Over the holidays, I discussed this topic at the dinner table with my father-in-law. My daughter recently asked me this question as a follow up to our dinner discussion. I serve on our town’s (Bedford, NY) local school board and on the board’s finance committee so it is not an odd topic to address, but it is not an easy one to grapple with either. I should mention that all of the opinions expressed here are my own and do not necessarily reflect those of any other board member of the Bedford Central School District or its Administration. At some later date, I may post a speech that I gave on the difficulties posed by one of the district's employment contracts that I gave during one of our board meetings. That speech is related to this topic.
Obviously, not all school districts and towns are in the same financial position. I don't think I can lump them all together, but there are some generalizations that I can make -- especially about the districts and towns in the State of New York. They are not in good shape. For example, Westchester County in New York pays the highest property taxes in the country. Nevertheless, our district must currently dip into its reserves to keep its taxes from increasing too much too quickly to meet the obligations of its operating budget. This is a perilous situation.
Obviously, not all school districts and towns are in the same financial position. I don't think I can lump them all together, but there are some generalizations that I can make -- especially about the districts and towns in the State of New York. They are not in good shape. For example, Westchester County in New York pays the highest property taxes in the country. Nevertheless, our district must currently dip into its reserves to keep its taxes from increasing too much too quickly to meet the obligations of its operating budget. This is a perilous situation.
According to the way my daughter would think about the question posed above, our schools can make payroll and pay interest on our debts so they are not running out of money today. Schools will open tomorrow unless there is a snow day. My children are probably hoping for one! The problem is that our district has incurred obligations for the future that we will not be able to match with tax revenues or other sources of income from future years. Many other districts in New York and in several other states are in the same position. We have a balance sheet of cash reserves set aside for a rainy day, but once those reserves are exhausted and once we have let go of all employees whom we can (even though it will be painful to do so), we will no longer have other choices. At that point, our district, and many others like ours, will not be able to pay the bills without a drastic change.
In our district, we have Federal and State mandates and contracts that require our district to provide minimum levels of educational services that we cannot go below. We have polled our taxpayers and know their pain threshold for tax payments as well. We vote on our budget every year and set our tax rates for the coming year. At some point within the next few years (perhaps less than 5), our district (and many others like it) will not technically run out of money and default on its debts, but may indeed run out of its ability to collect any higher taxes or find other revenue sources in the face of spending obligations and may have to restructure itself in some manner – by consolidation or overhaul at the state level if budgets cannot get passed. Neither outcome may be particularly pretty – especially if done out of necessity and under time pressures.
I would not count myself in the Meredith Whitney camp that believes that the Federal Government will need to bail out several states, counties, districts and municipalities in 2011 because they will not be able to service their debts.
I confess I have not read Ms. Whitney’s 600-page report on the topic because I am not one of her firm’s clients and so may not be doing her justice, but I do not see a short term widespread municipal debt crisis in the United States. For our school district and for most municipal entities, debt service is a relatively small part of the budget – generally in the low single digital percentages. I concede that defaults will occur in 2011, but they will not be large scale and ubiquitous. And even if our country were to experience a very nasty double dip due to a serious second downturn in housing prices (and this scenario combined with another downturn in employment are about the only scenarios other than an exogenous disaster that I can envision that would trigger large numbers of defaults), the Federal Reserve could buy short term obligations and municipalities could roll over their debts for some time.
Federal Reserve purchases do not solve the long term problems that our country faces, however. We have incurred obligations (primarily to public sector employees) that we cannot afford to pay back with tax burdens that we can sustain. Buying new bonds and enabling entities to make interest payments on old ones so they do not default is exactly the same alchemy of Quantitative Easing that will take this country to a painful place over the long run as well. Nevertheless, it will avoid the short term issue of a Congressional bailout vote if that were to become necessary, but I don’t think the state and local debt issue will rise to that level in 2011. Still, the issue is not going away and Governors Christie and Cuomo are right to try to tackle the issues driving the debt crises at the state and local levels before they explode in the coming years. Let us hope we come together and solve the problems before they swallow us and we really do run out of money in exactly the way my daughter would envision it....
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