It’s Not Just Houston That’s Broke. So Are Silicon Valley Cities.
Santa Clara, CA, might be one of the wealthiest cities in the country, but it still has the same financial struggles as places like Houston. (Source: California.com.)
The idea that Houston is broke, that its Ponzi scheme of a development pattern has put the squeeze on its finances, was a fascinating revelation to some. Houston’s low tax, pro-business vibe, along with its history of growing without zoning, makes it a flash point in our modern public discourse. It distorts how we hear the conversation.
Like a policy outcome in Houston? Go ahead and cherry-pick your favorite cause-and-effect connection. See Houston struggling with something? Go ahead and scoff at them for their backwardness (like many pundits did during Hurricane Harvey back in 2017). It’s kind of like Detroit in that regard. Everyone has their own self-affirming narrative about why Detroit struggles, but few are willing to admit that we all copied Detroit’s development pattern and so, simply put, we are all Detroit.
That includes one of the wealthiest, most successful municipalities in the country, the Silicon Valley city of Santa Clara. The median home value in Santa Clara is $1.5 million (compared to approximately $430,000 nationally) and the median household income is $150,244 (compared to $74,580 nationally), but that hasn’t prevented the city from being $624 million short of what it needs to maintain basic infrastructure.
That’s because this isn’t a wealth problem, it’s a productivity problem. And like all productivity problems, growing faster buys time but ultimately makes the insolvency problem worse. If you lose money on every transaction, you don’t make it up in volume, even in California.
The financial struggles of Houston and the cities of the Silicon Valley area—as well as tens of thousands of others across North America—have the same underlying cause. The aggressive outward expansion of cities after World War II was led by California, a state where comparatively little needed to be torn down in order to experience booming growth from each public investment.
What is overwhelmingly obvious today was just too easy to ignore in the exuberance of the day; all of this stuff would someday need to be maintained. Santa Clara City Manager Jovan Grogan explained that their current shortfall is “literally the cost of replacing many of our facilities that were built in the 50’s and 60’s.”
Engineers know roughly how long a street will last, as well as the useful life of a water pipe and all of our other essential infrastructure. A huge building boom one year will create a huge glut of maintenance after a predictable interval. All of these numbers were knowable in the 1950s and 1960s, just as they are knowable today.
They are easily knowable, but nobody bothered to make them known. Some of the reasons are structural (cities don’t do accounting in that way), but most of the reasons are all too human, and are common cognitive failings we see repeated today in Santa Clara.
For example, very smart and otherwise perceptive policymakers in California have a blind spot when it comes to Prop 13, the famous voter referendum that limits annual property tax increases. They reflexively blame it for all revenue shortcomings, refusing to acknowledge that it is a symptom, not a cause.
In the article, Michael Lane, the state policy director for urban think tank SPUR (we are fans of SPUR) was quoted describing the business model of a municipality before and after Prop 13. The description is mostly correct, but the conclusion feels very California (and by that I am suggesting it conveniently omits critical details). Here’s that quote in full:
Prior to Prop 13, that was the way to generate additional revenues by annexing more land and building, and you’d get that revenue and the new property taxes. When property taxes were capped then that was not the source of revenue from growth, but it actually created a burden, and so you had to be careful about how you grew and where to be able make sure your property taxes could cover all the ongoing maintenance for all the services.
Yes, prior to Prop 13, cities generated additional revenue by annexing more land and then having that land developed. That is the first step of the Growth Ponzi Scheme we’ve described here many times. California’s cities grew aggressively prior to Prop 13 (1978), but go back and look at that Fresno animation again. This is what we see in cities all over California. There was no push post 1978 to “be careful about how you grew to … make sure your property taxes could cover all the ongoing maintenance for all these services.” Quite the contrary: following Prop 13, California’s development pattern became a go-for-broke race to the bottom.
After all, if tax increases are capped on existing homes, then the place to make bank is on those new properties out on the edge. My experience is that Californians tend to fixate on the tax-and-spend implications of Prop 13, but fail to struggle with the secondary implications. Much of the last four decades of public investment in California has been a desperate push to add lots of new entrants to the leading edge of their Ponzi scheme. In this way, their actions speak far louder than their words.
It also means that population loss is going to hit California disproportionately hard.
Not knowing what the future holds in terms of unpayable maintenance obligations—not bothering to even find out how much they are—has not hindered cities like Santa Clara from pursuing race-to-the-bottom growth policies. In fact, their current revenue shortfalls make them all the more desperate for large, silver-bullet kind of projects.
In the article, the mayor of Santa Clara, Lisa Gillmor, acknowledged that the stadium for the San Francisco 49ers has “failed to deliver millions to the city’s general fund as promised” and that the Related Santa Clara development project has “hit roadblocks due to the pandemic and an evolving real estate market.” Even so, she expects they will someday help create a sustainable revenue stream for the city.
“I think that just those two alone would be a huge game changer for the city of Santa Clara in terms of long-term revenue streams that could be used for all of these deferred capital improvements,” Mayor Gillmor is quoted as saying.
I’m sure the mayor wants to believe this—I’m not suggesting otherwise—but this is a delusion. It is like a company is losing money on every product line they have, yet not bothering to do the accounting work to understand why, instead launching two new product lines. And one of them is failing and the other one is behind schedule!
None of this has dampened the local government’s confidence in the future, at least so far as confidence is measurable in willingness to take on (and ultimately pay back) hundreds of millions in debt. While those within city hall in Santa Clara have certainly known about expanding maintenance shortfalls for some time, they are leading an awareness campaign now in an attempt to get a bond issue on the ballot and approved by voters this fall.
This is late-stage Ponzi scheme stuff; confusing insolvency for a mere cash flow problem, taking on massive amounts of debt to solve today’s budget shortfall by making future shortfalls even greater. This allows current generations to live at a higher rate of consumption at the expense of future generations, a legacy of intergenerational irresponsibility today’s Americans inherited from their 20th-century ancestors.
This is a disaster. We all know it, or at least we can all see the decline setting in, even in ultra-wealthy Santa Clara. So, what do we do?
There is a natural impulse for affluent Americans to want a simple solution. Let’s get the state to solve this, or maybe the federal government. If the city did a full accounting of their liabilities, we’d understand the extent of the problem and could give them a budget amount. We can finance what the state and federal government won’t pay for and invest in new growth to make up the difference. This is America. Let’s go!
That’s the top-down, centralizing response. It’s how we got here. It’s simplistic and it’s wrong.
What we need is a more humble approach, one that starts by recognizing that cities are complex, adaptive systems with unpredictable feedback loops and untold novel responses to stress and opportunity. They are not mere mechanical devices, a collection of streets, buildings, pipes, zoning classifications, and financial products.
Once you recognize this, you can start to work from the bottom up to make your place stronger, more resilient, and broadly prosperous. At Strong Towns, we’ve identified the five most impactful ways you can get started.
Make your streets safe and productive, starting by creating your own Crash Analysis Studio.
Stop expanding highways and stop putting money into more auto-oriented infrastructure. Maintain what you have, but don’t add more.
Build a lot of housing, especially at low price points, and help your neighborhoods mature.
Turn your excessive amount of parking into something more financially productive for your community, and stop mandating that more parking be built.
Move beyond the cash accounting practices your local government uses and ask more sophisticated questions about the long-term budget impacts of current spending decisions.
If you are working with a local government, start with the Strong Towns Approach to Public Investment, a humble, four-step process to make the lowest-risk, highest-returning investments your community can make.
And if you are not part of a formal structure, but still want to see things get better in your community, start or join a Local Conversation to reshape the way your community is working at growth, development, and public investment.
As we say here, keep doing what you can to build a strong town.
Charles Marohn—known as “Chuck” to friends and colleagues—is the founder and president of Strong Towns. He is a land use planner and civil engineer with decades of experience. He holds a bachelor’s degree in civil engineering and a Master of Urban and Regional Planning, both from the University of Minnesota.
Marohn is the author of Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity (Wiley, 2019) and Confessions of a Recovering Engineer: Transportation for a Strong Town (Wiley 2021). He hosts the Strong Towns Podcast and is a primary writer for Strong Towns’ web content. He has presented Strong Towns concepts in hundreds of cities and towns across North America.