Submitted by Andy Duus, Former BET member & former Chair 2020 BET Debt and Fund Balance Committee and Bill Drake, Member BET & former member of the 2020 BET Debt and Fund Balance Committee
To the editor,
In the recent First Selectman debate, the Democratic candidate reaffirmed her party’s long-stated position that the Town’s current debt position is “suboptimal” and that “you should match the debt maturity to the life of the asset.”
Sigh…this comment reflects the wide-spread under-appreciation of the Town’s debt policy, that has served the Town well for recent decades. More or longer-term debt, likely, would not be a panacea for the Town’s prospective funding challenges.
Municipal debt differs from corporate taxable debt. Corporations may fund capital needs through the issue of either debt or equity. There are several reasons why corporations issue debt: (a) within normal bounds of financial leverage, debt is less expensive than equity, (b) debt may reduce potential ‘agency’ costs, and (c) equity investors appear empirically to prefer the stocks of companies that have some financial leverage.
Municipalities, however, may fund capital needs only through the debt or taxes, and municipal debt has several key distinctions and constraints:
- Interest costs make municipal debt always more expensive than taxes. If cost was the sole criterion, Greenwich should fund all capital expenditures through current taxes, and to the extent debt is used, short-term debt would be preferable to long-term debt.
- Federal law does not allow tax exemption on interest earned on municipal debt with a maturity longer than the life of the funded assets. This means that in contrast to taxable debt, which can be refinanced at maturity without legal limits, municipal debt at some point must be fully repaid. In other words, municipal debt merely defers the timing of the ultimate tax payment.
- Connecticut law prohibits municipalities from issuing debt with a final maturity greater than twenty years. It further requires that municipal debt amortize annually. Therefore, at recent interest rates, the longest debt that the Town could consider would have an average life of about a dozen years.
The BET establishes the debt policy of the Town. It sets forth guidelines within which it seeks to optimize among the goals of inter-generational fairness, low cost, and flexibility/ease of execution. Each year, the Town funds the cash needs associated with a portfolio of diverse capital projects through a capital tax levy augmented by a combination of one-year debt and five-year amortizing debt borrowings. These maturities permit funding off the typically lower cost short end of the yield curve. Funding cash needs, and not separate projects, is simpler, more flexible, less costly, and no less fair than match funding. It also means that for a major capital project that might take several years to complete, the associated debt might not be fully repaid for a decade, not that much shorter than the average life of the longest-term debt allowed by the State.
This year, Greenwich has budgeted a new record $112 million for capital, of which $86 million is for the public schools. This compares with the prior record-high annual capital budget of $73 million last year. Including debt service, total funding costs are expected to be $160 million. Given that Greenwich has budgeted a capital tax levy of only $55 million (raised from last year’s $51 million), the balance of $95 million must come from proceeds of new debt to be issued later this year.
There is ample current market and credit capacity for the Town to issue additional debt and the Town’s debt policy acknowledges that the Town may consider the issue of debt with a final maturity up to twenty years to fund an extraordinarily large long-term investment.
Many in Town may support continuation of the significantly increased capital spending budgeted this year into future years, and to have debt, not taxes, be the primary source of funding. The issue is that every dollar of municipal debt must be repaid from future taxes on residents. Larger and longer debts simply mean larger and longer taxes. Many municipalities and governments have gotten themselves in trouble with large debts, problems which Greenwich has avoided with our careful and successful debt policy.
If this year’s record level of capital spending were to continue, the Town would need to increase significantly future capital tax levies.
The challenge is that the Town already taxes a lot. To fund its spending, Greenwich relies primarily on property taxes. Although our current mill rate of 11.393 is one of the lowest among the 169 municipalities in the State (Salisbury has the lowest rate at 11.000), our local property grand list is highest by far in the State, and our property taxes per capita are also high at $6,532. Higher average rates are had by Darien, Westport, and New Canaan (which may have the highest rate in the State at $7,450 per capita). Greenwich, however, has a much more financially diverse population, for whom higher taxes would pose difficulties.
So, this is the major issue in this election. Do we wish either to follow the lead of the over-levered ‘blue’ states and municipalities or build only what we need, neither more nor less, and not what we would wish to have?
Candidates from both political parties espouse financial prudence. Although the Democrats may ‘talk-the-talk’, the Republicans have a record of prudent financial management of the Town. We ask that you please vote Republican in November.
Thank you,
Andy Duus, Former BET member & former Chair 2020 BET Debt and Fund Balance Committee
Bill Drake, Member BET & former member of the 2020 BET Debt and Fund Balance Committee