Interest is Very Interesting
By Ivan Beliveau: Goffstown Residents should be very interested in interest, especially interest rates. There is nothing that affects our financial future in town as much as interest rates. Unfortunately, for many people, discussions of economic or financial matters can cause people’s eyes to glaze over and roll back in their heads. There are many instances where interest rates affect our town property taxes, however.
For example, the town or schools may wish to borrow money and the currently low finance rates make that an attractive proposition. The borrowing may be to finance a big capital intensive project.
There are also residents who want to borrow money to buy something like a new car or a house now that house prices have been falling (good for buyers, bad for sellers or those “underwater”.)
At the same time, other voters who have worked and saved some money for retirement find that their savings accounts, CDs and Money Market funds pay essentially no interest. These residents sometimes have to struggle to pay their own bills and any excess spending in town gets their attention. They, especially if they are in financial difficulty, find the idea of their taxes going up a lot to be unfair. The local property tax is both regressive and a way to control local spending, however.
For a long time, NH has been loath to add a more progressive broad-based tax because of the inherent difficulty in controlling state expenditures at the local level. Just look at other states with other taxes.
Maybe if the local property tax could be permanently capped at say home purchase price, then reasonable people might accept a more progressive tax. That conversation is for another day for sure.
How the interest rates are determined for both borrowers and savers is a long story. The short version of why rates are so low is that a USA bank (The FED) wants them that way to encourage borrowing.
Borrowing is necessary because that is how money is created. A corollary to that statement is that if there was no borrowing (debt) at all there would be no money. If those statements are understood, then the rest is easier; if they aren’t understood, then a further explanation is also for another day.
Give a six year old $144,000 ( roughly the current cost of a 12 year education today) and have that in a restricted account that grows at an average of 7.2% a year, then that child at age 36 would have $1,152,000 in that restricted account to perhaps buy (cash) a house or pay bills - that is a lot of $$!
Those numbers only apply to today, because in this last decade the cost to educate a student doubled (2012 Goffstown Voter Guide.) That same average 7.2% yearly cost increase which, if continued for another decade, could also cause the cost of a 12 year education in 2022 to jump to $288,000. That same 36 year old given $288,000 at 6 years old in a restricted account would then have $2,304,000 to buy (cash) a house or pay bills - that is even a lot more $$! Why go to school or even ever work? Indeed!
A reader, whose eyes haven’t already glazed over, might want to ask why the cost to educate a student has doubled over the last decade. It does seem like a reasonable question, doesn’t it?
If today it costs about $12,000 ($36M school budget for 3K students) to educate each student per year including SAU non-education costs of about $2K per student, then a classroom of 25 students should generate $300,000 in income to the schools. What could be the expenses for that classroom?
An even bigger question is what happens to the current town and Goffstown schools combined budget of about $56,000,000 if it was to grow at an annual average percentage rate of 7.2% per year?
The answer to the question is that in slightly over 40 years, Goffstown would be looking at its first $ billion town and school budget. That would get some attention, wouldn’t it?
Voters can disagree over who will pay the extra budget increases, and for sure someone will pay them. There is no free lunch! The laws of compounding interest rates will not be repealed! Ever!
So perhaps interest is indeed interesting. It just depends whether you are paying or receiving it.
(IMAGE DATA - Goffstown Town Report - except years beyond 2007)