A Capital Idea
When I reviewed the audit, I was struck by the sheer amount of debt that our village carries. When I recall the documentary on Dixon, All the Queen's Horses -- I highly recommend it, where one of the first signs (that was ignored) was a neighboring community reaching out to Dixon and inquiring why they were taking on so much debt in comparison to the surrounding areas. To say when I combined this piece of information with the fact that apparently Fox River Grove carries ZERO debt -- I began to dig deeper. I should note that I read Fox River Grove's 2020 audit and in order to be debt free, they began a serious plan toward that goal in 2014. I recommend you take a little tour of their Village Administrator's Opening Letter to their audit.
What's the Situation Today?
Per our audit, the amount of debt our village carries grew $541,138 last year. We are now closing in on $11 million in debt. Quick side note: Business-Type Activities is the Golf Course and the Utilities Departments, everything else to run the village is Governmental Activities.
The audit goes on to tell me the expected payment plan for the next 15 years on this debt:
If you add the 2021 payments together, you will be $57,901 shy of a cool million dollars in debt payment of which $361,117 is just interest. For context, $361,117 is more than we have spent on repaving roads annually (going back to 2106)! So, if we didn't have the debt -- we could have doubled the roads we paved every year for the past 4 years!
But Debt is Cheap; the interest rates are low
I know this is a common argument for taking on debt when interest rates are low. Think about a zero percent interest rate loan on a car, if you have the $40,000 for the car you could pay cash OR you could earn the 2%-4% in the bank and use the bank's money at no interest. In that scenario it might work, but there are two flaws:
It only works if you are making more money in interest on the money you are holding than you are spending on the interest on what you are borrowing.
You have the cash to begin with.
If you are borrowing because you have no cash, you can't take advantage of this net profit of making more interest on the money you hold -- because you hold no money. Additionally, if the cash you have isn't in an interest bearing account (or in a LOW interest bearing account), you won't make more than you are spending.
For what it's worth, the village's debt has an interest rate of between 0% and 6.2% with a weighted average of 3.53% in interest. Last year, we posted $85,197.07 in interest income. If we assume that ALL of the village's money is in an interesting bearing account, that would be somewhere around a 1% interest rate. So, no we aren't making any money on borrowing cheap money and investing the difference.
To the second point -- we've been spending money down, so we don't really have the cash to make this plan work.
So, is there a solution?
Actually, there is and it's a pretty simple one. The very reason to have a General Capital Fund is to be able to separate those big irregular expenses from the normal day to day expenses in the budget. This allows a Trustee, who is doing their job, to quickly look over the books and see if there's any spending in the day to day accounts that looks off.
Today, when our CAO/Finance Director/Budget Officer plans the budget, she assigns the big projects to the General Capital Fund and then plans (hopefully) a transfer from the General Fund to pay for the project. In any given year, what goes into the Capital Fund is what is spent and there is no money in that account basically at the end of the year. (Technically, there's $100,000 that is in an interest bearing account that doesn't move -- but it's also not even grown by it's interest in the 3 years this fund has been set-up.
But there's a better way. With some simple advanced planning, a smart municipality would use the Capital Fund to build up for specific projects over time with the plan to pay cash. This is when you take a large project and break it down into payments (that you pay yourself) and you don't kick off the project until you have the cash to pay for it. Once you have the cash in hand, you have a lot more choices in how you spend it -- and bonus, all the time it is sitting there growing it's earning interest. If we look at every asset we own that will need to be replaced or have major repair to it and the time span that asset should last, we get to the idea of what we should annually be tucking away. For example, we paved two roads this year for about $200,000. If a road lasts 15 years, we should be putting away $13,333 a year to be able to repaved Loch Glen and Beaver Pond in 15 years.
Now this isn't going to get us to paying cash over night -- and we can't stop doing projects while we build this fund -- but by being careful with the spending and investing any excesses into the future, we could build the fund to where we could get out of this debt-interest cycle. But this will require discipline and careful spending. We'd need to prioritize what we'd be saving up for -- like we just bought new trucks for public works -- so maybe, we tuck away cash for their replacements; but we might not be able to do this for the police need cars now.
When we look at some sources of the cash to tuck into the Capital Fund -- Might I suggest looking no further that some of the line items that have grown exponentially since the hiring of our CAO/Finance Director/Budget Officer. The year before she was hired, our legal bill was only $64,390. Last year it was $92,408. (Before Trustee Berman claims the increase is in the FOIAs -- note those numbers are fiscal and she spent $92 thousand before any of the FOIAs in the past year were submitted -- and the $64 thousand in 2016-2017 likely included the high number of FOIAs for the TIF and Sportsplex -- it's not FOIAs that is driving up our legal bills -- it is the near daily chats our CAO has with the law office.) So -- there's $30,000, how many more line items could we find a savings on to build a Capital Fund?
This is how Fox River Grove got to be debt free. Well, this and spending $1 million less than they brought in last year. We could learn a lot about managing our money by putting basic balanced budgeting practices into effect in our village. Then once we stop paying $351 thousand a year in interest, think about the improvements we could make in this village that would last.