Sacramento: Here’s the Arena, There’s the Cliff

The news of a deal struck between Sacramento and the NBA for a new arena for the Kings brought “elation” to City Hall, the Sacramento Bee reports. If so, it’s the kind of cartoon elation Wile E. Coyote feels in that moment when, having run off the edge of the cliff, The Road Runner hands him an anvil.

The anvil Mayor Kevin Johnson has handed Sacramento, if approved by the city council, would commit the city to subsidize a $387 million arena for the Kings with $250 million of public money (the exact amounts and details have yet to be worked out or made public).

How heavy is that anvil? The media rarely provide any context for big numbers. But here’s a scale:

• The cost of the arena, a single building, amounts to more than a year’s worth of general fund spending by the City of Sacramento—a whole year’s worth of police, fire, parks, recreation, libraries, streets, arts, etc.

• The proposed $250 million taxpayer subsidy to build the arena for the basketball millionaires and billionaires amounts to about a year’s worth of city general tax revenue.

The crisis

That would be the big lift even for a healthy city. But Sacramento is a community in crisis.

At the epicenter of the crash of the housing bubble, Sacramento has taken blow after blow since the Great Recession began five years ago: foreclosures, the collapse of housing construction, cuts in the number and pay of workers in state government, the capital city’s largest employer. Its unemployment rate is 10.9 percent, well above the state and national rates.

The distress in the economy has created budget havoc in the city. As the chart below shows, the loss of revenue opened up huge holes in the city’s budget, which it has closed through a combination of severe spending cuts and one-time fixes, including draining its reserves and selling off assets.

Source: City of Sacramento

No one disputes that these cuts have made Sacramento a less desirable place to live, work, and invest: If you have a fire or medical emergency, the fire truck arrives more slowly with fewer people on it. If you want a pool to swim in or a park with regular maintenance to relax in, forget it.

The most damaging cuts have fallen on the police, making an already dangerous city more dangerous.

“Sacramento is currently ranked the second most violent major California city and also ranks as the second worst in property crimes,” the city reports in its own budget. “The approved reductions will increase crime in both of these categories and have widespread impacts on community members and businesses.”

Do you want the police to go after gangs and drug dealers and car theft rings?

“Elimination of gang, narcotic, auto‐theft, financial crime, and high‐profile offender units… will result in no follow up investigations in these areas….” the city says. “Elimination of field reporting for cold property crimes, misdemeanors, and non‐serious injury accidents will result in increased wait times to file and obtain police reports. The anticipated result is an under reporting of crime as victims become frustrated with the reduced level of service.”

Just to be clear on the tradeoffs here, a mayor who faced a choice between higher crime and standing up to extortion by his old NBA employers (who owe him a pension worth more than $1 million), has chosen higher crime for his city.

A reckoning ahead

Unfortunately, there is worse ahead. According to the city’s projections, it faces a $26 million annual general fund deficit for the next five years, a deficit equal to about 10 percent of its annual tax revenue.

The current projection looks like a best-case scenario. It assumes no economic downturn in the next five years (this assumption—that the period between recessions will be at least nine years—flies in the face of the post-World War II experience, where business cycles have lasted an average of 5.5 years). It makes no provision for population growth. It does not include the likelihood that the California Public Employees Retirement System will reduce its expected rate of return, as its actuary has recommended, thus increasing required city pension contributions by upwards of $10 million a year.

And, of course, this deficit does not include the $250 million it will take to subsidize the proposed arena.

After you’ve already cut the park budget by 61 percent and the library-arts budget by 69 percent; after you’ve already spent down your reserve to the point where it covers only a couple of weeks of payroll and would leave the city helpless in the face of a flood emergency; after you’ve cut police and fire by more than a quarter: where do you go next? There is nothing left but the prospect of budget mayhem.

To avoid leaving Sacramento at the mercy of criminals, city management is hoping to negotiate deep cuts in the compensation of police and other employees. But a city that has looked under every rock to find $250 million for the arena will have a hard time explaining to its employees—and its voters—why it could come up with money to lavish subsidies on the Kings but not pay the people who protect and defend the community. Having caved first to the NBA, what are chances that City Hall will stand up to the public safety unions?

On the road to Stockton

It’s a useful coincidence for Sacramento that the announcement of the arena deal comes in the same week that Stockton will consider whether to default on its bond payments as a possible first step toward bankruptcy.

As a result of the recession, both cities are feeling the full effects of the Prop 13 operating system we describe in California Crackup. They are coming to grips with the reality that Prop 13 is now pinching in a way it never has before. “Every local elected official should be paying close attention to what is happening in the city of Stockton today,” my former colleagues at the Bee admonish.

They’re right. Sacramento may not yet be in as bad shape as its neighbor to the south; Stockton, after all, has already built its white elephant arena and now feels the full weight of the anvil Kevin Johnson wants to drop on his city.

But Sacramento is nearing the precipice. It may take only a fiscally reckless and morally bankrupt decision to subsidize the arena to push it over the edge.