Our Sponsors

Want to take part in this feed?
Join us!

Search this Site
Hidden Stuff
« Best of Blog: ASCE and the Infrastructure Cult | Main | Best of Blog: TEDx »
Friday
Dec092011

Best of Blog: Measuring Productivity

This post is particularly timely for me as this week I got into a little bit of a spat with one of the council members in this city over the very issues discussed in this piece. At a public council meeting, he called my conclusions a "theory" but one that lacked basis because "when a street is built, it is a public asset for everyone to use." He accused me of wanting to have everyone live in "gated communities" while at the same time suggesting I demand that everyone abandon their cars and walk. He said that he could not support the planning effort I had been working on because it doesn't contemplate further expansion along the highway corridor.

Note that this was all after a very lengthy discussion by the council regarding next year's budget. In that discussion, he pointed out that we are spending more and more yet seemingly doing less and less. He argued that we need to make some radical changes to get the budget under control, not just nibble around the edges. In the past he has repeatedly claimed that the city's "high" tax rates have stifled business investment. 

This type of incoherence -- the notion that we have huge budget problems but, at the same time, believing that there should be no analysis of the rate of return on the public's investments -- is actually very common. A street is a public asset that we all get to use until it becomes a public liability that we all get to pay for. The fact that we have such a difficult time connecting those dots is one of the reasons the Strong Towns movement exists.

If you get bogged down with numbers, go ahead and skip through them. I'm a recovering engineer and feel compelled from time to time to prove to myself that I know math. Actually, I included the numbers because they bolster the premise of the article; that we don't need to hit home runs to be successful. When it comes to improving the productivity of our places, it is far more valuable to hit a lot of singles and draw a lot of walks. It's the little things that count.

---

In an age of austerity, we need to make our public investments go further. No longer is it acceptable to simply analyze public projects in one dimension, such as cash flow or job creation. Our projects need to leverage our limited revenue to do all that and much, much more. Our top priority today needs to be on making our places more productive.

(We appreciate everyone that has joined us over at the Strong Towns Network, a social enterprise dedicated to implementing a Strong Towns approach at the local level. If you are a public official, change-advocate or just want to learn more, we'd love to have you join us.)

In last week's Friday News Digest, I wrote about the work of Joe Minicozzi, whose speech from CNU 19 I had included in an earlier podcast. While we at Strong Towns often start with the public cost for infrastructure and then compare that to the revenue yield from the property it serves, Minicozzi comes at the productivity equation from a different -- and thought provoking -- angle.

Let me share an analogy from Minicozzi's CNU talk: When we look at the productivity of a car, we measure it in miles per gallon. The question we ask is, how many miles does a car travel per gallon of gas used? We are comfortable with this approach because it is vastly more logical than a miles per tank calculation. Nobody asks: how many miles can I travel on one tank of gas? We all understand that, while a Hummer may have a bigger gas tank than a Honda Civic, it does not make nearly as productive use of gasoline.

Cities often vigorously pursue that large business -- think Wal-Mart -- instead of the small ma-and-pa shop under the guise that the large business is going to generate more tax base. The same with the big house in the suburban subdivision. That sheetrock palace is paying a lot more tax than the little house on the city block. Isn't it logical that a city will be better off if they have more of these large businesses and homes?

Minicozzi's analogy would suggest that revenue per lot is a poor measure of success. The large business may provide a lot of tax base, but it also chews up a lot of land and requires a lot of infrastructure. Same with the house on the large lot. A better way to measure success, and true productivity, would be to look at the tax base on a per acre basis.

Seem abstract? Let me give you a real example.

At my other job with Community Growth Institute, we are working with the City of Pequot Lakes, MN, to expand their Grow Zone, an area in town where we helped establish a form-based code two years ago as part of a plan to promote business development. Last month we analyzed two streets that had just been reconstructed as part of a routine city maintenance project. What we found affirms Minicozzi's premise.

2nd Street in Pequot Lakes, MN.

The street reconstruction cost $180/foot. These costs were actual construction costs from 2010, so there is nothing theoretical about them. The tax base calculations were based on (1) the city's current budget, (2) the city's current tax rates and (3) the actual assessed value for each property. We assumed a 20-year life span for the street and put the total revenues collected over that period of time into a present value (at 4% for anyone interested). The results reveal two streets in the heart of the city's downtown that are not even close to being productive.

Street #1

  • Total cost for street reconstruction: $104,400
  • Total revenue collected for maintenance over one life cycle: $23,400
  • Revenue gap in current configuration: ($81,000)
  • Percent of project covered by adjacent tax base: 22%

Street #2

  • Total cost for street reconstruction: $126,000
  • Total revenue collected for maintenance over one life cycle: $50,000
  • Revenue gap in current configuration: ($76,000)
  • Percent of project covered by adjacent tax base: 40%

These are streets -- especially Street #2 -- that, if you asked a local to name the five most productive streets in town, would assuredly be on the list. It has some of the largest businesses and the town's major employers. Even so, the taxes collected from the adjacent properties are not even remotely close to covering the basic maintenance costs of the streets that serve them.

The premise of our work there is not just identifying this imbalance, but solving it. The standard "miles per tank" approach would suggest that we seek to attract another large business to locate along this street. That would be the wrong move.

In the spirit of Minicozzi's work, we analyzed the yield from each property along the streets. The one with the highest total value is also one of the city's largest employer and a business that the community values greatly (with good reason). It consumes five acres in the heart of downtown and, while it pays over $14,000 per year in property tax to the city, the yield is only $2,860/acre.

Major business in downtown Pequot Lakes. Tax yield: $2,860/acre.

In contrast, a small little shop that had lost its tenant and was currently sitting vacant -- a place that, quite frankly, nobody in the city government much values -- paid only $1,200 per year in property tax. However, it only consumed a quarter of an acre. Its yield: $4,960/ acre.

Vacant business in downtown Pequot Lakes, MN. Tax yield: $4,960/acre.

To be successful, the City of Pequot Lakes does not need to attract another large employer to build a new business. All it needs to do is get this run down little shop reactivated -- something that is actually much easier to do -- and then create an environment that would allow 20 more of them to be built along this same street. This is also doable over a longer time horizon. When all you need are a bunch of these modest-sized establishments, all of a sudden there is tons of room for growth.

I can already hear the chorus of objections from the "jobs first" crowd. They will say that the low-yielding, big business is creating a lot of jobs -- many of them high-paying -- and this little shop, even on a good day, will create few. They will argue that economic development is all about job creation and so focusing on this small end of the spectrum is missing the point.

I could question the basis of that assumption, but instead let me point out the obvious fact that always makes these economic development people angry. From the city's perspective, there could be a thousand jobs at that business and a billion dollars worth a sales run through there. None of that will change the property value and thus none of it has any bearing on this city's revenue. You can argue that tax laws should be changed to provide for a local income tax and a local sales tax (some places have one or both of these, but not Pequot Lakes), but until that happens, the only way this street pays for itself is by becoming more productive from a tax base standpoint.

That is not to say that jobs are not important. They are. But they are one factor in many. We can spend a million dollars to attract or create a job, but if that job doesn't generate any financial return to the community, it is going to be hard to repeat that effort. In an age of austerity, we need to make our public investments go further. 

This brings me to a final, obvious question: If these streets are not productive, why are we building them this way? There is a long answer to that (and I am currently working on a book proposal to answer it), but the short version is this: we've not had to bother about productivity until now. Since the end of World War II, we've been so wealthy and had so much growth that, for most parts of the country, the productivity of our places did not matter much. If it created a job, it was good. If it brought in a new business, it was good. We didn't ever pause to worry about what happens when the maintenance bill comes due.

Those bills are due now, and more are arriving each day. We don't have anywhere near the money to maintain so many unproductive places. What we face is a choice between a chaotic reset or a strategic contraction -- one where we intentionally divert our limited resources into those endeavors that are most productive while we seek -- block by block and neighborhood by neighborhood -- to improve the productivity of our places.

At least, I'm optimistic that we still have time to choose.

 

Additional Reading

 

You can join our conversation here by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

PrintView Printer Friendly Version

EmailEmail Article to Friend

Reader Comments (3)

A complete analysis from the city's perspective would combine your approach (tax revenue generated per acre compared to infrastructure maintenance cost) with economic impact studies that look at the local impact of each business (which could also be looked at per acre based on their footprint). I've never completely understood the methodology of a traditional economic impact study, but it's no secret that the local economic impact of a business is more important to the city where it's located than it's gross revenues, gross sales, or any other metric. A metric that could combine those economic impact studies with a tax revenue v. expense approach would have few skeptics and would be tremendously helpful to city decision-makers.

December 9, 2011 | Unregistered CommenterHerodotus

If infrastructure costs are largely proportional to land area, rather than the economic value of a property, perhaps it makes some sense to change the taxation system to also be based more on land area rather than on the value of the property? It would provide at least some incentive toward more efficient use of land (and thus tax-funded infrastructure)

December 9, 2011 | Unregistered Commenteranonymouse

Anonymouse: The land-based property tax is something that the Lincoln Institute of Land Policy has studied and advocated for many years (it actually goes all the way back to Henry George's Progress and Poverty in 1879).

There are many obstacles to overcome, but the case remains a compelling one. Check it out at:

http://www.lincolninst.edu/pubs/1568_Land-Value-Taxation

http://www.lincolninst.edu/pubs/1760_Assessing-the-Theory-and-Practice-of-Land-Value-Taxation

December 10, 2011 | Unregistered CommenterStu
Comments for this entry have been disabled. Additional comments may not be added to this entry at this time.