The Cost of Development, Walker Industrial Park


As part of my role with Community Growth Institute, I have been working with the small town of Walker, MN, to update their comprehensive plan in a Strong Towns mode. When we started the project, one of the top priorities of community leaders was to justify, through the process, a multi-million dollar extension of infrastructure to their industrial park. Six months later, that is no longer true.

I'm really proud of the hard work Walker residents have put in on this plan, not just attending meetings but spending time thinking through and discussing some difficult issues about their community. Sincerely questioning your own core assumptions is not an easy thing to do. That makes the following excerpt from the current draft of their plan all the more remarkable.

Not only that, it is yet another example of the actual cost of development - something rarely even pondered in America, despite being so critical. If you read the following and are astounded a community would ever consider such a project, brace yourself. On this blog, you can read many other examples of projects even worse - just the tip of our collective iceberg. You should also check out our Mechanisms of Growth to get an understanding of how this is happening over and over again across America.

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The City of Walker has set aside land on the outskirts of town for a potential industrial park. The area is platted and a sewer and water system has been installed. Unfortunately, the sewer and water system have not functioned as intended and their failed performance threatens future development within the park.

A proposal to extend municipal sewer and water systems to the industrial park to remedy the situation has become a major discussion point in this planning process. The project demonstrates the tradeoff between near-term gain and long-term liability that faces the city with every infrastructure expansion project. In this instance, even with the lost opportunity inherent in an underperforming industrial park, running utilities to the park is a bad investment.

According to the City Engineer, the expansion project has the following general parameters:

  • Estimated Cost: $1,916,000
  • Lots Served: 25
  • Cost per Lot: $76,640

For the sake of analysis, it was assumed that the project could be financed at a rate of 4% over a period of 30 years. If so, the annual cost of the city would be:

  • Annual Bond Payment = $110,750

If it is further assumed that all development in the park is taxed at a Commercial/Industrial rate (in other words, there is no residential development in the park), the valuation needed from each property can be determined as follows:

  • Each lot’s annual share is $110,750 / 25 lots = $4,430/lot

To generate $4,430 per lot, the following post-development value would be needed:

  • Value = $4,430/lot / 0.02 (industrial tax rate) / 0.70 (city tax rate) 

                                = $316,400

This analysis also assumes:

  • All of the tax generated from the industrial park will go to paying debt. None of the tax base from the new growth will go to lower the overall tax burden for other residents.
  • All of the lots will develop to an average value of $316,400 within one year of the improvement being completed. A phase in over a number of years – which is obviously what would have to happen – will increase the value needed. In the interim, the general fund will need to cash flow the project, which will mean higher taxes or reduced services.
  • There will be no Tax Increment Financing or other incentives that will reduce the amount of tax paid to the city as part of development of the lots.

It can be argued that, even if the taxpayer ends up subsidizing development in the industrial park, it is worth it to have the jobs and the other investments in the community those jobs would create. The proper way to phrase that as a question, however, would be this:

If the City were to invest $110,750 per year for the next thirty years on economic development, how should it invest that money for the highest return?

When phrased in this way, the central argument for installing infrastructure becomes less appealing. The relative expense and risk of such an undertaking is great compared to other alternatives. If it costs $110,750 to (hopefully) attract one business a year that can create 20 jobs, how much would it cost the City to induce twenty existing businesses a year to each create one job? The latter undertaking will not include ribbon cuttings or other outwardly visible signs of “progress” that come along with large projects, but it is financially much sounder over the long run.

The lesson of the Industrial Park analysis is that infrastructure expansion should not automatically be synonymous with economic development. Infrastructure systems must serve the community, not the other way around.

 

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