John, Bob, Rube and Patsy – A Mesa Story

 

Everything should be made as simple as possible, but not simpler – Albert Einstein

The finances of any large organization with thousands of employees across a wide spectrum of services is complex, but that doesn’t mean all the complexity is necessary. Before digging into all of the numbers presented on both sides of the issues let’s clarify some concepts that may get lost or overlooked.

     Resources have to come from somewhere and go somewhere. That’s why financial statements include cash flow statements in addition to income statements and balance sheets, which can more easily be manipulated.

     Most of the city’s revenues come from utility revenues and sales taxes. Issuing bond debt can affect the timing but, in the end, it will still have to come primarily from those sources.

     While much of the revenue must be earmarked for specific purposes, much of it isn’t. Two classic economic concepts to keep in mind when the city weaves an elaborate tapestry of transfers and special accounts are fungibility and opportunity cost.

     Fungible means Interchangeable, such as money or a commodity where one part can be replaced by another equal part or quantity.  Opportunity cost means choosing one alternative over another means you will miss or forgo a benefit offered by the forgone opportunity.

       This is why we don’t let the issue of funding a downtown ASU campus die. Ignoring that it was an end run around the expressed will of the people. We were told that it would not require a tax or utility rate increase. Instead they will be increasing taxes and utilities to replenish funds that were diverted to the ASU project.

Let’s illustrate this with numbers that most of us can relate to.

Imagine that you have a neighbor, let’s call him John, with assets, including his house, of $400,000 and liabilities, including his mortgage, of $370,000 leaving him with a net worth of $30,000. Despite relatively good times, he spends more than he earns, and continues to diminishing his savings with no plans to stop.

But wait, he has a buddy or relative, let’s call him Bob, who has this great real-estate investment. So instead of cutting spending and paying off debt he figures he can invest in this instead and use those future earnings to solve his problems, ignoring the fact that the guy not only can’t guarantee the return, he can’t demonstrate returns on past investments.

In the meantime, since he’s a little tapped out, he comes to you, Rube, and your wife, Patsy, and says needs to bum or borrow some money to pay his mortgage. He tells you that buying that new sports car, has nothing to do with the not paying the mortgage “Those are different accounts”. He has money set aside but those are in non-tax deferred “vacation” or “education” accounts and he doesn’t want to touch those, although there are no financial or legal restrictions for doing so.

     As long as Rube and Patsy play along, John will continue this game until he retires or until Rube and Patsy catch on to the game and quit writing him checks.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s