August 7, 2012

Budgeting and Spending

Patrick Laverty

Stop me around the part that no longer makes any sense.

Here are some values for you. This theoretical family nets $61,000 a year in income. That's after taxes. However, they find that in spite of cutting everything they think they can cut and is unnecessary, and trying to bring in extra money through second and third jobs, they still find themselves short by about $1,800. In other words, they still have $1,800 worth of expenses that are going unpaid. Then, in spite of the fact that they have a perfectly good 20 inch black and white tv, they decide that it's time to go to the local electronics store and purchase the latest and greatest flatscreen television for $4,000. That's $4,000 that they don't have in cash or in savings anywhere, they decide to simply put that on a credit card.

Does this make any sense at all?

This is pretty similar to what Providence is doing right now. The city has a near $614M budget, and according to today's, they have a $17.9M operating deficit. This in spite of all the cuts that the mayor has been able to negotiate through various sources, and all the extra payments he was able to get from the city's non-profits. They're still nearly $18M short of being able to pay all of their bills. So then why does it make any sense at all to ask the taxpayers to approve a $40M bond to repave some city streets?

The story here is that if you can't afford it, you can't have nice things. If you're already short on paying all your bills or doing things like:

the city’s plan to underfund its annual required contribution to the pension system by $10 million
then you should not be taking out loans and borrowing more money for what I call the "nice to haves."

Seeing as that it will probably take a year or so until all the roads would be completed, the timing is interesting. The Providence mayor would at that point be up for re-election or possibly to some higher post. "Hey Providence, how do you like those shiny new roads I gave you?" leaving out the part that "you paid for it...with interest."

Is it really a gift if you paid for it yourself?

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You say the mayor calls it a gift and then slam him for using your word. What a cheap shot!

Ah well, I guess you can sell it to your choir.

Posted by: OldTimeLefty at August 7, 2012 12:43 PM

The economist's lag is the politician's nightmare. Borrow money on your term, tout the acquisitions, and let the next guy deal with the bill. Irresponsible governance 101.

OTL - You don't have to sign your posts. It says your name right under the comment.

Posted by: Dan at August 7, 2012 12:55 PM

That's $4,000 that they don't have in cash or in savings anywhere, they decide to simply put that on a credit card.

Does this make any sense at all?

It does only if you're a brain damaged mutant known as "progressive".

Posted by: Tommy Cranston at August 7, 2012 1:18 PM

Patrick, your comparison of a family in debt borrowing to buy an expensive luxury item to a city borrowing to maintain infrastructure is I think a deliberate attempt to distort the reasons for long term borrowing. A more appropriate comparison would be if the family borrowed to have their roof repaired. The family has a leaky roof. They do not have the cash or savings to pay for repairs. But they want to make sure that their biggest investment- their property- is properly maintained. Either extend debt over a period of time while they remain living in their house with the roof fixed immediately, or, wait until they can pay lump sum for it and risk increasing levels of damage and expenses. I think the choice is a no-brainer.
I think Providence faces a similar dilemma. Finances are bad, but time marches on. City streets need repair. Borrowing makes sense in long term planning. To let the infrastructure go to complete disrepair for some short term monetary issues would be foolish.

Posted by: David S at August 7, 2012 6:30 PM

I agree with David S. Further, infrastructure must be maintained to avoid calling forth the disastrous affects of the "broken window" concept, where people's perceptions of the shabbiness of their enviornment cause them to deface public property, and to neglect their own private property.

Providence, close to bankruptcy, can't afford to look like it is already bankrupt. Consider David S' analogy of the house that has a leaky roof. Over time, that neglected roof might lower the property values of homes around it. Providence must maintain the cities streets to protect taxpayers property values.

Posted by: Snow at August 7, 2012 7:28 PM

"They're still nearly $18M short of being able to pay all of their bills"

This is not particularly meaningful without knowing the components of the debt. Has the budget been pared to the bone? Is a large portion truly wasteful?

Providence's "near bankruptcy" is a commonplace today. Is it time to recognize that there are some services the city can no longer afford to provide? Can such decisions be made apolitically? For instance, "recycling" is a net cost to many cities. Can it go away for a while? Can the life of police and city vehicles be extended? (I assume they have small trade in value, regardless of age) Can a lot of services performed by union, pensioned, workers be found in the Yellow Pages? Could Roger WIlliams be farmed out to a landscaping contractor? Please let's not hear that police and school sports have to go. We must be careful in reducing the subsidies to colleges and hospitals, they are the only "industries" we have left.

Posted by: Warrington Faust at August 7, 2012 8:04 PM

"A more appropriate comparison would be if the family borrowed to have their roof repaired."

Neither is that an appropriate comparison because, over the years, the adults in that family had the money to maintain and repair the roof but chose to spend the money on other things.

Posted by: Monique at August 7, 2012 8:15 PM

"Neither is that an appropriate comparison because, over the years, the adults in that family had the money to maintain and repair the roof but chose to spend the money on other things."

What the hell does this statement mean? Isn't it a little early in the evening for this sort of incoherence?

Posted by: Phil at August 7, 2012 9:02 PM

Actually when I wrote this, I thought of comparing it to the house's roof, but that's not really comparable. And entire house can be ruined by a leaky roof. A city can survive with bad roads, just like a family can survive with an old black and white tv.

If people want to worry about their property values, then the medicine they should have to take is bad roads for not having watched the administration and voted accordingly.

Snow, I'm shocked by your response. Teachers and other union members are getting whacked by the city, pensions are getting cut and yet you're in favor of taking that money to spend it on roads? If the city can afford to pay off a $40M bond, why can't they afford to live up to their agreed-upon pension obligations?

And David, I'm guessing you also disagree with the state who has decided against long-term borrowing. Interesting is that at least one member of the administration made the same comparisons and points as I'm making. But if you feel both of us are wrong, that's ok.

Posted by: Patrick at August 7, 2012 9:55 PM

Patrick, unions modified their retirement contracts of their own free will. As a Providence teacher, I took a pay cut and pay more for medical, we negotiated this with the mayor to help the city out. This is what unions do, they negotiate. Unlike the illegal state pension law, Providence sat down with its employees and retirees to come to a workable solution. I don't think we got "whacked," I think we negotiated a fair deal.

An infrastructure project, like repairing streets, is smart because interests rates are low and borrowing will be cheap. People will be put to work, and that should help Providence's economy.

Posted by: Snow at August 7, 2012 10:23 PM

I like the leaky roof thing, but bear in mind that with the $40M bond, we're not putting the job out to bid, we're gonna have a guy come and do the job at three times the cost of his competitors.

Posted by: mangeek at August 8, 2012 12:13 AM

Hey Phil,

It would seem that everyone but you understood Monique's comment. That says more about you.

As for the leaking roof analogy, is it really leaking or does it just look bad but is still doing it's job. It was interesting that there was a money grab. The council wanted to divide the money amongst districts yet the mayor didn't. Is that indicative of the money not targeting any specific projects? It sounds as though they are just trying to supplement the city budget with a bond issue? When all is said and done, it should be interesting to see where the money really went.

Posted by: Max D at August 8, 2012 11:52 AM
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