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Monday
Jan112010

The Cost of Development, Local Roads Edition

Most communities are struggling with their near-term budgets, yet few ponder the long-term financial implications of their land use patterns. The central principle of a Strong Towns approach is that there needs to be an understanding of the Return on Investment for public expenditures, particularly those made on transportation and infrastructure. Communities need to understand the real financial implications of their land use decisions.

It is our contention that, if people understood the ROI and the long-term financial implications - or better yet, were expected to fund the full cost of their living choices - they would voluntarily make different decisions. By masking these costs - using the Four Mechanisms of Growth amongst other means - we generate near-term growth at the expense of our long-term prosperity.

We were recently able to have a conversation with the City of Afton in regards to a specific road project they had undertaken. Afton is an exurban community on the eastern edge of the Minneapolis/St. Paul Metropolitan Area. Afton has a population of around 2,800 and a population density of 113 people per square mile - very low. If you are interested in knowing more statistics on Afton, you can click here.

The following is a rather technical (but readable) analysis of the project and its financing. At the end we give some potential solutions that all communities should be considering.

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There were 40 properties that were directly impacted by the Afton Hills project. Together those properties paid $44,473 in property tax in 2008 (we don’t have 2009 numbers).

The engineer’s estimate for the project that we received last July was $354,000. That included the reclaim and base course ($250k), the finished wear course ($80k) and the addition of Afton Hills Court ($24k) to the project. I know the final numbers differed from this amount, but for the sake of this analysis you will see that the precise numbers will not dramatically change the conclusion.

In 2009 the City of Afton did not budget for capital improvements. This means that the $45k paid by the property owners that benefitted from the project went entirely to other government functions – general government, public safety, routine maintenance, etc… In other words, after paying for their share of the functioning of the local government, residents of Afton Hills contributed nothing to the project.

If the City of Afton were to dedicate 10% of the property tax revenue to capital improvement projects - which would require a 10% cut in spending or a 10% increase in revenue – then we would have an annual contribution from Afton Hills towards capital improvements of $4,473.

Total Property Tax Paid to the City:             $44,473

10% Dedicated to Capital Improvements    x     10%

TOTAL                                                     $  4,473

Some simple math demonstrates how 10% of the budget dedicated to capital improvements is not going to bring the Afton Hills project into balance with the adjacent tax base.

Project Cost:                                                  $354,000

Annual Contribution from Affected Property Owners at 10% of Tax Revenue: $4,473/year

Time to Payoff[1]  =  $354,000 / $4,473  =  79 years

Since the roadway – properly constructed and maintained - would only be expected to last between 20 and 30 years without another significant improvement, dedicating only 10% of revenue to capital improvements means the city will need revenue from some other source to maintain Afton Hills drive over the long run.

If we were to look at this from a different angle we can get an estimate of what it would take to balance the long-term commitment the City has to maintain the roadways in the Afton Hills area with the long-term revenues it receives from that area.

If we were to take the entire project cost and bond for it over a 25-year period of time at a favorable municipal rate of 3%, it would result in an annual payment of $20,320.

            Project Cost:               $354,000

            Interest Rate:                        3%

            Bonding Term:            25 years

            Annual Payment:       $  20,320

If the City were to increase property taxes to recover this amount from the residents of Afton Hills, it would require an increase of 46%.

Current Annual Revenue from Afton Hills: $44,473

Additional Annual Revenue Needed from Afton Hills:     $20,320

Increase in Taxes Collected = ($44,473 + $20,320) / $44,473 – 1 = 46%

This is an analysis of one neighborhood in Afton. While it is fair to point out that we don’t budget neighborhood-by-neighborhood but over the entire City, there are some important things to point out.

  • Afton Hills is one of the higher density areas of the City of Afton. In theory, it should be a net-exporter of tax dollars (generate more tax revenue than it consumes in services) since most of the rest of the City has a higher service-demand / revenue ratio.
  • The ability of the City to assess for these improvements is questionable. While some cities assess maintenance costs, State Statutes require that property values be improved by the amount of any assessment. While the City Attorney can provide specific guidance on this item, it is not clear that a property would have any real increase in value going from a paved road to a nicer paved road.
  • Costs of road maintenance have historically risen faster than inflation. While that has not been true in recent years, asphalt (a petroleum product) is a major component of flexible pavements and hauling costs are also closely related to oil and gas prices. There are reasons to believe these costs will continue to increase at an accelerated rate.
  • It is not clear that home values are going to continue to increase at the same accelerated rate. In fact, there are significant reasons to believe that housing prices will stagnate or decline in coming years. (I’ve attached a recent article from the Strong Towns Blog that discusses this in some detail.) If housing prices fail to keep up, this will create an even greater imbalance between the City’s revenue stream and the cost of road maintenance.

The obvious question at this point is: what do we do? Some possibilities:

  • Evaluate the current land use pattern and its implications. Every time we add a development like Afton Hills that has more long-term maintenance liability than revenue-generation capacity, it creates an imbalance that needs to be made up somehow. To stop digging the hole deeper, a change in the pattern of development needs to happen.
  • Seek ways within the pattern of development to make more-efficient use of existing infrastructure investments. While Afton residents have indicated that they do not want additional density, it may be possible to locate new development along existing infrastructure in a way that is compatible with the character of the community. Where this is done, the City would be adding additional revenue without incurring additional maintenance liability.
  • Consider a strategy of aggressive road maintenance. Some communities have been able to significantly extend the life of their roads through aggressive maintenance practices. Deep annual inspections combined with intensive and site-specific maintenance plans have been shown to double the life of some roadways.
  • Evaluate the City’s road standards to see if they can be transformed into sections that are more affordable to construct and maintain. Most small towns have road standards that are derivations of state-aid highway standards. Not only are these standards a poor fit for the context of the neighborhood, they place extra financial burden than what is warranted by the traffic volumes. 
  • Raise taxes and/or cut services in order to dedicate more revenue to the long-term cost of maintaining infrastructure. The land use pattern used in Afton is expensive to maintain. That is a reality that will need to be addressed at some point.
I look forward to discussing these ideas with you.

[1] Not including adjustments for inflation or assuming future tax increases or property value increases. It is assumed, for this analysis, that the increases will be offset by inflation with no change in local government policy. Inflation rates that exceed tax increases or property value increases would extend the time to payoff.

 

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