from Marc Fandetti, Wrentham
Regrettably, I will be voting no on June 4. Here's why.
In the decade or so leading up to the financial crunch of 2008, property values in many U.S. cities and towns doubled, and in some places values grew even faster. During that same period, Town spending (here and elsewhere) grew dramatically.
In just the past 10 fiscal years (2002-2012), Wrentham’s budget has increased from $21 million to just over $34 million – a 5% growth rate, more than double the annual increase in inflation of 2.25%. If Wrentham’s spending had instead kept pace with inflation, its budget would be just over $26 million, not $34 million, for the upcoming (2012) fiscal year.
Said differently, during a period of time during which average incomes in Wrentham and elsewhere have barely budged, real Town spending, that is, spending in excess of inflation, has grown by about $8 million.
Relative to other towns, Wrentham’s spending growth may be modest. But we overspent relative to incomes and normal, long-term historical home price growth nevertheless.
The reason for this overspending was the unprecedented rise in property values, to which all towns' revenues are geared. As mentioned earlier, prices in the Boston area doubled in a very short period of time relative to historical appreciation rates, which we now know to have been the result of a nationwide "bubble.” Most town budgets, including ours, grew in lock step with this bubble.
But home prices are now roughly 17% off their 2005 peak (and might be much lower without ongoing government support). Despite this, Wrentham and other towns' spending is higher than in 2005, the peak home-price bubble year.
The hard truth is that Wrentham’s spending in the late 1990s and early-to-mid 2000s was attached to unsustainable property value growth. It was attached to a real estate bubble. Our overspending became chronic, or structural, as a result, and our budgeting process is thus starting with a baseline that is neither valid nor realistic. This is true of government at nearly all levels, and is not necessarily the fault of any one party or group of leaders.
The problem we face now – and may be facing for many years – is that the new state of the world (that is, one of flat or falling, not ever-increasing, home prices) cannot support a level of spending that was based on what we now know to have been a bubble in property values. The problem is structural, and so the solution must be structural. As such, it may be painful and disruptive to some.
Incredibly, the “right” level of Town spending may be somewhere in the range $28 million - some 17% less than we plan to spend today. This figure can be arrived at using a few different approaches. First, assume Wrentham’s budget should have grown at about the rate of inflation from 2002 onward - plus a little more (nearly $2 million, or almost 10% of the starting value, to be generous) for improved or additional services. Alternatively, reduce today’s spending by the percentage decline in property values, ignoring other sources of revenue. Finally, you can assume $2,000 in new spending (the 2002 starting value) for each new resident - population apparently increased by some several hundred between 2002 and 2010 - then round up very liberally. No matter how you slice it, you get about $28 million, or about 17% less than this year's budget.
Such an overall spending level would get us back to “normal” following years of abnormal home price growth, and accounting for population growth. This “normal spending” is therefore a more realistic baseline. Though not actually desirable or feasible, as a reference point normal spending reveals how much in excess of long-term, sustainable spending Wrentham’s budget actually grew during the bubble. In fact, much of the spending growth of the several years leading up to the Great Recession can be thought of as “bubble spending,” in the sense that it was not sustainable in the long-run.
Even with the spending restraint of recent years, there remains a huge gap – several million dollars - between normal spending, plus increases for increased and improved services, and bubble spending.
We have closed some of this gap with tax increases and spending cuts. Sacrifices and tough choices have already been made. Unfortunately, more are required to return spending to a more normal path.
Voting “no” on June 4 will result in more short-term pain. This is regrettable. But it is preferable to continued, unsustainable bubble spending.