Sound municipal fiscal policy requires both debt, savings

By Ben Sprague, Special to the BDN
Posted June 29, 2012, at 12:14 p.m.

Towns and cities, like individuals and families, have revenues and expenses, savings and debt, immediate needs and long-term goals. The municipal budget process, however, by its very nature encourages us to be shortsighted as we address our fiscal concerns. Councilors with changing priorities come and go, political tides ebb and flow, the uncertainty of state and federal budgets looms over the entire process, and a brand new budget is hatched each year.

Failure to address, update and monitor our policies on savings and debt could end up costing municipalities like Bangor a great deal. Earlier this year, for example, the communities of Scarborough and Saco saw their debt ratings downgraded, making it more costly for these municipalities to do business. If the same thing were to happen to Bangor, it would cost the city and its taxpayers millions of dollars in interest costs over time and make it more difficult for us to tend to our rapidly aging infrastructure of streets, sidewalks, sewers and pipes as well as invest in our personnel and economic development initiatives.

With all the talk in today’s political world about fiscal austerity, it is important to remember that debt is an important fiscal tool when managed properly. Debt allows us to invest in our community and to do so in an equitable way. Street repairs, for example, should be paid for through bonds so the repairs can be financed over the course of time. That way, a person who lives in Bangor and plans to move away does not have to pay upfront for a road he or she will not be using. Conversely, a person who moves to Bangor next year can contribute to the costs over time even though the repairs may have been completed prior to his or her arrival.

In order to finance debt, we need to have a strong cash reserve. Yet in Bangor we currently have no mechanisms written into the budget to build up our reserve fund even as we have been depleting the balance over the last several years. This is problematic. Furthermore, our cash reserves are already too low at just 8 percent of prior year’s expenses. While this is within the range of what major ratings agencies consider to be prudent, with such significant economic uncertainty in our area, unstable property values and a decline in federal and state money coming to the city of Bangor, prudent fiscal management should dictate we have reserves closer to 12.5 percent of our prior year’s expenses at minimum, which would be about average for the state of Maine.

Maintaining a strong cash reserve would likely make the costs of borrowing lower and allow us to better invest in our city. Just as importantly, we need to build our savings so that we can pay our bills in the event of a fiscal, political or natural disaster. Lastly, increasing our reserves would demonstrate to businesses, governmental organizations and ratings agencies that we have prudent, disciplined fiscal policies and that we are good stewards of our taxpayers’ money. This stability is good for business and good for the people of Bangor.

It would take just two simple steps to get our cash reserves to 12.5 percent of expenses, neither of which would require a tax increase. First, 50 percent of the property tax from all new development should go into savings. If we can make do with our property tax revenue as currently assessed, a portion of any new money that comes in should go into savings. Second, the city should liquidate many of the properties it currently owns; recent history has shown us to be a poor landlord and we should not be in the business of property management. The revenue from these sales could go into reserves. The additional benefit of doing this is that we would start to generate property tax revenue from these properties once they are off the city’s balance sheet, allowing for further infrastructure investment or property tax relief.

Finally, we need to readdress our city’s investment policy. As it stands now, the city earns nearly no interest on our cash reserves. Guaranteed yields are low right now and municipal investing is highly regulated due to some high profile bankruptcies during the credit crisis, but we can and must do better. A well-diversified portfolio with prudent management and a long-term time frame would serve us well. Even minimal interest above and beyond what we earn now in our current mix of short-term, low-interest investments would go a long way toward putting us on a firmer financial footing.

Bangor is a unique place in that we have an old, largely deteriorating infrastructure but also a new vibrancy in which we want to invest. Fixing what needs fixing and growing what needs growing depend on prudent policies with regard to both savings and debt and an investment policy that offers opportunities for realistic gains based on responsible fiduciary management. The time is now to get our fiscal house in order.

Ben Sprague is a member of the Bangor City Council.

http://bangordailynews.com/2012/06/29/opinion/sound-municipal-fiscal-policy-requires-both-debt-savings/ printed on September 23, 2014