Sunday, September 12, 2010

A time for not borrowing

Now I want to get back to the discussion of borrowing that I started a month ago. Borrowing is often a good idea if you can be reasonably confident that you'll be in a better position at payoff time than you are at borrowing time. If you borrow $5,000 when your annual income is $10,000, and pay it off when your annual income is $50,000, you've done pretty well. Last time I forgot to mention one way that you might be in a better position at payoff time: inflation. It can boost your income without any action on your part!

There are some times when borrowing doesn't make sense. One of those times is simply when you don't need the money. Borrowing always increases your risk (except in times of high inflation). If you don't owe anything and lose your job (always a risk), you just have to figure out how to make enough to survive. If you owe money and lose your job, then you have to figure out how to survive and make your loan payments.

Beyond that, though, if borrowing is a good idea when you can reasonably expect to have a greater income at payoff time than you do at borrowing time, then it's a lousy idea if you have reason to think your income might be lower, or even if your expected increase in income is not enough to pay the interest.

Sadly, many transit agencies borrow without any expectation that their revenue will be higher when it's time to pay the money back. The MTA here in New York has borrowed a ton of money, without any reason to expect higher revenues in the future. The improvements that were paid for with that money did not bring in new customers who could pay a lot more. They did not bring in a new constituency that would demand support for transit in the State Government. They just kept people taking the trains and buses, i.e. maintaining the MTA's farebox revenue, but a large share of the MTA's budget came from state contributions and other taxes like the mortgage recording tax, which were subject to many factors unrelated to the MTA capital program.

One bad reason for borrowing is to "spread out payments." It's total bullshit, and you can see that if you just ask, "Why not pay on the installment plan?" The answer is, "because then we'd have to wait." And that makes it clear that the spreading out payments is just an excuse to get the money before you've earned it. No. You need to ask yourself if your financial situation will be any better at payoff time, and if it isn't, just sit tight and wait.

There is a problem in government with sitting tight and waiting. Lots of government agencies get their funding by crying poverty, and the system is set up to reward that. A few years ago the Port Authority was flush with cash - at least as transit agencies go - and everyone wanted a piece of the pie. In addition to a new order of PATH cars and related improvements, and chipping in a few billion for the World Trade Center redevelopment and the new train tunnel, Schumer and Paterson wanted the Authority to help pay for Moynihan Station, everyone's favorite vanity transportation non-improvement.

I don't think the Port Authority fell for that one, but pretty much all of its savings have been vacuumed up by various other agencies and projects around the region, to the point where it's almost as cash-strapped as everyone else. But it's hard to save up for a project if everyone's got their eyes on your money. Administrators who want to avoid that kind of headache will avoid saving up money, and simply borrow to pay for what you want and then scream for more when the money runs out.

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