While I have a few minutes I will start working on the time value of money.
Most know what the concept means.
www.investopedia.com/terms/t/timevalueofmoney.aspI think investopedia does an excellent job of expressing some of my points as it describes the concept.
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"The
idea that money available at the present time is worth more than the same amount in the future
due to its potential earning capacity. This core principle of finance holds that,
provided money can earn interest, any amount of money is worth more the sooner it is received. "
"The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. "
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Theory and reality may collide however, to greatly reduce your ability to "offset" an obligation.
For me, having been trained as an accountant and having practiced as a CPA, the time value of money is most often used to compare two investment alternatives with the assumption that you have funds available to invest or, in it's most basic form, that you would rather have funds to day over tomorrow as you can invest and get a return today.
When you start using the concept to compare an obligation (a debt you have to pay) with investing you have to start making assumptions that aren't necessarily true for many or even most.
First, we didn't have a choice in the financing of MVHS. We are on the hook for the principal and interest since the District chose to finance the building.
So that forces the taxpayer into the position of having to offset the additional cost of interest paid with a revenue stream from the money we didn't have to give the District now, as a result of the financing.
That said, just because the district didn't collect the principal up front, does that mean we all have money available to pay now if they did? In other words, aren't there a number of taxpayers who don't have funds set aside and are living paycheck to paycheck? People who don't have any funds to invest now? You can't earn a return on money you don't have. Right?
In addition, most taxpayers who own homes have mortgages (all but about 8500 homes in Naperville, as an example, have some type of home mortgage. So many of them must put funds in escrow to pay p&i, taxes and insurance. How much does the avg bank pay on those accounts? Because of the short term nature for which these funds are held, very little.
These first two examples will knock out a significant cross section of the population to show that the theory and the fact don't meet as well as some would like it to.
Moving on, I would imagine there are some like me, who have money in the bank, like our checking accounts, that earn very little because we want liquidity for contingencies or discretionary purposes. Oh, that LCD finally went on sale! Be back in a few. You can create any number of reasons to have cash on hand. Under the time value of money, as it applies to this situation, you would have to have all funds earning interest at all times.
As an additional consideration, when you take the cost of the MVHS, approx $144 million (and counting) and divide that by 59k households in D204, you get an average liability of about $2500 per family for the capital cost of MV and about $1250 or so for the interest due over the 20 year period. That works out about $175 per year per family. I know i have at least $175 laying around that doesn't earn interest.
Even if you take the entire liability for the average taxpayer on current total debt of the district of about $300 million in principal and say $150 million left in interest due (in reality it is somewhat higher (the audited financials should be out soon for FY09 that will give us a pretty accurate picture) using these figures, the avg liability for the taxpayer is $450 million / 59k households, or approximately $7600/per household. So we aren't talking about a tremendous amount (I am aware it is for many and don't want to downplay that) that is due each year per family on the Districts total liability, so it could easily come from liquid funds that draw little or no interest.
If I do have cash sitting around I can invest, I might put that into longer term investments and start saving for my tax bill from my paycheck similarly to an excrow (which is exactly what I do). I take 1/12 of the tax bill out of my check and put it in another account at my bank and pay the bill from there.
Another thing to keep in mind is that each year you have to pay 1/20 (in our example) of the principal and interest. Since in the early years most of the payment is interest, we have to match that closely or we lose right off the bat. Remember, we are paying about 5% on these bonds.
Also remember that part of our total payment is due every year, so you can't take large risks with some of those years, least you get caught with your investment, needing funds when you can't necessarily get them out at a gain.
Finally, the taxpayers in D204 will have varying returns based on such things as age, risk tolerance, etc. How do you factor that in?
So while jlyc would like to use the theoretical world to make this fit in a nice box, it simply cannot and for most people, it simply doesn't apply.
We know with reasonable certainty what our liability will be, but as to the ability to offset that liability, how do we come to a credible answer as to how much that offset really is? For many, if not most, I posit that it is most likely very little. You be the judge.
