Wednesday, April 29, 2015

Sacramento Performing Arts Proposal Keeps Growing. Is Arena Fever Affecting the City's Fiscal Discipline?

When asked about the Sacramento Arena's public subsidy, I sometimes mentioned that some of the fiscal risk was indirect: subsidizing an entertainment center makes it harder for a City to say "No" to other long-term financial commitments - whether that is requests for other facilities or employee contracts - as well as deal with its unfunded liabilities.

Not long ago, Sacramento officials were saying they didn't have the money to take on a $10-50 million renovation of the Community Center theater, and at last nights City Council, it appears as if City leaders are now considering a City-financed $200+ million performing arts theater.  I watched part of the presentation to the City Council meetings presentation from the performing arts task force, and saw appeals to civic pride from the task force members while financing discussion was vague and deceptive.  [Although I appreciated Councilman Hansen's comments about not losing sight of a less expensive Plan B, and the operating budgets of local performing arts groups.]

Here are excerpts from a Sac Bee and Capital Public Radio coverage of the optimistic talk in last night's meeting followed by an excerpt from a Bee article just a year and a half ago that was pessimistic about funding the smaller renovation project

A task force exploring the need for a new performing arts center in downtown Sacramento has identified four potential sites for a 2,200-seat theater, but needs up to six more months to figure out how to pay for what would likely be a $200 million project.
During a hearing with the City Council on Tuesday night, task force members said they had determined that replacing the aging Community Center Theater would help the city compete for the musical and performance acts that are beginning to be lured to more modern sites in Davis and Folsom.
Mayor Kevin Johnson and the City Council directed city staff to work with the task force over the next six months to develop financing options, investigate locations that are under consideration, put together design plans for the theater and begin the process of requesting proposals from groups to operate a new theater.
 Garry Maisel, president and CEO of Western Health Advantage and chairman of the theater task force financing committee, said the project’s funding would likely be a “complicated puzzle” of public and private sources. He raised the possibility of a sales tax measure on the 2016 ballot to fund regional arts groups, as well as using state economic development loans or the city’s hotel tax to help cover the costs.Private sources include naming-rights deals, corporate sponsorships and individual donations.
“If you put the pieces together correctly, it will work,” Maisel said.

Read more here:

The Mayor's Performing Arts Theater Task Force director, Richard Rich says a new building would benefit the city more than a renovation of the existing Community Center Theater.
"We can do as little as possible and spend tens-of-millions of dollars to take a deeply-flawed situation and make it slightly less-flawed or we can embrace the renewed spirit that this city has and we can give our citizens a center that reflects their pride in the city."
From a November 2013 article on a less costly renovation,
Some city officials – including the city’s treasurer – caution that it might make fiscal sense to wait to make improvements until millions of dollars from a key revenue source earmarked for the project are available.
A tax placed on hotel rooms would serve as the foundation for the renovation project, but more than $8 million of that revenue is being used annually to pay off debt for the expansion of the Sacramento Convention Center in the mid-1990s. The convention center bonds will retire in 2021.
The $50 million renovation would require annual bond payments of $3 million, city Treasurer Russ Fehr said. The bonds would be backed by the general fund, but the city anticipates using hotel tax money to repay them. While those revenues are expected to increase in the coming years, Fehr said the city should wait until more of the money is available.
The city’s plan to help finance a new downtown sports arena is also playing a role in Fehr’s cautiousness.
Hotel tax revenue would act as security for the bulk of the city’s $258 million contribution to the project, should the primary financing method – revenue generated by parking operations – fall short of projections. The availability of the hotel tax as an arena financing security will also serve as a credit enhancement for the city when it issues bonds for the arena project, Fehr said.
The City Council voted earlier this year to devote $8.5 million from shuttered tax assessment districts to the theater project. City officials hope that naming rights and fundraising efforts will help close the gap, but acknowledge they are well short of being able to finance the entire project without taking on debt.
“For strictly financial reasons, I wouldn’t recommend debt financing (the theater) at this time except for the necessity to proceed due to the disabilities issues,” said Fehr, who will brief the City Council tonight on the theater financing issue. “We can do this at a minimal risk to the general fund, but I think we should wait a while before we do it.”
Councilman Steve Hansen, whose district includes downtown, said he will ask city staff tonight to provide details on what renovations can be made at different funding levels. He said he also wants to explore forming a nonprofit agency to take over operating the theater and raising money for the upgrades, saying such an entity might have better luck in soliciting donations than the city.
Hansen said he wants the City Council to vote on a renovation plan early next year.
“It’s a complex question, and I wish there was a clearer answer,” he said. “I believe ultimately we’ll renovate this theater, but right now, I don’t think anybody has made a strong case for one specific plan.”
Performing arts advocates argue the city should move ahead with the full $50 million renovation plan.
Richard Lewis, the executive producer of the California Musical Theatre, said the $50 million project – which would include improvements to the theater’s seating, restrooms and loading docks – would represent “not a 10-year fix, but a 30- to 50-year fix, in my view.
P.S.  4/30:  Personally, I have bought more tickets at the Community Center theater and Mondavi Center than Kings games, and would enjoy a new theatre in Sacramento. 

However, the City Council's decision to subsidize the Kings' arena means that Sacramento is less able to afford the performing arts project than before, not more.  Developing a viable financial plan may be an insurmountable obstacle for the project, but the tone of the conversation is makes me afraid that arena-fueled economic optimism threatens to cloud the City's overall fiscal planning. 

Friday, April 24, 2015

Does Cheap Community College Create Negative Incentives for High School Students?

With President Obama proposing free community college, perhaps it seems strange to wonder if California's two-year schools are too inexpensive.  California has the lowest CC tuition in the nation by far, and the biggest differential in tuition between 4-year and 2-year schools.  The state provides a strong financial incentive for its high school grads to attend 2-year schools, and they respond in large numbers.

A recent presentation and op-ed by Hans Johnson of PPIC, and my own daughters' graduation from high school has got me thinking about this issue. Johnson's op-ed makes the following observations,
Among the 20 most-populated states, California ranks 19th in the share of recent high school graduates that go to a four-year college — public or private, anywhere in the United States. In 2012, only a third of California high school graduates enrolled in a four-year college within a year of graduating from high school, compared with about half of high school graduates in Massachusetts, Ohio, Florida, Georgia, Indiana, New Jersey, Wisconsin and New York. Among the 50 states, California ranked 47th. 
In contrast, California ranks first out of the 20 most-populated states in the share of recent high school graduates who go to a two-year college (and ranks fifth among all 50 states). State funding reflects this focus, with California’s community colleges commanding an increasing and now majority share of state allocations — 54 percent — to the three public systems (UC, CSU and the community colleges). 
Clearly, community colleges play a very large role in California’s higher education system. The problem? Low completion rates. Substantially less than half of students who enter community colleges with the intent of transferring to a four-year college successfully do so. Research has shown that students are much more likely to earn a bachelor’s degree if they first enroll in a four-year college rather than a community college.
California looks more like the President's proposal than any other state. However, numerous reports show the educational achievement of California's residents - especially young adults under 35 - is falling relative to the rest of the nation and world, threatening the state's future competitiveness.  From California's experience, it isn't clear to me that making college degrees more affordable with financial incentives to start at a community college will lead to better educational outcomes.

Certainly, affordability is a barrier to higher educational achievement, and that is deservedly getting a lot of attention these days.  However, the evidence shows that poor high school preparation is also a strong barrier to college completion.  And as Johnson notes, students who begin in community college are less likely to finish even though their choice makes a bachelors degree more affordable.  I expect that it increases other issues with transfer credits, social and academic transitions, and academic preparation.

The other issue I have noticed this year in my kids' high school that I have not seen anywhere in this discussion is how the incentive to start in community college negatively effects what students do in high school.  I have seen capable high-school students avoid challenging courses and make lackluster efforts in academics, and they admit the reason is that it doesn't matter for admission to the local community college.  Students with ability and financial resources are discouraged from starting at 4-year schools, because you can "get the same thing" for much less cost - both in money and in work.  No need to worry about taking another math class, an AP course, the SAT, or study for the test tomorrow.  Not only does it reduce their learning in high school and preparation for college, it instills bad habits that persist in the future.

Admittedly, these are just some anecdotal observations on a small non-random sample of high-school students inspired by the differing educational climate I have observed in California compared to other states I have lived.  It's a hypothesis, and I have no idea if there is any serious research that shows that a financial incentive to attend community college can have negative effects on high school academic choices and achievements.  And if there is a negative effect, there may be better ways to correct the incentive than increasing community college tuition.

Monday, April 6, 2015

Quick Take on LA Times' Report on Restructuring the Delta Tunnel Plan

Some highlights from Bettina Boxall's extremely interesting and important article.

"Sources familiar with the state discussions said that it is likely the department will separate the habitat restoration component from the tunnel proposal and pursue shorter-term operating permits for the new diversion facilities and existing pumping operations. Although the Bay Delta plan included restoration money, it is unclear how the separate restoration effort would be funded or carried out.

While the changes would not affect construction of the tunnels, they have raised concerns that the restoration work could fall by the wayside. And the revisions, expected to be released in coming weeks, could also make the project less attractive to the urban water and agricultural irrigation districts that have promised to pick up the roughly $15-billion construction tab....

The plan revisions would represent more than just a bureaucratic change. The agricultural and urban water districts that are the major drivers of the long-planned project were betting that a 50-year permit would stabilize delta deliveries that have been restricted by increasingly stringent protections for endangered fish. 

Reverting to shorter-term approvals would leave future water deliveries vulnerable to cuts associated with a change in permit conditions. And that raises questions of whether the project is still worth the money to the districts that have promised to pay for the tunnels. 

"We don't really know what the permitting will be 10 years from now, 15 years from now," said Jeffrey Kightlinger, general manager of the Metropolitan Water District of Southern California, which would cover a portion of the tunnels' cost. "That's the challenge in making sure it's a sound investment. Does it pencil out and still make sense?"

I am in rare agreement with Mr. Kightlinger, this change has huge implications for the economics of the tunnels.  As I have discussed on this blog and a variety of other issues, the value of reducing regulatory uncertainty is the majority of the economic benefit attributed to the tunnels in the BDCP economic studies.  According to this article, the level of regulatory assurance will be massively reduced under the revised plan.

I wrote this blog in 2012 right after Dr. Sunding unveiled the regulatory certainty argument in a BDCP meeting. That post still looks good to me this morning, and it looks like my environmental sources were right on target when they told me the regulatory certainty scenario was not accurate.

The argument was later repackaged by changing the no-tunnel baseline to the "Existing Conveyance Scenario" where exports are assumed to plummet in the future without the tunnels, but remain near current levels with them.  Even with this reframing, the economic benefits of BDCP drop substantially with the impending change to short-term approvals, and risk of significant drops in water deliveries even with the tunnels.

Faced with that heightened risk even with the tunnels, it is reasonable to expect that water agencies will make more investment in expensive, less risky water supply alternatives.  Thus, another economic justification that has been made for the tunnels - that it will avoid the cost of these investments - is also weakened by this change.

The other big change described in Boxall's article is separating the habitat restoration component.  This will really help clarify the economic analysis, as the incorrect packaging of the restoration with the tunnels (restoration does not require the tunnels), was a major analytical shortcoming.

As for environmentalists worries that restoration will fall by the wayside without this packaging, they shouldn't worry.  The BDCP/tunnels were not creating any new funding for habitat restoration, it was diverting public environmental funding from other uses to the BDCP.  Good projects like the Yolo Bypass enhancements do not depend on the BDCP for funding and will go forward anyway with or without the tunnels.  And as we learned with last years water bond, environmental funding is more likely to be approved when it is detached from BDCP.  I would also argue that this is a good time to bring up again my argument for a no-tunnel BDCP, which is a more conventional approach to a Habitat Conservation Plan under the ESA, in which the regulated entities provide new resources for habitat restoration in return for some level of regulatory certainty.  I discussed that in an October 6, 2013 op-ed in the Sacramento Bee (can't find a link), and in this old blog post,

A bit unrelated, but I read an interesting new article last night in Businessweek about Seattle's troubled tunnel project.  The on-line version has fun graphics too and is worth a look by those interested in the Delta tunnels proposal.