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Wednesday
May052010

The Mailbox: Tower Historic Harbor "Renaissance"

We received an email asking us our opinion on a project taking place in Northeastern Minnesota in the city of Tower. The project, which is described in detail on the city's website, would dredge a river channel to create a new harbor and then build a new town around that harbor near the existing city. In the words of the local State Senator, this would be Minnesota's version of San Antonio's River Walk. The cost is somewhere around $9 million.

This is a small town and an even smaller circle of people involved in the machinations of the project, so I've not included the name of the individual that sent the email or some of the other background information. In discussing the project, the emailer offered the following thoughts:

It is rare anyone asks about whether the initial purpose of a project is questionable, but lately I and some of my associates have started rolling our eyes. Rural airports with five hangars expanding by a thousand feet to "serve possible business expansion", or atv trails with beneficial economic impacts listed as a supporting reason. Remember, these are always public money; the project on the above link is to be funded with state and federal money. They speak of a renaissance, but I envision a half open hotel with a coffee bar closed between September and Memorial day employing a few East European summer visa workers slinging coffee to the occasional wandering boater. This after dredging a river and harbor , building jetties into the lake and disturbing wetlands.. millions in public cash. The distances on Vermillion are great, and even many locals sarcastically describe visitors traveling the length of Vermillion rather than hitting a closer resort.

All of this to save a city dying because it no longer has a reason to exist.

Today I would like to do a Strong Towns analysis and take a critical look at the numbers behind this project. I'm going to rely on their website and some other publicly available data.

Let's just start by looking at this investment in terms of the existing size of Tower.

Project Cost: $9 million

2008 Population of Tower: 498 (295 housing units)

In rough terms, this is an investment of state and federal (and a modest amount of local) dollars of $18,000 per person, $30,500 per household. This is roughly the entire income of the median household in Tower. That is quite a significant investment! In fact, in proportionate terms it would be like the city of Minneapolis making a $7 billion investment.

In terms of tax base, the investment looks even more disproportionate. The entire tax capacity of Tower in 2008 was $351,000. The Tower website indicates that the value of the proposed improvements following the project is "expected to exceed $32 million". If you assume that they hit that number (there are strong reasons to believe they won't get anywhere close to that in the new economy), that would yield an additional taxing capacity of $480,000.

Value of Improvements: $32,000,000

Average Tax Classification Rate: 1.5%

Projected New Tax Capacity = $32 million x 1.5% = $480,000

Tower's 2008 tax rate is just under 80%. That means, when the project is done, the private sector has worked its magic and everything is completely developed as imagined, Tower will see an additional $384,000 per year in property tax revenue.

Tax Revenue = Tax Capacity x Tax Rate

Projected Tax Revenue = $480,000 x 80% = $384,000

It is certain that project proponents will argue that the overall economic growth created in the area will generate more revenue than just $384,000, but they will argue that based on their perception, not reality. In Minnesota, without special legislation authorizing a local sales tax, the only taxing authority a city in Minnesota has is the property tax. There is no other mechanism, outside of fees, for cities to raise revenue.

So if this is a good investment, are the taxpayer's of Tower willing to make it?

They would be crazy to do so. If the $9 million were loaned to Tower at 4% interest with the generous provision to pay it off just from the tax receipts from the additional growth, the first year's interest would be $360,000. If the entire $32 million in private investment they hope to get were built in the first year, it would take 71 years to pay off the $9 million investment.

These are absurd numbers. It is clear that the good people of Tower would never make this investment, even if their lofty projected returns were guaranteed, because it does not make any sense. But they are not making the investment. The American people are. This is a really neat project. I like the concept. But as a country, is this the type of speculative investment we want to make? Is doing more of this really going to bring us prosperity, even if it works out exactly as they dream it will?

Of course not, but the tragedy here is not the fact that this project is a bad public investment. The real tragedy is how the beautifully-designed town of Tower has been left to decay while the politicians and professionals focus everyone on the next big idea. If you truly want to be outraged, check back with us next week for that analysis.

Our emailer astutely summed up what is going on.

Before I read your site, I would end up analyzing a  small town like Tower with a population viability analysis. Why did it initially exist? What was the resource that drew the population? Was that a long term sustainable proposition? Why did it then fail? A place like Tower, the answers were fairly simple; it formed before the Mesabi Range when the railroad did not wish to cross the extensive swamps south of the Giants Range and either timber,  gold or iron was speculated there. It was then sustained by the artificial construction/mining  boom that lasted over two decades until 1980. Of course since then, like all of Northeastern Minnesota, it has declined despite massive public spending.

Multi-million dollar gimmicks cannot save Tower. America can prosper when we focus cities like Tower on Strong Towns solutions that make better use of their current investments instead of focusing their energies (and our money borrowed from China) on the big gamble just outside of town. Doing that would be a true renaissance.

 

If you think what you read here at Strong Towns needs to be part of the broader public discussion on the future of America, please recommend our site to others. We appreciate all of the feedback and support as well as the tremendous growth in readership. Thanks to you, the movement to build Strong Towns is gaining momentum.

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