My hometown of Brainerd, MN, is millions of dollars in debt. We’re one of the poorest cities in the state and are perpetually among the highest in unemployment. More of our budget comes from aid from the state than we raise locally through property taxes. We have untold obligations we cannot meet, from building repairs to road maintenance, and we’ve laid off our fire fighters and many of our police officers. Yet, despite our fragile and nearly desperate financial state, we are about to borrow another $10.7 million for a sewer and water expansion project we don’t really need. Why would we do such a thing?
The one word answer: growth.
This week I’m going to be offering a Strong Towns interpretation of the insights of Czech economic Tomas Sedlacek whose book, Economics of Good and Evil, I’ve spent a lot of time with over the past two weeks. Let’s just say that I’ve finally found an economist I can respect.
Speaking during the darkest days of the recent European economic crisis, Sedlacek argued that our economy is not depressed but is more correctly described as manic-depressive. The mania we collectively experience is both on the way up and the way down, although we only choose to treat the latter. The former we embrace.
During the good times, “we always wanted to grow just a little more than we otherwise could.” There was always a reason why, if a little bit of growth was good, more would be even better. It was very easy to justify various kinds of mischief — from annual deficits to artificially low interest rates — in order to wring just a little more growth out of the economy. This is true whether your goals were motivated by left wing thinking or right wing thinking.
Very consistent with the mindset of The Patron Saint of Strong Towns Thinking, Nassim Taleb, Sedlacek suggests that our economic policy of recent decades has been to sell stability in order to buy growth. This is what I alluded to in the Brainerd example I started this piece with. We’re already unstable, yet we’re prepared to commit half a generation of projected revenues for the slim chance that we are going to be able to experience some growth today. I’ve described this concept in some detail in the Growth Ponzi Scheme series.
These policies — nationwide reflecting down to the local level — have the effect of amplifying growth during the good years and then accelerating downturns in the difficult years. This is why an economy can grow really fast from 2001 through 2008 and then suddenly collapse. Graphically, here is how our current growth economy tends to perform.
I’ll pause here and note that we collectively call the period between 2001 and 2008 a housing bubble. From 2008 until 2010 we saw that bubble burst. Now housing is back to 2008 levels, but do we have another bubble? Of course not. We call 2010 to 2016 a housing recovery. An inflated sense of esteem is one of the criteria for the manic phase of a bi-polar disorder.
I want to contrast a growth economy with a resilient economy. The idea of a resilient economy is that we sacrifice some growth in order to gain stability. During the good years we would not grow quite as much and, in turn, during the bad years things would not decline so precipitously. Forgoing debt, buying insurance, fully funding your pensions and prioritizing maintenance are all ways to pursue a resilient strategy. Such an economy would perform more like this.
Let me contrast both of these approaches with a Strong Towns approach, embodied in Nassim Taleb’s concept of antifragility. An antifragile economy is one that gains from disorder. Such a system will experience growth during the good years, although not nearly as much as the growth economy or the resilient economy. However, the antifragile approach will continue to experience some success during the bad years. As it is stressed, it grows stronger. Here’s what that looks like.
Where does such a system exist? For cities, the antifragile approach is the traditional development pattern. It is the incremental way in which we built and matured cities for thousands of years all around the world. Flexible building forms, constantly maturing neighborhoods and incremental investments — cities that continually grow up, grow out and grow more intense — ensure that there are always positive ways to improve.
The antifragile approach does not outperform the growth economy or even the resilient economy during the good years. In times of extreme affluence such as America experienced after World War II, sticking to the antifragile approach — especially after two decades of depression and war — was not going to happen. Our natural human inclinations overrode our time tested wisdom. In many ways, I understand that.
What is harder to understand — and harder yet to forgive — is the way we accelerated our debt during those good years in order to grow just a little bit more. We traded stability for growth until now we find that we have neither.
“People say Greece is behind. It is actually the other way around. Greece is ahead. They just went bankrupt twenty years before everybody else.”
There is a tragic paradox to the women’s movements of the past century, specifically when it comes to women in the workplace. What started out as liberation – the choice of whether or not to work and to have that labor valued and respected in the same way as a man – has evolved into something else. Today most women do not have a choice as to whether or not they work. Work is an economic necessity.
In a theoretical sense, women entering the workplace should have meant a number of positive things at the family level of finance. For a home that now had two breadwinners, it should have meant a higher standard of living. It should have provided the household with more capacity for leisure time. It should have given the other spouse the ability to work less or to choose a different job that perhaps was more fulfilling. In short, the sacrifice of extra labor should have provided the benefit of a better life for everyone.
It may have in the early years, but our insatiable lust for additional economic growth wore away those benefits. We’ve now reached a point where we have sucked all the productivity gains out of employing the other half of our workforce — as economists like to call women — and still we need more growth. To what end?
Czech economist Tomas Sedlacek, whose insights we are examining this week, observed the following in his book Economics of Good and Evil:
The United States could have devoted the technological development of the last twenty years to saving time. In other words, if the United States remained at the standard of living it had twenty years ago, and were to invest technological progress into free time, maintaining this standard would require 40 percent less work, or a three-day workweek.
Stated another way: Imagine how spartan and deprived your life was back in the 1990’s (not). If you were to have sacrificed and simply maintained that standard of living — house sizes, gadgets, automobiles, etc… — today it would only take three days of your labor each week to sustain that quality of life. So, if we measured success in terms of….say….leisure time instead of growth, the path we’ve been on the last two decades has resulted in a vastly reduced standard of living.
We don’t measure success in leisure time, however, which is actually an interesting observation when one stops to ponder it. Why do we work? Sedlacek puts forth some provocative challenges to the growth economy, such as an examination of the modern treatment of Sabbath. The Sabbath is a day of abstinence from work recognized by Jewish and Christian religions. It’s a time out. A day of rest. Not a day to work a few hours or get caught up on the yard.
Genesis describes God’s labor of creating the heavens and earth and all that is as taking six days. On the seventh day, God rests. God doesn’t rest because God needs to be back at the office Monday morning to create another universe. God rests because God is done.
As modern Americans, do we work for the weekend? Do we put in our toil and labor so that we can be done and then rest? Or do we, as modern economists who argue over the proper length of the work week put forth, need rest so that we can become more productive workers? Who serves whom?
The political right in this country often treats the growth economy as a religion, as if it in and of itself is a thing possessed with a higher morality. Growth is a good unto itself. This is why, in the wake of the financial crisis, some so-called conservatives had open discussions about the merits of the Beijing Consensus — a little state capitalism with some authoritarianism thrown in — if that is what was needed to get growth going again.
Again, do we have western democracy that can result in economic growth OR do we require economic growth in order to have western democracy? Which is the dependent and which is the independent variable for us?
The political left largely accepts the dogma of a growth economy but — like the One Ring in Tolkien’s trilogy — tries to wield the power for good. Instead of changing the system to function differently, there is a lot more power to be had in letting it churn and then reallocating the spoils. And, of course, let’s just take on huge amounts of debt if we have to — of course we do, people are in need, after all — in order to increase that (managed) growth.
The refreshing thing about Sedlacek is that, unlike his economist peers, who deny humanity and replace us with homo economicus, a totally rational being that cleanly fits their mathematical models, he starts with a deeper understanding of human motivation. We’re not the utility-maximizing entities that our economic models count on us to be. There’s a lot of good that comes from growth, but growth is not the only good. An economy based solely on growth is one that misses out on a lot, not to mention wreaks a lot of havoc.
This brings me to one last rhetorical question: What does the end look like? When the growth economy has provided everyone a house, two cars, clothes, food, two iphones, a driverless car and a robot maid, what then? Are we done? Does our model even contemplate a time when we have enough, or at least a time when our wants are insufficient to create a 3% annual rate of gdp growth?
Sadly, the answer is “no” and so tomorrow we will examine the problem caused by debt.
“If maximum growth is the imperative of our time, at any cost, then true rest and satisfaction are not possible.”
“The debate on GDP growth frequently tends to be nonsensical. GDP growth can simply be influenced with the help of debt (and either through fiscal policy in the form of deficits or budget surpluses) or through the help of interest rates (monetary policy). So what sense do GDP growth statistics make in a situation with a several times larger deficit in its background? What sense does it make to measure riches if I have borrowed to acquire them?”
Common consensus among our intellectual class is that debt doesn’t matter. Perhaps more precisely: concerns over debt are less important than concerns over growth. Paul Krugman, the living caricature of this mindset, writing in his book End This Depression Now, made the following argument in the introduction:
Every time I read some academic or opinion article discussing what we should be doing to prevent future financial crises—and I read many such articles—I get a bit impatient. Yes, it’s a worthy question, but since we have yet to recover from the last crisis, shouldn’t achieving recovery be our first priority?
He then goes on to lament that GDP growth, “is barely above its precrisis peak,” a clear sign that we are in a depression. Krugman has argued that more debt is a moral imperative — debt is good and nobody understands debt (except him) — that we’re not grasping the basic lessons of John Maynard Keynes when we contemplate policies of fiscal austerity.
When everyone suddenly decided that debt levels were too high, debtors were forced to spend less, but creditors weren’t willing to spend more, and the result has been a depression—not a Great Depression, but a depression all the same.
Czech economist Tomas Sedlacek, whose book Economics of Good and Evil we are discussing this week, calls our current growth economy “Bastard Keynesian”. He points to the story from Genesis of Joseph interpreting Pharaoh’s dream as the first macro-economic forecast, a forerunner of Keynesianism. In the story, Pharaoh has a dream of seven fat cows grazing who are then consumed by seven lean cows. In a subsequent dream, Pharaoh see seven heads of healthy grain devoured by seven thin and withered heads of grain. When none of Pharaoh’s magicians or wise men could adequately explain the meaning, Joseph was summoned. He told Pharaoh:
God has shown Pharaoh what he is about to do. Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.
Joseph then provided a way to deal with this crisis, one that would require prudence and sacrifice during the good years:
Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”
The is the essence of Keynes. During the good years we save so that, during the difficult years, we can spend. One of his great insights is the paradox of thrift: when everyone cuts back on spending, as tends to happen during economic downturns, it only makes the crisis worse. In response, Keynes suggests that government can — and should, like Pharaoh — step in to build up reserves during good times so that, in those inevitable downturns, it can fill the gap and prevent unnecessary suffering.
What happens when Pharaoh wants more growth during the good years — because growth is a good unto itself and more is always better/necessary — and also wants to be able to counteract downturn during the lean years? That is where our growth economy operates now, which is why Sedlacek calls it Bastard Keynesian. It takes one half — spending during downturns — while doing little in the way of prudence to build up reserves during the good years.
This has turned our growth economy into a debt economy. We cheer when the economy grows by 3% in a year even when our collective debt levels have risen by more than 3% of gdp. Nobody who borrows $10,000 believes themselves to be $10,000 richer, yet we manage our growth economy as if this is an actual reality.
In a manner that mainstream American economic thought reflexively laughs at — think Ron Paul, the gold standard, and the original Tea Party emphasis on balanced budgets — Sedlacek describes the way in which interest rates allow money to travel through time. From Economics of Good and Evil (emphasis mine):
Money can also travel through time. This time-travel of money is possible precisely because of interest. Because money is an abstract construct, it is not bound by matter, space, or even time. All you need is a word, possibly written, or even a verbal promise, “Start it, I’ll pay it,” and you can start to build a skyscraper in Dubai.
Understandably, banknotes and coins cannot travel through time. But they are only symbols, a materialization, an embodiment or incarnation of that energy. Due to this characteristic, we can energy-strip the future to the benefit of the present. Debt can transfer energy from the future to the present.
On the other hand, saving can accumulate energy from the past and send it to the present. Fiscal and monetary policy is no different than managing this energy.
We will soon have experienced a decade of interest rates at or near zero. Understand what that is. It is a desperate attempt to energy strip as much of our future productivity as possible for the benefit of today. Negative interest rates, as are now being contemplated, would allow us to reach just a little bit further into the future. We are buying growth and the price we pay is our future stability.
Let me put some numbers to this abstract notion of lost stability. Back in 2013, we began to suffer through the horrors of the sequester. The sequester is an $85 billion reduction in spending on a $3.5 trillion federal budget, something Paul Krugman called a Doomsday Machine, but we can well imagine Pharaoh calling a prudent move. Nonetheless, consider that, with our unprecedentedly low interest rates, over the past decade we’ve been able to expand our national debt to nearly $19 trillion without increasing our annual debt service costs. At this point, for every 1% rise in interest rates, we are facing an additional $190 billion in interest expense — more than double the Doomsday Machine of the sequester — just to pay interest on our past spending.
How much stability do we have if our policymakers can’t raise interest rates without exploding the budget? Ah, but Chuck, inflation is low. Yes, but if you Krugmanites are successful in your theory — and how can you not be if the theory is to print and borrow endless sums of money until we get acceptable levels of spending back — then inflation will rise and you will be forced to pick your cyanide. Destroy people’s lives — especially the poor — through relentlessly rising prices or blow up the growth economy and suffer through the collapse. My guess is we’ll try to stick it to the poor, but really, all bets should be off at this point.
As Sedlacek contends: “It’s not a question of austerity: yes or no, but when.”
If we believe that man is evil in his nature, therefore that a person himself is dog eat dog (animal), then the hard hand of a ruler is called for. If we believe that people in and of themselves, in their nature, gravitate toward good, then it is possible to loosen up the reins and live in a society that is more laissez-faire.
It is a rather obvious, yet profound, point that is made in a more humorous way by the comedian Louis CK as he discusses the difference between how he reacts to nameless, faceless person in an adjacent car and how he would treat a person standing next to him in an elevator. In the separation of the car, he spews hate, but in the elevator he is far more tolerant. When it comes to human morality, proximity matters.
Adam Smith is most well known today for The Wealth of Nations and, in that book, his single (perhaps offhanded) mention of the Invisible Hand is the most famous passage. To say we have literally built our entire growth economy around this notion — that a market where everyone works in their own selfish, self interest will magically produce optimum outcomes for society — would not be an overstatement. Here is that quote, as it’s commonly presented:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
…he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
Interestingly, as listeners to our podcast heard last year when I interviewed Econtalk host Russ Roberts on his book How Adam Smith Can Change Your Life, Smith’s primary obsession was not with economics. It was with morals. His first book — The Theory of Moral Sentiments — is a fascinating prism through which to view The Wealth of Nations.
If we listen to the leading voices of today’s economics profession, we are told that we are consumers, a rational, utility-maximizing creature of their models that has taken to being called Homo Economicus. Yet, Adam Smith — whose invisible hand has been used to justify all manner of private vice in the name of the common good — clearly recognized that people are motivated by far more than their own rational self interest. In The Theory of Moral Sentiments, he wrote:
Regard to our own private happiness and interest, too, appear upon many occasions very laudable principles of action.
Kindness is the parent of kindness; and if to be beloved by our brethren be the great object of our ambition, the surest way of obtaining it is, by our conduct to show that we really love them.
The Czech economist Tomas Sedlacek argues that there is an invisible hand, but that it is not constrained to simply the realm of the market. It crosses into the realm of the social, the psychological and the historical. It compels us to act and react as a society in certain ways which often are not, in a purely economic sense, wholly rational. From Economics of Good and Evil:
For small acts (hunting together, work in a factory), small love is enough: Camaraderie. For great acts, however, great love is necessary, real love: Friendship. Friendship that eludes the economic understanding of quid pro quo. Friendship gives. One friend gives (fully) for the other. That is friendship for life and death, never for profit and personal gain.
In times past, the butcher, the brewer and the baker — particularly in the age of Adam Smith — would all have been people we personally knew. They lived up the street. Our kids would have played with their kids. We would likely have gone to the same church, received the same moral teachings and been part of the same circle of peers. To say our transactions were purely market-based is missing a lot. I care about the butcher, the brewer and the baker, not in some abstract way that I generally care for humanity, but in a very real way because I know them.
Sedlacek shares this insight as well and compares love — yes, I assure you, he is an economist — to a force that behaves differently based on proximity.
It could almost be said that “small love” is a kind of gravitational force which, while weak (and almost imperceptible in comparison with other forces), is similar to charity in that it is a weak love, difficult to detect in comparison with other loves (which are intense and concentrated on one or a couple of people). But just as with short but strong (nuclear) forces and distant and weak (gravitational) forces, charitas holds together large units, in our case society—in a similar way to how gravity keeps together objects at large distances but is not as “strong” as nuclear or electric forces.
In the name of maximum growth, we have moved the morality of market transactions in our society — in pursuit of maximum efficiency — from the realm of near and strong to that of distant and weak. So that my meat is (theoretically) the highest quality at the lowest price, I now bypass the butcher — he has long been put out of business — and instead buy it from a national retailer. The clerk there does not know the shareholders who own the company, nor do they know the clerk. Or me. None of us know the actual people who cared for the animal, slaughtered the animal, processed the animal or transported the meat to the store. Nearly all moral dimension in this transaction have been removed leaving me, the clerk and the shareholder owners of the company free to treat each other with the least amount of social connection possible.
Yet, society still operates with an amazing degree of individual decency. It is still news when someone acts terribly because it is a rare occurrence. That should be a refreshing observation and should make us less fearful of a world where we sacrifice growth for stability, where we focus less on maximizing efficiency in our markets and more on building the resilience of our cities, towns and neighborhoods. Unfortunately, that is not the case, and so we’ve shown, in the face of all these distant and weak moral connections, an inclination to turn our power to do good over to others with the hopes that they will enforce a better world.
Again, from Sedlacek:
The question of whether man is good or evil is a key question for the social sciences. “Regulation” will develop from it. If man is evil by nature, then it is necessary to force him toward good (in the context and under the pretext of “social good”) and limit his freedom. If it is a dog-eat-dog world, as Hobbes believes, we need a strong state, a powerful Leviathan that forces men toward (men’s unnatural) good. But if on the other hand human nature (or something of the ontological core of man’s being, his very “I”) is good, then more laissez-faire is possible. Man can be left alone, because human nature will automatically have a tendency to steer him toward good.
State interventions, regulation, and limits to freedom need be applied only where man as part of a whole is not sufficiently (collectively) rational, where spontaneous social coordination works poorly or where forced coordination is capable of ensuring better results (in the case of externalities, for example). This is one of the key questions for economics: Can the free will of thousands of individuals be relied on, or does society need coordination from above?
Are we a society of villains or of neighbors?
I believe we are a society of people inclined to be neighbors who have adopted an economic structure predicated on our villainy. By shifting our markets from interactions that are predominantly distant and socially weak to those that are near and socially strong, we can start to move beyond our fragile dependence on growth and debt to a stronger America based on strong cities, towns and neighborhoods. Tomorrow I’ll finalize this series by showing what that could look like.
“In recent decades, our debt has risen not out of shortage but out of surplus, excessiveness. Our society is not suffering from famine, but it must solve another problem—how to host a meal for someone who is full.”
-Tomas Sedlacek in Economics of Good and Evil
A couple years ago I put together this Strong versus Fragile graphic as a way to help people think about the nature of productive cities. In the rain forest, you have a complex, adaptive system that has emerged in a way that is, as a byproduct of how it emerged, highly resilient and adaptable. The corn field, in contrast, is a system based on efficiency, constantly increasing the amount of output for a given unit of input. One hail storm, a few weeks of drought or a swarm of locusts and it’s gone.
We might think we prefer the human equivalent of the rain forest, but do we?
Let’s pretend we were made king/queen of a portion of a rain forest and, magically, we had the authority and resources we needed to right the wrongs, correct the deficiencies, that we saw in the world around us. What would we do?
As we delved into the situation, we would quickly realize that the process of emerging, of developing a resilient equilibrium, is a brutal one. In the rain forest, one creature’s cruel death is the essential nutrients for many others. A tree grows strong and creates an ecosystem of winners and losers. Another tree falls and an entirely different system of winners and losers takes over. Would any of us have the wisdom to decide which winners are best? Which is the optimum path for that moment in time?
Or would we, as ecologists suggest, let well enough alone so that the infinitely complex interactions that give the rain forest is adaptive resiliency can run their course?
Since World War II, Americans have seemingly had the power and the resources to right the wrongs, correct the deficiencies, in the world around us. Whether the wrongs you’ve identified emanate from concerns of the political left or the political right, there have been enough resources available to move ahead as far as political consensus would allow. There is something noble in this — who doesn’t want the world to be a better place — but also something dangerous and destructive. Just as with meddling in the rain forest ecosystem, how do we know what is actually the best course of action? How do we know what set of winners is optimum?
Enter modern economists. If there is one thing American society has been able to achieve broad consensus on it is that more growth provides us with more resources and, whatever problems we are actively trying to solve, more resources are really helpful. The paradox of our economy, as we’ve discussed this week, is that we create more collective resources — growth in GDP — by individually consuming more resources. This system worked for a long time — we leveraged individual appetites to accelerate collective growth — but now, as Czech economist Tomas Sedlacek suggests, we’ve reached the point where individuals are unable, or unwilling, to consume enough to keep it going. From the Economics of Good and Evil:
Economics mainly counts on situations when a person is unsaturated and would like to consume more (and also make more money). What would economics look like without this? Our resources have grown so much that we can allow much more than full satiation. Economics is the study of “allocation of scarce resources,” but what happens when they are in abundance?
Today, it feels like we’re stuck. We’ve so many problems to solve. With the way we go about solving problems — largely top/down, centrally directed efforts — we need more resources. Yet, we struggle to get our economy to grow because, individually, we can’t or won’t consume at the levels needed to generate those collective resources. Is this the ultimate irony? Can we only satisfy our needs by increasing our neediness?
For reasons that are not important to this conversation, I’ve spent a great deal of time thinking about the business model of a newspaper, and I’d like to use those insights to contrast our current approach to what was and could be again. When we look at a local, family-owned newspaper, we see an endeavor that is the ultimate invisible hand kind of undertaking. It is a business proposition that, if done well, is also a great service to the community. I’ve known a number of local news publishers who make a good living reporting on the local comings and goings, breaking the occasional big story, crying with families when they have tragedy and celebrating success when it is found. In time they often come to own a building, maybe some equipment and can someday pass on the entire enterprise — with some modest gain — to a new generation. Few find riches but many have experienced enough success to make them among the privileged and powerful within their communities.
Now take the modern corporate media company. I won’t suggest that these endeavors don’t also struggle to be a service to the community, but the risk and reward are much different. It isn’t adequate for a publicly traded company to simply do good work and make a modest profit year after year. The dictates of shareholders — rightfully, as is our system — are that profits must be maximized, to increase year after year. New efficiencies must be found. New opportunities must be exploited. Capital must be leveraged by a leadership team required to return value to shareholders. Pretty soon the paper lays off senior reporters — the ones with sources and community knowledge — in a cost cutting measure. Then the team that actually designs the paper — the ones who grasp local nuance and culture — are let go so assembly can be outsourced to corporate offices on the other side of the country. Pretty soon the software used to lay out the paper is standardized to the low bidder, even though it doesn’t really work. And on and on and on.
The product here — a local newspaper — is very similar between these two, but the motives and incentives in the underlying production are vastly different. So, would our lives be worse off if our local news was brought to us by a locally-owned newspaper rather than a publicly-traded corporation? It’s hard to argue that it would. Yet, if it were locally produced, that paper would be free of the continuous need to increase efficiency, the constant pressure to increase profits and expand margins above all else. Sure, a good business owner would still do some of that, but as part of the community they would also balance those urges with the other competing interests, many of them social and without direct economic payoff. And, if 3% year-to-year growth didn’t happen, that too would be okay.
We cannot have a centralized, corporate-driven, debt economy without continuous growth, but we cannot sustain continuous growth. We therefore need a different model, one that doesn’t require continuous growth. That is only going to be found at the local level, by localizing those endeavors that can be localized. As a matter of public policy, we should be doing everything we can to end the subsidies and incentives that promote the big/centralized — banks, corporations, government — and focus our efforts on seeding the small/localized wherever possible. More chaotic but smart and less orderly but dumb. We can have growth, but not be a slave to it.
If we do this, I believe we’ll have an economic system that is more moral, more just. From Economics of Good and Evil:
In our constant desire to have more and more, we have sacrificed the pleasantness of labor. We want too much and so we work too much. We are by far the richest civilization that has ever existed, but we are just as far from the word “enough” or from satisfaction, if not further, than at any time in the distinct “primitive” past. In one sentence: If we ourselves did not have to constantly increase GDP and productivity at all costs, we would not have to also constantly overwork ourselves in “the sweat of our faces.”
I’m going to return to the rain forest because I suggested earlier that locally complex systems are brutal, that their resiliency is the byproduct of frequent failure and adaptation. How can a system like that be more just? How can we call something like that moral? There are many of you eager to vote for your brand of tyrant for president, someone who will enforce your version of righteousness and morality on a country badly needing both, often because you don’t trust your neighbors to do the right thing.
The rain forest is brutal, yes, but nature is filled with countless examples of altruism. From plants that interlock roots to share water during drought to birds that warn others of danger. Humans are the most social of all species. We’re wired to work together. Let’s stop trying to bypass that wiring.
One of the most positive things about recent reflections on Urban Renewal policies is the acknowledgement that the African American communities that were bulldozed may have been poor, but they were also vibrant. They were full of strong social connections, the kind that makes a place resilient. The great injustice that was done in these places had economic ramifications, for sure, but the worst aspect was social. We tore apart the complex fabric of the community. That we would now out of fear resist the restoration of this fabric, in poor and affluent neighborhoods alike, defies all that we have learned. Are we still so lacking in humility?
I end this series with one last excerpt from The Economics of Good and Evil. This a quote from John Maynard Keynes on what life could be like in an economy where growth is good, but not the only good, where people are more than consumers, more than some theoretical Homo Economicus, where our fate is not directed by economists or central planners but by our relationships with each other:
When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues.
I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue—that avarice is a vice, that the exaction of usury is a misdemeanor, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow.
We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.
Thank you for allowing me to share these thoughts with you over the past few days and for all the encouragement with this intellectual exploration.
[In 2016], I wrote about 8,000 words in a series we titled Understanding Growth. Sometimes it takes that many words of writing for me to understand something. I’ve been asked to simplify a little which, at this point, I think I’m able to do.
All of that writing was an attempt to process Tomas Sedlacek’s book, Economics of Good and Evil and place it into the context of Strong Towns. These are my interpretation of his thoughts mashed together with a little Nassim Taleb, Jared Diamond, John Dominic Crossan and some of my own.
The profession of economics has long had a moral component.
Sedlacek starts with the Epic of Gilgamesh, an ancient poem, and then spends time looking at the moral teachings of ancient Hebrews and early Christians. From restrictions against interest to the forced rest of land, people and debt (mandatory debt forgiveness), economic transactions have long had a moral dimension.
Even when we reach the Enlightenment, we still see the writings on economic systems coming largely as an extension of philosophy. Adam Smith, often credited with starting the profession of modern economics, was primarily a moral philosopher. His work, The Wealth of Nations, spent a great deal of time on the moral implications of economic transactions.
Our current economic system has a moral component that is largely captured in the invisible hand metaphor.
Modern economics has become a profession of numbers and equations. In doing so, it presents itself as being value neutral; as not projecting any particular set of moral constructs but simply reporting the facts. This is a distortion.
For example. the Invisible Hand — Adam Smith’s suggestion that individuals, acting in their own selfish, self-interest, will undertake endeavors that will benefit all of society — is an accepted truism of modern economists. The “greed is good” belief is embedded in the entire structure of our market economy, essentially an elevation to moral of what, in a prior age, would have been called vice.
The invisible hand metaphor has evolved into a system where growth is now our most important objective.
The way in which “greed is good” is transformed from a vice to a moral imperative is through growth. Economic growth is one way to improve standard of living. When there is more opportunity for consumption — both on the supply and the demand side of the equation — people see their lives improved.
Until they don’t. As Sedlacek points out, there is a limit to how much can be consumed. How do you hold a banquet for someone who is full? You can convince them that they are hungry OR you can make tomorrow’s meal contingent on them overeating today.
Greed is good via the invisible hand. Growth uses the invisible hand to improve our standard of living. Therefore, to improve our standard of living we need more growth and, thus, more greed. It’s a self-reinforcing bit of circular logic than can be used to justify just about anything.
A system where growth is the main objective will fail, but only after it has exhausted every means to expand consumption.
Once we collectively believe that growth is the primary vehicle to prosperity, there is very little we won’t do to achieve it. That includes bailing out Wall Street banks, turning the financial system predatory, taking on trillions in debt with no intention of ever paying it back except with more debt, reducing individual freedoms, etc…
We will use negative interest rates — charge people to save money — in order to force people to consume today instead of save for tomorrow. We will, in the words of Sedlacek, sell stability in order to buy growth. Ultimately, we will have neither.
Growth is good, but is not the most important thing. We need an economic system that can accept this fact and still continue to function.
Economists have become so important to our country because we are now so dependent on growth. Without growth, our economic system falls apart. Economists thus fill a social role similar to the shamans or prophets of old. They look at the tea leaves and predict the future, albeit with spreadsheet instead of goat entrails. They tell us what us what we need to do now to satisfy our god: growth.
Every single person reading this has given up some economic advantage somewhere in their life for something they felt was more important. The economics profession discounts this behavior and surmises that any altruism you have is canceled out by someone else’s greed. What a horrible — and untrue — way to look at humanity.
A more localized set of economic institutions and practices would personalize transactions so that human values (beyond simple growth) could be expressed.
This is my adaptation alone. I’m not sure what Sedlacek would think about it, but it seems to me that part of making this transition from a growth economy to one where growth is good, but not a requirement, will involve adding a moral dimension back into our transactions. In a country as large as ours, and an economy as enormous as ours, the only way that happens is to bring as many transactions as possible back to the personal realm. I buy from you and you buy from me. We know each other and, while we are going to care about profit and loss, we’re also going to care about each other on a human level.
Note that I’m not suggesting that localizing fixes our problems. I’m firmly convinced that the problems we face — the growth Ponzi scheme we’ve gotten ourselves into — are not fixable. This system is going to break — is already breaking apart — and will be replaced by something else. We can help that transition to be less painful and set ourselves up for a more prosperous future by starting to make these changes today. We can do that ourselves in our own cities, towns and neighborhoods.
And a final observation: I realize we’re in the middle of a political season that has got everyone right where our national parties want them (fearing the other candidate). I don’t hear this conversation on growth anywhere in our current discourse. Whether your candidate is a modern socialist (which means the state as Robin Hood, not the state controlling the means of production, as in real socialism), a modern state capitalist (where capitalism is directed for the objectives of the state) or a member of the debt capitalist establishment (where debt is used to create growth as a state objective), you’re not getting a serious critique of the growth economy, it’s fragile nature and an urgent need for an alternative approach.
Let’s start talking to our friends and neighbors about it.
As Oregon struggles to digest its “surging” population (up to 4.1 million), one of the most important things we can do here is learn the lessons of the experiences of others — something Americans are, in general, notoriously bad at, even when accounting for the fact that humans are generally bad at it. We need all the help we can get. And Strong Towns is the best source of it out there. Today’s featured series perfectly illustrates that.
So there is no better investment you can make to help Oregon’s future than to ensure that organizations and individuals with the kinds of insights available at StrongTowns.org keep flourishing and keep focusing on the issues considered there.
The mission of the Oregon Department of Veteran’s Affairs (ODVA) is to serve and honor veterans through leadership, advocacy, and strong partnerships. ODVA has three primary program areas that are supported by the agency’s core operations:
the Veterans’ Loan Program,
the Veterans’ Services Program, and the
Oregon Veterans’ Home Program.
The Veterans’ Loan Program, funded entirely with Other Funds, provides home loans to qualified veterans. Loan origination and servicing functions, as well as the agency’s administration costs, are included in the Loan Program budget.
The Veterans’ Services Program provides claims and appeals assistance, conservatorship services, and partnerships with counties and national veterans’ service organizations to assist veterans. The Veterans’ Services Program is primarily funded through a combination of General Fund and Lottery Funds.
The Oregon Veterans’ Home Program operates skilled nursing and memory care facilities in The Dalles and Lebanon. The operational costs of the facilities are funded with Other Funds from resident-related income.
Revenue Sources and Relationships
Other Funds revenues for the Veterans’ Loan Program are derived from the proceeds of general obligation bond sales ($240 million), veteran loan and contract-related repayments ($86 million), and interest earnings ($53 million).
The balance of revenue comes from service charges, rent, licenses, fees, and miscellaneous revenues totaling approximately $4.3 million. Available revenues and reserves are expected to be sufficient to cover operations and necessary debt service. The Home Loan Program’s administrative costs are limited in the budget, while the direct loan activity expenditures (i.e., loans made to veterans, pass-through payments made on behalf of borrowers, and debt service paid on general obligation bonds issued to finance the program) are nonlimited.
The Veterans’ Services Program has historically been funded with General Fund and Other Funds primarily generated from conservatorship fees. Beginning in the 2017-19 biennium, the Veterans’ Services Program funding includes Lottery Funds available through the passage of Measure 96, which dedicated 1.5% of state lottery net proceeds towards veterans’ services. Total lottery revenue dedicated to veterans’ services is projected to be $19.1 million for the 2017-19 biennium based on the Office of Economic Analysis’ May 2017 revenue forecast with adjustments for administrative actions. Lottery revenues will be allocated to the Department for the Lottery Funds expenditure limitation included in the Department’s budget, with the balance being retained in the constitutionally dedicated Veterans’ Services Fund.
Collectively, General Fund and Lottery Funds support ODVA’s statewide veteran services, including Veteran Service Officer positions, a small emergency assistance program, and service delivery partnership programs, where funding is passed through as special payments to counties and national service organizations. Lottery Funds directly support a veterans’ crisis support and suicide prevention telephone hotline, veteran volunteer program, veterans’ services grant fund, and grants to public universities and community colleges for campus veteran resource centers.
In addition to General Fund and Lottery Funds support, the Conservatorship program receives Other Funds revenue from fees charged to manage the finances of conservatorship clients (7% of the protected person’s income). Conservatorship fee income in the 2017-19 biennium is estimated to total approximately $920,000.
The Oregon Veterans’ Home Program operational costs are financed entirely with Other Funds. Revenues are primarily moneys received from the residents of the facilities, Medicare and Medicaid payments, and a per diem amount received directly from the U.S. Department of Veterans Affairs (VA).
Veterans who reside in the Homes receive benefits not available to them if they reside elsewhere. Many veterans receive aid and attendant benefits along with disability compensation or income-based VA pensions, which, combined with their social security benefits, provides the revenue with which to pay for their care in the Homes. Home Program charges for services are estimated to total $85.4 million in the 2017-19 biennium. The total amount of revenue is based, in part, on occupancy projections from the Homes’ contractor.
Other Funds revenue is also received from the sale of veterans’ license plates through the Department of Motor Vehicles and the Charitable Check Off program. ODVA projects a 2017-19 beginning balance of $11.5 million in the Veterans’ Home Program. Cash reserves will be used during the biennium for working capital, capital improvements, match for The Dalles Veterans’ Home federal renovation grant, and held for contingencies.
An estimated 310,333 veterans live in Oregon who have served over the following five eras:
World War II (5.5%),
Gulf/Post 9-11 (25.6%), and
during times of peace (23.3%).
ODVA continues to focus on serving more veterans and reaching the seven out of ten veterans who are not accessing their federal benefits for education, health care, disability, or retirement. Additionally, over 50% of veterans are 65 or older, placing an emphasis on the need for aging veteran services.
The Veterans’ Home Loan program is funded through the issuance of tax-exempt Qualified Veteran Mortgage Bonds (QVMBs). Federal law limits the use of QVMBs, requiring that borrowers must apply for a loan within 25 years of discharge from military service and that proceeds may not be used to refinance homes. In 2010, Oregon voters passed Measure 70, making the Home Loan Program a state lifetime benefit for veterans. Loans for this eligible group must be funded from reserves or older bond proceeds. Oregon and the four other states with veterans’ home loan programs (California, Texas, Wisconsin, and Alaska) are seeking federal legislation to ease this restriction. While more veterans are eligible, and the product to serve them is restricted, reserves from the loan program have subsidized costs of the veterans’ services and administrative functions of the Department.
In response to a General Fund shortfall in the 1991-93 biennium, Veterans’ Home Loan Program revenues were used to supplement veterans’ services funding. This practice was a contributing factor to losses and a decrease in the overall net position of the Home Loan Program over the last six years. A portion of the subsidy was eliminated in the 2013-15 biennium when the cost of Veteran Service Officer positions performing non-loan program work was shifted back to General Fund. The remaining $4.1 million of veterans’ services and administration costs being supported by home loan revenues are shifted to Lottery Funds in the 2017-19 budget. Eliminating the subsidization of veterans’ services program activities will help to strengthen, stabilize, and sustain the Home Loan Program for future generations of veterans.
The recession and bursting of the real estate bubble, low conventional mortgage rates, and the inability to refinance significantly decreased ODVA’s home loan originations and outstanding portfolio. Over the past two biennia, as the economy has recovered, the demand for veteran home loans has continued to increase. However, this growth is limited by low housing inventory and rising prices. As of June 30, 2017, the loan portfolio was approximately 1,870 loans totaling $296 million.
Expenditures for the Oregon Veterans’ Homes relate to the cost of providing residential care. Operation of the facilities is contracted out to a health care service provider. Obtaining and maintaining a high occupancy rate is important to each facility’s financial condition. A second Veterans’ Home was opened in the City of Lebanon (Linn County) in the fall of 2014. Construction of a third home in Roseburg was reauthorized in 2017, with Article XI-Q general obligation bond proceeds set aside to fund a portion of the non-federal match obligation.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget for the Department of Veterans’ Affairs is $524.5 million total funds and 96 positions (95.84 FTE), which is a 10.2% increase over the 2015-17 legislatively approved budget.
Other Funds Nonlimited of $387.5 million for the Veterans’ Loan program bond-related activities, debt service, and loans to borrowers make up 74% of the total budget. Excluding Nonlimited funds, the 2017-19 legislatively adopted budget is a 33.2% increase over the 2015-17 legislatively approved budget.
Lottery Funds expenditure limitation of $14.9 million, available to the Department beginning in the 2017-19 biennium through the passage of Measure 96, is included in the budget. The budget also includes a $8.4 million of General Fund, which consists of $7.4 million for veterans’ services and $1 million for debt service on outstanding bonds.
Current Service Level
Other Funds (NL)
The Veterans’ Home Loan Program was created in 1945 to provide a benefit to World War II veterans returning home. The Loan Program provides qualified veterans low-interest rate mortgages on single-family owner- occupied homes through the issuance of general obligation bonds authorized under Article XI-A of the Oregon Constitution. Since the Loan Program’s inception, the Department has made over 335,000 home and farm loans with a principal amount of over $7.9 billion. The program budget consists of:
Director’s Office – policy, public information, and communications
Veterans’ Home Loan Services – functions dealing with the loan program, including originating and servicing loans.
Financial Services – overall financial oversight of the Department, including budgeting, accounting, cashiering, and financial management.
Support Services – human resource services, information services, and facility services.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $404 million Other Funds is a 3.8% increase from the 2015-17 legislatively approved budget.
Other Funds Nonlimited of $387.5 million for loans to veterans ($155 million), expenditures related to making loans and issuing bonds ($13 million), and debt service ($219.5 million) make up 96% of the program budget. Limited Other Funds of $16.4 million for loan services and ODVA operations is a 3.3% increase from the 2015-17 legislatively approved budget.
This increase is net of a reduction of $1.7 million to shift funding for six veterans’ services positions (6.10 FTE) and associated services and supplies from Other Funds supported by home loan revenues to Lottery Funds in the Veterans’ Services Program.
Shifting the costs of veterans’ services activities to Lottery Funds is expected to strengthen and stabilize the Home Loan Program. The following Other Funds increases were also approved:
$933,333 on a one-time basis to refresh the Department of Veterans’ Affairs’ office building, including replacing the carpet, painting the walls, and updating exterior and interior signage.
$250,000 to purchase and install a home loan system that combines loan origination and servicing into one application, creating efficiencies and reducing errors. The new software system will also allow veterans to review home loan information online.
$201,359 to establish a quality assurance and compliance coordinator (QA/CC) position (1.00 FTE) and reclassify two existing Loan Specialist positions. The QA/CC position will maintain oversight and compliance with federal and state regulations, including new Consumer Financial Protection Bureau (CFPB) rules.
Reclassification of the Loan Specialists supports the increased responsibilities of these positions to comply with the new Dodd-Frank and CFPB regulations for loan origination.
Veterans’ Services Program
Current Service Level
The Veterans’ Services Program provides advocacy and benefits to veterans, their dependents, and survivors through the following activities:
Statewide Veteran Services – Assists veterans, their dependents, and survivors to obtain service-connected and non-service related benefits from the U.S. Department of Veterans Affairs. Federally accredited and state certified veteran service officers (VSOs) provide claims and appellate representation through ODVA’s power of attorney. In 2016, ODVA received 11,842 new powers of attorney, and currently holds power of attorney for nearly 101,000 veterans. Over 79,000 active claims were filed in fiscal years 2015 and 2016. This program also provides training, certification, and accreditation for county and state VSOs.
County Veteran Service Officers Program (CVSOs) – Pass-through funding to counties that supports a network of trained county veteran service officers. This partnership began in 1947 to aid counties in promoting veteran services at the local level. Prior to the 2017-19 biennium, CVSOs have existed in 34 of the 36 counties and ODVA provided services for Marion and Polk counties. However, a Polk County Veteran Service Office was established in January 2017 and ODVA expects Marion County to open a Veteran Service Office in 2018.
National Service Organizations (NSOs) – Pass-through funding supports national veteran service officers that provide benefit and claims representation. ODVA’s partnership with national veteran service organizations in Oregon was established in 1949. Currently, the Disabled American Veterans, Military Order of the Purple Heart, National Association of Black Veterans, American Legion, and Veterans of Foreign Wars participate in this funding.
Veterans’ Emergency Financial Assistance Program – Provides emergency aid to Oregon veterans and their immediate families through an emergency assistance program established by the Legislature in 2005. One- time grants are provided to help with health and welfare emergencies.
Partnerships – Leverage existing state programs and partner with federal, state, and non-profit organizations to expand services in the key areas of health, education, and economic opportunity. In the 2017 session, two new grant programs were established to expand ODVA’s partnerships. HB 2891 established a Veterans’ Services Grant fund to provide non-profits and other veterans’ organizations grants to expand services and programs that benefit veterans. SB 143 created a grant program to expand and enhance existing veteran programs on college campuses that help veterans successfully transition from military service to college life.
Aging Veteran Services – Provides conservatorship and representative payee services for veterans and their dependents who are determined to be “protected persons” and who are recipients of U.S. Department of Veterans Affairs’ benefits. Conservatorship services are provided when no other entity or person is willing or able to act as conservator and the agency is appointed as fiduciary. The staff serves as trust officers, files required legal reports, apply for all benefits due the veteran, and counsel with families, hospital personnel, social workers, and protected persons to ensure their needs are met within the resources available. Representative payee services are more limited in scope, with staff paying bills and advocating on behalf of veterans. As of June 30, 2017, ODVA had 136 Conservatorship clients and 144 Representative Payee clients.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $22.8 million total funds represents an 83.1% increase from the 2015- 17 legislatively approved budget. The increase is attributable to the addition of $14.9 million Lottery Funds, available through the passage of Measure 96. General Fund support for veterans’ services is a 29.1% decrease from the prior biennium, primarily due to the shift of $2.5 million of current service level expenditures from General Fund to Lottery Funds. Additionally, $850,000 General Fund was also phased-out during development of the 2017-19 budget to remove one-time funding provided in the 2015-17 budget for a crisis and suicide prevention hotline ($350,000) and an increase to support CVSOs ($500,000).
The legislatively adopted budget makes key investments with the lottery dollars dedicated by Measure 96 to expand services to veterans, while retaining a projected $2.8 million in the constitutionally dedicated Veterans’ Services Fund to allow for fluctuations in revenue projections and provide a working capital balance. Specific investments include:
$4.5 million to double the current service level pass-through funding to County Veteran Service Officers and National Service 2017-19 combined General Fund and Lottery funds support for CVSOs totals $8.7 million and support for NSOs totals $236,312. Increased funding is intended to enhance exiting state and county funding, helping to serve more veterans, increase the number of claims filed, and bring more federal dollars to the state.
$4.1 million to shift the funding for veterans’ services from Other Funds supported by home loan revenues to Lottery Funds. Veterans’ services activities ($2.9 million) and the program’s share of support service costs ($1.2 million) previously funded with Loan Program revenues will be supported through Lottery Funds. Corresponding Other Funds decreases are reflected in the Veterans’ Services Program ($920,464), Loan Program ($1.7 million), and Veterans’ Home Program ($319,794).
$1.2 million to develop and implement one or more grant programs to expand and enhance existing veteran programs on college campuses that help veterans successfully transition from military service to college life, succeed in college and complete educational goals, and transition from college to the workforce (SB 143, 2017). Funding of $187,194 is provided for a Student Veterans’ Coordinator position (0.92 FTE) to administer the program and $1 million is provided on a one-biennium basis for grants to public universities and community colleges.
$600,000 to replace the conservatorship system, which will enable the Department to effectively and efficiently deliver conservatorship and representative payee services. Funding is provided for one-time development, implementation, and training costs ($400,000) and ongoing software licensing and maintenance costs ($200,000).
$555,000 to establish a grant fund for purposes that benefit veterans, including expanding outreach and services, promoting mental and physical health care, housing security, employment opportunities, education, and transportation accessibility (HB 2891, 2017).
$390,256 to establish two positions (2.00 FTE) to accommodate the increased statewide support services workload anticipated with the additional funding to CVSOs. A trainer position in the Salem Office is established to provide essential training and certification for county veteran service officers. An administrative position is established to process the increased number of claims and appeals that will be filed through the Portland ODVA office.
$380,548 to establish two positions (2.00 FTE) within the Aging Services Program. A Representative Payee position is added to accommodate the representative payee caseload and an Aging Veterans’ Outreach Specialist position is added to serve as a veteran service officer with expertise in veterans’ benefits and complex aging health care issues.
$350,000 to support a veterans’ crisis and suicide prevention hotline that offers free, anonymous assistance, 24-hours a day, to active-duty service members, veterans, and their families.
$245,509 to establish a Veteran Volunteer Coordinator position (0.92 FTE) responsible for developing and establishing a statewide veterans volunteer program that will expand outreach to veterans in their communities (HB 2908, 2017).
The 2017-19 veterans’ services budget also includes $500,000 Federal Funds in anticipation of the Transportation of Veterans in Highly Rural Areas 2017 renewal grant. ODVA has applied for and received the annual grant since the grant program was established in 2014. Grant funding is available to highly rural counties, as defined by the
U.S. Department of Veterans Affairs, for transportation of veterans to medical appointments. Expenditure imitation for federal grants received during the 2015-17 biennium was phased-out during development of the 2017-19 budget and ODVA will request limitation during the 2017-19 biennium for any additional grants received.
In summary, the 2017-19 legislatively adopted budget funds ongoing veterans’ services programs at the following levels:
Highly Rural Transportation Grant: $500,000 Federal Funds
A lottery allocation of $1.5 million was also approved to address veterans’ homelessness and housing issues. Expenditure limitation of $350,000 was provided to the Housing and Community Services Department (HCSD) for emergency housing assistance to veterans through the Emergency Housing Account program. The remaining $1.15 million is reserved pursuant to a budget note that requires ODVA and HCSD to report back to the Joint Committee on Ways and Means in February 2018 with a proposal that includes strategic investments that will result in long-term housing stability for veterans.
Oregon Veterans’ Home Program
Current Service Level
The Oregon Veterans’ Home Program provides skilled nursing, Alzheimer’s and memory-related, and rehabilitative care to Oregon veterans and their spouses, and to parents who have lost a child to war-time service, through two Veterans’ Homes in Oregon.
The Dalles Veterans’ Home opened in November 1997 and has a bed capacity of 151 residents. Funding for construction and equipping of the facility was from a 65% federal grant matched with a 35% state obligation contributed by Wasco County. As of June 30, 2016, The Dalles Veterans’ Home had an occupancy rate of 90%. As The Dalles Veterans’ Home enters its 20th year of operation, repairs, maintenance, and capital renewal are needed to keep the facility in good operating condition. Health and safety improvements were completed in 2011-13, and the home will undergo a renovation in the 2017-19 biennium through a federal grant approved in 2015-17.
A second Veteran’s Home in Lebanon (Linn County) opened in the autumn of 2014. The Edward C. Allworth Veterans’ Home has capacity for 154 residents who need long-term care. Skilled nursing, including inpatient rehabilitative care, is provided using a small house model, providing a home-like setting with “neighborhoods” that include landscaped courtyards and a community center. While census levels were lower as the facility began operations, as of June 30, 2016, the Lebanon Veterans’ Home was at 94% capacity.
The facilities provide care at lower-than-market rates to veterans and their families because veterans’ benefits can be utilized toward the cost of care. Home operations are funded entirely by Other Funds, consisting primarily of resident-related income, including federal VA payments, Medicare, Medicaid, insurance, and private payments. The program also receives monies from the sale of veterans’ license plates through the Department of Motor Vehicles and donations from the charitable checkoff income tax program. ODVA contracts with Veterans Care Centers of Oregon (VCCO), a non-profit organization, for the day-to-day operation of the facilities, utilizing the state’s competitive procurement process.
Legislatively Adopted Budget
The legislatively adopted budget of $84.8 million is a 23.4% increase over the 2015-17 legislatively approved budget. General Fund of $1 million is appropriated for debt service on Article XI-Q bonds issued in 2013 to fund a shortfall in the state/local share of Lebanon home construction costs that were driven by federal design requirements. Increases in Other Funds expenditure limitation for the Veterans’ Home Program include:
$14.9 million to address the Lebanon Veterans’ Home operating at a higher census and occupancy level sooner than originally anticipated, in addition to a higher census at The Dalles Veterans’ Home. The increase also includes updated projections for minimum wage costs.
$310,000 for costs of issuance on Article XI-Q general obligation bonds approved for capital construction projects.
$249,080 to establish an Aging Services Assistant Director (1.00 FTE) within the Veterans’ Home Program to help direct and manage the day-to-day operations of the division, including the two Oregon Veterans’ Home program directors and contractors who manage the homes.
Other Funds expenditure limitation was also decreased by $319,794 to reflect the transfer of the Aging Services Director position (1.00 FTE) to the Veterans’ Services Program. A corresponding Lottery Funds increase and position is included in the Veterans’ Services Program. The Aging Services Director is responsible for coordinating the statewide effort related to aging veterans’ services.
Current Service Level
Legislatively Adopted Budget
Capital construction expenditure limitation of $13 million was approved for the following three projects funded with the proceeds of Article XI-Q general obligation bonds:
$10.5 million to build a new veterans’ home in Roseburg.
$1.3 million to build a new parking lot at the Lebanon Veterans’ Home.
$1.2 million for capital improvements to The Dalles Veterans’ Home, including construction of new educational and daycare buildings, upgrades to wireless and security infrastructure, and phone system replacement.
Bonds are scheduled to be sold in spring 2019, with debt service of $2.2 million General Fund beginning in the 2019-21 biennium. Capital construction expenditure limitation for the approved projects will expire on June 30, 2023.
The 2015-17 legislatively approved budget included $3.3 million Federal Funds capital construction limitation for a U.S. Department of Veterans Affairs construction grant for major renovations to The Dalles Veterans’ Home.
The federal construction grant requires a 35% state and local match ($2.5 million Other Funds approved in 2015-17), which will come from the Veterans’ Home Program cash reserves. The funds will allow for new flooring, paint, wallpaper, and ceiling tile throughout the facility; furniture replacement; remodel of the nurse stations; upgrades of all resident rooms; remodeling of the production kitchen and nutrition centers; and remodel of the rehabilitation and therapy area, including replacement of equipment. A storage building will also be added. Capital construction expenditure limitation for this project is authorized through June 30, 2021.
$10.5 million of lottery bonds were authorized in the 2011-13 biennium and reauthorized in each subsequent biennium for a third veterans’ home in Roseburg. A U.S. Department of Veterans Affairs construction grant was not received in prior biennia to provide the remaining funding for the home. Additionally, analysis by the Department has not supported the facility maintaining necessary occupancy levels to operate at a sustainable level. Capital construction limitation established in 2011-13 for the Roseburg Veterans’ Home (HB 5006, 2011) expired on June 30, 2017. Limitation was re-established for a new six-year period in the 2017-19 budget and general obligation bonds were authorized to support funding for the home.
ODVA continues to evaluate the need for skilled nursing care in the Roseburg area, as well as explore a new veterans’ home model that would include assisted living and secure memory care.
Additionally, due to the shortage of nurses and medical technicians in the City of Roseburg and Douglas County that would be required to staff the Roseburg Veterans’ Home, ODVA was directed though a budget note to convene a rural medical training facilities workgroup.
The workgroup will investigate issues related to alleviating the shortage and include representatives from the City of Roseburg, Douglas County, local hospital or medical facilities, including the Roseburg VA Medical Center, and local medical practitioners with experience in training nursing and medical technician students. ODVA will report the results of the workgroup and recommendations to the Legislature by September 18, 2018.
The Oregon Military Department (OMD) is responsible for administration of the Oregon Army National Guard, the Oregon Air National Guard, the Oregon State Defense Force, and the Office of Emergency Management (OEM).
The National Guard is a federal-state partnership with a dual mission:
Provide combat-ready units and equipment in support of national defense;
Provide units and equipment to protect life and property during natural disasters and civil unrest, as well as to provide backup support to law enforcement.
The National Guard serves on a day-to-day basis under the command of the Governor, and is available to the federal government upon order of the President of the United States. The Department is overseen by an Adjutant General, appointed by the Governor to a four-year term. The Adjutant General also serves as the Governor’s homeland security advisor and chief of staff of the Military Council.
The federal government directly funds federal employees, guard member salaries and wages, and all equipment and equipment maintenance. For the state, federal responsibility primarily centers on providing facilities and facility maintenance for the Oregon Guard. The federal government also is a major source of funds for new construction of facilities, and for Homeland Security.
The Department operates two National Guard Bureau-funded educational programs: the Youth Challenge program and the Science and Technology Academy Reinforcing Basic Aviation and Space Exploration (STARBASE) program.
Youth Challenge provides students at risk of dropping out of high school an opportunity to complete educational credits for graduation or to take the General Education Development (GED) examination.
The STARBASE program increases third through eighth grade students’ awareness of the importance of math and science through learning about flight operations, weather reporting and forecasting, and electronics maintenance at Oregon’s two military air bases.
Revenue Sources and Relationships
The Department’s state budget receives nearly two-thirds of its funding ($271.8 million in 2017-19) from the federal government. These funds are used to finance each of the Department’s four major program areas and are based on federal/state cooperative agreements and federal grants. Also included are Federal Funds for major construction projects.
Outside of the state budget, the Department receives direct federal support ($677.2 million in 2017-19) through the National Guard Bureau for funding federal employees (2,011 FTE), guard member salaries and wages, and equipment.
The level of federal support in the state budget varies by program, type of facility, and type of construction project. For example, troop training sites are entirely supported by Federal Funds, as are base security and the STARBASE program. Approximately 75% of the costs associated with logistical sites and between 75% and 85% of utility, maintenance, and supply expenditures of the Air National Guard are federally funded. Oregon Youth Challenge Program costs are covered by federal funding at the 75% level. Federal Funds converted to Other Funds provide most of the support for the Department’s administrative costs. OEM receives Federal Funds for emergency management, disaster recovery, and homeland security.
The federal and state expenditures for the National Guard in Oregon total over $1 billion over the course of a biennium. General Fund supports wages and salaries of state employees, debt service, and state matching funds for various federal/state agreements.
Other Funds revenue received by the Department totals $111 million. Approximately $84.1 million is related to 9- 1-1 emergency telecommunications surcharge revenues. The Department also generates facility rental fees and miscellaneous sales revenue. Rental revenues earned from federally supported facilities are required by the federal government to be used in support of the facility that earned it. The Department’s facility rental revenue is estimated to be approximately $3 million in 2017-19. Miscellaneous sales revenues are derived from vending machine profit, coin operated telephones, and recycling programs.
Other Funds revenue includes approximately $27,000 in Oregon individual income tax check-off deduction revenue, which began with the 2006 tax year and is associated with the Emergency Financial Assistance Program.
The Oregon Youth Challenge Program receives Average Daily Membership (ADM) revenue from the Bend-LaPine School District totaling $2.1 million, as well as approximately $414,000 National School Breakfast and Lunch transfers from the Oregon Department of Education. Lastly, the budget includes Other Funds for bond proceeds for Capital Construction projects.
The following display shows total funds, by fund type, from 2009-11 through the 2017-19 legislatively adopted budget.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $417.8 million is 4.2% less than the 2015-17 legislatively approved budget and includes 477 positions (426.82 FTE).
The General Fund portion of the budget totals $25.6 million and is 0.1% less than the 2015-17 legislatively approved budget. Other Funds expenditure limitation is 4.3% less than the 2015-17 legislatively approved budget, and Federal Funds limitation is 4.5% lower. The following display shows the 2017-19 adopted budget by agency division.
Significant changes to this budget include:
A revenue reduction package of $500,000, to bring Other Funds expenditure limitation for armory operations and maintenance in line with estimated armory rental revenues. Armory rental revenues have fallen since early 2015, when twelve of the Military Department’s 38 armories were closed to rentals following the discovery of lead contamination in and around indoor firing ranges used by National Guard soldiers. Remediation activities are expected to continue through 2017-19.
$7.4 million Federal Funds and 21 permanent full-time positions (21.00 FTE) to operate a 7,500-acre National Guard training site on the former Umatilla Chemical Depot. Transfer of the property from the U.S. Army to the Oregon Military Department will be finalized in the second quarter of the 2017-19
$224,000 General Fund and $896,000 Federal Funds expenditure limitation to pay an annual storm water fee assessed by the City of Portland at the Portland Air National Guard
A reduction of $1.5 million General Fund from the fire protection programs operated at the two Air National Guard bases in Oregon. The National Guard Bureau has determined that fire protection programs at such bases are 100% federally
$181,178 General Fund, $181,178 Federal Funds, $5.1 million Other Funds, and two positions (2.00 FTE) for the Resiliency Grant Program created in HB The Resiliency grant fund will be capitalized with $5 million of Article XI-Q bond funds, authorized in SB 5505.
An increase of $256,000 Other Funds and $518,000 Federal Funds for the Youth Challenge program, following updated revenue estimates from the National Guard
An additional increase of $477,113 Other Funds, $600,322 Federal Funds, and 13 positions (4.94 FTE) for the Youth Challenge program to accommodate additional cadets expected in January, 2019.
An increase of $726,331 Federal Funds and the conversion of twelve limited duration positions to permanent full-time positions in the STARBASE program
Bond funding for the following projects:
Grants Pass Armory Service Life Extension: $3,270,356 Other Funds (Article XI-Q Bonds) was approved for a service life extension project to renovate the facility
Regional Armory Emergency Enhancement Project: $8,534,400 Other Funds (Article XI-Q Bonds) was approved for making structural improvements to bring the following three facilities to essential facility standards for seismic events: Coos Bay Armory, Newport Armory, and the Anderson Readiness Center in Salem.
Future Readiness Center Sites: $1,730,000 Other Funds (Capital Construction Account) was approved for the purchase of two parcels of land necessary to construct two new Readiness Centers as replacements for the Hillsboro and Redmond Armories.
The Legislature provided $1 million General Fund for construction or repair of the military museum at Camp Withycombe in Clackamas.
A net agency-wide reduction of $2.3 million total funds for statewide adjustments to personnel and services and supplies expenditures, and to state government service charges and Attorney General rates.
These and other budget changes are described further in the individual divisions’ sections.
The Department’s budget is composed of
$77.5 million personal services,
$58.7 million services and supplies,
$25.6 million capital outlay,
$245.9 million special payments, and
$10.1 million debt service.
Special Payments, the largest sector, are primarily in Emergency Management and are provided to local governments and state government to prevent, mitigate, prepare for, respond to, and recover from natural and man-made disasters. Additionally, 9-1-1 tax revenue is distributed to public safety answering points for operations and equipment maintenance.
The following display depicts the 2017-19 legislatively adopted budget by expenditure type.
Current Service Level
The Administration program consists of the office of the Adjutant General, the Command Group, Financial Administration, Personnel, and Public Affairs.
The program supports almost 2,500 state and federal Oregon Military Department and Oregon National Guard employees, commands over 8,100 soldiers and air personnel, and provides oversight for more than $4 billion worth of facilities and equipment.
Additionally, this program administers the Emergency Financial Assistance Program, which provides hardship grants and loans to National Guard members and their families. This program is funded with charitable check-off revenues from Oregon person income tax returns and occasional General Fund appropriations from the Legislature. Since its inception in the 2005-07 biennium, the fund has provided financial assistance to more than 1,000 individuals.
Revenue Sources and Relationships
The program is funded with a combination of General Fund and Federal as Other Funds. Other Funds revenue includes approximately $27,000 in Oregon individual tax check-off deduction revenue associated with the Emergency Financial Assistance Program.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $7.7 million is 23.5% greater than the 2015-17 legislatively approved budget and includes 25 positions (23.88 FTE). The considerable increase is due to price list adjustments of $1.2 million, which cover State Government Service Charge and Attorney General charge increases agency-wide.
Current Service Level
The Operations program supports Oregon National Guard facilities operations and maintenance. There are fourteen programs within Operations, including the Army National Guard Facilities Operations and Maintenance, Construction Operations, Environmental, Electronic Security, and Wildland Fire Management programs; and the Air National Guard Administration, Civil Engineering, Security, Fire Protection, Environmental, Distributed Learning, and Counterdrug programs. These programs and their component sub-programs are almost entirely federally funded, some with state matching requirements from 10-25%, depending on the program.
Revenue Sources and Relationships
The program is funded primarily with Federal Funds. General Fund provides state matching payments for those programs with cooperative agreements requiring matching funds. The source of the Other Funds is primarily facility rental fees (approximately $3 million), but includes some Federal as Other Funds. Federal Funds are received through Federal/State Cooperative agreements to support the programs for which they are received.
The Oregon National Guard currently has 559 buildings totaling 4.55 million square feet spread across the state in 27 counties. The largest of these facilities are fifteen training/logistical sites, two air bases, and 38 armories.
Major Oregon National Guard facilities include:
Air National Guard Installations – Portland Airbase and Kingsley Field
Army National Guard Installations – Armories, Readiness Centers, Armed Forces Reserve Centers, and two aviation
Unit Training Areas – Camp Rilea Armed Forces Training Center, Camp Adair, Central Oregon Training and Education Facility, Biak Training Center, Oregon Military Academy, Boardman Training Range, and the former Umatilla Chemical Weapons Army
Other – Oregon Youth Challenge educational facility and Christmas Valley energy
The age of some National Guard facilities makes them inefficient and expensive to operate and maintain. The Department reports that 28.9% of its facilities are in compliance with National Guard Bureau/ Department of Army standards and are in the best condition, 5.3% do not fully meet standards, and the remaining 65.8% are substandard and/or in very poor condition. Facility compliance with these standards has declined in recent biennia as resources have not been available for repairs, maintenance, and improvements. Twelve of the Department’s 38 armories were closed in 2015 to remediate lead contamination from indoor firing ranges. Two armories have been remediated, remodeled, and reopened for public and National Guard use, and ten remain to be completed in 2017-19.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $97.9 million is 0.4% less than the 2015-17 legislatively approved budget and includes 337 positions (295.38 FTE).
The legislatively adopted budget includes the following changes:
A revenue reduction package of $500,000, to bring Other Funds expenditure limitation for armory operations and maintenance in line with estimated armory rental revenues. Armory rental revenues have fallen since early 2015, when twelve of the Military Department’s 38 armories were closed to rentals following the discovery of lead contamination in and around indoor firing ranges used by National Guard soldiers. Remediation activities are expected to continue throughout 2017-19.
$7.4 million Federal Funds and 21 permanent full-time positions (21.00 FTE) to operate a 7,500-acre National Guard training site on the former Umatilla Chemical Depot.
$224,000 General Fund and $896,000 Federal Funds to pay an annual storm water fee assessed by the City of Portland at the Portland Air National Guard Base.
A reduction of $1.5 million General Fund from the fire protection programs operated at the two Air National Guard bases in Oregon. The National Guard Bureau has determined that fire protection programs at air national guard bases are 100% federally funded.
A reduction of $1.8 million total funds for statewide adjustments to personnel and services and supplies expenditures, and to state government service charges and Attorney General rates.
Oregon Emergency Management
Current Service Level
The 2007 Legislature (HB 2370) expanded the Department’s statutory mission to include the responsibility for state emergency management. The Office of Emergency Management (OEM) coordinates statewide emergency services and maintains emergency communications systems used for public warnings, emergency notifications, and emergency support. OEM also provides cities, counties, and tribes throughout Oregon with planning, training, exercise and technical assistance for disaster preparedness, emergency response, recovery services, and hazard mitigation.
In addition to OEM Administration, the program has three primary responsibilities:
Executing planning, training, and exercise programs to raise awareness and preparedness for all hazard incidents. This section is responsible for Homeland Security grant programs, Emergency Operations Plans, the Geological Hazard Program, the National Incident Management System, and the State Emergency Coordination Center.
Operating the statewide Enhanced 9-1-1 system, including managing the network that delivers 9-1-1 emergency calls to Oregon’s 43 Public Safety Answering Points throughout the state. This section also oversees the state Search and Rescue program and the Oregon Emergency Response System.
Coordinating the development, planning, and adoption of local community hazard mitigation plans.
Revenue Sources and Relationships
The major funding source is Federal Funds received for state homeland security, Federal Emergency Management Agency (FEMA) disaster recovery, and Non-Disaster Emergency Management Performance grants. These funding sources are used for general OEM operations, development and administration of the emergency response infrastructure, training, and grants passed through to local governments for emergency management programs. Some of the funds require a 50% state or local match.
Oregon’s 9-1-1 toll-free emergency number to access safety services is a state and local partnership. The state’s portion is funded through an Emergency Communications Tax, a per-month $0.75 tax for any phone line capable of accessing 9-1-1 services, excepting federal, state, and local governments. During the 2013 legislative session, the 9-1-1 program’s statutory sunset was extended from January 1, 2014 to January 1, 2022 (HB 3317).
Additionally, prepaid cellphones were taxed at $0.75 per month, per customer until October 1, 2015, when the tax changed to $0.75 per retail transaction.
The Emergency Communications Account is distributed quarterly according to statute for the following purposes:
(1) up to 4% of the balance may be used by OEM for program administration costs;
(2) 35% is transferred into the Enhanced 911 subaccount; and
(3) the remaining balance is distributed to cities and counties. Local governments use the revenue to partially fund the expense of 43 Public Safety Answering Points (PSAPs) across city and county governments in Oregon. Revenue in the Enhanced 9-1-1 subaccount is primarily used by the Department to make direct payments to vendors for PSAP circuit charges and software upgrades. The subaccount may reimburse cities and counties on an actual cost basis for some costs.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $268 million is 5.8% higher than the 2015-17 legislatively approved budget and includes 44 positions (44.62 FTE). This budget includes the following changes:
$200,000 Other Funds expenditure limitation for a special payment to the Department of Public Safety Standards and Training for two additional telecommunicators training classes in 2017-19.
$1 million Federal Funds expenditure limitation to pass FEMA Pre-Disaster Mitigation and Hazard Mitigation grant funds through to the Department of Land Conservation and Development.
$181,178 General Fund, $181,178 Federal Funds, $5.1 million Other Funds expenditure limitation, and two positions (2.00 FTE) for the Resiliency Grant Program created in HB 2687. The Resiliency grant fund will be capitalized with $5 million of Article XI-Q bond funds, authorized in SB 5505.
A net reduction of $118,000 total funds for statewide adjustments to personnel and services and supplies expenditures, and to state government service charges and Attorney General rates.
Current Service Level
The Community Support program coordinates support for local education programs and emergencies that require assistance of the National Guard. The unit includes:
Oregon Youth Challenge Program (OYCP) – Since 1994, the Oregon National Guard has operated the OYCP through a federal/state agreement with the National Guard Bureau. OYCP is Oregon’s only accredited statewide alternative high school and its only public military school for at-risk students. It offers high school- aged youth, at risk of dropping out of school, an opportunity to complete educational credits with a goal of reintegrating into high school to earn a diploma or prepare for the General Education Development (GED) examination. The program is a 22-week residential training program followed by a 12-month nonresident mentored program. OYCP graduates approximately 250 students per year.
Science and Technology Academy Reinforcing Basic Aviation and Space Exploration (STARBASE) – STARBASE is designed to increase third through eighth grade students’ awareness of the importance of math and science. National Guard members demonstrate the applicability of math and science to flight operations, weather reporting and forecasting, electronics maintenance, and firefighting facilities. The STARBASE program operates at the Portland Air National Guard air base and at Kingsley Field air base in Klamath Falls.
Emergency Operations – In the event of a state emergency, the Governor can call upon the National Guard to provide personnel and equipment to help with the state’s response. For example, in August 2017, the Governor ordered 946 soldiers and air personnel to assist the Oregon Department of Forestry and the State Fire Marshal’s Office with wildland fire suppression efforts. The Office of Emergency Management is the coordinating entity for Department resources used for statewide emergencies.
The Emergency Operations budget structure is a “placeholder,” used only in the event of reimbursable emergency operations having taken place. The Department’s legislatively adopted budget does not include funding for Emergency Operation expenses, as they are difficult to predict. Therefore, the Department has, historically, requested expenditure limitation increases for amounts it is unable to absorb within its normal operating budget, as well as General Fund reimbursement of expenditures. Revenues for Emergency Operations come as Other Funds from state agencies the National Guard is supporting, most commonly the Department of Forestry.
Revenue Sources and Relationships
The program is funded almost entirely with Other Funds and Federal Funds. The STARBASE program is 100% federally funded through the National Guard Bureau. The Oregon Youth Challenge program is federally funded, with the required 25% state match funded through Average Daily Membership (ADM) revenues through the Bend- La Pine School District. A small amount of General Fund is available for budgeted expenditures not covered by Federal or Other Funds.
In 2015, the Legislature approved $5 million of Article XI-Q bond funding to enlarge the OYCP facility to house 24 additional female cadets and 60 additional male cadets per 22-week residential class. Construction and program expansion is occurring in phases, with the additional female cadets first expected in the class starting in January, 2019, and the additional male cadets in the class starting in January, 2020.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $14.2 million is 2.8% less than the 2015-17 legislatively approved budget and includes 71 positions (62.94 FTE). The reduction is due to phasing out one-time Emergency Operations Other Funds expenditure limitation approved in February, 2016, for the cost of National Guard troops and flight crews deployed to fight wildfires in 2015.
The legislatively adopted budget incorporates the following changes:
An increase of $256,000 Other Funds and $518,000 Federal Funds for the Youth Challenge program, following updated revenue estimates from the National Guard Bureau.
An increase of $477,113 Other Funds, $600,322 Federal Funds, and 13 positions (4.94 FTE) for the Youth Challenge program, to accommodate additional cadets expected in January 2019,
An increase of $726,331 Federal Funds and the conversion of twelve limited duration positions to permanent full-time positions in the STARBASE program.
A net increase of $16,615 total funds for statewide adjustments to personnel and services and supplies expenditures, and to state government service charges and Attorney General rates.
Current Service Level
Other Funds (NL)
The Debt Service Program provides funding for principal, interest, and financing costs associated with the issuance of Article XI-Q bonds and previously issued certificates of participation (COPs), which are tax exempt government securities.
The Department relies on bond proceeds to match National Guard Bureau Federal Funds when constructing, altering, or repairing National Guard installations. The percentage of state matching funds required varies by the type of installation. Bonds provide financing for federally non-allowable project costs, which, for example, include the cost of real property. Bonds also fund certain armory additions/alterations that are a 100% state responsibility. The Department’s debt service is funded primarily with General Fund.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $10.5 million is 4.5% more than the 2015-17 legislatively approved budget. General Fund for debt service is reduced by $802,765 as a result of both revised debt service estimates for new debt and reduced debt service requirements after refunding existing bonds. Other Funds expenditure limitation in the amount of $448,249 is added for the cost of issuance required for bonds to be issued in 2017-19.
Current Service Level
This program provides for capital improvements to existing facilities. Capital improvement projects are those with a total cost of $1 million or less. The Department’s capital improvement projects are overseen and coordinated by agency construction staff budgeted in the Operations Program.
The Capital Improvement Program’s primary purpose is to address the Department’s backlog of deferred maintenance projects, currently estimated at approximately $134 million on 3.4 million square feet of facility space. Capital improvement expenditures delay, where possible, facility replacement. This is important for certain installations, especially armories, where the replacement schedule is dependent upon the National Guard Bureau’s Long-Range Construction Plan and Congressional funding of that plan.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $5.9 million is 14% higher than the 2015-17 legislatively approved budget. Changes to the budget include an additional $1 million General Fund (one-time only) for construction or repair of the military museum at Camp Withycombe in Clackamas.
Current Service Level
The Capital Construction program plans, designs, and constructs facilities projects with a cost of more than $1 million. Since 1986, the Department has undertaken 47 major construction projects totaling over $318 million with a federal/state funding ratio of 7:1. The Department currently has 18 projects identified in the National Guard Bureau’s Long-Range Construction Plan, which will bring additional federal construction dollars into the state through 2040.
Revenue Sources and Relationships
Typically, Federal Funds provide the majority of construction funding. In general, Other Funds and General Fund are used only for required matching funds for projects. State funds also pay for certain costs ineligible for federal match (e.g., real property, local permitting, etc.). The sources of Other Funds are either bonds or the Department’s Capital Construction Account, which is discussed below.
Depending on the type of facility constructed, the federal government pays between 67% and 100% of the approved construction cost. By emphasizing construction of Armed Forces Reserve Centers (AFRC) wherever possible, the Department can access Federal Funds for approximately 97% of the design and construction costs. Site improvements and multi-purpose accommodations outside the federal guidelines are 100% state obligations. Where possible, the Department partners with other federal, state, or county agencies to co-locate functions. This reduces the Department’s design and construction cost obligations, and reduces the long-term operations and maintenance burden of each agency.
The Military Department Capital Construction Account (CCA) is a statutory, interest-bearing account into which proceeds from the sale of Military Department real property are deposited. The Department requires legislative approval to dispose of surplus property. Moneys in the CCA can only be used for Capital Construction expenditures on legislatively approved projects, which include: (a) paying for construction costs that are a state obligation outside federal guidelines; (b) state matching requirements on federal Capital Construction funding; and (c) miscellaneous land acquisitions. The Capital Construction Account generally has an insufficient balance to meet matching fund requirements on major construction projects.
Other revenue sources are project management fees charged to the federal government and bond revenues transferred into the account. Some of the Department’s real property originally donated by counties is on a reversion clause, which requires that the land returns to the county if the Department determines it is no longer needed for military purposes.
Of all the Department’s programs, the Capital Construction program is the one most likely to be affected by shifting federal priorities. The Legislature is frequently requested to add projects or transfer limitation between existing projects; such changes may require additional state matching funds. The fluidity of the Department’s capital projects as compared to other state agencies’ capital projects underscores the uniqueness of this agency and the influence federal funding has over its budget. It also underscores the need for OMD to frequently communicate short- and long-term Capital Construction priorities to the Legislature.
Legislatively Adopted Budget
The 2017-19 legislatively adopted budget of $13.5 million is 72% less than the 2015-17 legislatively approved budget. While the period-to-period change can be significant, the legislatively approved expenditure limitation for any Capital Construction project has a six-year duration.
Funding for the following projects is included in the budget:
Grants Pass Armory Service Life Extension: $3,270,356 Other Funds (Article XI-Q Bonds) was approved for a service life extension project to renovate the facility. The project is for design and construction of additions and alterations to the Grants Pass Armory to bring the building into conformance with current building code. The project will upgrade mechanical, electrical, and plumbing systems; remodel the existing classrooms, administrative space, latrines and showers, equipment storage areas, kitchen, and assembly hall areas; replace failed paving areas; and replace existing site lighting, landscaping, and fencing.
Regional Armory Emergency Enhancement Project: $8,534,400 Other Funds (Article XI-Q Bonds) was approved for making structural improvements to bring the following three facilities to essential facility standards for seismic events: Coos Bay Armory, Newport Armory, and the Anderson Readiness Center in Salem. The project includes seismic structural upgrades, backup power and water systems, and emergency equipment and fuel storage for the three facilities.
Future Readiness Center Sites: $1,730,000 Other Funds (Capital Construction Account) was approved for the purchase of two parcels of land necessary to construct two new Readiness Centers as replacements for the Hillsboro and Redmond Armories. One property is located in Washington County and the other is located in Deschutes County.
The Legislature approved the extension of the project expiration date and expenditure limitation for The Dalles Readiness Center (Other Funds) to June 30, 2018 and The Dalles Readiness Center (Federal Funds) to June 30, 2018; and approved the proposal from the Oregon Military Department, as required by ORS 396.515 (4), for the sale of the Burns Armory and 40 acres of land in La Grande.