Beware of long-term government debt for short-term assets

The economy is thriving and the future looks bright. Most economists are predicting strong and sustained economic growth, despite our having passed the average lifetime of a typical recovery.

Local governments have been testing the waters with millage rate tax increases. Many governments see this as an easy and quick solution to avoid prioritizing and making tough decisions about budgets. But citizens have begun to revolt loudly against general millage increases.

With this revolt has come a new backdoor path to lazy government budgeting that is one of the least healthy financial practices a person, business or government can follow. The idea of borrowing for short-term assets with long-term debt is now on the table.

An example is borrowing money for 15 years in order to buy a computer that typically lasts no longer than five years. Think about how much this would cost to finance and how much money would have to be paid for this asset over the course of 15 years, especially since you will need at least another two computers during the term of the loan. The debt and interest payments from such a loan would outlive the equipment. It is a mismatch of assets and debt.

This is a very dangerous practice that leads to bankruptcies in the private sector and that kills public-sector bond ratings.

It is difficult for elected officials to leave such easily accessible money on the table when it is so convenient to borrow. Once elected officials see one government do it, it becomes an acceptable practice for others.

But doing so fails to look at the long-term capital needs of the government and might preclude long-term capital needs from being adequately addressed through appropriately matched long-term borrowing. It also places a future generation into debt for an asset they will never see or benefit from.

The debt also shrinks or eliminates the government's borrowing capacity to pay for future capital needs and does not take into account the possibility of an unexpected drop in income, such as in a recession.

An economic downturn would cause the government to set aside a larger percentage of overall general revenues to service debts taken on during the good times, squeezing its capacity to pay for existing or new services. As a result, the government would be forced to reduce services or increase taxes.

Keep in mind that this is long-term debt, so it is not “if" a downturn will happen during the life of the loan, it is “when.” Knowing this, the level of irresponsibility in taking on this debt for a short-term asset is just huge.

A lack of foresight and lack of impulse control by elected officials are the sole causes of this problem.

All it takes to avoid this is for policymakers to carefully analyze budgets. Elected officials should make sure their constituents' “needs” are budget priorities and “wants” get second billing or are pushed off to later years. These officials should seek advice from financial professionals and make sure they use their financial advisory boards' recommendations.

These officials also should not lose sight of the fact that this is real money that must be repaid, with interest.

And taxpayers need to pay closer attention than ever to ensure that governments are not setting them on a path to debt and bankruptcy by taking on loans that exceed the life of the assets they are intended to pay for.

Local governments need to make decisions with financial sustainability in mind. If they don’t, the loser will be taxpayers saddled with avoidable tax increases that have become necessities.

Christine Robinson is executive director of the Argus Foundation and was on the Sarasota County Commission from 2010 to 2016. Contact her at christine@argusfoundation.org.