Letter submitted by Brooks Harris, RTM District 10, RTM Finance Committee
Greenwich has historically financed a majority of our expenditures through tax receipts.
While we do borrow to pay for some portion of our capital expenditures, that borrowing is limited both in size and in maturity.
Our current policy, often referred to as “pay-as-you-go,” allows us to pay for some capital improvements over 5 years to spread the cost of the project and avoid a sharp but temporary spike in taxes.
Our prudence is one of the factors that makes us fiscally strong. In an age where many states and cities are experiencing financial difficulties, the Town of Greenwich is still rated “AAA” which it the highest rating available.
Recently there has been a call to revise our financing policies. It is possible we will face some large expenditures in the near future such as unfunded liabilities for pensions and toxic waste remediation. We will also likely have to invest a considerable amount to bring our school facilities and playing fields up to date.
The Board of Education has completed a study which has a preliminary spending target of $773 million over 15 years.
With the recent limitation on deducting state and local taxes for federal tax purposes, residents already will be sensitive to significant tax increases.
As a result, there has been a call to consider issuing longer-term debt to spread the cost of capital expenditures over more years and reduce the annual impact.
In addition, there is a fairness argument. Why should the price of a school that lasts 30 years not be shared between taxpayers today and tax payers in the future who will also benefit from the long-term investment? Having today’s tax payers pay the full price for something that will be used by future tax payers who do not pay is referred to as a “generational transfer” and trying to avoid such transfers is a valid consideration.
Issuing long-term debt to fund expenditures is seductive. We can spend a lot today and we don’t pay too much now. If we borrow for 5 years, we typically repay 1/5 per year. When we borrow for 20 years, we only have to pay 1/20 th per year. On a $100 million project, this is a savings of $15 million per year for the first 5 years. Unfortunately, there is no free lunch. While 20-year debt saves us a lot in the early years, we would have to pay $5 million more per year in the last 15 years. And if we do this often, those back end payments will build up and potentially crowd out other important expenses in the later years.
This is the “moral hazard” associated with long-term debt, and it is frightening. Well intentioned municipalities have fallen into this trap and have seen their credit ratings erode and their ability to fund basic services such as police and fire fighters reduced. This is something we should certainly avoid.
So how do we make the capital expenditures we need without raising taxes too fast and without mortgaging our future with excessive debt? There is no easy answer. If you spend money, you have to pay for it now or later.
That is why part of the equation is making sure we only spend the money we really need to. But assuming you decide you need to spend the money, any financing plan must assure fairness to current and future tax payers and assure Greenwich will be fiscally strong today and in the future. To do this, such a plan would also have to make sure people were educated about their choices and had maximum say in the voting booth if they disagreed with choices that were made.
Until now these decisions were made by the Board of Estimates and Taxation (BET) and approved by the Representative Town Meeting (RTM) in an up-or-down vote. There has been some informal opportunity for the RTM to collaborate with the BET, but the RTM has no formal financing policy. And while an up-or-down vote technically constitutes oversight, in practice it is not realistic to expect the RTM to vote “no” at the very end of the process.
Because current RTM policy (or lack thereof) does not promote formal collaboration and effective oversights and because financing decisions are likely to be increasingly important going forward as we start considering major long-term expenditures, we need to improve our approach. I advocate the following steps:
1) The RTM should adopt a formal financing policy which gives good guidance to the BET on the goals and practices that should be followed in the normal course.
2) Debt maturities of up to 5 years would be explicitly allowed.
3) Longer-term debt would also be allowed, but only by exception, and only with the consent of the RTM. The type of projects that would qualify for such an exception might be large projects with very long useful lives.
4) It would be clear that if a funding plan is submitted to the RTM that does not meet the
established guidelines, it would likely be rejected unless the exceptions had been discussed with and approved by the RTM in advance.
Such a plan would allow fiscal conservatives more checks on the process to make sure spending does not get out of control.
For those who believe Greenwich has under-invested in our schools and facilities, it changes our current “pay-as-you-go” strategy to allow longer-term financing for exceptional projects.
This is critical because if you only fund projects with short-term debt, you may never make the large, long-term investments you need because the short-term impact on taxes would be prohibitive.
The specifics of this approach should be hammered out by debate and approved by consensus. Indeed, that discussion is taking place right now and the results likely will be presented to the RTM in the near future. Similarly, the BET has established a working group to review debt policy. Undoubtedly, these issues will be discussed there as well. Greenwich is a wealthy town, and we should rightfully expect to have first-rate services and facilities. To do this and maintain our long-term financial strength will not be easy, so we need to make sure our financing policy is robust enough to insure us the best outcome.
Brooks Harris
RTM District 10
RTM Finance Committee