Borrowing for The CIty Budget - Limitations and Rules

August 24, 2011 3:46 PM

When Dean Mosiman of the Wisconsin State Journal wrote Agencies' responses to Soglin's budget request would cut deeply, for 2012, this comment appeared:

...interest rates are at an all time low...more borrowing at this advantageous time...

The use of borrowing by governments is one of the most misunderstood aspects of budgeting. While many states and the federal government do not have a coherent set of rules and guidelines for borrowing, most cites, counties, school districts, and other local governments try to abide by the standards set by the Government Finance Officers Association budget practices particularly debt and debt capacity.

Do Not Borrow for Operating Budget Items

The operating budget covers salaries, routine equipment and supply purchases. These are functions of government that do not provide a benefit after their immediate use.

The capital budget is used for those items that have a long life, usually more than ten years. Borrowing can be used for most capital budget items. Heavy earth moving equipment that lasts more than a decade fit, cars for the city fleet do not. Lap tops do not, but enterprise software programs do.

The point is that you can borrow for roads, buses, buildings and those types of purchases that have a life as long, or longer than the borrowing.

When you start borrowing for day-to-day needs, the outcome is different. It means next year you have to pay the debt on the money you borrowed for food and the utility bill as well as this year's food and utility bill. Clearly this kind of Ponzi scheme can last only so long.

Do Not Borrow What You Cannot Afford to Repay

The nature of the problem is not much different for our city than it is for your family. If you borrow $300,000 to purchase a home, you have to pay back the principal and interest over a fixed period of time. If your income is $300,000 a year a monthly mortgage payment of $4000 a month is affordable. If you make $60,000 a year, it does not work. In fact it still would not work even if you have no interest payments and only have to pay the principal.

If your borrowing results in a house payment that is more than you can manage, you will not have enough money to pay for utilities, food, and other basics.

That is what we did here in Madison. Our enormous debt service load is taking away dollars to use for snow removal, park maintenance and public safety.

We cannot borrow our way out of this problem. In fact we had to make two significant changes in borrowing practices:

1. We stopped borrowing for operating budget items.
2. We reduced our borrowing because our debt service is already too high and it takes away dollars we need for current city services.

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