Why Many Cities Have No Money
Good piece, but there is another major factor that is missing entirely - the impact of debt financing and continuously rolling bonds.  In addition to what the article mentions, this is the other factor contributing to the slow death of our cities.  What nearly every municipality in the US has done (all municipalities BTW, not just the &quot;cities&quot;) is to take on a debt load to finance their desired expenditure, whether it be for infrastructure or otherwise - very similar to what our Federal government has done.  And at first glance, it makes sense.  It&#x27;s a huge expenditure so let&#x27;s finance it and pay it off over time in accordance with tax revenues.  The problem is that they almost never pay it off.  I know that statement sounds crazy at first, but it&#x27;s not.  Sure, they pay off bonds as they come due.  But they pay them off and roll them into new bonds - that&#x27;s the problem.  This has been fueled by steadily decreasing bond rates over the past 30-33 years.  This allows the municipalities to roll over their debt at a lower rate when it comes due, which reduces their interest payment and also allows them to borrow more at the same time.<p>Here&#x27;s an example - It&#x27;s 1&#x2F;1&#x2F;1985 and the rate on the 10 year treasury note is 11.65% (yes, that was the real rate), so our city was able to get a rate of, say, 12%.  They issue a 10 year bond for $5 million to build a school and some road maintenance.  They make the required coupon payments (usually semi-annually) using tax revenues - and that amounts to $600,000 each year.  They keep doing that until just before the principal comes due in full on 1&#x2F;1&#x2F;1995.  The idiots running the city haven&#x27;t saved the 5 million required to pay off the principal so what do they do?  Well they take a look at the market and see that the 10 year treasury note is now 7.19% so they can get around 7.5%.  So they issue a new bond for $5 million for another 10 years and now only have to pay $375,000 in interest coupons every year.  But they are still collecting 600k at the given tax rates which leaves them 225k in the green.  So they can either spend that every year or they can use that as the coupon payment on an addition $3 million bond and they get it right now!  Even if some scrupulous treasurer or township board member were to say that they should just spend the 225k and not take on any additional debt, someone will point out to them that over 10 years that&#x27;s $2.25 million and here they get to instead use that money to spend a total of $3 million - these guys feel like they are making money taking on debt.  And as long as interest rates keep going down and they don&#x27;t need to repay principal, it all works so they agree.  Now 1&#x2F;1&#x2F;2005 rolls around - they owe $8 million but rates are 4.5% so they can get 4.75%.  So they rollover the $8 million for a yearly coupon of 380k.  They also use the remaining 220k to open up a new bond for ~$4.6 million (4,631,578.95 to be precise) - and now they can still pay the same 600k in interest that they have been for decades but they have an outstanding debt issuance of $12.6 million.<p>Now, if you are still reading this far and fully grasp the horror of the above, you can begin to understand one of the many reasons rates can&#x27;t go too far up anytime soon.  We have been Japan&#x27;ed, and this is just part of the reason of how it happened.  Also, I want to point out that in the above example no increase in the tax rate is needed to help pay for this, even without population growth at all.  Tack on population growth, productivity and technological progress, as well as the increase of the money supply by the federal reserve over that time period and in real terms it becomes even less.  Now think about how much your taxes have increased on a percentage basis over the same period on the state and municipal levels and it should become clear just how horribly mismanaged everything has been for quite some time.  Rates can&#x27;t really go much further south so even if they hold constant and never increase...all of our broke ass cities and towns will only be able to refinance at the same rate (best case scenario).  This means they can&#x27;t increase expenditure at all for anything unless they make taxes sky high to support the spending.  The free money game is over.