Going in to debt to fund Green Space
by Dan Dodson
(in response to various e-mails on the subject of supporting 2003 Ballot Question 1 - specifically a letter from Elizabeth Johnson of Isles)
I'm afraid I'll
have to question Question 1.
While we all know that sprawl is bad is it disingenuous to suggest that green space can be acquired for nothing as this e-mail suggests.
This letter points out that because interest rates are low we should "re-finance" our state and use the money to buy green space. Fair enough, but there are two big questions left un-answered. Should we increase our debt? and, if so, is the best use of that money the purchase of green space?
The first question is mainly financial but the fact is that increasing debt decreases flexibility. We found out about that the hard way this year when we stared down the elimination of many state funded programs including the Arts and state jobs. We could have used to extra debt capacity to avoid those problems. Just like in a household, increasing debt is never something you take lightly.
The second question is whether spending this precious capital is the best thing for the welfare of our citizens. Plenty of debate can happen here, but keep in mind that NJ politics is littered with expensive 'bad' decisions. I'm sure that many believe green space to be the #1 priority. However, some argue that the answer is education. Others might say business incentives. To be honest I believe it is urban revitalization and brownfield reclamation. I would prefer to attack sprawl at its roots, in the tax code and in our highway budget.
By voting for this question you are taking two great leaps. 1) NJ can risk new debt and 2) increased greenspace spending is more important than any other increase.
I respectfully suggest that both are NOT the case.
recall some finance basics
If I have debt service of $100 a year on a $1000 loan and then refinance from 10% to 8% to have debt service of $80 a year, then I still have a debt of $1000. I can borrow an additional $250 at 8% to yield an additional debt service of $20 a year. I now have a $100 debt service so it sort of feels like I got something for nothing. But also have $1250 in debt instead of $1000.
Bond issuers use the indebtedness of an agency to assess its credit worthiness. Therefore NJ can not simply rack up debt forever. A fiscally conservative approach is for governements to pay down their debt when interest rates are low in order to soften the blow of borrowing when they are high again. That's what Clinton did during the '90s.
Finally, NJ's debt rating is for all of our debt not just debt associated with open space. Therefore borrowing for open space affects the entire budget. The tax revenue that pays the debt service isn't assigned to specific legistlation. You can't think about specific programs in isolation. If they involve debt and allocation of revenue from taxes then they impact the entire budget.
Another option for how to spend the money from savings in debt service is to give it back in the form of reduced taxes.
another way of looking at it. What else could we do with the money?
This measure will borrow $150M to buy land. Obviously the taxpayers will pay the debt.
One option is to refinance the existing debt and reduce taxes. Let's assume that we don't want to reduce taxes but would rather consider other better ways to combat sprawl.
What if the state took the same $150M and used it to subsidize $750M in urban residential construction. $750M equates 3000 $250K homes. 3000 homes is 10 large subdivisions that wouldn't have to chew up previously undeveloped land. At 1/4 acre per home that's 750 acres.
Additionally, this kind of spending would stimulate economic development in places like Trenton. It could have a compound effect. Not only that, but new homes generate local property tax.
This money comes from from the same pockets, ours. I suggest that this proposal does not make best use of our tax dollars towards the goal of combating sprawl.
The author of this rebuttal to Question 1 is a Fellow of Leadership Trenton 2002, a management consultant in private industry and a graduate of the Harvard Business School.
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Copyright 2002, Dan Dodson