The PAY-AS-YOU-GO Myth of Greenwich Capital Financing.

The most interesting issue in this election is the fight over how Greenwich finances its major capital projects. This issue has divided the BET for over two years and now is a primary issue in the First Selectman race between Peter Tesei and my wife, Beth Krumeich. 

The BET candidates, Bill Finger, Jeff Ramer, Randy Huffman, Mary Lea Kiernan, Sean Goldrick and John Blankley, have written eloquently on the subject in the Greenwich Time (10/12/13). Drew Marzullo has also spoken out on the need for long term financing. 

Unfortunately, Peter Tesei has made this a partisan issue and the BET Chair has stated he does not see a reason to change the way we finance capital projects with short-term bonds. They do not recall that we just started financing with short-term bonds in 2007, as Alma Rutgers pointed out in an excellent piece in the Greenwich Time (10/12/13). This was when we realized the old pay-as-you-go system made it difficult to finance major projects and maintain the infrastructure. 

The enduring myth of Greenwich town government is that we fund capital projects on a pay-as-you-go basis. That has not been true for many, many years. I was in the RTM in the ‘80s and on the BET for 14 years and large projects used to be funded directly from tax revenues spread over five years so they would not crowd out other projects. When I was on the BET Budget Committee we mimicked this system when the town bought the Pomerance property and issued five-year bonds. We realized at the time, as experts told us, it made more sense to bond the debt over a longer period with smaller payments but we felt the RTM would be hostile to bonding if it was not for the same limited period they were used to with direct taxpayer funding. Later we took advantage of historic low rates (lower than the rates earned on town investment funds) and established a financing plan for large capital projects based on two-year bond anticipation notes and five-year bonds. This seven-year short term bonding is the present financing system Peter Tesei and the Republicans on the BET refuse to change. 

Today it makes much more sense to fund long-term capital projects over twenty years so that tax revenues to service the debt are lower because debt service is spread out over a longer period so the entire debt burden is not laid onto current tax payers but extends over more of the useful life of the project. This is fairer to today’s taxpayers and would allow us to do more capital projects sooner without increasing debt service from tax revenues. 

An expert in municipal finance from Goldman Sachs made these points at a presentation to the BET recently and also told them that the town’s approach of using short-term bonds for long-term projects was “risky” because the town may get caught with higher interest rates when this period of historic low rates comes to an end. Today we can issue 5-year bonds for 1.75 % and 20 year bonds for 3.125 %.

The expert noted that all the other AAA rated municipalities in lower Fairfield County finance their projects through 20-year bonds with lower principal to interest ratios in their debt service than Greenwich. He also explained the present-value-of-money principle that money paid sooner costs more in terms of present value than money paid later. Debt service will also be reduced by spreading out principal payments to leave more room for other capital projects, operating expenses or tax cuts. Lowering debt service is particularly important now as the town faces a trifecta of financial challenges: large unfunded pension liabilities, environmental cleanup costs at Greenwich High School and rising health care premiums. 

So far Peter Tesei and the Republicans on the BET have resisted change and are oblivious to the waste of taxpayer money in using short-term bonds to finance long-term projects. Their stubborn refusal to lengthen the term of the bonds is one reason debt service (i.e. principal and interest) is 6.6% of our budget, with much higher principal payments than other AAA towns that use 20 year financing. The inflated debt service on major projects mean there is less money for other items like repairing and maintaining our infrastructure. 

For example using the $ 23 million Central Fire Station and the $ 43 million MISA projects both under way now the present value of bonded costs to taxpayers would drop approximately $ 4.5 million if the projects were financed with 20-year bonds rather than 5-year bonds. The effect on cash flow is even more dramatic: based on the above rates to finance both projects over 20 years would cost $ 4.154 million per year as opposed to $13.04 million per year if the bonds were paid off in only five years, a reduction in payments the first five years of $ 8.9 million each year. The extra cash flow would allow the town to do more projects or pay other expenses without increasing annual tax levies. Long delayed projects like the Eastern Civic Center, Northwest Greenwich Firehouse, dredging Binney Pond. We would not put off urgent projects like making the sewer treatment plant flood-proof or accelerating  the $ 50 million plus in drainage and flood control projects that are now being done at a pace of much less than $ 2 million per year. 

The other benefit would be to lock-in today’s low interest rates and avoid the risk of future interest rate hikes. Not only will taxpayers earn more by paying less in taxes but the tax burden would be more fairly spread among all the taxpayers who benefit from a project whose useful life may be 20-50 years not just current taxpayers. 

Beth Krumeich has made avoiding waste of taxpayers’ funds through long-term financing of long-term projects a central theme of her campaign, as she explained in a recent article. “We are wasting millions using short-term bonds to pay for long-term projects.” 

BET Democrats’ advocacy of long-term financing has met a stonewall from defenders of the status quo like Peter Tesei. Speaking to a state Republican group he complained about his opposition as reported in the Greenwich Time (10/2/13): “Tesei … told party stalwarts that being a Republican in Greenwich is not always so easy. Tesei said that he has faced a strident opposition from local Democrats, whom he characterized as eager to incur long-term debt for major capital projects.” 

This comment confuses two separate matters: the first is the idea that long-term projects should be financed with long-term, not short-term, bonds for the reasons discussed above. The second is what projects should be done and whether they should be financed through debt or directly from tax revenues. As noted above, at least with major projects, at today’s interest rates that is a no-brainer and already has been decided because our present policy is to finance those projects. The decision whether the project should be done at all is up to the Selectmen, the BET and the RTM; it is not until a project is approved that the question of how to finance it arises. While the total debt carried on the books will increase with long-term financing, as experts have explained, the present value of the taxpayer revenues needed to fund the projects will be much less and debt service payments will drop precipitously so more cash flow will be available for other uses. 

The present financing model and cap on capital spending are misguided because they tie up too much cash flow in debt repayments rather than using tax revenues to spend for needed projects or to cover increased operating expenses. Instead of focusing on total debt we should be focusing on reducing debt service, the principal and interest the town is forced to pay annually, which is much higher if you pay off the debt in seven years rather than over twenty.

 To dismiss lengthening the term of the bonds as just meaning more debt ignores the benefits of long-term financing and defies common sense. You would not finance your house with a short term loan, the way you might do if you were buying a used car, because you will have that house a long time and will save money by spreading out the repayments freeing up cash for other uses. The same is true for municipal projects. 

The simple minded argument that all this means more debt misses the point that taxpayers will save more if the town was smarter in financing its projects. I have read the ludicrous argument that the best reason not to use long-term financing is because if more money became available the “politicians” would only approve more projects. That misses the point: we would be able to do more projects because long-term financing would free up cash flow that now is tied up in paying artificially high debt service. That’s the reason our debt service ratio is so much higher than other AAA municipalities who use 20 year financing. The idea that we should pay more and get less is nonsense. So is the argument we lack capacity to do more. The solution is not to do the work in-house but to use construction managers and outside contractors like we are doing on MISA and Nathaniel Witherell. If we have to add personnel sobeit; the savings more than pay for it.

Also misleading is the argument that increasing debt means imposing costs on “our grandchildren”, as opponents like to characterize it. The exact opposite is true. By taking care of needed projects today when interests rates are low we spare future generations from having to pay for crumbling infrastructure later when conditions are worse and rates will be higher. More importantly, the tax burdens will be less if all generations of taxpayers who use the buildings pay their fair share rather than imposing all costs on current taxpayers. That is why we abandoned the depression era “pay as you go” system, which discouraged investing in our infrastructure to keep mill rates low until they deteriorated so badly that more expensive projects forced their way onto the budget to correct years of neglect.  

Until Peter Tesei and his partisans on the BET begin to understand the benefits of long-term financing Greenwich will continue to waste taxpayers funds simply because they think that the only way to do things is the old way. Beth Krumeich and the BET Democrats know a better way to finance major projects. We need to change the way we do business. Changing those who control financial decisions will return common sense and sound fiscal practices to our town. Don’t forget to vote on November 5.