Rosey Scenario

Sioux Falls Mayor Mike Huether is proposing to pay for a new Sioux Falls Event Center at the Arena by selling bonds and repaying them out of current income.

Current income being defined by the use of the 2nd penny of the City Sales tax that currently is used for the Capital Improvements portion of the City fudget. The key numbers are yet estimates but will be firmed up by the time of a November 2011 election for Citizen approval for City government to proceed. The numbers: Cost of the EC $100 to $120 million, Interest rate 4%, repayment term 22 to 30 years. The term seems reasonable because it is (within estimate) about one half the projected life of the facility.

I have no doubt that the City can repay a bond issue but I do question what stress it might put on the City’s otherwise very stable and conservative finances. In thinking about paying for a new facility of this magnitude out of funds usually reserved for more routine uses like parks, streets, sewers, parking lots has caused me to question why we are optimistic about City finances.

What follows is not intended to be judgmental about the Events Center project (I have already stated that I currently do not favor an EC at this time) nor a criticism of the City Administration (that I feel is well intentioned) but rather my thoughts about government finance and the economic outlook (at least in the short term – long term I tend to always be optimistic even when facts don’t seem to support optimism.)

Government is broke.

At the federal level - Consider the deficit ceiling issue that is taking all the oxygen at the Federal level. Deficit spending is reaching gargantuan proportions (estimated $1.5 TRILLION this year) because of the weak economy (high joblessness, low consumer confidence) and government spending for every problem for which there is a perceived government solution AND did I mention the big three seemingly untouchable entitlements (Social Security, Medicare, and Medicaid.) All the players and parties agree - cut spending – the government is broke.

South Dakota state government is broke. State workers haven’t had a raise in three years (upper management including the Governor took a substantial pay cut), many Departments and Divisions including the Court System took a 5 to 10% cut, and State aid to K-12 education has been cut 6.6%. In many areas State revenues are down – The Bank franchise tax, video lottery, contractor’s excise tax, slow sales tax growth and gas tax revenues among others. It’s quite likely that the $80 to $100 million in the Reserve Fund may be depleted to pay for many of the flood related expenses.

Minnehaha County government because of their increased expenses is cutting their employee’s wages and salaries by 5% in 2012 (there will be a 2 ½ % step adjustment though added to their pay (as I understand it). Minnehaha County who made substantial cuts in their 2011 budget was even more austere in the 2012 budget. The County Commissioners would not opt out to raise additional real property tax revenue.

Sioux Falls School District – See State Aid to Education above – The School District did opt out to increase real property taxes over the statutory limit. The State is broke, thus the Schools are pinched. In accordance with their employment contracts many employees and teacher are taking a pay cut because State revenues are less.

Just in today’s news were the Lewis & Clark Regional Water System who will not be receiving enough Federal assistance to even pay their administrative expense, and the United States Postal Service who want to close over 3000 post offices nationwide including 80 in South Dakota. The USPS lost something like $8 billion last year.

However, Sioux Falls seems to be an island of prosperity among all the gloom and doom. The Mayor and finance department will shortly unveil the proposed City budget for next year. Given the economy and the status of both the Events Center finance and the other units of government, the City Budget should be interesting. Moving forward I understand are negotiations with the various Unions representing different units of the City’s workforce. What will be budgeted for worker pay? I assume that Wages and Salaries are a significant portion of the City’s budget.

If memory serves me, the Mayor since early on in his term said he wanted to hold spending at a Zero percent increase for 2011 and 2012. It should be remembered that when revenues slowed for funding the 2010 budget, Mayor Dave Munson ordered hold backs in City expenditures. Mayor Huether continued with the hold backs, and instituted his 0% increase budget for 2011. The Mayor has been very aggressive in watching the expenditure side of the equation. This is another interesting aspect of his new found optimism for economic improvements.

While the City operates in the same economic environment as the other units of government two things strike me as distinctly different. These are: City government bears little responsibility for individual social welfare entitlements and the City has the ability to collect the stable and most quickly forgotten tax - the sales tax.

With the rather small exceptions of the public health center, limited public housing, and perhaps public transportation the City has little involvement with individual welfare. In the macro sense they are responsible for broad based general welfare items as public safety, police, fire, public health, utilities, libraries, parks and recreation. Individual welfare entitlements at other levels of government are causing huge expenditures. The Seemingly Untouchables at the Federal Level, Medicaid at the State level, and indigent care at the County level.

Also there are the increasingly expensive incarceration costs of State Penitentiaries and the County Jail yet the City does not pay such costs.

The City has the stability of the property tax (which grows with economic activity but also remains stable in spite of economic conditions) and enjoys and relies are the relatively stable sales tax. This sales tax importantly is also broad based. This truly makes City government an oasis of revenue prosperity particularly since Sioux Falls is the regional shopping center.

Will the growth in sales tax continue to be as robust as in the recent past may be open to question.

Sidebar – Because of the continued diversification of its economy and because Sioux Falls is such a Great Place to live; Sioux Falls will continue to grow in terms of population and employment.

Why the sales tax may not increase as fast as in the recent past – Simply put the Retail business is Changing! - With the decline of commerce in the smaller towns and the advent of the Big Box Stores, Sioux Falls has become THE regional shopping Mecca. Retail has been pretty much been decimated, (with the exception of the Agricultural enterprise) in the smaller towns (note the proposed Post Office closings). Thus Sioux Falls during the decimation has enjoyed tremendous retail growth but with much of small town commerce shuttered there is nothing left to sustain this growth. To some extent this phenomenon was also true health care in the small towns being replaced by the large Health Systems.

And there is the Internet. Stores are no longer only brick and mortar. Stores have become screens. Enough said!

There is one other budget I must touch on and it impacts and is impacted by all of the above.

Household budgets – In context, our economy is growing but anemically. Unemployment is high. Energy costs are high. Medical costs are high. Food costs are high. Consumer confidence is low. This is in no small part why there is little sympathy for increased government spending.

The future is bright for Sioux Falls but I would keep one eye open in looking out into the future. Bob Dylan had it right almost 50 years ago – “The Times They Are A-Changin”.