The Expert Podcast

Certainly you have heard about the jump in lumber prices. You may have heard about supply chain issues with materials. Everybody has seen the news about inflation on gasoline prices. But even if you're not directly affected by some of those things, you're going to find that the cost or even lifestyle deficiencies from those factors are going to creep into your life one way or another. One area has to do with municipal budgets, and municipal budgets are government projects that are always occurring.

In your city or town or county or state, there are hundreds of projects at any given time. It might be a small road repair, it might be adding a guard rail, it might be repaving a highway in your area, it might be building a new school or new library or remodeling the town hall. There are any number of municipal government projects that are in process at any given time. Now, the money for those projects, as you know, comes from taxes. It can come from property taxes, income tax in your state, sales tax — they all come from taxes. And those taxes, of course, come from the citizens and consumers within that state.

So if there are inflationary effects, if there are supply chain shortages, even if there are labor issues, those are going to affect those projects. Give an example: most medium to large-size municipal budget projects are put together and planned many years in advance. A typical road project might be proposed in year one. It might be a feasibility study in year two. There might be a formal discussion within the government agency, maybe it's the city council, maybe it's the county commissioners, maybe it's a state government in year three. In year four it will go out for a bid for a proposal and there'll be bids from different companies, and in year five the proposals will come in, it'll be voted on, and it will start in year five.

Well, in year five — that's five years before the project was even conceived — it's five years later. A lot can happen in five years. The needs of the project might change. But more importantly, especially in the last five years, the realities of cost have changed. Everything from the wages of the actual workers that are contributing to that project have gone up. You know now, even without passage of a formal minimum wage bill that everybody was trying to push at $15, it's almost impossible now to even get quality work for these types of projects for anywhere less than $15 anyway. So where five years ago you might have expected eight, nine, ten dollars an hour for construction work, now you're going to be $17, $18 an hour.

And really high-quality contractors are going to pay their people more anyways — they're going to pay them well into the $20s, even $30s for some specific skill trades. So that original budget might be squeezed. In addition, materials — if you're paving a road, you're going to use asphalt. Well, asphalt uses petroleum to make the asphalt. As we know, petroleum prices have gone up dramatically in the last five years. Any other material you can imagine would go up in price.

Now, a lot of projects have escalation clauses built in where if it's five percent, ten percent, whatever the inflation rate is, up to a certain amount. Nobody could have ever imagined the level of inflation that has happened in the last two to three years. So many of these projects are now getting squeezed. So what the municipal government has to do is now make decisions. Do we cut back on the project? Maybe you're halfway through and you realize you're not going to have enough money to finish it. How do you handle that? Do you reduce the level of that project? Maybe you cut out another project? Maybe you raise taxes? Probably all of the above.

If you're a government agency or government organization that's deciding on municipal projects, as you see these budget items balloon in price, you're going to do all three. You're going to take the projects that are in place and you're going to shrink them down a little bit, cut some corners. Any new projects you might put on hold or delay them or even cancel them. And you're going to look to raise revenue from additional taxes.

How does that affect you as a citizen of that municipality? Well, you're probably going to see less completion of all the projects that have been talked about. Maybe they don't build that new school. How does that affect you? Well, in three or four years, class size might not be 28 students per teacher; it might be 38 students per teacher. That might affect the education quality for your children.

What about projects that are in place? Well, they may have been planning on repaving the road for eight miles; they might only do it for three miles. That might affect the wear and tear on your car if there's potholes, and it might affect the future budget of your municipality. Anything that was budgeted and approved for an expense was done for a reason. A lot of it is preventive maintenance, preventing bigger problems later.

You know, there's an old saying from the 1700s: "A stitch in time saves nine." That was an old saying where if you had an old pair of socks and had a small little rip in it, and you put one stitch to hold it together, that's better than waiting until that thing rips open and now you need nine stitches to hold it together. Well, in municipal budgets, it may be a good investment to spend a million dollars to fix the road now rather than letting it deteriorate further where the road bed and the underlayment now need to be replaced, and now you have to spend $9 million to fix it because it's structurally deteriorated.

So those are some of the trade-offs. Even though it might not affect your budget too much now, in 7, 8, 10, 12 years when they have to do a special assessment to get caught up on all this, or they just have to cancel the road. There was a period of time in the 2008–2009 financial crisis where some counties were going to de-pave roads and make them dirt or gravel because they didn't need the same kind of maintenance.

That has an effect on the citizens and the residents. It tears up your car. Plus, homes that are for sale on a road that's not paved are worthless. Even the appraisal is going to include the fact it's not on a paved road. Schools are part of home values. We are seeing in some municipalities — we just saw this in a small area in Oregon — where there was a small unincorporated town that had its own fire service. And because of budget cuts, they were mostly a volunteer fire department but they had some paid workers. They had to cut back.

Because of the fact that they reduced their coverage, the other counties around it that did a mutual aid agreement where they all shared aid — if there was a fire in one town, everybody would go there; if there's a fire outside your jurisdiction, you would go pitch in — they had a shared agreement. They had a contract where all the different municipalities did a mutual aid shared agreement. Well, when this one town started to really not be able to staff itself to share its resources elsewhere, they broke up that mutual aid agreement and they canceled the contract.

So now you don't have the same fire coverage. Well, some residents and homeowners in that area were finding their insurance rates went up because the insurance companies now de-rated their fire response. There are rating numbers: there's 8, 10, 12, whatever it is. Then they de-rated them three or four numbers because they didn't have the same fire coverage.

The financial and regulatory and bureaucratic process that went into that result were probably under the radar because nobody really knew that was happening or didn't pay much attention to it. Look, if there's not a fire at your house, you don't really care. But that budget item affected each individual homeowner. If their insurance rate went up three or four hundred dollars per year, that's real money out of your pocket.

So these material costs and labor costs and inflation can affect you in ways other than just, "Well, I had to pay an extra $8 to fill my tank," or "My grocery bill went up $10 this week or $20 this week." It could come back to affect you on insurance, on taxes, on the quality of life in your area.

So making sure that the organization in your jurisdiction that handles municipal budgets is sharp, is paying attention, and is thinking ahead might be a good thing to take advantage of and to pay attention to. Because if you have a government agency that's paying close attention to these budgets and taking advantage of ways to mitigate these losses, that might save you a couple thousand dollars a year.

As an example, there's a government agency in central Texas that handles the management of the power company. It's a quasi-government power company; it's a collective. And that power company, electric company, saw these inflationary effects a few years ago and they went out and they bought extra spools of wire and extra materials and transformers and the other items that go into what they know they need to do: normal wear and tear maintenance, repairs, damage, or storm comes through, they have to fix things, you know, the creosote-soaked telephone poles that they need. They bought extra ones of those.

At the time there was pushback — "Well, why do we need to buy this much extra? We don't normally need this. Normally we keep two years' worth of materials on hand; you're buying up to six years of materials ahead." And the planning commissioner said, "Well, we're going to use these anyway. It's not like they're going to go to waste. They don't spoil, they don't go out of compliance, they don't become obsolete. They're the same things that we'll use."

And it's almost impossible that the price is going to go down, so we might as well have them. In fact, the commissioner — she made the argument that the excess cash that the government agency, this municipal co-op, has, they put into CDs that pay 1%, maybe 2%. So her recommendation was, why not put the extra cash into extra materials? Because if inflation — even if it's 5% inflation — we will get a bigger return on our investment by having these materials than we will just sticking it in the CD.

And in fact, the inflation on those items went up more than 20%, so the return was even greater. So those are the kind of decisions that a municipal agency can make to help the residents of their area come out ahead when there's inflation. But it does require planning and proper consideration of what all the effects are. And you have to have good people in those roles to do that.

If you are an individual, a citizen, a consumer living in a certain jurisdiction, take a look at your county budget. What does their balance sheet look like? You don't have to be a financial expert — numbers are numbers, math is math, two plus two always equals four — and you can see what is going on with your county or your city to help alleviate some of these problems. Also, take a look at what projects are currently in the works so you know what is going to be constructed in the next two or three years.

That awareness will help you understand: is there going to be different traffic flows in your town? Will there be different areas for economic development in your town? If there are conflicts with contracts because it's priced higher and a contractor is trying to gouge on price or reduce the scope of a project, if you've seen the contract — they're all public — you can point out even sometimes to a commissioner, "No, the contract already has a clause in that if the prices go up this much, then the contractor has to eat it." So having that awareness will help.

Look, your internal family household budget is X amount per year — $20,000, $30,000, $50,000 a year, whatever you spend on your discretionary things. In effect, by being part of a local community, you probably are part of a tens of millions or hundreds of millions of dollar budget that that community does. Your share of that might be $8,000 or $9,000 or $10,000 a year. Think of all the taxes you pay. If you add up your property tax, the sales tax you pay, any income tax for the state — if you add all those taxes together, you are a shareholder in that government agency organization.

And you knowing about those budget items might be as important and valuable to you as your own personal household budget. It's not going to be bigger in terms of dollars, but it's also something that you can't have direct control over month by month. If you have a sudden expense that comes up in your personal budget, you can make some changes — maybe don't drive as much, spend as much on gas; maybe you can cut back on groceries; maybe you don't buy as many birthday presents.

You can't change your municipal budget presently. All you can do is make influential decisions and suggestions and voting for things that will happen in the future. And knowing about those projects will help you with your own personal budget but also be a positive contributor to your community. Remember, the effects on your personal budget from external forces are more than just what you have to pay at the gas pump or at the grocery store.