Thursday, January 13, 2011

$20m Bond Avoids Bounced Checks

"You can't borrow your way out of debt," argued Flint Councilman Josh Freeman, chair of the Finance Subcommittee and expert of Flint's budget situation.

For people interested in a functioning city, it is fortunate that six other Councilmembers disagreed and voted to borrow $20m during Monday’s Council meeting. Without this money, the city will run out of cash in two months. 

No money = no paychecks = no services = no city.

What does this mean?

Imagine GM moved your job overseas, and you’ve sunk to working bad jobs for a couple of years. Your wife’s savings and steady salary kept the lights on and the family together. Now, her savings is almost gone. Worse yet, her pay was recently cut. You still have to feed the kids, pay the babysitter, take care
Buick City
of sick grandma, and pay for college. In two months, however, you won’t have any cash; you’ll be officially broke. Cashed out, Lights out, Get out.

What do you do?
Find another job:
  • Jobs are scarce and competition is fierce.
Cut expenses:
  • It’s too late for that, and Grandma’s not going anywhere
Declare bankruptcy:
  • You don’t have money for lawyers and it might not work as expected
Borrow on the credit card:
  • The only solution.

What does the $20m do?
Flint Water Plant
To step back from the metaphor, Flint’s General Fund, i.e. the fund which pays for police, fire, and city administration, borrowed $11m from the Sewer Fund and another $7m from other funds over the past few years. However, this game will end soon because these funds are broke, too. But wait; Flint might have one last chance. By borrowing $20m, the coffers will be full and the crisis will be over! You can feed your kids (social services), pay the babysitter (police and fire), take care of sick grandma (pension), and pay for college (downtown renewal).

Now what do you do?
You (and Flint) have enough cash for one year, given your lifestyle. How can you (and Flint) receive more income and cut expenses to keep you from relying on your savings? Councilman Freeman, with his comment mentioned at the beginning, wanted that plan. This is the reason you can’t borrow your way out of debt. It might keep you from catastrophe, but without a plan, it’s not sustainable.

Perhaps city leaders will reveal this plan; it might even work. Stayed tuned for updates...

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