Monday, December 8, 2014

All the Debt We Can Carry

Everyone knows the federal budget deficit is large and getting larger all the time. It's out of control, right? Well, what everyone knows and what's the truth sometimes bear little resemblance to one another. In fact, the federal budget deficit has been plunging in recent years, falling from nearly 10 percent of G.D.P. in 2009 to less than 3 percent in 2014, below the average experienced over the past 40 years. So much for what everyone knows.

Let's bring the discussion closer to home. What about the situation in the City of Richardson? After the jump, a look at what our community owes.

Because the State of Texas and its cities are required by law to have balanced budgets, you might think deficit spending shouldn't be a problem for state and local government. In fact, cities raise money by issuing bonds. As long as they meet the interest payments on that debt, they can say they have balanced budgets while still going deeper and deeper into debt. The game is the same, only the bookkeeping is different.

Luckily for us, the Texas Tribune offers a handy "Local Debt Explorer" to tell us what Richardson owes and how that compares with similar cities. First let's look a cities with a similar population.

CityPopulationOutstanding debtDebt per person
Wichita Falls104,552$74,605,000$714

Wow, Richardson's debt looks excessive, right? But wait. Maybe looking at cities with a similar population is not the right comparison. Cities rely on their property tax base to support their debt, so maybe we ought to compare Richardson with cities with a similar property tax base. Where does Richardson fall in that comparison?

CityProperty tax baseOutstanding debtDebt to PTB

That's better. Richardson sits right in the middle. But why is there such a wide spread? Why does Pearland have a 5.14% ratio of debt to property tax base but Lewisville has only a 1.58% ratio? Would it be good or bad for Richardson to move the city's ratio of debt to property tax base closer to Pearland's or closer to Lewisville's? The "Local Debt Explorer" doesn't answer those questions.

I'm smart enough to know that debt, per se, is neither good nor bad. Borrowing money is a tool, and like any tool it can be used well or used poorly. And just like the price of tools can be either expensive or on sale, so too can money. Right now, our country is experiencing low interest rates (i.e., a money sale) of historic proportions. It makes sense for governments to take advantage of that sale to make investments. Richardson has been doing that, making some big plays recently using debt for financing. $5.6 million for purchase of land at Plano Rd and Apollo Rd for future parks and recreation purposes. $11 million for expansion of the Spring Creek Nature Area. I supported this aggressive approach to debt in both instances.

Monday night, the Richardson City Council will review and discuss the planning for a future bond program. As part of that planning, I hope they ask some basic questions about the benefits, costs, and risks of accumulating debt. I hope they ask for explanations why Pearland and Lewisville's ratios of debt to property tax base, which are so different than Richardson's, might make sense for those cities, but maybe don't make sense for Richardson. Because no matter how cheap money might be right now, it somehow doesn't seem prudent to take on all the debt that we can carry.

Or is it? When interest rates are at rock bottom and can't go any lower, don't assume the old truisms still apply. As Nobel Prize-winning economist Paul Krugman puts it, "in a rock-bottom economy the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly." Make sure you understand why before you rely on your gut feelings to decide how much debt is right for Richardson.

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