Local Commentary

Guest Commentary: City Should Borrow & Spend, Not Tax & Save

On many occasions during the recent budget discussions, I have heard the Mayor, the City Manager, and other City leaders trumpet the stellar credit rating of the City of Falls Church. The 2011 budget proposal doesn’t miss the opportunity to remind us of the City’s “strong credit ratings: Moody’s AA; Standard & Poor’s Aa2; and Fitch AA+.”

Unfortunately, our leaders’ infatuation with these ratings has saddled us with restrictive policies and narrow thinking as we try to navigate the worst recession since the great depression.

As recently as 2009, the City Council decided to impose a debt limit on itself of less than 5% of the net assessed valuation of taxable property in the city even though the Commonwealth Constitution allows for a 10% debt limit (Resolution 2009-01). In a further fit of fiscal conservatism, the City has committed itself to repay 25% of total debt within five years and at least 50% of total debt within ten years. Essentially, they want to cut the length of their mortgage in half.

Of course, most homeowners would like to do this as well, but we don’t have the luxury of paying our debts with someone else’s taxes.

The Council’s continued adherence to these conservative debt limits and accelerated payment schedules will increase the budget burden placed on city workers and property-tax payers all in a vain effort to curry favor with the bond market.

By attempting to ‘pre-fund’ its balance sheet, the City would be destroying money at a time in which it should be creating money by spending.

It is worth repeating who the City is trying to please – the same credit agencies that told us that sub-prime mortgages and credit default swaps were a safe bet.

Unfortunately, the courtship doesn’t end there. Not only has the Council codified its apprehension to take on debt or extend it for longer periods, it is also keen to increase its saving.

The 2011 budget calls for a two cent increase in the real estate levy in order “to restore the City’s fund balance to 8% of the City’s revenue.” This again stems from the Council’s self-imposed policy of being fiscally conservative with its fund balance, “The goal for undesignated fund balance shall be 12%, but not less than 8%, of the actual General Fund revenues for the then current Fiscal Year (2011 Budget Proposal).”

Unlike many households and the Federal government, who are drawing down their savings and taking on debt to stay above water during the recession, the City is proposing to collect taxes from us in order to squirrel it away – presumably to appease the bond market again. By attempting to “pre-fund” its balance sheet, the city would be destroying money at a time in which it should be creating money by spending. When they collect an extra $100 in taxes from me (a median homeowner) and save it rather than giving it to a city worker, neither of us can spend it in the community where it would get spent again four or five times. This is the exact opposite of how governments should behave during an economic contraction.

Instead of cowering to the bond market’s nostrums of “sound finance,” they should be drawing down all surpluses to zero in order to spend counter-cyclically.

The good news is that all of this fiscal conservatism is reversible. The Council can double their debt limits, extend their payment terms, and reduce their pre-funding targets. Instead of bemoaning the loss of private development, they can solicit good ideas for public development. They can then borrow at historically low interest rates to bequeath future City residents a livable community. Certainly, the City can borrow at much lower interest rates than any homeowner as it has a broader revenue base than any household, namely the power to tax. But simply having that tax power does not mean that it has to be used to the fullest extent during every budget “crisis.”

The City should use its power to tax to leverage public investments that will improve the attractiveness of the city and enhance its ability to pay its future obligations when more favorable fiscal conditions return. Incidentally, if the City spends aggressively enough, those improved fiscal conditions may return sooner than otherwise as government spending can be a self-fulfilling prophecy when it comes to stimulating economic activity.

I encourage all residents to speak out about the conservative nature and the unnecessary demands placed on taxpayers in the 2011 budget proposal as it currently stands.

 


Robert LaJeunesse is a senior economist at the Equal Employment Opportunity Commission. He has a Ph.D. in Economics and has been a City of Falls Church resident, on and off, for the past 10 years.


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