Commentary
Editor’s note: In this commentary, Steve Hart, the recently elected Kerrs Creek member of the Rockbridge County Board of Supervisors, contends that the county should save for major capital expenditures rather than incur debt. He campaigned on this issue and has been advocating for it since taking office. If another of the supervisors would like to offer an opposing view in a future commentary, we invite him or her to do so.
When we are spending taxpayers’ money, Rockbridge County should make financial decisions to minimize longterm costs and maximize flexibility and independence.
Our current culture of continuous debt to finance our capital improvement and major maintenance projects is one of short-term convenience. We are paying 18 debts using annual payments of $7 million for total payments of $87 million over 25 years. When we pay off one debt, we take on another one, so we are always paying $7 million per year. For the proposed Recreation Center, we require an additional $14.4 million debt, pushing us above the $7 million annual payment. Every year, this debt transfers about $2.65 million OUT of the county in interest payments.
Switching from debt financed capital construction and maintenance to savings financing minimizes costs over time, gives us more for our money, provides flexibility in budgeting, and avoids moral hazards.
Interest on our debts is Rockbridge County wealth flowing OUT of the county. Interest paid on our savings is wealth flowing INTO the county. HVAC systems require major service every 20-25 years so let’s consider replacing 3 HVAC systems costing $7 million each for which we allocate $1 million per year. In both approaches, the total principal paid is $21 million. In the debt approach we PAY $3.44 million in interest resulting in a net cost of $24.4 million and taking 24 years to pay off. The savings approach EARNS $3.6 million in interest with a net cost of $17.4 million and takes 21 years. Supporting calculations available upon request. Debt costs more; savings costs less.
Interest payments on the proposed Recreation Center are expected to be $8.8 million over 20 years. What could we do with $8.8 million if we didn’t spend it on interest? We could a) Give our teachers a $2,000/ year pay raise for 20 years, b) Pay $7 million for the scheduled HVAC replacement at Maury River Middle School, c) retire existing debt, d) Reduce taxes by $444,000 per year, or e) Save it to pay cash for a Recreation Center. Interest on debt is the price we pay for lack of financial discipline and a “We have to have it NOW” attitude where savings allows us to spend more money on things that benefit us.
A savings strategy provides flexibility when economic downturns happen, whether from pandemics, hurricanes, floods, or recessions. When we have debts, we must pay them first. If sales, lodging, meals, and admissions tax revenues decline, we must raise property taxes to pay the debts. In a savings strategy, if tax revenue declines, we have the option of pausing our savings until revenue returns.
County debt spanning 20 or 30 years is “taxation without representation” for an increasing number of taxpayers. In years 2-18 of the debt payment, an increasing number of taxpayers were too young to vote when the debt was decided. In years 19-30 of the debt payment, an increasing number of taxpayers were not born when the debt was decided! Debt taxes future taxpayers without their permission.
The experts in modern municipal finance will tell us we have a ‘manageable level of debt,’ our debt load is lower than our peers, and structured debt is the way municipal finance is done to convince us we are smart and sophisticated. Some of that may be true, but this is also true: The finance wizards have built a system that allows them to extract a continuous stream of income from the taxpayers of Rockbridge County. Our debt payments are a transfer of wealth from the taxpayers of Rockbridge County to the bondholders and the companies that administer the debt. The people that advise us to go into debt and that hold our debt financially benefit from the fact we are in debt. Perhaps their advice is not unbiased.
So how do we switch from a debt strategy to a savings strategy? When we are $87 million in debt and considering another $14.4 million more, it will be hard. Really hard. ‘Hard like woodpecker lips’ as we said in the Army. First, we must refuse all new debt. This is hard because we will want things and we will have to say no. Second, we must pay off the debt we have, not in 30 years, but much faster. If we are diligent, I think we can do this in 10 years. If we get aggressive, eight years is possible. Third, we have to collect sufficient money to start paying cash for everything, which is probably another two years. Hard? Absolutely. Doable? Also, absolutely.
If we are doing just fine now, why bother changing? Because over time, we will pay less and get more, we will have a budget that is less susceptible to economic variations, and we will leave our children a financially sound and independent county.
