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Why don’t we get a tax cut when a bond expires?

I received an email the other day with an important question:

“With the several bond warnings being placed before the public this budget season, I am graciously asking for an explanation of why our present use of acquiring bond money never retires. In other words, why do the voters approve a bond (which is essentially a mortgage) for a certain term but the money which was taken by a vote is never returned to the voting public. The voters allow the town to use their money for a certain project which raises the tax rate by a certain amount of cents per / 100 dollars. Why is that money never returned in the form of a tax cut when the bond expires?”

Here’s my reply:

I will take a crack at this.

Let’s say the town’s expenses are 10 million a year. Part of the 10 million includes $100,000 in repayments of principal and interest on two bonds. The next year, the town’s expenses are 10.1 million. The $100,000 increase is due to a combination of factors — wages, benefits, fuel, electricity all are more expensive. But part of the 10.1 million includes $100,000 in repayments of principal and interest on two bonds.

The year after that, the town’s expenses are 10.15 million. The $50,000 increase is due to a combination of factors — wages, benefits, fuel, electricity all are more expensive. But part of the 10.15 million includes $50,000 in repayments of principal and interest on one bond. The other bond that used to be costing the other $50,000 is all paid off.

Notice that while expenses went up $100,000 for some reasons — wages, benefits, fuel, electricity all are more expensive — other expenses went down $50,000. So the increase in spending is not as much as it might have been.

You might say this is “the town giving back the bond money to the taxpayer.” But it’s more accurate to say “total expenses for running the town can generally be expected to increase slightly from year to year unless the town cuts back on services.” Over time this means that when bonds are paid off the amount of taxes that have to be raised are higher than they were when the bond was approved. So it seems like the town “never gives the money back.” But if you looked really closely at the budgets, you would see that it did, and taxes, while going up, were not going up as much as they might have.

Offsetting the increase in expenses should be an increase in property values as population increases and more housing and businesses come to town. If property values decline, then the burden is shared with a smaller pool and everyone in it has to pay more.

Indeed, our general spending in next year’s budget is only about $35,000 more than the current year — less than 1%, in fact, 0.27%. But because the property values are expected to decrease by 3%, the tax rate will increase by 4 cents, from 72 cents to 76 cents, and yes, that is over 5%. Another factor is that we are getting less money from the state and federal government next year. That means we have to collect about $110,000 more in property taxes than last year, about a 1% increase.

Or you could combine our general spending with our spending on business activities like the water and sewer systems and say total spending is down $83,000. Yes, this year’s total town budget is $83,000 lower than last year. That’s -0.44% from last year.

You’ll be happy to know that we cut taxes 31,050 last year. Dig out your copy of the town report and look in General Fund expenses section 912, Bond Redemption. You will see that the budget for the year ending June 30, 2012 included a $30,000 principal payment on the 1991 Water Tower Bond (remember that?). Another line in that section shows a $1,050 interest payment on that bond.

So, the question is, what happened to that $31,050 expense in the next budget? Was it included? Did it go toward taxes?

No!

That line item is ZERO DOLLARS in the budget for the year ending June 30, 2013 — the current tax year. So, compared to last year, the town “charged” $31,050 less in taxes.

Isn’t that what you want us to do? Hmmm….well, maybe what you want is for us to start giving the money back. Is that what you mean when you say you (meaning the taxpayers) “loaned” us (meaning the town) the money? Is that what you mean? I am going to assume that is what you mean. That you consider taxes to pay for a bond a loan, and that money has to be returned to the taxpayer when it is done.

So, let’s see, now instead of $0 in the budget I have to put $31,050 in the budget as revenue so that the taxpayers “get the money back.” And I have to do this for 20 years. Where can I get that money? Obviously I can’t charge the taxpayers, that would defeat the purpose. I have to sell something. How about the Water Tower? Maybe I would get $200,000 for it and whoever bought it would then start billing the town for using it. Hmm, that’s no good, 200,000 won’t last more than 6 years and I have to pay for 20. Plus I’ll be getting a bill for $15,000 a year or more, no doubt about that. So in 7 years I’d be worse off. No tower, a bill that lasts forever. Taxes would have to go up.

So, no, “we” are not going to “return” the money “you” “loaned” us for the Water Tower.

Instead, we are going to provide a good quality water service using the Water Tower you purchased via a 20 year mortgage. Because the town owns the water tower, our annual expense will now be lower for a long time. This purchase by the taxpayers was one of many capital improvements paid for by bonds. Bonds are loans from banks to the town to pay for things the taxpayers want to buy.

Again, please, understand, you didn’t “loan” the town money. You, as part of the town, bought something using loaned money. Then you paid off the loan through your taxes.

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