8/31/2016

What’s Inside the Sausage?

For some perverted reason, I decided to put myself on the ballot for one of Red Wing, Minnesota’s city council seats this fall. Part of that citizen-penance has been to attend city council meetings, especially this fall’s budget planning sessions. There I was reminded, again, that humans are incapable of learning from past experience. If you have ever been part of a corporate budget planning session, especially for a manufacturing company, you wouldn’t be able to recognize the civil service version. Instead of presenting a best-case/normal-case/worst-case revenue budget figure, so the city’s representatives can decide what gets done and what doesn’t, the city’s “finance officer” presents the happiest scenerio possible without any presented data to support his optimism. As usual, the more I learn about how my municipal sausage has been made, the less likely I am to want to eat sausage.

A new-to-me  term titled “tax capacity” was introduced along with a really depressing chart that described how city property taxes could be increased over the next decade. “Tax capacity” is the city finance officer’s best guess as to how much the city can raise tax rates before “something bad” happens. That undefined bad thing would be when the city raises taxes and the cost of services so high that even the current retirement community in the city and the small-to-large businesses are motivated to leave.

The problem with optimistic budget plans is that optimism is not often justified. In the case of Red Wing there are many looming financial difficulties and, by leaving them completely undefined and unanticipated, the city is setting itself up for failure. Here are just a few of the likely bumps in the road in Red Wing’s future:

  • The country elects another borrow-and-spend Republican President and, this time, the House and Senate are also Republican. After a brief bubble in a variety of recently “unregulated” sectors, the economy crashes into a real depression when all of those previously-regulated gangsters and con men crash the house. Housing values fall, businesses fail, tourism vanishes, people move away looking for the few jobs that exist in the rest of the country, and the tax base collapses for loss of population and local income.
  • The Prarie Island Nuclear Power Plant is either decommissioned (as planned) and 6-10% of the city’s revenue vanishes overnight. The city is not only left with a huge hole in the budget, but clean-up costs at the nuclear power plant fall on the city and county as Xcel “bankrupts” out on the obligation, as they have repreated across the country. Thanks to the revenue from this facility, Red Wing has over-built its school system, police and fire departments, city management, and services. The cost of maintaining these facilities and personnel without Xcel’s tax revenue could push local taxes high enough to cause rapid population loss.
  • Prarie Island has a Three Mile Island-level event, which not only forces the plant closed “unexpectedly,” but causes the city, county, and state to spend massive amounts of borrowed money to hang on to something resembling a community. Since there has been no planning for this event, the city moves quickly from prosperous to bankrupt when the bonds/debt comes due.
  • The obviously aging Red Wing demographic takes a jump in years and tax revenues fall when one or two major manufacturers decides to leave the area. What little attraction there was to the city for young families vanishes and they evacuate Red Wing for the Cities.
  • The same “aging Red Wing demographic ” continues to increase in years, allowing more Minnesota residents to take advantage of property tax allowances and the aging Minnesota demographic votes itself a better deal on property taxation in general. That shifts the municipal tax burden to younger families and to a lesser extent on local business. Of course, that provides incentive for the younger citizens to leave the area.

These are just the top of my list. I could add at least three or four more bad news scenarios and I’m sure you can think of a couple I would miss. Even without a significant catestrophic event it is likely that the overall US economy will continue the generally downward path it has been on since the late-60’s and all those bills we put off for a more prosperous future generation will come due on our children and their children. The time to solve those problems is now, while there is still some money available to work with.

When a competent business (a rare organization today) makes an annual budget, one part of the planning is examining all of the good and bad things that could effect that plan. During the Red Wing budget process I heard far too much about how much additional tax capacity the city would absolutely have for the future. I’m not picking on Red Wing here, either. I suspect that my little town is no different than 99.999…% of the country, including counties, states, and the feds. Civil servants are not the right people to be in charge of the budget process. Either citizens, both elected and not, tell their government how to manage the community or the process is out of control. As I’ve said at least a couple hundred times this summer, there is no such thing as a successful non-participatory democracy. The only way to actually find a fix for the looming problems of Red Wing, Goodhue County, Minnesota, and the United States is for citizens to be actually involved instead of pretending to be patriots on-line and in preaching-to-the-choir bar conversations with like minded friends. It’s dirty work and no one wants to do it, but you always get exactly the government you deserve.

nuclear closingsRed Wing and Goodhue County’s golden goose, the nuclear power plant, Prarie Island’s operating license expires in 2033-2034 and Xcel Energy has and will continue to explore shutting the plant down early. Fusion nuclear plants are expensive to maintain and alternative energy is becoming cheaper, more reliable, We are likely near the tipping point for a variety of technologies that will make nuclear even more unprofitable and undesireable. In not more than a dozen years, Red Wing and Goodhue County will lose a huge source of municipal income. There appears to be no local concern or plan to address that drastic change.

The questions that should be asked today, while there is some time left to work toward solutions are: How much of the city’s future debt is covered with savings? Is the city pension fund (or funds) fully covered? Does any new city hire automatically trigger increased savings in the pension funds? Are new hires and capital expenditures justified with the anticipated future population and demographics?

DemographicFor example, in 1995 the city built a new high school complex that includes “a full size greenhouse and one of its kind Minnesota Department of Natural Resources-licensed Aquaculture Facility play host to plant science and agricultural courses. The Hovda Auditorium seats 732 people and supports concerts and community events. The Black Box Theatre allows seating for 250 and hosts smaller productions. . . The sports complex includes a football stadium, eight tennis courts, three baseball fields, four softball fields, soccer fields, a nine-lane all-weather running track and field event areas. The district also owns both of the city's indoor ice arenas: Prairie Island Arena and Bergwall Arena.Minneapolis DemographicThis is a facility that educates about 1200 students. As you can see by the age demographics chart at left, Red Wing’s population is pretty much the same as the rest of Minnesota. However, if you compare that to Minneapolis’ demographics the picture is more than a little scary. Red Wing’s population “hump” is solidly in the 25-64 territory with an obvious hole in the 18-24 age group. Adults in the 18-44 age groups are highly mobile and will evacuate quickly, especially if they are skilled, if the local economy tanks, if local taxes makes the city unlivable, or if the quality of life declines. An empire as substantial as the Red Wing High School could quickly become a major economic drag on the city with even a 10% drop in high school age students. With current trends, it’s not hard to image a much small school age population in the next decade. Those 1990’s high expectations for Red Wing’s growth were likely driven by delusions of grandeur that have not been realized by the city.

At the budget meeting I heard several recommendations from city bureaucrats that the council approve hiring consultants to do work I would have expected the city employees to be doing. That reminded me of some of my consulting jobs where management wanted close evaluation of low paid employee activity when that same examination of management and executive effectiveness would have produced far greater returns. So, with that in mind I’d like to know who evaluates the effectiveness of city employees? With all of that consultant money being spent on things that should be at least partially researched and evaluated by the existing city employment, why not hire a management consultant every few years to evaluate the efficiency of the city’s employees including all levels of city management? In fact, that should be in the city’s charter that such an evaluation is the first thing an incoming City Council undertakes.

Instead of allowing city employes to speculate on corrosive and unproductive concepts like “tax capacity,” I’d like to see city employees refocused on business concepts like “value added” service to the community, customer service, and data-driven customer satisfaction. Obvious and tested business concepts like “return on investment” with the return being value provided to the taxpayers would be core to a well run city. I have no idea how to get this conversation started and history, unfortunately, shows that Americans want entitlements, wasteful spending, and incompetence reduced; just not the entitlements, wasteful spending, and incompetence that benefits them. Personally, I think catestrophe is the only thing that successfully motivates human beings. We are, by nature, stodgy conservatives afraid of change in any form and Americans are more conservative than most 1st world nations.

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