IVGID GM’s Corner: Debt is not always a four-letter word
March 16, 2017
When it comes to providing your IVGID services, a prudent amount of debt allows us to keep service levels high and your costs low.
A quick look at our annual audit will give you a summary of our current debt obligations. We are currently using a little over one percent of our statutory capacity. And what little debt we have has decreased by over 60 percent since 2008.
I realize that being debt-free is a great catch phrase in many political circles, and I would never recommend taking on more debt than necessary. However, simply eschewing debt on principle isn't a sound way to budget whether it is your personal budget, government budget or corporate budget.
In fact, even the most fiscally conservative companies realize that debt is an essential part of properly managing your corporate bottom line. That is because debt can both directly and indirectly save you money. Let me provide a couple of examples.
We typically do lease options, instead of purchasing our golf carts. We do this for two main reasons. First, golf carts depreciate rather quickly after four to five years. In our mountain environment, the batteries in particular aren't long lasting and therefore we are taking the risk of significant reinvestment less than halfway through the useful life of the vehicle. We also have a very busy course in the summer, and the furnishings on the vehicles also wear down fairly quickly and often require a refresh after four years as well.
Secondly, the manufacturers are very anxious to sell us new golf carts. Therefore, in order to make a new sale, they are willing to enter into sales agreements wherein they agree to purchase our existing carts at a very competitive price, despite the wear and tear and failing batteries.
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Thus, with a leasing program, we spend less money upfront, far less money on maintenance, and we are able to provide our customers with a new vehicle every four years. By keeping a more up to date fleet, we are also able to charge higher non-resident rates for a round of golf, which then keeps our costs down to our residents.
There are also many instances where long-term capital investments are better served via a financing plan. Part of this is due to the low cost at which we can obtain funding. As a government agency, we have access to tax exempt funds. In addition, because of our strong financial position, we are able to get rock bottom rates from our lenders.
For example, we have bonds outstanding right now with interest rates as low as 2.25 percent. Construction costs typically increase 4 percent or more per year. With this spread between rates and costs, it often makes more sense to finance a project than to wait until all of the cash has been accumulated.
For example, let's say we need to replace a one million dollar sewer pump station. If we wait five years to accumulate the cash, that pump station will now cost $1.2 million to replace. If we are able to finance it now at 2.5 percent over ten years, we will end up spending approximately $60,000 less total money over the ten year period.
In addition, we have remedied a maintenance and operation issue five years sooner. If that station had failed in the meantime, the District would have taken on even greater cost.
With a lower annual cost for both capital funding and operations, there is less pressure to raise revenue. Thus, financing the project reduces utility rates in both the short run and the long run.
It also frees up funding to do other capital projects sooner, which often result in cost savings for those projects as well—since they are also being built sooner and at a lower cost than in the future.
As you can see, "cash" can often be the four-letter word, not debt.
The District's prudent use of use of debt has provided a "no surprises" proposed 2017-18 budget for our community. There is no proposed increase in the Facility Fee for the eighth year in a row. Our proposed utility rates are far below the average in the basin — and pennies away from being the lowest rates in the basin. And our capital plan provides enough resources to ensure no unfunded liabilities.
Our focus on prudence instead of slogans adds up to lower costs and better services for all of us!
"GM's Corner" is a recurring column from IVGID General Manager Steve Pinkerton, who discusses issues and offers updates regarding various district matters. He may be reached for comment at firstname.lastname@example.org.
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