Online or by mail: Patrick Thomas White Committee • 81 Hawthorne St. • Lenox, MA 01240

Inflation prediction

In 2021 I predicted the rise of interest rates, and discussed what steps towns should take to lock in low rates. The article was pubished in 2021 in The Berkshire Edge.

What inflation means for our towns

By Patrick White

You've probably noticed how inflation is already impacting your personal finances. The impacts of inflation are not just personal: we need to anticipate and avoid the havoc inflation could bring to our local municipal budgets.

First, a bit of history. Since the financial collapse of 2008/2009, we have enjoyed historically low interest rates, driven by the Federal Reserve Bank's Fed Funds Rate. Currently, that rate is 0.08%, or eight-hundredths of one percent!

It has been less than 1% for much of the past 12 years, and stood at around 2.5% at the onset of the pandemic.

This is an historic anomaly: The highest Fed Funds Rate was nearly 20% in June of 1981; it was nearly 10% in 1989, and generally was in the range of 5%-12% in non-recessionary times prior to 2009.

This Funds Rate drives all other interest rates, whether for personal, commercial, or municipal borrowing.

What has kept the rate low since the recovery from the financial crisis? Two words: low inflation. Since higher interest rates are the primary vehicle by which the Fed controls inflation, it has not had to use this mallet to pound down inflation in the past decade. If you've been watching the news, you know this won't be the case in 2022. In fact, the Fed has announced plans for three rate increases next year.

What does inflation and the corresponding rising interest rates mean for South Berkshire towns? Currently, with inflation under control, our towns can borrow from the state at a relatively cheap rate of 2%.

But if inflation drove up borrowing rates to 5%, the monthly payment amount on a loan would rise a whopping 50%. At 8%, the annual payments associated with a loan for, let's say a bridge, double. At around a 14% rate, those annual payments triple. At Carter/Reagan era rates, the cost to borrow quadruples.

Put another way, the annual principal and interest on a million dollar 30-year note at 2% would be less than $40,000; at 5% it is $60,000; and at 8% the annual principal and interest payments top $80,000.

This doesn't even take into account the direct impact that inflation will have on the underlying cost of these projects. We are already seeing an unprecedented increase in construction materials, along with unusual project delays/added costs due to the impacts of the more severe weather due to climate change.

The good news is there is still a window to lock in the current low rates, but towns must do it soon. While the Fed plans to begin raising rates early next year, it takes time to raise them significantly.

With that in mind, towns should urgently consider what investments in their communities they want to make. Here is a list of some of the projects in Stockbridge, for example, that each have a six- or seven-figure price tag:/p>

• The replacement of the Curtisville and second Averic Road bridges, and the repair of the Tuckerman bridge.
• The redesign of the Main St./South St. intersection by the Red Lion Inn.
• The dredging of Stockbridge Bowl.
• An expansion of the sewer system, requested in the past year by property owners in both the Lake Drive and Averic Road neighborhoods.

Of course, none of these projects comes close to the cost of replacing Monument Mountain Regional High School, a project that could easily cost the three towns in the district upwards of $50 million, and that’s if the state pays for half of the project as we hope.

There's an old adage: Hope for the best, but expect the worst. We should plan for a significant increase in rates, due to inflation and the Fed's response to it, over the next three years. That's why we should decide, this winter, what projects we plan to go forward with before the window closes. Making decisions now—and quickly financing these projects—Acting now will save us 50% of the total cost should rates rise just 3 points.

Unfortunately, it is not that simple. Just to develop a request for proposals for any of these projects to go forward, engineering needs to have a level of completion (shovel ready) of at least 25% to 50%. That costs money, sometimes a lot of it.

BHRSD has the funds in place to complete this upfront engineering. For other projects, the American Rescue Plan Act includes nearly $20 billion for local governments in the form of the Coronavirus Local Fiscal Recovery Fund. Stockbridge, for example, is receiving just over $500,000; Great Barrington approximately $2 million. Local select boards can direct these funds at their discretion without the need for annual Town Meeting approval. I will recommend that we expedite engineering to quickly assess over the next several months projects that require financing. By completing the engineering now, we can be ready to present these priorities to the voters for action in the next fiscal year. My rationale is simple: let's lock in financing while rates are still relatively low.

Government often works at a slow and measured pace. Unfortunately, a business-as-usual approach to capital investments in our communities could result in an untenable rise in these projects' costs. We are quite possibly at the end of a once-in-a-lifetime financial sweet spot: near-zero interest rates and windfall funds for planning. Let's not squander the opportunity that this moment presents.

The writer is a Selectman in the Town of Stockbridge.

PS: Running costs money. I need your help. If you believe, like I do, that we have hope, that we can control our own destiny, that we can move the needle on the seemingly intractable issues we face, please consider donating to my campaign.