Growls

As described in last week’s Arlington Sun Gazette, “ Backers of the proposal to create a countywide cultural center in Rosslyn won a big tactical victory April 7, as delegates to the Arlington County Civic Federation decisively rejected a resolution calling on the county government to abandon the project.”

What’s at stake? According to the Sun-Gazette:

“The county government has obtained a long-term, low-cost lease on the Wilson Boulevard space formerly occupied by the Newseum, part of a deal with a Rosslyn developer. Among amenities planned for the cultural facility are two theater spaces, a ballroom, restaurant, art gallery, centralized ticket office and a host of other facilities as part of the project.

“But the government also has an out: If it abandons the plan by June, the government will collect up to $10 million from the developer. Those funds could go a long way to ease the current county government fiscal crunch, opponents said.”

According to the report of the Revenues & Expenditures Committee presented to the Civic Federation delegates, the space is being provided “rent free” by a developer as part of a so-called “community benefit package.” However, the report emphasizes that “rent free” does not mean “cost free.” The county would be responsible for about $4 million in capital costs and perhaps $500,000 for rent in year 11 of the lease and $1 million in rent in year 12 and thereafter. As the R & E committee's report points out:

“We have yet to see a proposed budget that has the Center breaking even operationally, even during its “free rent” period, even with annual support of $200K from the Rosslyn BID. Even accepting the budgets as presented – and we are skeptical of how achievable the revenues are – the projected annual operating shortfalls are about a quarter of a million dollars per year. Additionally, annual debt service on the bonds for the upfront renovations would come to another $290,000 in the initial years.” (emphasis in the original)

The committee’s reports points out in their recommendation:

“While we have some concerns about the viability of the Newseum location for a cultural  center, we do not even need to reach that analysis to form a recommendation. It may be the wrong place – but given the budgetary situation and outlook, it most certainly is the wrong time. We do not see a plan that involves a $14M front end investment and probable operating subsidies as being appropriate in the current economic climate.”

So how does “moral hazard” enter the picture? As Bert Ely writes in the Concise Encyclopedia of Economics:

“Common to all government insurance and guaranty programs is “moral hazard,” the risk that the insured or guaranteed institution will make economically unwise bets because severe losses from these bets will fall on taxpayers, while owners and managers will profit from winning bets. As insurers learned long ago, properly priced insurance premiums are key to minimizing moral hazard. This moral hazard was the main cause of the S&L crisis in the 1980s. Unfortunately, government insurers cannot charge truly risk-sensitive premiums without experiencing severe political opposition from those who would pay high premiums because of their riskiness. Hence, moral hazard will continue to plague government insurance and guaranty programs.” (emphasis added)

This 2007 report from the National Endowment for the Arts (requires Adobe) describes how the United States funds the arts. Noteworthy is that:

“ . . . in 2004 about 44 percent of the income generated by American arts organizations came from sales or the box office. The rest was donated -- overwhelmingly from the private. Only about 13 percent of arts support in the U.A. came from the government, and only about 9 percent from the federal government . . . “

For the record, the arts are a good thing and offer a multitude of benefits. However, support for the arts should be provided by private sources rather than by government. And taxpayers should not be responsible for the “moral hazard” involved.

Full disclosure: This citizen journalist/blogger served on the R&E committee, and wishes to thank Wayne Kubicki, committee chair, for his wealth of knowledge and hard work in preparing the committee's report.