I have to take a diversion from the usual Friday News Digest format to fill you in on some extraordinary details from a council meeting I had last night in the city of Ginagaapi here in Minnesota. There were no reporters there (usually aren't in most small towns these days) and so this may be the first account of what happened. I'm sure you'll be reading about this in the papers in the coming days.

So I'm there at the meeting - mine is the fourth agenda item, but I'm after the engineer's report. I told my wife I might be late because the engineering report can take a long time. The city has been working on a sanitary sewer expansion project for many years and I know they are in the final stages of design. I was expecting the engineer to talk a long time.

Let me give you a little more background because it is kind of important to the story. This small town of 350 people is in the quintessential trap that many small towns find themselves today. It used to be a logging town and, at its peak, had a population of around 1,500. I don't know how many of them were loggers, but it was a fair percentage. This was a railroad town so you had all of the essential elements of small town life there centered around the old railroad stop: the barber, baker, butcher, bar and probably a brothel or two amongst the general store, hotel, surveyor and the other commercial enterprises you would find in a typical small town of the late 1800's to the early 1900's.

It is hard to say exactly when, but obviously at some point around the Depression, the logging industry started to decline. The mature timber had been cut and, while the mill still operated, the volume of work was a lot lower. But the town carried on. There were enough people there in one place to sustain a critical mass and enough exports to provide the few imports necessary for the town to continue.

At some point in the 1960's as part of national initiatives to improve life in Rural America, the Federal government paid for sanitary sewer and water systems for the town. They had a little water tower with their town name on it - a sign of modernity that went right along with the upgraded highway that now went through town. Unfortunately, however, this did not create the growth they were hoping for. While some new ventures were built along the highway corridor, many more closed shop. The regional center, a mere thirty miles away, was still too far to commute to but close enough for that occasional trip. The population in 1960 was 820.

Unfortunately, the sewer system that was built was installed incompetently, not an uncommon occurrence for the time. Pipes settled and shifted and created all kinds of problems. Many were under the groundwater and leaked, overextending the sewage treatment system. The treatment system, shoddily built and poorly maintained, did not fare well. By the 1980's, major infrastructure work was needed to keep the system viable.

Fortunately, the Federal government was available with assistance, this time in the form of a grant/loan package. The loan was very modest and financed over an extended period of time. The system was rehabbed and the sewers extended to capture that new growth on the periphery. By 1980, the population was down to around 550.

The 1990's saw further expansion of the highway and a lot of growth in the area, but declining population and further decline in town. A lot of people - mainly baby boomers in their peak earning years - bought land outside of town for recreational homes. There were a lot of local people employed in the construction and contracting industry and some of the local landowners came into big windfalls when their family estates could be divided into lots. With the regional center now within commuting time, the area around town became a "bedroom community" with the town itself becoming a place for those that didn't get out quickly enough or had no other options. While properties outside of town were appreciating rapidly, in town they were stagnating or declining.

Now we get to the current situation with the sewer system, which, while patched together in the 1980's, has really now reached the end of its life cycle. It needs some huge investment, but remember - it was built originally for a much larger population that was expecting growth. Where the growth happened, it was not captured by the investment in the sewer system. So today a much smaller population is being asked to pay to maintain a system that a much greater population could not afford in the first place.

Enter the engineer. To "fix" the problem, the engineer recommends - and the council agreed - to extend the sewer system to the remote areas outside of town to capture pockets of new users. There is still some grant money from the government involved, but it is a much smaller percentage than in past projects and will go largely for system rehab. This leaves a huge funding gap that will be filled by the new users through a) assessments and b) ongoing user fees to retire debt.

The agenda item last night was to give final approval to the project. Here is where the bizarre part happens. The engineer gives his report and asks for a council vote. The council votes with a roll call. All vote aye. As soon as the vote is over, the engineer sits down at the table and puts his head between his knees like he is going to pass out.

Into the meeting comes three guys in suits who were apparently waiting outside. They announce to the council members, "Everyone stay where you are at. Don't move. You are all under arrest." They flash badges and the town cop comes in looking dejected. This clearly was not a hoax.

Of course, at this point there are gasps and people are looking at each other with panic in their eyes. These officers - I learned later that they were FBI - start reading each council member their Miranda rights as they are handcuffed and, one-by-one, led out the door. I'm watching this thinking, "What the...."

They get to the mayor and he stands up straight, kind of defiant, and demands to know what they have done. The lead agent says, "You are all being charged with running a Ponzi scheme."

"A Ponzi scheme?" the mayor says.

"Yes," the agent responds. "This entire sewer project is one big Madoff-like Ponzi scheme. You are using revenue from subsequent connections to pay the expenses of prior connections, with no chance that either will ultimately pay off. You are promising everyone prosperity at levels that cannot possibly be sustained by the current investments, even with miracle-level returns. That is a classic Ponzi-scheme. Your city is insolvent and we're going to shut this down before it ensnares anyone else."

The mayor at this point has that deer-in-the-headlights kind of look. He looks over at the engineer who is unbuttoning his shirt and removing a wire and recording device from his chest.

"Stool pigeon," the mayor yelled at him. That's a term you don't hear often enough, but it was actually inaccurate. The engineer was not a decoy. It turns out that he had actually been the first one taken in and had agreed to turn state's evidence and assist the FBI. At least his conscience has some peace, unlike many engineers in similar circumstances.

And that's really kind of the bright side to this dark cloud. If you read about Madoff or anyone who has run a Ponzi scheme, they attest that the day they get caught - the day they have the big reckoning - is the best day of their lives. That is the day they can stop living the lie. They can end the fraud. They can stop the impossible task of trying to keep all of these balls in the air at once. The hours of worry, fear and dread from the knowledge that it will someday all collapse are gone. When the gig is up, they can finally have some peace.

Then we all confront reality. Then, because we are human, we start rebuilding.

The little town of Ginagaapi -- which means "to laugh" in Ojibwe -- is, of course, my April Fools joke. This meeting never happened - the city doesn't even exist - and no council members were arrested for what they are not only legally allowed, but actually encouraged, to do: perpetuate a Ponzi scheme.

The next time your local politician, engineer, planner or financial advisor tells you that, to solve the deep financial problems your town faces, you need more horizontal growth in the same pattern you have been following for the past sixty years, you ask them what kind of Ponzi scheme they are running. How do they believe that doing more of the same will produce better results? Why do our existing places lack the productivity to simply sustain themselves? Why is it an acceptable strategy to search for a Peter to rob so as to pay Paul?

Let's have a good laugh today. Then let's start building Strong Towns.

 

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