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Saturday, October 26, 2013

AF Road Bond: Can Bonding Be "Fiscally Conservative"?

If being fiscally conservative means choosing the cheapest path (in total dollars) to where we're going, or getting the most value for our tax dollars, the answer may surprise you.

This is the fifth in a series of eleven short pieces on American Fork's proposed bond issue for road repair. The first is here.

Pro-bond signs around the city say voting for the bond issue is the "fiscally conservative" thing to do. That may seem odd, since fiscal conservatives tend to oppose both the federal government's borrowing on a galactic scale and the larger, more intrusive governments that more revenue can buy at any level. I'm sorry to bend your mind, but . . .

What if borrowing is the cheapest way to proceed in some instances?

Allow me to plagiarize something MFCC recently posted on Facebook:

Here's another way to look at the road bond.

Scenario 1 (the ballot proposal): The City bonds for $20 million, pays 4 percent interest, and amortizes the bond in 20 years. Property tax at the average household increases by $7 per month, raising $1 million per year. The work is done over the next 4 years, and the total payout over the life of the bond is $28 million. (Some existing City budget dollars, other than those gained through the tax increase, are used to help.)

Scenario 2 (a pay-as-you-go approach): Instead of bonding, the City raises property taxes at the average household by $14 per month, raising $2 million per year. The work is done over the next 10 years ($2 million x 10 = $20 million). At 6 percent inflation (a conservative estimate in road construction), the cost of $20 million in road repairs rises to $35.8 million over 10 years.

Under Scenario 2, we pay twice as much in taxes, take 6 years longer to do the same job, and only accomplish 55 percent of it.

(For more related discussion from MFCC, whom someone other than me lately called "my favorite civic geek in all the world," see her recent Daily Herald op/ed and this blog post from a few months ago, when the logic was the same but the numbers were a little different. She's also been posting facts and answering questions on Facebook; you might look for her there, too.)

It is entirely plausible, even probable, that construction and materials costs, to say nothing of inflation generally, will increase enough over the next several years that it will be cheaper to borrow -- and thus to do the work sooner and faster, enjoying some economies of scale. This is why the city council proposed the bond issue instead of simply raising property taxes. Did you notice that, if the voters approve the bond issue, the property tax increase to repay it will be about half what it would be on the "pay as you go" plan, and the cost will be much lower, too? We'll also enjoy the economic and safety benefits of better roads sooner.

Bear in mind that the proposal here is not to borrow to pay ongoing road maintenance costs; borrowing to pay for recurring maintenance is unwise. The object is to help us out of the hole we dug for ourselves by not paying nearly enough for road maintenance over about a dozen years.

Provo Mayor John Curtis has been misquoted as having urged American Fork not to bond for road reconstruction. He actually said he opposes bonding for road maintenance, but he fully supports bonding for road reconstruction (a capital investment), which is the issue now in American Fork.

In any case, remember how this started: In a sense we borrowed for years, beginning in the last 1990s, from our infrastructure. (See this earlier post.) Now the infrastructure wants its money back.

Next in this series: Two Logical Fallacies to Avoid

Copyright 2013 by David Rodeback.
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