November 11, 2001
[Note: I sent former Oshkosh Common Councilor and UW Oshkosh Professor of Economics Kevin McGee my essay on the city of Oshkosh debt problem, as well as Steve Hintz's response. In a cover note to Kevin, I wrpte that "I also realize that you might come to the conclusion, as have almost all members of the Common Council, that I am completely misinformed and full-of-shit!" Here's Kevin's response.]
Tony,
The good news is that you're only PARTIALLY full of shit!!! Here's my feedback, which you can post if you so wish:
(1) REVENUE BONDS VS GENERAL OBLIGATION BONDS: I think the City's decision to use General Obligation bonds rather than Revenue bonds is a reasonable decision. The difference is in risk: with General Obligation bonds, if the Water Utility couldn't cover its debts, city taxpayers would cover them; with Revenue bonds, if the Water Utility couldn't cover its debts, it would default, leaving the bondholders high and dry.
By issuing GO bonds therefore, city taxpayers are shouldering the risk, but they benefit by getting a lower interest rate. Since the risk is extremely small, I think that's a tradeoff worth taking.
(2) DEBT VS OTHER FINANCING OPTIONS: When we issue debt, we may or may not be "passing on our ... obligations to people who may not even benefit from those projects." It depends on what projects are being financed. It seems to me that its altogether appropriate to use debt for major, long term projects: street reconstructions, new water plants or fire stations, and the like. The problem is that we've used debt for way too many "small" capital items. A city with a $50 million budget shouldn't need to issue bonds to buy a $15,000 pickup truck.
Unfortunately, not issuing bonds for the truck means paying for it immediately, which means higher taxes initially. Future taxes will be lower, since there won't be any future debt payments for the truck, but taxpayers are generally unaware of future tax payments. So the politically easy thing to do is spend now and pay later, by issuing excessive debt.
(3) HOLDING DOWN TIF DEBT. In a sense Tax Incremental Financing debt is different from other debt, but in a more fundamental sense, the difference disappears. TIF debt is paid off using the property taxes collected from the TIF district, so it appears that "our children and grandchildren" will not "inherit a huge debt burden." However, since the TIF property taxes that pay off the TIF debt are NOT available to help pay for police protection, teacher salaries, and other public services, our children and grandchildren get stuck with higher property taxes nevertheless.
The point should not be that we should never issue any TIF debt. Rather, we should recognize that TIF debt is as burdensome on the future as other debt, and that therefore we should scrutinize TIF debt as much as any other debt.
(4) HOLDING DOWN ALL DEBT. Should the Common Council "take a critical look at the City Manager's $29 million capital improvement budget and eliminate all but the most vital projects?" Certainly -- but what you think are vital may differ from I consider vital, and this scrutiny should apply whether the projects are financed through debt or through current taxes. We should always be asking whether a project worth paying for, and whether we can afford it, debt or no.
I would agree though, that as our debt level approaches the state limit, the question of affordability becomes all that much more cogent.
Kevin