Local bankers have been some of the biggest supporters of the current pattern of development. I've seen many advocate for public investments that are ridiculous - projects that, if they were private-sector, the bankers would never participate in. The incorrect assumptions of our development pattern are so pervasive, the incentives so wrong, that even those with seemingly the greatest financial knowledge reflexively support it. This reality has often made me wonder what a conversation would be like if a city had to go to the local bank, instead of the federal/state government or the bond market, for their loans.


Scene: Quimby walks into bank, removes hat, sits down at conference table opposite Baily. 

Baily: What can we do for you, Mr. Quimby?

Quimby: We need a loan. As you know, we have run into a little bit of a tough time. Revenues have stagnated. Expenses continue to climb. We face some pending difficulties with the potential loss of a major revenue stream. Our board has decided we need to make some major investments and get back to growing.

Baily: Sounds interesting. Let me ask you a few questions so I understand what you are asking for. How much of a loan are we talking about.

Quimby: Oh...about $3 million. 

Baily: And what is your operating budget right now? What type of revenues do you have to work with?

Quimby: We're sitting at around $1.6 million, give or take a little.

Baily: Huh? You said that was stagnating? Elaborate a little bit on that.

Quimby: Well.....after years of robust growth in revenue, it has kind of slowed down. In fact, our revenue stream has declined about 20%. To stay level we've had to really squeeze expenses and raise our rates somewhat.

Baily: Raise your rates? Are you worried about losing some of your business? How much more upward room do you think you have in terms of rates?

Quimby: Well, theoretically, we've got a lot of room. In practicality, there is a limit to what can be done. Right now I'm actually more concerned about some losses in our AID sector. We could potentially lose all of our revenue there.

Baily: What are we talking?

Quimby: It would be another 20% of our budget. That's why we need to get this growth plan in place. We need this loan to get that going.

Baily: Okay, let's talk about this growth project. Is this some kind of new venture?

Quimby: Kind of. It's really just more of what we do now, but we are extending it and looking for more growth.

Baily: Okay, but I thought you said your revenue was declining.

Quimby: Yeah, that is why we need more growth.

Baily: I'm not following you. You are going to take what you are doing now, which is in decline, and just do more of it? You want a loan from us for this?

Quimby: Precisely. We add more capacity and we get more growth.

Baily: So is your capacity maxed out right now?

Quimby: Not exactly, but it is a little difficult. A new market would be much easier.

Baily: I see. You still have excess capacity. You must be generating more revenue than your expenses there.

Quimby: No...you are not understanding. We need to expand because we are not generating enough revenue. We've got some big, looming maintenance expenses coming up on our current operation. We can't fund those on our current revenues without a major restructuring. This expansion is going to bring growth and the revenue we need for that.

Baily: So the existing operation has more expenses than income? You want a loan to grow and that new revenue will cover your shortfall?

Quimby: Yes, now you have it.

Baily: Okay. So how is the new expansion different from the current operation again? 

Quimby: It's not. It's the same thing, George. We're just expanding it.

Baily: Yeah, but you're operating at a loss today. Won't doing more of the same just compound that?

Quimby: No. We need the money to induce growth so we can cover these shortfalls. This is what all of our competitors are doing. We're really no different.

Baily: Let's assume we agree to this loan. You must have new revenue streams lined up and ready to go. What do you have?

Quimby: We really don't have anything right now.

Baily: Nothing?

Quimby: Come on. We need the loan so we can make the investment so we can generate the growth so we can solve our revenue problem. We can't get additional revenue until we make the investment. We're in a competitive market. We need to be out there leading the way on this stuff.

Baily: I thought you said the market was depressed? Revenue is down?

Quimby: It is. Yes, that is our problem.

Baily: So what is the likelihood of getting the additional revenue from this investment? How likely are you to actually get any new growth?

Quimby: Well, we're going to offer some incentives to make sure that happens.

Baily: Will that eat into your bottom line?

Quimby: In the short-term, sure. Long term, it will work out well for us.

Baily: But if your model now is not generating sufficient revenue to cover your expenses, how is expanding that same model and giving away incentives on top of it going to help you out? 

Quimby: Okay, I see where you are coming from, but I have to answer to shareholders right now. They're uneasy as it is, times as tough as they are. If I go back to them and say we're not going to invest in more growth, they are likely to throw me out.

Baily: Have you thought about trying to squeeze a higher return out of your existing operation? You already told me you have excess capacity there. Seems to make more sense than just adding more to a failing system.

Quimby: That's easy for you to say. My shareholders are not interested in steps to increase efficiency. Nobody else is doing that. If we commit to that, we're going to lose what revenues we have to our competitors. No....we have to have that loan.

Baily: $3 million.

Quimby: Yeah, $3 million.

Baily: Aren't you just borrowing the money to improve your near-term cash flow, making your long-term situation that much worse? How can you even repay this loan?

Quimby: I'm going to let the next CEO worry about that one. For now, we need the growth. After all, if we're not growing, we're dieing.

Baily: Amazing. I'm just glad people that think like you are not running this country.


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