Friday, November 22, 2013

Tennis courts and state spending (continued) ...

Wednesday I wrote a column about the current battle over the use of state money to build indoor tennis courts in Anchorage.

I have written about the issue several times before (here, herehere and here), but let me set the stage again.

The chart on the left -- which is taken from a report earlier this year on the status of the state's current fiscal condition by the University of Alaska-Anchorage's Institute of Social and Economic Research -- tells the story.  In its report, ISER concludes:
Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the cash reserves might fill this gap until 2023, as the adjacent figure shows. But what happens after 2023?

Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash. ...
What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. ... If Alaska had $117 billion in cash reserves and the Permanent Fund by 2023, the state would be on the path to sustainable spending far into the future. But ... that’s twice what the state has in financial assets today. So the state needs to sharply step up its savings rate, starting now.
How much does the state need to step up its savings?  The ISER report responds:  "All revenues above the sustainable spending level of $5.5 billion ... [sh]ould be channeled into savings."

Against that, the actual proposed spending for the current fiscal year -- including that for the proposed tennis courts?  $7.1 billion, nearly 30% above sustainable levels.

What if the state doesn't save?  Two earlier studies (here and here) by Northern Economics and ISER answer the question:
... the phasing in of a state personal income tax starting in 2022, reduction in the Permanent Fund dividend by half, and diversion of remainder of the earnings of the Permanent Fund to support general fund expenditures starting in 2023 largely offset declining oil revenues for a decade but eventually they are insufficient to forestall a downward trend in general fund revenues ...
In short, as the graph at the beginning of this piece indicates, the state falls into a fiscal abyss, reducing the standard of living in the state significantly.

To me, the battle over the tennis courts has become part of this larger story.  Given that state spending for this year already is way over sustainable levels, we need to identify opportunities for lowering state spending commitments wherever they arise.  Governor Parnell recently identified Medicaid expansion as one such opportunity (see "Where the money runs out: The price of oil, Medicaid expansion and Alaska social policy …"); the Anchorage tennis courts are another.

Later in the afternoon Wednesday, after posting my latest commentary I received two comments, which are available here.  The first is from Stephanie Williams:
I’ve tried to post to your blog… “The battle over tennis…” Mr. Keithley, the 8 million is 3/10,000 of 1% of the state capital budget of 2.3 billion. Demboski’s proposal is not a good move for the city or the state. If we were to accept her proposal, it would destroy high school regional tennis and the state tennis program along with many other wonderful programs that go on during the summer when recreational players can use the outdoor courts. We lobbied successfully for the monies to fund a multi-purpose facility providing 2 1/2 basketball courts, volleyball, badminton, table tennis and 6 tennis courts. The assembly should honor the intent of the legislature.
It is hard to understand how the failure to build new facilities "would destroy" programs that already exist utilizing existing facilities.  Maybe they won't be as nice as they could be, but "destroy" them?  Unlikely.

Moreover, there are other calculations which are relevant.  The "$8 million," for example, is more than one-third of the $23 million shortfall that the Anchorage School District is projecting for next year's budget.  If the purpose of the grant is to support school activities, perhaps the money instead should be directed to the Anchorage School District to weigh whether the use of the funds for tennis outweighs other high school activities that are currently being cut.

But the better course is that suggested by Assemblywoman Any Demboski -- not spending the money at all and returning it, hopefully for investment in savings, to the state.  As the ISER report makes clear, choices made today are affecting tomorrow.  Spending above sustainable levels today are leading directly to income and other broad based taxes, the diversion of income from the Permanent Fund and other, significant, financial cuts tomorrow.  Indeed, it is not too farfetched to visualize a situation in which building the tennis courts today contributes toward the expense, very quickly, of being unable to pay for high school tennis coaches tomorrow.

Alaska has reached the era where it is required to make choices.  The state can no longer -- if it ever could -- afford to be all things to all people.  The writer suggests that since "we" (whoever "we" is) "lobbied successfully" for money at the state level, they should be permitted to proceed.  The problem is that they forgot one step in the process -- being transparent with the Assembly at the front end so that the Assembly could prioritize that request among other, competing uses for money.  Now that the Assembly finally is catching up with the process at the back end, the proponents can't reasonably complain that the Assembly members are out of bounds in offering alternatives to simply taking the money.  They may be late in the process, but that's not their fault.

The second comment was from current Alaska Tennis Association President Allen Clendaniel, and is more directed to the portion of my comments Wednesday which discuss Ed Hendrickson.  As you may recall, I didn't pick Hendrickson out of the air; instead he himself publicly had made some comments the day before which appeared to attempt to defend the tennis courts on economic grounds, but without providing any economic support.  My column challenges those assertions.

The email suggests, however, that I should
... breathe for a second. Ed Hendrickson can be a volunteer for a non-profit [and] a corporate executive. More folks should give back to the community. Building public recreational infrastructure is good for the community. If we don't believe in public recreational infrstraucture we should sell the Performing Arts Center, Sullivan Arena, Ben Boeke, Dempsey Ice Arena, the Spenard and Fairvew Rec Center, and let the trail system rot. I'm not sure why you are singling out a project that represents 0.0003% of the capital budget and going after a volunteer. No good deed goes unpunished I guess.
I disagree that, given the state's financial condition, its a "good deed."  A good deed would be giving money personally to the effort and helping raise at least a substantial (e.g., 50% or more) portion of the remainder personally from others in the private sector.  That is how such things are financed elsewhere in the country.

Take for example the Michael D. Case Tennis Center at the University of Tulsa.  One of the premier college tennis facilities in the nation, the facility was built in 2001 for $10 million.  How was it financed? "Tulsa developer and philanthropist Mike Case ... funded a major portion of the tennis center and raised the additional funding for the project."  Now that is a "good deed."

Simply being part of a lobbying group to carve out state (i.e., "other people's") money to fund a new capital project, when the state already is spending over sustainable levels, does not require much of a personal sacrifice.

More importantly, seeking full funding for such projects from the state sends very confusing signals to state policy makers.  I have lost count of the number of times legislators have told me stories of people or companies coming to them on the one hand to argue for "fiscal restraint" or "fiscal certainty" and then in the next breath, asking for state support for this or that project.  Understandably the second ask severely undermines the credibility of the first, which has led us precisely to the condition in which the state currently finds itself.

The ISER report makes clear that we have come to a time in the state's history where first things have to be put first.  The first thing that the state needs to do is to put its fiscal house in order, and then, once we have adopted sustainable budgets, to fund only those projects going forward that fit within a sustainable budget and citizens believe in enough to help fund significantly themselves.  Frankly, that is not a lot to ask in a state that otherwise imposes no state level income, sales or property taxes.

The tennis courts meet neither of those criteria.  Until they do (if they ever do), my criticism of the proposed appropriation -- and support for Amy Demboski's alternative -- remains.