“The reason to finance public works projects over time is so that the citizens that use them will pay for them over their useful life. So for example, instead of burdening today’s taxpayers with the full cost of a new or renovated school or water treatment plant we spread the burden over 20 years so that future taxpayers, who are using the asset, pay their fair share.” Michael Spino
Lost in the recent discussions at city hall are some basic principles of public finance that need to be brought back to life.
1. Municipal bonds and similar financial instruments such as bank loans are legitimate and sound tools of local governments. For over 200 years American cities have used bonds to finance public works such as schools, water treatment and sewer projects, libraries, bridges and highways. Why? The reason to finance public works projects over time is so that the citizens that use them will pay for them over their useful life. So for example, instead of burdening today’s taxpayers with the full cost of a new or renovated school or water treatment plant we spread the burden over 20 years so that future taxpayers, who are using the asset, pay their fair share.
If the city has so much money laying around that they can pay for the full cost of the new school with cash then they have over taxed current tax payers and should cut taxes. Using capital debt to pay for the proposed projects such as the renovations of the train station, library and humane society are exactly how municipal bonds and similar instruments are supposed to be used.
We may disagree about which projects should be funded and at what levels but using capital financing to pay for them is fair, appropriate and responsible.
2. The amount of capital improvement bonds and similar instruments such as bank loans and revenue bonds that cities use should be controlled and monitored. Sound public finance requires that the amount and use of public debt should be carefully controlled. That is why the city of Fernandina Beach retains bond counsel. First Southwest was selected as the city’s bond counsel through competitive process and serves that function for the city. Bond counsel reviews the proposed financial instruments and makes sure that the city does not issue more debt than it can afford and uses the funds appropriately. Generally speaking the city should only issue general fund backed debt so that the debt service not exceed 5% of the general fund budget.
A quick look at the city’s budget shows general fund expenditures of about $15.5 million for fiscal year 2013 and debt service of $425,484 or about 2.7% (http://www.fbfl.us/DocumentCenter/View/12792.) In other words the city is well under the level of capital debt that it should carry at this time.
3. Florida cities and counties are constitutionally prohibited from using long term debt to finance current operating expenses. Under no circumstances should municipalities use debt to pay for the salaries and everyday expenses of running the city. The proposed capital borrowing and spending should only be used for “brick and mortar” projects that will outlive the period of borrowing. And no, we can not use borrowed funds to rebuild operating reserves.
4. If the city of Fernandina Beach has budget deficit it is an operating budget problem, not a capital debt problem. Cutting back on capital borrowing in order to reduce interest costs at a time of historically low interest rates would be irresponsible and wasteful. The city has already incurred costs for the debt issuance. Interest rates are below 3% and the funds are needed for legitimate purposes. Returning these borrowed monies means the loss of the issuance costs and then the full burden of the capital expenses will fall on current tax payers. In other words to pay for capital investments like a library, dog pound or visitor center the cost will fall entirely on current tax payers and likely require a tax increase. That would be plain foolishness.
Editor’s Note: Mike Spino is a retired budget official from the State of Ohio. Mike worked as a budget analyst and senior budget analyst for the Ohio Office of Budget and Management from 1985 – 1999. While at OBM Mike helped to create and implement the school district fiscal emergency provisions and the Ohio School Facilities Commission. Mike also served as Chief of Staff for the Ohio Department of Education from 1999 through 2002. Mike holds a Masters degree in Public Administration from the Ohio State University. Mike and his wife have lived in the historic district of Fernandina Beach since 2006.
February 15, 2013 10:47 a.m.