like with the final changes.).

 

 

I have long argued that public investment in infrastructure and in human capacity  are the keys to stimulating private investment which in turn creates jobs, markets and a sound economy. It pains me to have to have reduce our investment in infrastructure and slow down some of the needed projects. However, we also cannot afford to spend too much of our revenues on debt which leaves less funds for everyday city services.

There are some things we can do in the future that will prevent a recurrence of this problem:

• No borrowing for items that should be in the operating budget.
• Keep the level of borrowing and investment in infrastructure on an even level. Note the drops that took place in the early part of the last decade, particularly 2007 and 2008. In those years we did not borrow enough for needed infrastructure.
• Grow the city's tax base so that the cost of borrowing is spread over a larger base.

Getting My Priorities Right For the City of Madison

A reader wrote into the Wisconsin State Journal on Tuesday, Todd Van Fossen: Soglin should focus on crime, not signs: 

As a nearly lifelong Madison resident, I was baffled and appalled by Mayor Paul Soglin’s interview with Shawn Doherty. It was either a case of bad mayoral priorities, bad reporting and interviewing, or both. I have tremendous respect for Soglin, but the city has real problems that require real leadership....

...Crime is rampant. It’s a problem. It happens under the shadow of the West Side Police Station on McKenna.Mr. Mayor, with all due respect, the problem is not with signs at Johnson and Mills that impede your bicycling. The problem is crime and the declining home values and quality of life it causes in neighborhoods that are a primary tax base of our city...

 

Frankly, I cannot blame Mr. Van Fossen. Clearly it is time for me to return to blogging to make sure that Madisonians know that I hear from them, what is important to me, and what I recommend we do.

The first and most important challenge is to tackle City of Madison budget issues. We took several blows from the state in lost shared revenues, transportation aids, and recycling funds. In addition we have our own problems created by a series of decisions that lead to too much borrowing, borrowing for operating expenses, and relying on grants that required the city to step in with significant expenditures to maintain required service levels.

After we stabilize the budget we will be able to get into a position where we can tackle the problems of many Madison neighborhoods. We are well aware of the challenges -- rising poverty, increased crime, particularly violent crime, and needed employment opportunities. We are not waiting. Certain areas of the city are getting heightened police coverage, attention for violence related to substance abuse and mental illness, and issues related to neglected property.

At the same time there are still the 'broken window matters'. Some are aesthetic, such as illegal signage. Others are more serious such as carelessly parked bicycles and scooters on sidewalks that make the way impassable for anyone using a walker or a wheelchair.

I love the challenge of solving these problems.  Some commentators prefer to gossip about my attitude in addressing these very sobering and serious problems. I am serious about them. But I also get great joy when we solve these matters and I see an open government engage residents and public officials in a process that improves our quality of life.