If you are like me, you have debt. Whether it’s your mortgage, student loans, or credit cards – or all of the above – most people carry debt. It helps us pay off important but high cost expenses over time and makes them affordable and it helps us through difficult times when perhaps our cash flow isn’t what we need it to be. However, sometimes it just feels like free money that we’ll spend now and worry about later. Not all debt is bad, but it carries a cost – the interest we pay to the lender. We pay for the benefits of debt, and sometimes, we pay a lot.
The township is no different. We carry debt. In fact, we carry over $68 million of debt, and in this year’s budget, we will pay over $1.9 million in interest on that debt (4.5 percent of the budget). That is money that could, in theory, be going towards reducing taxes or road improvements, instead of paying off bondholders. While the township is below our “borrowing authority,” as established by the state, that simply means we haven’t maxed out our credit card. Just because we could borrow more, doesn’t mean we should.
So what did we pay for with our current debt? All kinds of things going back decades (since debt is financed over a long period of time). We have debt for property acquisitions, construction of the municipal building, capital purchases (cars, equipment), migration to county 9-1-1- dispatch and road and infrastructure repairs. In the past, borrowing has enabled us to meet some of our goals, and to do so in a way that did not burden taxpayers with a large tax increase at one time, especially for large, one-time expenditures. However, we also borrow for yearly expenses – like equipment or roads – that we know we are going to need each year. In the past, money was cheap, interest rates were low and that practice was prudent. However, it is time to reexamine whether that holds true moving forward.
Last year, we authorized spending of approximately $6.6 million for capital expenditures. We put 5 percent down, so we borrowed, or will borrow, 95 percent of that amount. This year, the administration has proposed a $6.1 million capital budget for items such as roads and equipment. If these are part of our annual maintenance costs associated with maintaining infrastructure and our vehicle fleet, shouldn’t we pay for these expenses in cash every year and avoid paying interest? I think we should, and now is the time to start shifting our past practices to protect us moving forward.
Currently, the cost of borrowing is rising. As those looking to buy or sell a home may know, the price of a 30-year fixed mortgage recently reached a five year high when it hit 4.58 percent in late April. According to FreddieMac last week, the 30-year fixed mortgage rate is up 50 basis points from last year – a pretty dramatic increase. The same concept is true for municipal bonding, as the Federal Reserve looks to raise interest rates to offset inflation from improved economic conditions. We also don’t know how federal and state policies will further exacerbate our ability to borrow cheaply. We cannot simply sit back and rely upon borrowing at low interest rates to continue into the future and assume that it will still make sense for our taxpayers.
Second, it is the responsible thing to do. If the collective “we” are going to enjoy the services that government is going to provide, shouldn’t we pay for it rather than place that burden on future generations? As a father of three young children that I hope will stay in Bridgewater, I don’t think they should be paying for roads that will be worn out and in need of repair long before they ever drive on them.
Third, the less we pay in interest means that we can utilize that money to reduce taxes, increase infrastructure improvements, or build up our reserves for future emergencies. It seems like an obvious point, but I would much rather see our residents keep their money, or at least use tax revenue on physical improvements, then pay it out in the form of interest to bondholders.
In a future Moench’s Musings, I’ll detail some of the steps the council has taken recently to begin the process of examining the way we look at borrowing and lessening our reliance on long-term debt. This is an important, multi-year project that I hope will lighten the debt load for future generations and keep more of your money where it belongs – in your own bank account. In the meantime, I think the commercial below highlights the point rather nicely.