A Conversation with a City Official


I've been pondering for two weeks now over a recent conversation I had with a city official. My local city is committing $18 million to attract a retail development - and I highly doubt they will make it back. This is the stereotypical "old economy" project - pay a ridiculous amount (millions!) of money in the hopes that it will generate jobs, sales, or housing.

As a Strong Towns advocate, two core beliefs of mine are;

  • We should not spend public money attracting or propping up handpicked private businesses. ("Target is looking at our city! Let's spend millions of dollars building roads and preparing utilities just because they're a well known brand!")
  • City spending should be seen as an investment. A city invests in itself by providing services and infrastructure, and that increases the value of the city, which generates greater tax revenue that covers the cost of the investment.

Often, no development (doing nothing) is better than bad development. Why would we want the promise of 500 new jobs, if the city will be worse off?

 

I've blurred the city official's name with xxxx because I don't wish to offend anybody.

My initial e-mail:

Dear Mayor, and others,

I came across the article on the Log Cabin Democrat titled "Council to consider $18 million infrastructure project" - http://thecabin.net/news/local/2014-02-01

I understand that the city is approaching some very serious revenue issues in the near future ( http://thecabin.net/news/local/2013-12-27-0 ) - and I feel that the proposed infrastructure is a very serious mistake with some very serious consequences for the city.

With every infrastructure project that we undertake, the very basic question we must ask ourselves is if the project is financially viable. Will the infrastructure project generate a return on the city's investment?

The proposed infrastructure project will cost the city $18 million. My first question I'd like to raise is - How long will it take before the city will get their initial $18 million investment back?

My second question concerns the ongoing obligations that the city will inherit by undertaking this project. The average lifespan of civic infrastructure is 20 years before it requires replacement. Not only are we paying for $18 million in infrastructure, but we're also inheriting the obligations of maintaining this - which (as a quick estimate) work out to be approximately $900,000 per year ($18 million divided by 20 years) - not accounting for inflation.

Will the proposed infrastructure, once built, either increase property values or generate enough extra sales - that the city will generate an additional $900,000 per year (not accounting for inflation or the initial construction costs) in tax revenue - to pay for the ongoing costs of this infrastructure?

My greatest fear is that we depending on the promise of future growth to pay for these obligations - despite modern subdivision developments being a burden on city infrastructure (and finances), and our falling sales tax revenue that indicates that in the near future we may no longer be able to rely on sales tax to fund the city's budget. (I really hope the answer is not to resort to issuing bonds - where not only are we concerned about the cost of our maintaining our infrastructure, but also furthering us down the path of municipal debt.)

As a resident that is concerned for the future of our city, I would love to see our city on a path to financial prosperity. But, I am deeply concerned that this infrastructure project will be a burden on the city that, in the few decades, will come back to bite us.

Sincerely,
Andrew Price

Their reply:

Andrew,

Thank you for your thoughtful email. It means a lot to us when any resident takes the time to share their thoughts, but knowing how respected and knowledgeable you are on planning and development topics gives your words a little extra weight.

Eighteen million dollars is a big sum, no doubt. I think if someone tells you they’re not at least a little bit nervous about spending that kind of money then they must not have a heartbeat. When choosing how to apply this investment, it’s important to consider the strategic goals of the project––the most pressing of which is getting Central Landing operational. But there are others...

This is a public project, and being such, its ROI is not necessarily financial.  Like you and I have discussed before, for example, a bus system won’t pay for itself. It’s a public service we provide, all the while knowing that it generates no significant financial return. We do it because it’s important in other ways.  The same is true with this Central Landing street project.

Having a regional scale destination such as this will complement the desired social and cultural lifestyles of a large segment of our population. A vast number of Conway residents, as well as residents from several other counties around us, love these sorts of shopping and dining destinations, and will frequent them with friends and family as a matter of choice. We believe that Central Landing will better provide for their quality of life. Providing the quality of life assets that our resident's desire is one of our greatest duties as public servants. (And this is true whether we, as leaders, agree with the public’s desires or not. Personally, I don’t care much about youth baseball, but I still think providing high quality ballparks is a wise investment.)

This street project will not only serve Central Landing, but the entirety of Conway drivers. One of our greatest challenges since the 1960s has been east/west access across the I-40 corridor. This project will provide that, reducing commuter volumes on Oak and Dave Ward Drive by some margin and guaranteeing another crossing option for all drivers. In the end, drivers will be able to navigate from Salem Road to Conway Commons along the Bruce corridor. Providing an efficient network of streets is another one of our principle duties.  (The traffic study is available. If you’d like to see it, please let me know.)

Thousands of service sector jobs will be created over the lifespan of Central Landing. This is important in a city with our age demographic. The local economic impact of all of those paychecks over all of those years is very substantial. We don’t want a single young college student taking a job at Little Rock mall or a Little Rock restaurant if we can help it. Working with the private sector to create employment opportunities is one of our primary roles in economic development.

And of course, when it does come down to direct, financial, return on investment, we will create a mountain of property and sales tax revenue where none currently exists. 

Will it be enough to pay off the $18m in a twenty or thirty year period? 

It doesn't matter. 

For the social, cultural, transportation, and employment reasons I mentioned above, I doesn't need to. (Although the economic impact analysis states it will come very close.)

I hope this helps you understand a bit more about the rationale behind this project, and behind every decision we make. Always here if you need anything.

xxxx

PS> I know you and I agree on a lot more than we disagree on when it comes to proper planning and development policy. Be sure, my thoughts on Central Landing and this street project in no way defies my love for urbanity nor my desire to see much greater investment in dense neighborhoods in the future. I think they’re both necessary in cities like Conway. 

My reply;

xxxx,

Thank you for your reply. I have a concern with;

 “The local economic impact of all of those paychecks over all of those years is very substantial.

 Will it be enough to pay off the $18m in a twenty or thirty year period?

 It doesn't matter.”

 I would argue otherwise. This is a difference in ideology, but please allow me to explain myself.

If you take a street, residential or downtown – everything the city invests in the street directly benefits the properties along the street, and should be done with the intention of making the street a ‘nicer place’, raising property/land values, and ideally generate a ROI for the city’s investment – otherwise I’d argue that the city is making the investment for the wrong reasons.

I wouldn’t promote transit as a charity service – but as another investment the city should make, enabling denser development, making the city much more financially productive. As we both know, a mixed-use 3 story building is substantially more productive (in terms of tax revenue per acre) than a single-use auto-oriented building.

We build roads and thoroughfares because we know it makes the regions it connects on either side much more productive and valuable when they’re able to connect to each other.

Likewise, we provide schooling, fire and police protection, and other services, because ultimately, it’s an investment that makes our city a more attractive place to live and work – without those services, the value of our city would significantly diminish. People and businesses would move out, tax revenue would fall.

At the end of a day, a city ultimately needs to generate a profit. By profit, I merely mean our expected revenue should exceed our investment for every action we undertake. Without this, we’d accumulate debt. Even a charity, such as a church or an orphanage, needs to operate a profit otherwise they will accumulate debt and eventually close their doors.

I’m not arguing that building a new road is bad, but we should do so diligently.

This is why this part scares me;

“The local economic impact of all of those paychecks over all of those years is very substantial.

Will it be enough to pay off the $18m in a twenty or thirty year period?

It doesn't matter.”

If we treat all investments like this – if every subdivision we build, every outlet mall, office campus, or factory we attract – we operate at a loss – we spend more than we expect to make back from it – in the effort to attract more residents, make more sales, or create more jobs – but we never expect to make a return on our investment – at what point does it matter? At the end of the day – if none of our investments ever make a return for the city (enough to pay for itself and the obligations we inherit to maintain it) – will not our city eventually go broke?

(I really hope the answer is not ‘let’s issue bonds’, then when they mature ‘let’s issue more bonds to pay back those bonds!’)

Making our city financially sustainable should be at the core of our mission - that may be our greatest ideological difference.

Andrew

 Their reply:

Great points you’ve made below, Andrew.  To me it’s clear that we agree on a lot more than we don’t.  

Please know that government is not is the business of turning profit.  If we did,our taxpayers would be quite angry at us. That profit would be their money, not ours.  Taxpayers want to know that we’re applying their money in a way that balances the level of service we provide to the level of demand they generate. This is why government institutions use zero-based budgeting: expenses are tied to revenue directly, line-by-line, across all accounts––general, capital, debt service, fiduciary, etc.  There is no budgeted space for “profit.”**  There never will be, unless it’s in the form of what’s called “fund balance,” which is the difference between assets and liabilities. (aka, equity)

We are a customer service organization only. That’s the whole purpose of government—to provide collective-level services that are not possible at the individual level. The streets project that will serve both Central Landing and the city at large will do that. Is it debt? Yes, but it’s debt that is long-term and secure, just like the healthy debt of a home mortgage.

One of these days, I hope Conway is putting these tens of millions into a dense, high-output landscape, complemented by services and infrastructure that are far more efficient than what we’ve been building for the last fifty years. But alas, we’re just not there today. Culturally, socially, politically, financially, and professionally, we’re just not there yet. But we’re making strides in places like The Village at Hendrix, downtown, and soon, Markham and Donaghey.  In the meantime, we must acknowledge what is possible and where the biggest ROI does exist, and today, that’s Central Landing.

Thanks again for your input. I look forward to reading your next blog.

xxxx

**Enterprise accounts will permit profit, but they’re a completely different beast and cannot, by law, be used to support something like this street project.

 

My reply:

I think we’re misunderstanding profit. By profit – I mean that at the end of the day the money coming in needs to be greater than the money going out. Otherwise we’re creating debt. It’s essential to basic accounting – otherwise, even the most philanthropic charity will one day run out of money.

I agree that our city should not be attempting to ‘get rich’ and that any money we do receive, we should plan to reinvest in our city. Very much like a charity would do. (Also, most charities, knowing they have future obligations will store a little extra money away, so when the day comes to meet their obligations, they can do so and stay solvent.)

“Is it debt? Yes, but it’s debt that is long-term and secure, just like the healthy debt of a home mortgage.”

With all debt, we need to make sure we have plans to repay it. If I took out a mortgage I can’t afford to repay, I’d eventually bankrupt myself.

 “Will it be enough to pay off the $18m in a twenty or thirty year period?

 It doesn't matter.”

 Because it is “long-term and secure” - are were merely kicking the bucket down the road? What will we do when the bill is due? This comes back to the question from my previous email;

“If we treat all investments like this – if every subdivision we build, every outlet mall, office campus, or factory we attract – we operate at a loss – we spend more than we expect to make back from it – in the effort to attract more residents, make more sales, or create more jobs – but we never expect to make a return on our investment – at what point does it matter? At the end of the day – if none of our investments ever make a return for the city (enough to pay for itself and the obligations we inherit to maintain it) – will not our city eventually go broke?” 

Andrew

Their reply:

Andrew, 

This will be my last email to you as I have a mountain of other work to which I must attend.  I will lay it our very clearly according to your questions and assertions.  You’re welcomed to call me with further questions.

You said, “...at the end of the day the money coming in needs to be greater than the money going out.”

And, "we spend more than we expect to make back from it.”

And, "if none of our investments ever make a return for the city (enough to pay for itself and the obligations we inherit to maintain it) – will not our city eventually go broke?”

In these three lines, you’re recognizing only two options for us:

1.) That we end up with extra money at the end of the project, or

2.) That we end up in deficit which will lead us to bankruptcy at some point.

What you’re failing to recognize is a third option, which we actually aim to achieve, and which actually has two possible end states:

3a.) That we break even, and revenues match costs exactly. (Zero-based budgeting.)

3b.) That we don’t break even on the given program/project/policy, but that we can justify it because of the service it provides the community. (See "the Fire Dept.”)

And 3b above is okay because , 1) service is what we do, period. And, 2) those justifiable shortages in one department or project can always be made up for by other sources of revenue.  State law requires they be. (And it still adheres to our system of zero-based budgeting.)

Option 3a is what will be used on this streets project, which brings me to your next point...

You said, “Because it is 'long-term and secure' - are were merely kicking the bucket down the road? What will we do when the bill is due? 

There is no bucket-kicking, Andrew. The revenue stream that pays for this $18m project is already in place. It’s up to City Council to decide how to attach it to this project, but the money is there and will be allocated for the exact period of time it needs to be to pay for this project––to the penny.  We are not permitted to “bucket-kick” any deficit. Not once. We’re not even allowed to create a deficit.  Again, state law denies us that ability.  

That said, we are permitted to carry debt. Debt service is omnipresent and necessary in personal, business, and government budgeting. It’s part of the process and as long as it’s justified and matched to a dedicated revenue stream, there is nothing to fear. The City of Conway will carry some form of debt as long as it stands as an institution. Guaranteed.

My friend, this is just how government accounting works. I honor all your knowledge about land-use and planning, but I encourage you to dig more deeply into city management and finance topics in order to further your understanding of how our budgeting system and designated revenue streams affect the prioritization of projects, the methodology of their execution, the politics of local will, and ultimately, the landscape of our city. 

I also believe that for all your fiscal-conservative-based passion and concern in this series of emails, what you’re really upset about is Central Landing itself. You’re upset that we’re even partnering to build this sort of low-density, low-efficiency, disposable set of boxes when we could be investing this money in far more powerful forms of urbanity.  

If my hunch is correct, then I’ll go ahead and say it: you’re right.  We should be.

But we’re not. 

Right now, this is what opportunity looks like. It’s not ideal, but it will be a benefit to our area.

Stay passionate for this stuff, my friend. It’s people like you that keep momentum in the grand flywheel of change.  

Always a pleasure to chat with you.  Have a great day.

xxxx

He's a great guy with good intentions, but I am having trouble understanding what he is seeing that I don't.

The conclusion I got from the conversation was this; 

  • Our sales tax revenue (which makes up the majority of the city's revenue) is falling, so we are scrambling to attract a big retail development to pop this revenue source back up.
  • But - our goal isn't to make enough money back to cover the cost of what the city is spending - cancling out the point above (since our city will be financially worse off - spending money and not making it back.) This makes the argument of spending money to attract retail to prop up sales tax moot.

Honestly, I don't think anyone is doing anything wrong. The council members voting on it are just normal folks that are thinking "Oh! Dillards is coming to town! I like to shop at Dillards!" An economist in the city does a study and thinks "It will create sales tax revenue and jobs!" The engineer thinks "We need to widen this road and build a roundabout!" And the city treasurer thinks "We can afford that - if we issue bonds!" So, the city gets together and tells them "We want you in our town! We'll do anything to make it happen! Tax subsidies? Infrastructure?"

Indivdually, everyone is doing there job and they're acting rationally with what they know. It's the system, and how it all comes together, that I believe is broken.