Let me start out by saying that I was a philosophy major in college. I never took a finance course or spent a bunch of time running numbers on Wall Street. But as a citizen and someone who is concerned generally about the common good I have had to learn a fair amount about public finance. So there you have it: caveat lector.
Nicole Gelinas is author of a very interesting article called Beware the Muni-Bond Bubble—and she is a chartered financial analyst. So she knows a thing or two or three about public finance. But I think her comparing the increasing government use of debt to individuals getting in over their heads on mortgages is wrong. States and local government borrowing money for building large scale infrastructure—especially clean energy infrastructure—is nothing like the mortgage bubble that built up. Instead, using debt to finance energy efficiencies is probably the best use of public debt.
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Here’s one example of how Gelinas characterizes the recent uptick in debt financing:
Like homeowners, state and local governments spent the boom years using illusory gains to justify ever-higher spending and borrowing. Between 2000 and 2008, state tax revenues, buoyed by the housing and financial industries, outpaced inflation by 15 percent, according to the Census Bureau. Local tax collections mushroomed, too. But instead of using all this money to reduce their debt, state and local governments spent it on rising public-education costs and expanding Medicaid for poor and working-class residents.
Now I would tend to agree with Gelinas’ dislike of using debt financing for services. Financing at all levels is all about getting the money needed today to make money in the future. Paying for things like health care, public education, or parts of the safety net is a little like buying your lunch or breakfast with a credit card—it isn’t a wise use of debt capacity because it’s just the cost of the status quo, and there is no value generated by the purchase that will help you pay back the loan.
I am not going to challenge Gelinas’ numbers either. But her analogy is a dangerous one for green jobs. And it’s an analogy that is likely to surface in discussions about whether to build clean energy infrastructure. So here’s why I think the analogy to the housing bubble doesn’t make sense.
First, energy infrastructure can actually pay for itself. In the case of performance contracting, the savings from reduced energy bills can cover debt service. So energy efficiency retrofits are not like a bubble. They’re not like a bet on buying low and selling high. It’s more like a farmer buying a cow and being able to pay for its purchase by selling milk. Sure, it’s possible that the cow could go dry, but being able to make progress in business and energy efficiencies doesn’t come without some risk.
Second—and this is a very Keynesian argument—building clean energy infrastructure, like ground-source heating for example, creates jobs. And when people have jobs, they spend money. And when people spend money, they pay taxes. So using debt to build ground-source energy in North Portland will pay for itself and, once the debt is paid off, the tax revenue will keep pouring in to state and local coffers. That’s not at all like a person buying a house hoping to sell it off as prices continue to rise.
There’s a connected point too, which is that the money spent on ground-source is spent locally—on installation and maintenance. By contrast, the money spent on gas or oil fuel heating is largely sent away.
Finally, using debt to build clean energy infrastructure can build “community equity.” I’d like to propose that term—“community equity”—for investments that government makes for everyone’s benefit, and that otherwise couldn’t be delivered by the marketplace. Right now, clean energy infrastructure is that kind of investment. Unlike equity in a private home which accrues to the owner or the bank, community equity—the value of a capital project that uses bond financing—accrues to everyone in the public realm; and, if you really want to be expansive, to the whole planet.
Why is it important to challenge Gelinas’ comparison? Too many decision makers are already spooked about using public debt to finance efficiency retrofits that could create jobs, energy savings, and emission reductions. Just this year, for example, Washington State’s Treasurer was raising concerns about how the Jobs Act might harm the state’s credit rating, and his concerns seriously imperiled the legislation. And legislators’ major anxiety about the Energy Efficiency Financing Act—which didn’t get out of the legislature—was caused by a misunderstanding of public finance and debt. While this confusion might be understandable, it was made worse by the legislature’s growing anxieties about using debt. Gelinas’ article, while well reasoned, stokes those fears.
In the end, cities might max out their municipal credit cards, and then walk away from the debt the way many homeowners did. But that seems unlikely and, after all, nobody can predict the future. The analogy just doesn’t work, especially for bond-financed clean energy projects. Debt can be a good way to get things done; it pushes forward future savings so that they can be used to build infrastructure now. When used responsibly and with a good plan, bond financing can make dreamy clean energy projects a reality with a built in payback in the form of energy savings. Building ground source energy infrastructure using bonds, for example, is a great investment, while building massive highways and backfilling social service budgets using debt is not.
If I remember right, the finance 101 text told us that current expenditures (services) should be paid for out of current income, and that longer-term investments would appropriately be paid for with debt, with repayment more-or-less synchronized to the expected returns from the investments. In private sector finance, the investment should throw off some profits beyond making the repayments; in the public sector, repayment can be more flexible because there’s no requirement for profit.