BET Vice Chair Explains Greenwich's Long Term Debt Policy

This op-ed was written by Arthur D. Norton, Vice Chairman of the Board of Estimate and Taxation.  

There has been much recent discussion about long term Debt financing for the Town Of Greenwich, and those advocating this must be flummoxed about the dynamics of debt. To consider the merits of any Debt financing program, either existing or proposed, it is necessary to examine and to identify the risks, explicit and implicit, with a program.

Every Debt program will involve risk, and an understanding of those risks is an incumbent and a necessary prelude to consideration of a program. Discussion of the risks applicable to long term has been lacking, and it needs clarification.

Since the Greenwich BET proposed seven years ago to initiate external financing (debt) for current capital projects the Town Debt model has utilized Bond Anticipation Notes (BANS), one year instruments, and five year Notes. This is a prudent structure of debt financing to satisfy the three- part capital appropriation model.  This Debt model was proposed and adopted for multiple reasons, including the reluctance of the RTM to approve external debt financing, and the multiple part capital appropriation model that we utilize.  Each Town of Greenwich capital project has three components or stages. The initial stage is conceptual in which we determine feasibility, the second stage, if feasibility identified, is design or planning, and the third stage is construction.  We appropriate and finance separately each stage. The first two component stages frequently are financed with a one year instrument, BANS. The construction stage will be financed with two one year Notes, BANS, followed by five year Notes.  Thus, most capital projects have a minimum financing term of nine years with an average length extending to eleven years.  This model is both very effective and sophisticated, it serves very well our needs, the cash flow requirements as a project progresses, and it minimizes debt service costs.

Understanding the Greenwich appropriation and financing models requires an understanding of the risks inherent in debt financing.  To modify these models by lengthening maturities will be a zero sum game. Since debt will add to total project costs, to lengthen debt maturities will lower annual debt service costs, and it will increase the total cost of each project.  This is not a prudent fiscal policy, if it is not necessary.

What are the substantive risk issues to consider in any Debt financing model, and that apply to all debt, government, municipal, corporate, and personal?  They include economic, financial, inflation, business, liquidity, and credit, and our Debt policy has considered each.   These risks are current always, and the periodic, every two year, review of the Town of Greenwich Debt policy, requires that we continue to consider these elements impact to the current policy.  Our analysis is that longer term financing is affected more negatively by these risks.  A Goldman Sachs salesman who appeared before the BET subcommittee reviewing our Debt policy discussed interest rate risk, and the potential exposure of the Greenwich policy..  It is our position that our current credit quality rating, Triple A, from three Agencies is the best nostrum for interest rate risk.

An argument has been made that extending debt maturities will allow more capital projects “infrastructure” for Greenwich.  However, that argument does not address the constraints, environmental, managerial, capacity, and administrative, that are impediments to suggested capital projects, and I posit that the argument is specious.  Longer debt maturities do not influence consideration.

To conclude:……There are inherent and substantial risks in the use of debt by governments, corporations, individuals, everyone, and we need to understand the risks and to make sound business decisions about the use and application of debt. Debt is a financial burden, and once incurred it must be paid as agreed, usually semi-annually.  Debt requires that the BET has to model its financial plans every year to service it, and if there are issues with the debt, they will remain for their maturity. These are constraints that the current BET is imposing on the future BET, and it will impact the decision flexibility for future members of the BET   Thus, we all benefit when  constraints are kept to a minimum. 

The Republican BET caucus has made these evaluations, and it is our opinion that the current Debt policy is sound, prudent, and in the best interests of the residents and taxpayers of Greenwich, and that to extend debt maturities will have negative unintended consequences.  We do not support any change in policy, and we urge the voters of Greenwich to endorse our view.