Imagine a life where your tax money works for you, not against you. I'm a big fan of Dave Ramsey. I have seen firsthand people who have followed his baby steps, gotten out of debt, and gone from living paycheck-to-paycheck with no emergency fund to being financially stable. Earning interest is better than paying interest. Not having payments gives you flexibility to do more with that money, such as investing it. Having money invested and saved makes it possible to cover emergencies and make large purchases without debt.

The Czech economist Tomáš Sedláček has described (I'm paraphrasing) debt and savings as consumption time traveled. Savings is when you agree to consume less today, so you can consume more tomorrow. For example, you want to buy something that is $1,000 when you only have $100 a paycheck to spend. There are three ways you can afford the large purchase:

1. Buy it now with money from savings, because in the past you put money away so you can make larger purchases in the future.
2. Save your surplus today into a sinking fund, and buy it in the future.
3. Buy it now with debt, pay off over time.

When you save money, your consumption is time traveled into the future. You are agreeing to consume less today, so you can consume more in the future.

When you use debt, your future consumption is time traveled into the past. You are agreeing to consume less in the future, so you can consume more today.

Not understanding the future obligation of debt is what will quickly get you into trouble. It's also fragile. The future can be unpredictable, so if there's a disruption to your income and you can't pay for yesterday's consumption, you suffer and can get into a cycle of paying off old debt with new debt.

Putting money away into savings, then making a big purchase, is different to making a big purchase, then putting money into paying it off. This is because consumption warps when it time travels, thanks to interest. When consumption is time travels into the future, it grows (maybe 4% APY in a high yield savings account, or 11% in the S&P 500.) You consume less today for the ability to consume a lot more tomorrow.

When consumption time travels into the past it shrinks (4% on a mortgage, or 28% on credit card.) You consume today, in exchange for consuming a lot less tomorrow.

One of the differences you may have noticed between the two is that savings compounds, and so it continues to grow over time, whereas debt tends to be a fixed pay off rate. For example, saving $100 annually for 5 years at 5% interest grows to $582, while borrowing $500 at 5% interest costs $442 in today’s dollars—a $140 difference. Money shrinks and grows the farther it travels in time. Over 30 years, $100 per year ($3,000 total) could pay off a $1,552 loan today or grow to $7,124 in savings, a difference of over $5,500.

If you take out a 30 year loan at 5%, you agree that you will spend the next 30 years paying $100 for each $51.74 you spent today. For a 15 year loan at 5%, you will spend the next 15 years paying $100 for each $70.25 you spent today. For a 5 year loan, each $100 will go towards $88.32 you spent today. If instead you save that money, every $100 you put away for 5 years will be used to spend $116.44 in 5 years, $152.5 in 10 years, $237.49 in 30 years.

You get a lot more value for your income by putting it away to spend later, rather than spending today. How does it relate to municipal finance?

Our local governments are addicted to debt. We issue bonds for repaving streets, maintaining parks, upgrading schools. A typical bond is issued for 20 years and today's rate is 4.4% with semiannual payments. This means, if a $1m bond is issued today, over the next 20 years, $1.514m of taxpayer money will be spent paying off the bond. Wall Street loves the idea of adding a 51.4% tax to every large municipal project, so the finance industry lobbies to make it easier to issue bonds rather than to run and invest a surplus.

Years ago, I spoke with a city manager and suggested that they run a surplus, and we pay for our capital projects with savings. He acted offended, and said that government wasn't in the business of running a profit. But, the alternative is that government runs the equivalent of living paycheck-to-paycheck with no savings, and issuing debt anytime a big expense comes up. As you can see, time traveling future tax revenue back in time to spend on projects today results in a lot less value for money, and ultimately, higher taxes for the same level of government services.

Municipal governments spend a lot of money on paying off debt. This can range from 3.7% (Philadelphia, 2010) to 34% (Milwaukee, 2015), with the average around 10%. Imagine instead if governments could break the debt cycle and instead save 10% of their tax revenue. Just like an individual building an emergency fund or saving for a big purchase, municipalities could create sinking funds or capital reserves to cover future projects without relying on bonds. No more adding a 51.4% tax to Wall Street.

Cities could create a Municipal Wealth Fund to manage surpluses, growing these funds to finance future projects without debt. In an ideal world, I'd love to see the wealth fund grow to such a level that it's able to fund local government and we can significantly reduce our tax rates.

Why do I care? Because I live in New Jersey with record high property taxes. There are towns where the median property tax bill is over $20k a year. This is more than the average American pays in rent. I care about preventing my state chasing our community away with its high cost of living, and I want us to get value for our tax money.