Medicine Hat Arena and fiscal responsibility

I don’t often write on strictly local issues, as I realize that not many of my readers are from Medicine Hat, and I tend to think in terms of larger issues anyway. Today, however, I do want to speak about a local issue that has larger implications, IMO, to the way we all tend to finance large projects. Over the past few months, the City of Medicine Hat has been looking into the feasibility of building a new arena and trying to find a suitable building site. There is little question in the community whether a new facility is needed … just considering the WHL Tigers alone, the continuous sell-outs of their games in the current 4000 seat building show there is certainly a large appetite for seats for the hockey games. When you add that to the events that Medicine Hat looses as a result of not having a facility large enough to accommodate the crowds, its not hard to see the need for such a facility.

The issue, to my way of thinking, hasn’t really been about whether there is a need for a new arena, but instead about how to finance it, where to build it, and when to start construction. Last night’s (Apr 16) city council meeting saw debate and a vote on the issue of funding, with the majority of Aldermen voting to hold off on any construction or actual work until more of the funds have been secured. The final proposal passed calls for council to come up with 50% of the price tag before any real work begins.

There were arguments on both sides, with local Alderman Cathy Smith (locally famous for her stand on adult material in the city) championing the need to get moving more quickly on the facility. She argued that with construction costs continually going up, there is no time like the present for the city to get moving, and that any finance costs of borrowing money will be offset by construction cost savings realized by the earlier start and therefore earlier finish. On the face of it, its hard to argue with her logic … if we don’t even start the design process for two or three years while we try to collect funds, the total project cost will inevitably go up. There is little doubt that an arena started 3 years from now is going to come in at a higher finished cost than the same arena started today … the real question is whether that increase is in line with the cost of 100% financing of the project from day one.

Ultimately, that’s a question for accountants I expect, but it strikes me there is a larger issue at stake here. Buying things we can’t afford is NEVER good fiscal policy, whether you are talking about an individual or a government, and its always vital, before a purchase, to have a very specific understanding of how that purchase is going to be funded. I do think that suggestions like Smith’s SHOULD get attention, but those plans need to have specific information about why its necessary to spend money we don’t currently have at the moment … in general, we should ALWAYS reject credit unless there is a compelling reason for it.

One of the arguments Smith used to justify her suggestion of incurring debt for the arena was that no one would invest in a fund raising plan for an arena that doesn’t exist, and to a degree I agree with her. The main problem with the adopted position is that there is nothing firm for investors to invest in. There is a vague promise to build an arena when 50% of the funds are collected, but without specific time lines, plans, and expectations, there is nothing REAL for people to invest in.

That doesn’t mean we need to finance the whole thing, of course, and to jump straight to that is an example of lazy reasoning. There are many steps we can take to make the adopted plan more specific … for example, setting a specific time line of fund raising and project planning goals that is continually checked against gives investors the confidence of knowing when and how things will proceed. Further, committing to certain investments of the funds in the meantime, with guaranteed returns to investors if plans do eventually fall through would also make people more interested in risking capital in an idea that may not pay out for several years.

Ultimately, I think its almost always bad policy to go into debt to finance things. It is ALWAYS better policy to plan for your needs in advance and save the money required. From the simplest perspective, a $90 million arena financed at 10% interest will cost MORE than $90 million in the end, while a $90 million arena paid for by cash from a savings account cost LESS than $90 million, because interest earned while saving helps make up part of the cost. That is the simplest analysis, of course, but the basic math can’t be contradicted by any other logic. There ARE times when we need to use financing to get necessary upgrades, but we need to be sure that we aren’t wasting money by paying fees that have nothing to do with the actual project. Just remember that a $90 million arena actually costs $95 million + if its financed, and probably $85 million or less if it is paid from cash … to me, that $10 million difference is significant, and needs to be justified before the decision to finance makes any sense at all. It may be that $10 million is offset by rising construction costs, but I need more than a vague statement of such … I KNOW financing it will cost that much more, so there needs to be numbers proving that, by financing and starting early we will save at least that much. I haven’t seen or heard that argument from the aldermen who want to finance the project, and until I do, the decision to wait until we can afford it is the right one.

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