From Patrick McGrady:
On April 23, 2012, Aberdeen Mayor Michael Bennett introduced his proposed budget to much fanfare at the Aberdeen City Council meeting. Some of the Aberdeen City Council gushed what was presented as a HUGE budget cut from last year to this year, a time in which the City received 28% less revenue than in the previous year.
“It is about $4 million less than last year,” Ruth Elliott, who has been an elected official in Aberdeen for decades, said. “It’s really been looked at very closely, and I can’t remember in all the years I’ve been on this council where any municipality had decreased their budget as much as we have this year. So I’m a very happy person in that regard and I congratulate everyone on this council, the mayor and, of course, the folks that work on this budget. Thanks a lot.” — Source: Link
I was very pleasantly surprised to read this, but as with many things that come from the City politicians, reality was not as they wanted it to appear.I downloaded a copy of the proposed budget from the Aberdeen City website here: http://www.aberdeen-md.org/finance/
Here’s the real scoop:
When Counties, Towns, and Cities want to spend lots of money that they don’t have today, they can go to the bond market to borrow money, promising to use future taxpayer dollars to pay back the loan. This happens all over the world, and is often considered a reasonable way to spread the cost of a project, like a bridge or a water system, over the useful life of the project.
This way a project like the new Aberdeen High School, for example, does not get paid for by today’s taxpayers only. The taxpayers who live in Harford County will pay for this school over 30 years (the projected lifespan of the building).
Using a tool like long-term debt, the community that uses the infrastructure can pay for, instead of today’s taxpayers paying for tomorrow’s consumption.
Governments borrow for a variety of projects using the same method of funding, but the debt is a very real burden laid upon the taxpayers, both current and future, who will be required to pay the bill. The City of Aberdeen and its taxpayers are carrying an albatross* of debt, in the bond-funded project known as Ripken Stadium.
In the early 2000s, the City government borrowed millions of dollars in order to build the new Stadium, indebting the taxpayers at a fixed rate for a period of years.
Since interest rates last year were at the lowest rates ever offered, (or, offered since the start of the loan) the City government took advantage of the opportunity to refinance the earlier debt at lower rates. In practical terms, this is much like refinancing the balance of a 10% 30-year Home Mortgage to 5%, to reduce your remaining monthly mortgage payments.
If you borrow $10,000 at 10% over 10 years, your monthly payments will be a certain amount for those 10 years. If interest rates go down, you might refinance by borrowing the $10,000 (or the balance) at 5% to pay off the original loan and to have lower monthly payments for the number of years of your new loan. But you would not think of the difference between your higher monthly payments and the new, lower payments as income, or revenue!
Nobody in the real world would ever count this as “revenue” or, on the flip side, count it as a reduction in spending in the next year’s budget, where no new refinancing is taking place. But our politicians don’t limit government to the real world, and Aberdeen City government is no exception, as it declares the absence of new re-financing for budget Year 2013, an decrease in Revenue.
Why is this a problem, you might ask? If my business counted loan proceeds as revenue, I would be obligated to count it as income, and pay taxes on it. Borrowing money doesn’t count as a budget item.
This leads to the question: What were the Council members thinking? Is this just an ongoing propaganda machine in Aberdeen, or do they really think that not getting a huge loan this year counts as a real reduction in the Aberdeen City budget?