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Tuesday
Jun142011

The Growth Ponzi Scheme, Part 2

In yesterday's post we pointed out how cities routinely trade the near-term cash advantages of new growth for the long-term financial obligations associated with the maintenance of infrastructure. Cities pay little for new growth, but receive enhanced revenue from the development. In return, the city assumes the obligation -- and the long-term financial liability -- to maintain the now-public infrastructure.

At this point, it is easy for any of us to see the perverse incentives underlying this system. Politicians are generally inclined to worry more about the next year than an event that will occur a generation into the future. The public is likely to join them, discounting the future commitments they are making in favor of added financial benefit today. It is near-sighted, yes, but this type of thinking is also part of human nature.

It is tough to forgo real benefits today for the theoretical enjoyment of an uncertain future. The ubiquitous nature of dieting books, dieting plans, diet coaches and diet foods, all in a land of unprecedented obesity, does a great deal to validate this observation.

Examining the underlying finances of our cities at face value, one must acknowledge the following: In order for our development pattern to financially work, the amount of revenue generated by the new growth must ultimately cover the expenses incurred by the public for maintaining the new infrastructure. If cities are not raising enough revenue to repair and replace their infrastructure, the system cannot sustain itself.

Understanding this, we began to collect hard numbers from actual projects and compare those costs to the revenue generated by the underlying development pattern. This work continues, but in every instance we have studied so far, there is a tremendous gap in the long-term finances once the full life-cycle cost of the public obligations are factored in. Without a dramatic shift of household and business resources from things like food, energy, transportation, health care, education, etc... and into infrastructure maintenance, we do not have even a fraction of the money necessary to maintain our basic infrastructure systems.

The following is a smattering of examples. We link to a further explanation of the underlying numbers for those with a deeper interest in our methodology.

Rural Road

A small, rural road is paved, with the costs of the surfacing project split evenly between the property owners and the city. We asked a simple question: Based on the taxes being paid by the property owners along this road, how long will it take the city to recoup its 50% contribution. The answer: 37 years. Of course, the road is only expected to last 20 to 25 years. Who pays the difference? Click here for this case study.

Suburban Road

A suburban road is in disrepair and needs to be resurfaced. The modest project involves repair of the existing paved surface and the installation of a new, bituminous surface. The total project cost was $354,000. We asked the question: Based on the taxes being paid by the property owners along this road, how long will it take for the city to recoup the cost of this project. The answer: 79 years, and only if the city adjusted upward its budget for capital improvements. For the city to recoup the cost of the repairs from the property owners in the development, an immediate property tax increase of 46% would be needed. Click here to read this case study.

Street Serving High Value Homes

A group of high-value lake properties petition the city to take over their road. They agree to pay the entire cost to build the road -- a little more than $25,000 per lot -- in exchange for the city agreeing to assume the maintenance. As one city official said, "A free road!" We asked the question: How much is the repair cost estimated to be after one life cycle and how does that compare to the amount of revenue from these properties over that same period? The answer is that it will cost an estimated $154,000 to fix the road in 25 years, but the city will only collect $79,000 over that period for road repair. To make the numbers balance, an immediate 25% tax increase is necessary along with annual increases of 3% with all of the added revenue going for road maintenance. (Case study available on request.) 

Urban Street in Decline

An urban street section is in need of repair, which will consist of milling up and replacing the bituminous surface. The development along the street has stagnated for decades in favor of new growth on the periphery of town. As such, over the estimated life of the new street, the City expects to collect a total of $27/foot for road repairs. Depending on the alternative chosen, the cost for repairs is estimated to be between $80 and $100 per foot. (Case study will be posted next week.) 

Rural Industrial Park

A rural town has an industrial park that is stagnating. The park consists of 25 rural lots sized at roughly 2 acres each. As part of an undertaking to encourage more development in the park, the city engineer recommended serving the park with municipal sewer and water utilities. While the city is pursuing a grant to pay the costs, everyone understands that they will assume the maintenance liability, so we asked the question: How much private-sector development is necessary to sustain the infrastructure. The answer: $316,000 per lot. This is more than double the current rate of investment seen in the park. Click here to read this case study

Suburban Industrial Park

A suburban industrial park with full utilities was constructed in 1995. Over the years, the park has filled out with a mix of commercial and industrial uses. City officials, pointing to the park as a major success, seek to double its size. We asked the question: If the city could spend the same amount of money today and have the same return in terms of private investment, would this be a good investment. To answer the question, we applied an inflation adjustment to bring the 1995 costs into today's dollars and then compared that against the current tax receipts. If a $2.1 million project immediately induced $6.6 million in private investment, and if all of the income to the city were devoted to paying off a bond to finance the improvements, it would take 29 years for the park to break even. In that time, the businesses in the park would rely on other taxpayers to plow the streets, provide police and fire protection, etc... Of course, the $6.6 million of private investment happened over 16 years and was often subsidized, factors that would extend that payback period significantly. Click here to read this case study - see page 50.

Small Town Wastewater System

A small town received support to build a sewer system from the federal government back in the 1960's as part of a community investment program. Additional support was given in the 1980's to rehabilitate the system. Today, the system needs complete replacement at a cost of $3.3 million. This is roughly $27,000 per family, which is also the median household income. Without massive public subsidy, this city cannot maintain their basic infrastructure. It is, essentially, a ward of the state. Click here to read this case study.

Aggressive Expansion Project

A town that was represented in Washington by a major political powerbroker initiates a project that is designed to essentially double the tax base of the city. The project requires the dredging of a river to create a harbor, the extension of major infrastructure and the repair/replacement of existing utility systems. The projection is for the improvements to induce $32 million of private-sector investment. We asked the question: If the private-sector investment was guaranteed, how long it would take the city to pay off a bond for the project costs (since they are taking on the long-term maintenance obligation)? The answer: 71 years, far beyond the expected life of the improvements. Click here to read this case study.

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The last case is probably the clearest example of the perverse incentives of the American pattern of growth-based development. The city gets $9 million of federal money to induce new growth. It costs them relatively little. If the growth happens, they get the tax revenue. If it does not happen, they are out relatively little. This all works fine until the end of one life cycle, when large-scale maintenance or replacement is needed. At that point, the costs vastly exceed the ability of the city to pay.

And this is where the Ponzi scheme aspect kicks in, because what is the solution to this unsolvable problem? In America of the post-WW II era, that's easy: The solution is more growth.

When more growth is created, the city gets excess cash (in the near term). That cash can then be applied to the old obligations. So long as the city continues to grow at ever-accelerating rates, the system works just fine. But like any Ponzi scheme, as soon as the rate of growth slows, it all goes bad very quickly.

If you want a simple explanation for why our economy is stalled and cannot be restarted, it is this: Our places do not create wealth, they destroy wealth. Our development pattern -- the American style of building our places -- is simply not productive enough to sustain itself. It creates modest short-term benefits and massive long-term costs. We're now sixty years into this experiment, basically through two complete life cycles. We've reached the "long-term", and you can clearly see we've run out of options for keeping this Ponzi scheme going.

Tomorrow we'll look at how we've reacted to this lack of productivity and the position that has placed us in today. Thursday we'll offer some rational responses to this dilemma.

 

Strong Towns is a 501(c)3, non-profit organization run by three professionals volunteering their time and resources to change America. If you would like to help us spread this important message, consider making a supporting, tax-deductible donation. We appreicate the support.

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Reader Comments (1)

Hmmm, I get the feeling that this is why economics is dubbed "the dismal science." Enlightening, but now I want to go back to bed.

June 16, 2011 | Unregistered CommenterMWBrown
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