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Wednesday
Feb082012

The Future Importance of Local Infrastructure Funding

The author of this post, Nathaniel Hood, is a Strong Towns partner. In addition to contributing to this site, you can read Nate's work at his blog, Thoughts on the Urban Environment, and at the new Minnesota-based transportation site Streets.MN. You can also follow him on Twitter.

About a decade ago, Saturday Night Live did a skit that epitomized the spirit of the late 1990s. In a mock 2000 Presidential debate, Al Gore (played by Darrell Hammond) responds to each question in an exquisitely monotone voice saying “lockbox”. Upon each utterance, laughter and applause erupted. Soon enough, the word ‘lockbox’ ceased being an idea worthy of consideration and became something synonymous absurdity.

The SNL skit is unquestionably funny, but our cultural write-off of the ‘lockbox’ is not. For those younger than myself and unfamiliar with this ‘lockbox’ concept, let me explain. In 2000, then Vice-President Al Gore proposed this bizarre idea: the government should save money.

The ‘lockbox’ concept didn’t vibe in the era of tech market booms and the inflated housing fiasco. The idea that when the government runs a surplus, it should save money for future obligations just didn’t seem all that important.

Now, fast-forward twelve years to a much different existence and add a Strong Towns flare. It’s not just that we’ve invested in an inefficient infrastructure system with a low return on investment - it’s also how we’ve decided to acquire the money we’ve spent on this is inefficient infrastructure system.

The United States funds infrastructure largely through debt. This means that a $10 million road is not a $10 million road as associated costs are incurred through interest and other debt service payments. Chuck put it best: “Our current approach to infrastructure spending is impoverishing us as a country.”

The rudimentary idea of saving money for a rainy day (or creating a ‘lockbox’) has completely eluded us at the local level. We’ve ignored the simple principles of finance that parents attempt to instill in their growing children: save money and steer clear of the pitfalls of debt.

So, a local government wants to pursue a straightforward road project. Today, they can do it through a handful of ways. Most all of them require some form of debt. Depending on the road and its jurisdiction, cities can apply for Federal or State aid grants through various agencies, levy nearby property owners and developers, or raise the money locally through the issuing of bonds.

Even in the most localized and conservative of these situations, one where adjacent property owners or developers are charged for the “improvements,” doesn’t typically cover the full costs of the design, construction and maintenance. The rest is financed through debt from either the local, state or federal level, or some combination of the three (This is well-documented in the Strong Towns Curbside Chat Companion Booklet).

If communities want to be resilient, they’ll need to start making plans to transition away from traditional infrastructure financing mechanisms. Why? Because it rolls downhill: the Federal government cuts their budget by bleeding the States. The States pass those cuts down to the local level. This happened in Minnesota; local government aid was slashed and community balance sheets instantly became lopsided.

If, and when, the Federal or state government turns off the faucet, how will local governments pay for infrastructure? Under the current system, local governments won’t be able to. They have their hands tied.

In Minnesota, local governments can’t legally raise sales tax for an ambiguous future infrastructure projects or even put away money into a ‘lockbox’ savings account for long-term maintenance obligations. And, even if they could - it would need to be approved by the State legislature. As if to say, that a House of Representatives member from Fergus Falls should have any say whatsoever in the Mankato City Council’s decision, and subsequent approved community-wide referendum, to (for example) approve a .15 percent sales tax increase on alcohol (or gas, clothes, etc.) to support a small-scale local infrastructure project.

We can’t maintain the local infrastructure we have today under our current framework. If we want anything to change, we have to allow communities to get creative. As alarming (or funny) as it might sound, we need to allow cities and towns to have a ‘lockbox’. There are other options out there, but the most plain, simple, and uncomplicated way we can start doing this is through savings. Yes, that bizarre idea of setting money aside for the benefit of future generations.

This time around, instead of ‘lockbox’ – how about we go with something less Al Gore-esque? May I suggest local infrastructure bank?

 

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Reader Comments (5)

"In Minnesota, local governments can’t legally raise sales tax for an ambiguous future infrastructure projects"

This isn't entirely true. The big transportation bill that passed a few years ago (over Pawlenty's veto) gave counties outside of the 7-county Metro the option to raise their sales tax by referendum up to 0.5% to pay for a specific transportation improvement. True, it's not a "lockbox" per se, but it does allow the counties the option to bump their sales tax up for transportation if they put it to a referendum vote.

February 8, 2012 | Unregistered CommenterFroggie

And it's important to not penalize a locality for saving. As in ... "oh they don't really need state assistance/grant as much as this other locality, because they are just sitting on cash."

February 8, 2012 | Unregistered CommenterDaniel

With so many states, counties, cities, and townships losing funding, and the feds and states unwilling to raise taxes, especially on the wealthy, could it be possible for more local taxes to spring up to fill the gap? I realize there's political and logistical hurdles, but it's certainly not unheard of. Cook County, Illinois for instance levies its own additional gas tax on top of the state and federal ones, and the City of Chicago may pile another one on top of that. With taxes being so low overall compared to decades past (and yet we were a much more prosperous country then, imagine that!), maybe we could see things like raises in property tax rates being more palatable. The benefit of course would be that each municipality would have more control over the projects they choose to implement because they're paying for it themselves, rather than having to meet some state or federal criteria to get funding.

February 8, 2012 | Unregistered CommenterJeffrey Jakucyk

Re: Froggie
You're right about about (somewhat) recent Transportation Bill (2008?). That was a move in the right direction, but shouldn't have been limited to the 7 county metro. I'd love to see an academic follow up on what and how municipalities used that option.

Re: Daniel
Very true. There is this perverse system where governments (and their agencies) will be penalized for saving money. We've stressed this "use it, or lose it" mentality - and it leads to waste. My favorite example is this; a friend of mine who works for a large government entity needed a new work computer. Well, the annual technology budget for the department was shot. BUT, they did have some money remaining in the furniture/misc. budget - so most everyone in the office got a new chair (despite the fact that workers needed new computers, not chairs). If they didn't spend money from furniture/misc. budget in its entirety, it'd be reduced the following year.

To tie it all in together, this is a little bit like LGA. If a government saved money (in a lockbox or local infrastructure bank) and had a good balance sheet, the free money from the State would disappear.

Thanks for reading and commenting. I really appreciate it.

February 8, 2012 | Unregistered CommenterNathaniel

Nate et al,

This is a very important topic that goes beyond Strong Towns as I think you all know. It doesn't matter if you're a state getting money from the feds, a city getting money from the state, an agency getting money from a city, or even an individual getting money from a bank, saving doesn't help you, Here is an example (that breaks the trend) of something that is a symptom rather than an illness that ST is addressing. Albeit something that may be beyond the scope of the ST discussion, but still.

February 8, 2012 | Unregistered CommenterMarty Walsh
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