Budget and Debt
Summary: Our debt is too high and is jeopardizing our future ability to provide the services that our residents expect; we need to take action immediately to get the debt under control.
The City's budget and debt can seem complicated, and they certainly did when I was first elected to the City Council. Words like "bonding" and "promissory notes" get thrown around with almost no context included, and it can be confusing. Moreover, we hear some aldermen decrying the debt as too high and others saying that it is not a problem at all. We are also told that there is a difference between "good debt" and "bad debt". What is really going on here, and how can we determine how much debt a City of our size can handle?
I get my best handle on our City's finances by treating them as I would a household budget. In a household, you make up a budget (often informal) based on the amount of money your household takes in and the amount of things your household needs and wants to spend money on. Sometimes you borrow for larger purchases such as a home or an automobile. When times get tough, you either have to increase the amount of money coming in to your household, and/or decrease the amount that you are spending.
It is NOT inherently irresponsible to borrow for larger purchases and thus put yourself in debt. But--It is not always customary and appropriate either. How can we make the distinction? Say you want to take out a mortgage for a house and the house that you want to buy will involve a monthly payment of $1,000. If you have $1,000 coming in to your household that you can devote to paying a mortgage, it probably makes sense to take out a mortgage and spread that debt out over a number of years, especially if you plan to live in the house for a while. However, if you look at your household budget and you can really only afford $800 per month for housing costs, it would be fiscally unwise for you to take out that $1,000 mortgage, even if your mortgage broker is willing to loan you the money. So, your mortgage could be "good" or "bad" debt depending on your situation--Long-term debt doesn't always fall into one category or other.
(On a national scale, a lot of the current financial crisis in the housing markets is due to loose lending practices that told home buyers that they could afford more home than they actually could. The lesson is, just because a lender tells you it is OK for you to borrow a certain amount, you still must run the numbers and do a reality check with your own budget.)
Getting back to the City finances, how have I come to the conclusion that our debt is too high and is quickly threatening to paralyze us? I look at the amount of interest (also known as "debt service") that we must pay each year just for the privilege of using the money. It has been on the increase over the last several years. I don't like to muddle up arguments with too many statistics, but a table may be the best way of explaining this:
Year Debt Service Total Levy Debt Service % of Levy
2006 $3,586,366 $10,390,286 34.5%
2007 $4,162,751 $10,905,440 38.2%
2008 $4,671,472 $11,631,170 40.2%
As can be seen, each year our debt service has increased, and is comprising a larger portion of our overall levy. This trend is simply not sustainable. Going back to our household example, this would be like have a lot of credit card debt and only being able to pay the minimum each month while continuing to borrow because our credit limit keeps being raised. We have also adopted strategies that are similar to paying off one credit card using a cash advance from another. Again, this is simply not sustainable.
What is the solution? We must either increase our revenue and/or cut expenses. I do not want to increase revenues by raising taxes. . .I have discussed the devastating consequences of tax increases in other parts of this website. That is a last resort. So, we must cut expenses. This is never easy or popular, but I believe that it can be done in a reasonable way that maintains services that are the most important to citizens.