I’ve read several articles recently (including this one) that talk about the “straitjacket” of municipal finance – how the requirements of the bond market reduce the ability of local governments to provide enhanced public goods, such as better schools, more housing, cleaner water, and affordable childcare, because of the additional resources that must be devoted to interest payments when you borrow money.
Debt constrains future government action. But there are only so many ways a local government can accumulate the funds needed to provide public goods:
- You can raise taxes, and save up over time to pay for capital projects. Marginal tax rates are lower now than they have been in the past, so (at least theoretically) there is room to bump those up.
- You can borrow it.
- You can get it through philanthropy. Will the days when America’s richest people built libraries, colleges and other public buildings ever return? (MacKenzie Scott aside.)
- You can get it from another governmental entity, either as a grant or a subsidized loan – but that other government only has the same tools available to get the money to give to you.
There are many “good government” reasons to borrow money for capital projects, including intergenerational fairness and “we need the project now, not ten years from now.” If you are going to borrow money, there is no avoiding paying interest (or paying the bankers and lawyers for that matter).
The bond market doesn’t treat everyone fairly, not every local government operates effectively, and there’s financial inefficiency in the processes. We could expand the revenue options available to North Carolina local governments, but even enhanced revenue options fall within the broad framework stated above. If we start from the proposition that there is no free lunch, there are only so many answers to the question of “How do we fund government?”
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