BrokeHaven
What the Haven's Impending Prop 2.5 Fight Really Means
Making ends meet
Last week I made the case that, on a per-acre basis, Fairhaven’s downtown businesses are the most productive use of our town’s precious land. As recent budget discussions have revealed, the Haven is not on a sustainable financial footing for the long term. The town has been using free cash and reserves to shore up operating gaps in recent years, meaning operating revenue is not enough to cover expenses. The short-term answer to this challenge is that the town is going to ask for a vote to raise taxes beyond what’s allowed by Prop 2½1, a state law that limits the amount a municipality can raise tax rates on an annual basis. According to town leaders, the current budget has us about $450K in the red and they’d like to make up for this by raising taxes further on residents. This will require a vote. The vote will be contentious.
While I’ve already noticed signs up in my neighbors’ yards opposing any additional tax hikes, I’m not going to make a case here for either side of that vote. What’s of greater concern to me is the long-term implications of our current budget shortfall. The move into deficit spending is a troubling trend. To paraphrase Hemingway, we go bankrupt in two ways: gradually and then suddenly. Towns are no exception to this phenomenon.
The Haven as a business
There are really only two ways to close operating budget gaps: cut expenses and/or increase revenue. On the expense side, my sense is that our town leaders have made a strong effort to trim town budgets as much as possible. In addition, any kind of major cuts to municipal services would likely be a non-starter: all of us are biased toward keeping what we have above all else. Viewing this through a political lens, it’s hard to see a town in Massachusetts implementing anything close to an austerity budget. The one politically viable move involving expenses is to ensure, to the best of our ability, that long-term expenses don’t increase disproportionately to our revenue growth. This includes not taking on sneaky liabilities in the form of shiny new infrastructure that looks great now but adds to our long-term operating expenses.
Even if the proposed override succeeds, the town can only rely on raising taxes for so long.
In addition to limiting additional long-term liabilities, the financial future of the Haven depends on our ability to create a resilient and growing revenue stream.
By resilient I mean that our revenue stream is sufficiently diverse so as to hedge against future risk. Over-relying on one industry or a few large businesses for our revenue is too risky, no matter how fat the receipts are in the short term. By growing, I mean that we should care more about the potential of our investments to increase in value than we should care about their current value. One-time grants don’t increase our revenue over time. Chain restaurants and outer ring cul de sac developments are built to a finished state. That means that they’re typically destined to decrease in value over time (whilst increasing the town’s infrastructure liabilities).
Municipal Value Investing
To create a resilient and growing revenue stream, the Haven should take an approach akin to value investing. Value investors like Warren Buffet build a resilient portfolio that increases in value over the long term by focusing on securities that currently trade below their intrinsic value. Note that these companies do have value— we’re not talking worthless penny stocks— the value just isn’t fully recognized by the market yet. Regardless of their current size, companies that are value investments are profitable now and have a lot of room to grow, well into the future.
What does value investing look like for the Haven? It means we encourage lots of small bets, all aimed at thickening our existing neighborhoods and revitalizing our downtowns. As opposed to development that’s built to a finished state, this type of incremental development increases in value over time, growing the revenue stream for the town. Maybe the Ice Cream Cottage, slated to open next month, does so well that it grows into a bigger downtown space. That opens up their old space for a new business and increases the net value of our downtown. The town should be doing everything in its power to encourage the growth of small businesses like this. Need outdoor tables? Parklets? The town should be soliciting these needs from business and property owners and finding ways to make them happen.
Let it Grow
As unsexy as it may seem, this kind of investment is the way we grow our tax base and increase the productivity of our limited space. If an effort like this requires that the town spends a little more money now, I’m ok with that. I’d gladly chip in a few more bucks of taxes if I know that those dollars are going to multiply the resources of the town well into the future.
There is abundance here! We have everything we need to have a thriving, prosperous Haven well into the future. We don’t need to wait for the next federal grant or Big Project to save us. Chasing grants and shiny things may result in short-term revenue, but, in the absence of our building underlying financial stability, these kinds of big bets just paper over our insolvency and add to our long-term liabilities. We need a growing revenue stream. The most reliable way to increase our revenue without taking on unsustainable long-term liability is to plant many seeds now, most of them in the fertile soil of our downtowns and established, walkable neighborhoods. As the Morrisville Miracle (more on that soon!) demonstrates, this strategy is a tried and true way to ensure we continue to reap financial fruit well into the future.
Property tax in Fairhaven is about 1%, right? So, to cover a $450,000 deficit we would need to add $45,000,000 worth of residential property which is over 100 houses valued at $400k? Is my math wrong?