Bonds can reduce heavy annual tax burdens

As the Borough looks to the future with its capital infrastructure investments, it’s important to look at how Ramsey is positioned to utilize the debt markets to finance these investments. Using the debt markets for large capital improvement projects stabilizes property taxes because the capital improvements are paid over
their life span instead of in one year.

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New Jersey uses a common formula of a municipality’s net outstanding debt as a percentage of its equalized valuation of properties. This formula applies to all 570 municipalities in New Jersey, regardless of size. A municipality’s debt cannot exceed 3.5% of its equalized valuation under the common formula. Ramsey’s debt percentage is 0.306%, which is well below the 10% limit that New Jersey allows for a town of Ramsey’s size.

 

For comparison purposes, the average debt for the 13 Northwest Bergen County towns is .545%, making Ramsey’s debt 78% below the average neighboring towns. These facts are important as they illustrate that Ramsey is well positioned financially to utilize the debt markets responsibly for future large scale capital investment projects.

 

To that end, it’s important to understand why municipalities leverage municipal bonds. As stated above, it is a common and effective strategy for municipalities to finance necessary projects and services without imposing significant immediate tax burdens on residents. Here are some the benefits:

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• Access to Capital: Municipal bonds allow municipalities to raise large amounts of capital that can be invested in infrastructure and essential services. This upfront funding can be crucial for timely improvements and development. Municipalities often issue bond anticipation notes (BANs) as a way to finance projects in the short term.

  • BANs provide immediate financing for projects while the municipality waits to issue long-term bonds. This can be particularly helpful for covering costs early in a project or when there is uncertainty about the final amount of financing needed.  

  • Since BANs are short-term debt instruments, the interest rates on them are often lower than those of long-term bonds. This can save the municipality money on interest costs in the short term, especially if long-term bond rates are currently high.  And the Borough may delay issuing long-term bonds to take advantage of favorable future interest rates.

  • BANs allow us to wait for better market conditions before locking in long-term borrowing costs. Using BANs also gives a municipality time to refine the total costs of a project. If a project is still being designed or its costs are uncertain, BANs provide funding while giving borough officials time to finalize the exact amount needed for the long-term bond.  

  • In addition, issuing BANs allows the municipality to avoid taking on large amounts of long-term debt all at once. BANs provide municipalities with more options to manage their finances over time. They can be renewed, converted into long-term bonds, or even paid off with other revenue sources before long-term debt is issued, allowing for financial maneuverability.  

  • In summary, the advantages of using BANs include short-term interest cost savings, flexibility in financing timing, and the ability to postpone long-term debt decisions until there is more certainty around project costs or market conditions. 

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• Spreading the Cost: By using bonds, the cost of long-term projects is spread out over time. This equity approach ensures that those who benefit from the improvements help pay for them over time. In other words, if you don’t issue debt and install pay as you go to make borough improvements, you would drastically raise taxes immediately for projects, many of which benefit generations of residents over a long time (e.g., Senior Community Center, roads, water treatment, emergency services, etc.) 

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• Low-Interest Rates: Municipal bonds typically have lower interest rates compared to other forms of borrowing. This makes them a cost-effective way to finance public projects. 

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• Tax Advantages: Interest earned on many municipal bonds is exempt from federal income taxes and, in some cases, state and local taxes as well. This tax advantage makes them attractive to investors, thereby reducing the interest costs for the issuing municipalities.

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• Credit Ratings and Fiscal Responsibility: Municipalities need to maintain good credit ratings to issue bonds at favorable rates. This encourages fiscal responsibility.