Please read the attached articles about the problem facing the borough of Kenilworth, New Jersey.  The latest trial has just been lost.  The town owes $16.1 million because of a legal suit that arose out of an automobile accident in 1982.  The accident occurred when a traffic light was out of order, and the police didn’t have a portable sign to warn motorists about the danger.  $16.1 million is a lot of money for such a small town as Kenilworth — several thousand dollars for the average homeowner.

            As is clear from the article, the Borough Council has no idea of what to do.  So they have hired you to advise them.  Your job is to prepare a 20-minute presentation to make to them on what they should do, and why they should do it.

            The first question is whether Kenilworth should pay the judgment.  After all, you can’t lock up 7,500 people.  Interest accumulates if you don’t pay the judgment, but it also accumulates if you sell bonds.  Once you’ve paid the judgment, you can never un-pay it.  What is the optimal time to pay, if any?  (Be very careful here; remember that this is the same group of people who have not yet paid the bill for your services either. 

            If you recommend paying the judgment, consider how the money to pay it should be obtained.  Aside from robbing banks or holding very large bake sales and car washes, does it make any difference how the borough raises the money?  Do the taxpayers have available to them strategies to offset perfectly whatever the borough decides to do if they don’t like it?  For instance, can taxpayers who want immediate payment buy bonds if the borough decides to sell bonds?  Can taxpayers who want delayed payment borrow (i.e. sell personal bonds) if the borough decides on immediate payment?  What happens if they don’t have such strategies available to them?

            The borough council is also concerned about the impact on various segments of Kenilworth’s population.  There are a very active senior citizens organization, a PTA organization, two or three politically active realtors, and several medium-sized factories and plumbing supply houses, including one owned until recently by Simone (Sam the Plumber) DeCavalcante, a reputed leader of a famous New Jersey organization whose members frequently appear in the newspapers wearing raincoats on their wrists outside courthouses.

            The council would like to present a plan acceptable to all these groups, or at least fair to them all.  Clearly no Pareto improvement over your proposal should be possible.  When discussing senior citizens, what difference does it make how they value consumption by their heirs after they themselves are dead (this is called “the bequest motive”)?

            You should pay attention to the interest rates available to these different groups and to the borough.  How should the borough determine the maximum interest rate at which it would sell bonds (if you recommend sale)?  What denominations should the bonds be sold in?

            In one of the bars on the Boulevard, some of the patrons are suggesting that the borough buy lotto tickets.  Please evaluate this recommendation as well.  How many tickets, over what period of time, should the borough buy?  What numbers should it play?

            Finally, the council wants to know what it should do about insurance in the future.  Should it buy any?  IF it buys, should it have a deductible?  Should it have a ceiling?  What sort of deductible?  What sort of ceiling?  Remember that the borough itself doesn’t have a utility function — only the public does, and there are 7,500 of them to pool the risk.

            You should include a brief (one or two page) summary of your recommendations.