Remember the term, “balloon payment?”
For those too young to remember, a balloon payment was a creative financing concept popularized by mortgage lenders in the late 1970s and early 1980s. Those were the days of the Misery Index, with inflation and unemployment hovering near or above double digit levels, when 30-year fixed rate home mortgages were at 17-18 percent, and when the rapid increase in the price of new and existing homes was fueled, in part, by the rapid expansion in the number of two-income families.
The only way many first-time home buyers were able to afford a new home was for the seller to finance part of the purchase price in the form of a second mortgage, typically due in full at the end of, say, five years. In other words, they deferred the consequences of not being able to afford to buy the house in the first place.
The theory was that, by the end of five years, interest rates would have fallen dramatically, thereby allowing the buyer to refinance the loan and pay it off in cheaper dollars. Or the buyer’s income after five years will have risen to the point where paying off the amount due would cause considerably less stress to his/her bank balance. Or the buyer would wind up selling the house before the balloon payment came due. Or perhaps the buyer would win the lottery, or maybe somehow, someway, the debt would just go away if you put it off long enough.
For a first-time homebuyer, typically with very shallow pockets, it was a risky gamble that brought short-term happiness but, for many, long-term gloom. Sooner or later, someone had to pick up the tab.
Many state and local governments have been taking similar gambles with their finances, and sooner or later their balloon payments will come due. The two most common ways are deficit spending and deferred maintenance.
The first is pretty straightforward. Beware of states that are racking up a lot of debt. While debt has its useful purposes, it must be repaid, and the only way for a government to repay debt (short of discovering oil or gold) is to raise taxes and/or cut spending, with the former being the most likely. A state with a large debt is a tax increase just waiting to happen and, as a businessperson, a good portion of that increase is likely to be headed your way.
The second type of looming debt involves deferred maintenance of basic infrastructure.
Politicians love to defer expenses for road and bridge maintenance. This allows them to spend the money on other things, while assuaging themselves and their constituents that it’s only a year. The problem with these one-time “savings” is that they become addictive and, before you know it, five or ten years have gone by and, instead of low cost routine maintenance, they are now faced with expensive major repairs.
Our Logistics Quotient, in certain areas, reflects the results of deferred maintenance in many communities and states. Congestion, road surface roughness, narrow lanes, inadequate bridges -- all are reflections of major capital infrastructure improvements in need of being accomplished. How much is the result of deferred maintenance? Only the local folks know, but I suspect that a good portion of it is.
Just like balloon payments of 20 years ago, deferred infrastructure expenditures are a ticking time bomb that will effect a community’s attractiveness and competitiveness for years to come.
As Wimpy can tell you, there’s no such thing as a free lunch.
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