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Monday
Apr022012

Assessing our Future

The concept of a special assessment contains little dark secrets that city officials like to keep to themselves. The ability to assess the cost of maintenance -- a questionable concept at best -- is the only thing allowing many cities to avoid facing their true reality. Elected officials and the public need to understand assessments, their legal and practical implications, and the dramatic shift that is likely to happen as more taxpayers resist paying them.

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Last Friday, I received a couple of boisterous reactions by email to the Baxter assessment story I linked to. These guys were livid, and I suspect many others will be as I discuss it more fully here today. I too often forget that people don't know this stuff. I've been immersed in it for years and have, as a mostly powerless bystander, become numb to it. Thanks for the reminder -- this will be eye opening for many.

As we've discussed here for years, almost all of America's cities are financially insolvent. They have far, far more liabilities than they have revenue that they can tap into to pay for those commitments. This is the result of 60 years of the Suburban Experiment, a development pattern that creates (for a while) the illusion of wealth by allowing cities to exchange near term cash benefits associated with new growth for long term liabilities associated with infrastructure maintenance. We're now in the long term and, financially, everything is breaking down.

City managers and other public officials that argue with me on that last paragraph (and there are getting to be fewer and fewer that do) almost universally depend on one funding mechanism as the key to remaining solvent: the special assessment. 

For many cities, the special assessment is a magic money machine. The idea is simple. The city does a project. The costs of that project are assessed (charged) to the property owners that benefit from the project. To make things go smoothly, the city generously finances the project at reasonable terms and collects the money "painlessly" in the same way that property taxes are collected.

If it were only this simple.

Anyone who listened last week to the health care testimony at the U.S. Supreme Court knows that a big deal was made over the government's ability to tax versus the government's ability to collect money in other ways. Among other things, the 5th Amendment to the Constitution states that individuals may not:

...be deprived of life, liberty, or property, without due process of law...

The 14th Amendment ensured that states (and by extension, cities) would be bound by these same provisions. At the time it was adopted, the Obama administration argued to us -- the masses -- that the health care impact fee was not a tax, but to the court last week they insisted that it was. Why? Because the government has the authority to tax citizens but it can't take your property (money) by other means without due process (nor can they delegate that authority to others, aka: insurance companies). This is not a small nuance; it is the basis of our government.

What if the government decided that you should pay an extra $20,000 in taxes this year. Not anyone else, just you. That would be illegal, a violation of your rights to equal treatment under the law and due process. Now, if the government decided to tax every family an extra $20,000 in taxes this year, they may have a revolt, but the tax would not single out any one person (or specific individuals) and would thus be legal. There is a lot of legal nuance here and attorneys can and will argue over this for as long as we are a country, but in a broad sense, the government can't take your money unless they tax you or go through a process that affords you the right to appeal (like a fine you can argue in court or, in this case, a special assessment).

So special assessments are not taxes. It is a charge in exchange for a benefit. I'm going to go back and quote the 5th Amendment again.

...nor shall private property be taken for public use, without just compensation.

Here's how this applies: If the city takes your money to build a street -- not through taxing everyone but through a special assessment on you -- you have to receive "just" compensation. Is your compensation that you get to drive on the street? No, everyone has that right since it is a public street. So what is your compensation?

It is the value that is added to your property from the improvement. That is it. Period. End of discussion.

Let's put some real numbers on this. Your property is worth $200,000. The city goes out and improves the street in front of your house. The cost is $14,000 per property. After the project, your property is now worth $205,000. What is the maximum your special assessment can be?

The answer: $5,000. That is the amount that your property increased in value due to the project.

But the cost was $14,000 per property. Who pays the rest? That is where the general taxpayer comes in. If the project is for the public good, then tax everyone to pay for it. If the project benefits just you and a few others, that benefit will be reflected in the increased value of your property and can be captured through the special assessment process.

I actually find that Wikipedia (bless their souls) do an awesome job of explaining this. From their entry for special assessment (my emphasis added):

The property tax most citizens are aware of is known as an ad valorem tax. This tax is used to fund general or day-to-day government operations. An ad valorem tax is commonly levied on both real and personal property. A property tax is based upon a property's market value. The ad valorem tax levy is based upon a "millage rate" which never varies from parcel to parcel. The foundation principles for ad valorem taxes are that each property is valued according to its market value (equity) and that each property is taxed based upon a single millage rate that applies to everyone (uniformity).

Special assessment levies are not ad valorem property taxes even though they may be collected on a property tax bill. A special assessment is based strictly upon the concepts of "need" and "benefit." Special assessments require a finding that the public improvement is "needed" for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefit from the public improvement that was needed. The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner. This contrasts significantly with the ad valorem tax which is extracted to fund government operations that are designed to benefit all citizens.

If I could underline "measurable" twice, I would.

There are some of you that see the clear problem at this point, but for those that don't, let me point it out to you. You live on a paved road. You are refinancing your home and get an appraisal that says it is worth $200,000. The road in front of your house is in rough shape and the city needs to fix it, which they do in the weeks after your appraisal. The cost they want to assess you is $14,000. In light of the assessment, the bank requests a new appraisal. You had a paved road with cracks and potholes before and now you have a smooth, paved road. How much is your house worth?

Very likely, it is still going to be worth $200,000. If you had gone from a gravel road to a paved road, maybe you would have seen an increase in value. Maybe, but the form that appraisers use and the comparables they review don't get into the quality of the pavement. There is an inherent assumption that, since a property fronts a paved road and since the property owner pays taxes, that road is going to be maintained. It is a rare case that a simple maintenance project is going increase the value of a property.

Let me give you another example to drive this point home and show you that roads and streets are the least of our problems. Look at that water pipe buried in the ground. The one you've been paying a water bill for decades supposedly to maintain. Let's say the city knows that pipe is old and needs to be replaced before it becomes a costly maintenance burden and so they dig it up and put in a new pipe. How much more is your property worth now that it gets water from a shiny new pipe instead of an old, worn out pipe? Pretend you were out of the country for the six months that this happened and arrived home without knowing. Would you notice a difference? It is really hard to argue that something adds value when it is imperceptible.

Now the city managers, engineers and finance directors are all hopping mad at me. Let me ask their question for them: If there are four homes on a cul-de-sac and the city has to go in and fix the street, replace the sidewalk, replace the sewer pipe and the water pipe, and the cost is $400,000, who, Mr. Marohn, are you suggesting pays for that? Nobody is using that infrastructure except for those four homes. Shouldn't they each pay $100,000? Isn't that fair since they are the only property owners that benefit?

My answer is simple: It is public infrastructure, taken over by the city for maintenance through a public process, and it is now the city's to maintain at full cost of that maintenance, minus any increase in property value the project might create. If the city did not think this infrastructure served a public purpose, it should not have taken it over and assumed the maintenance liability.

Now that is very inconvenient -- in fact it is devastating -- to the wishes of city officials. As we've demonstrated many times, the amount they are collecting through property taxes and fees pays only a tiny fraction of the cost of maintaining this infrastructure. The rest they assume they can make up through government transfer payments, taking on debt and through special assessments. If they can't -- and they really can't, if they are challenged -- it destroys their budget and the gig is up.

I've found that there is an art to assessing improvements that keeps this all from turning too ugly for a city. Let me again go back to the Wikipedia entry for special assessments:

Among the unique characteristics of the special assessment is one that makes a special assessment particularly onerous for ordinary citizens. A special assessment levy enjoys a legal benefit known as a "presumption of validity." This means that it is much harder and usually, much more difficult to appeal than the ad valorem property tax most citizens are familiar with. This happens because it is difficult for the ordinary citizen to recognize that an error in the special assessment procedure or methodology has occurred and the resources a taxpayer must use to fight a special assessment levy are more expansive and costly than resources to fight an improper ad valorem tax on their real estate.

If your real estate taxes are messed up, you go to a hearing with some proof of that and there is a board that, while not always accommodating, will typically hear reasoned arguments. If your special assessment is messed up, you have to go court. Not only that, before you go to court you have to file proper objections with the city indicating that you are contesting the assessment. This all has to be done within certain time frames or your right to appeal is lost.

To fight your assessment, you will need to hire an attorney and an appraiser willing to testify in court. This is going to cost you between $6,000 and $10,000. Let's say that your assessment is $14,000 -- are you going to pay $10,000 in hopes of getting a verdict, at the district court level, that is 100% in your favor and that the city -- with more resources and more to lose -- won't appeal to higher levels? Not likely.

So there is an incentive for the city's approach to become devious. Keep the assessment low enough to where it is more expensive to fight it than to simply pay it. Make the project complicated -- don't simply fix the infrastructure but improve it in some marginal way, like a wider shoulder or something -- so that more expertise is needed to ascertain what is going on. Make the assessment process as prefunctory and opaque as legally permissible to avoid the opportunity for substantive objection. Of course, since this is all being done for the "greater good", the deviousness is justified as what is needed to "get things done". At least that is what we tell ourselves.

I've seen poor, uneducated people living in trailer houses assessed more than their home was worth. I've seen well-heeled property owners negotiate their own "insider" terms of assessment. I've seen citizens forced, through the assessment process, to pay for improvements that actually devalue their property and their neighborhood. The end of our video, Conversation with an Engineer, lays out this irony of ironies.

In recent years when property values were rising and the real estate market was liquid, the special assessment process ran into few objections. If the assessment was too high, people could sell their property, typically make a lot of money, and buy something else. Progress was not worth fighting over since all seemed to be benefiting. Today is a much different story. Add to rising property taxes to falling home values and a frozen housing market, and I anticipate there will be some aggressive resistance to the special assessment process.

And when that happens, even the smug city officials that believe they have everything under control, that they need not be concerned with the public return on investment, that special assessments are the perfect tool for routine maintenance -- even they will need to acknowledge that we've long passed the time when we need to start building strong towns.

 

For those of you visiting us today, you'll notice some dramatic changes to the website. Let's call it StrongTowns.org, Version 3. While it is still a work in progress, you can see where we are headed with getting our message out there. The website is such an important tool for that. We hope you find it helpful. I want to acknowledge my friend, Jen Krouse of Steepletown Studios, whose brilliance has not only orchestrated this transition but I believe pulled out more of the substance in our message than I thought was possible. If you need web site assistance, I can't recommend her highly enough.

Friday
Mar302012

Friday News Digest

I've really had two amazing weeks in a row here being in Omaha and then in Albuquerque for a series of Curbside Chats. It is great to see the audiences growing, the questions I'm being asked evolving to be even more insightful and the entire concept of building a Strong Towns being received so positively. Both places were incredibly generous to us and, from the feedback I've received, we're impacting the local debate dramatically. Thank you -- I can't wait for an opportunity to return.

Those of you reading our blog from the Strong Towns website will notice some construction going on around here. We're in the final stages of a website overhaul. Give us a little time to tweak it all to be just right and, in the meantime, please don't mind the mess.

Enjoy the news.

  • As fallout from the Omaha Curbside Chat, Craig Moody of the Verdis Group Blog asks a really important question: Are we building a better Omaha? In this very thoughtful article he reacts to the Chat presentation and goes on to discuss some of the specific challenges they face there in Nebraska. The quality of the conversation here is top notch and the questions posed are right on.

I run in circles that can largely be considered “believers”. If asked whether or not we need to alter our current development patterns, they will largely say yes and may have some ideas on what sustainable development looks like. But they are in the minority. With that said, I don’t think this issue is partisan. No matter how you look at it, our current path is unsustainable fiscally and environmentally. I firmly believe it’s just a matter of educating the average citizen on the issue and asking them to advocate for smarter development. This leads us to our elected and appointed officials. If citizens get educated and then activate, I would like to think our officials will follow. Am I naive? Maybe a little, but I also think that pushing for smarter development is an easier decision than some of the other challenges these officials face.

  • In a couple of weeks we start our Curbside Chat Tour through California. We start in Redding, which is in the northern part of the state, and end up in San Diego where, I've just found out, the Chat is going to be held at a place called the Bamboo Lounge. This sounds like the perfect way to cap off a week. If you would like to know precisely where we will be and when, for our trip to California or any future Chat, just sign up for our newsletter.
  • Economist and housing expert Robert Shiller made an appearance on Yahoo! finance this week to say, among other things, that suburban housing may not recover in our lifetime. Of course he says this in a very understated way, which is his style (he's not given to hyperbole), but what an eye-opening statement from one of the foremost experts in the housing market. I'd recommend watching the entire clip (I have five times already -- lots to ponder there), but if you want to hear this quote, skip to 4:45 and listen through 5:30.
  • One thing I have not yet had a chance to listen to (actually listened to six hours of Supreme Court testimony during my travels instead) is this interview with the Patron Saint of Strong Towns Thinking, Nassim Nicholas Taleb, but I am going to start as soon as I'm done with this. I already know some of what he is going to say because I watched this video of his first TV appearance in nearly two years (warning: we are strictly non-partisan here and he, amid other economic analyses that is interesting, endorses Ron Paul in the clip -- please don't infer anything from that in relation to us) and then went and pre-ordered his upcoming book, Antifragility: How to live in a world we don't understand. I hope he does more public speaking once the book release gets closer.
  • I am amused by the people who argue with me that our financial analysis at Strong Towns is wrong because, if people simply paid more taxes, we will be able to afford all of this infrastructure we have committed to maintain. The other of my twin hometowns -- Baxter -- has long (illegally, IMO) assessed 100% of the cost of infrastructure maintenance. (If you are a member of the Strong Towns Network and want to see why I say illegal, click here.) This worked when property values were rising aggressively and the market for homes was liquid -- not many complaints and the few there were fell on deaf ears. Now that times have changed, a proposal to assess property owners $14,000 to fix their street is seen clearly by public officials as politically ludicrous. Want to know why we won't be able to just raise taxes to pay for all of this? The comment someone posted after the article explains it succinctly.

As a resident of Baxter (Wildflower Drive), I can say for a fact that because of the economy, our property values have dropped thru the floor! It is a huge struggle just to make the mortgage (upside down now, due to the economy) as it is, without adding an assessment! ANY assessment amount would put us over the edge, and we would be forced to sell (TRY to sell) our home...or worse, foreclosure. I'm sure we are not the only ones struggling to keep our home.

  • Unfortunately for Baxter, they are a creature of the Suburban Experiment and have no historic buildings that they can sell of like the city of Baltimore is looking to do. Sell a long-term asset to close a short-term budget gap - makes perfect sense (if you are running a Ponzi scheme).

  • Last week in Omaha I was asked about the impact of a Strong Towns approach on those that are impoverished. It was a sincere question to which I had a sincere answer: I really don't know. I suspect that, as local economies change and the demographics start to shift away from our suburbs and to financially viable cities and neighborhoods, we may see a reverse of the "white flight" of the 1950's and '60's. This would leave the current suburbs with very high rates of poverty combined with a living arrangement that does not lend itself well to community support. In other words, an even worse situation than we experienced two generations ago in our inner cities. Unfortunately, this is also the opinion expressed recently by Lisa McGirr in the New York Times.

At the most basic level, poor people living in suburbs face challenges gaining access to services they need, because the municipalities they live in are unaccustomed or even hostile to providing them, or are simply unable to do so. Suburbs, with their thin safety nets, are not well equipped to handle the rising demands for help. Local food pantries in suburbs across the nation are stretched beyond capacity to meet the needs of the new poor.

  • There is so much that we need to do here at Strong Towns -- we're just getting started with this message redefining the terms of American prosperity. The Curbside Chat report is about the underlying fundamental assumptions of growth with the Suburban Experiment. We're working on a second report debunking the myths of auto mobility and its relationship to financial prosperity of our places. At some point after that, we have to deal with our sorry (an un-American) approach to economic development. Consider this article a primer.

As Clifton writes in his book The Coming Jobs War, "The government has never, will never, nor should it be expected to ignite badly needed sustainable economic booms. These economic booms originate in the souls of individuals and great cities. Washington exists for law and order, war and peace, infrastructure, social services, and a wide variety of national and international policies that help hold the country together. But don't look there for sustainable, quality, economic growth."

Government can't create jobs, says Clifton, because that's not government's job. Businesses create jobs, and that happens in cities, which means that the solution to the problem of job creation is local. For that reason, job creation efforts should focus on the complicated relationship between companies and cities. It's an organic relationship, but there's a way to cultivate it.

  • While the headline of this article appeals to my basic social instincts, it is filled with a high degree of ignorance. If I had more time I would make responding to it an entire post, but let me just point out one thing. The article makes the point that cities rarely die and go away while also pointing out that their existence is an evolutionary process. I agree that, pre Suburban Experiment, the growth of cities was evolutionary, but many did die. This is not remembered because, like all evolutionary changes, the ones that weren't viable died early. They never got big enough to have their death be a catastrophe that would be remembered. Only cities that were resilient became as big as Athens, Jerusalem, Vienna, and the others cited. This is far different from what has gone on in the Suburban Experiment where cities have not failed, despite being financially unviable, because of our Mechanisms of Growth. We don't need competition in the way that Goldman Sachs competes with JP Morgan. We need innovation in local government, which is not as simple as starting a new Ponzi scheme to replace the existing one.
  • Parking lots are the low hanging fruit for places that can be repurposed to add value to a community without increasing costs. In the downtowns of Omaha and Albuquerque, as in most American cities, there is a perception by many that there is not enough parking. This despite the endless number of empty spaces and total lack of any significant traffic outside of a small window in the morning and afternoon. Capturing the lost value in those spaces, as discussed in this opinion piece by Eran Ben-Joseph, is something that should be on the top of the agenda.

I believe that the modern surface parking lot is ripe for transformation. Few of us spend much time thinking about parking beyond availability and convenience. But parking lots are, in fact, much more than spots to temporarily store cars: they are public spaces that have major impacts on the design of our cities and suburbs, on the natural environment and on the rhythms of daily life. We need to redefine what we mean by “parking lot” to include something that not only allows a driver to park his car, but also offers a variety of other public uses, mitigates its effect on the environment and gives greater consideration to aesthetics and architectural context.

  • Friend of Strong Towns, Kaid Benfield, posted this video of a panel he sat on recently about "defining resilience". I've been listening to it while I put the FND together and, as always, Kaid is insightful and enjoyable to listen to.

  • Finally, my age cohort is one that grew up with Dana Carvey and Conan O'Brien. Whenever they get together, my insides ache from laughing so hard. Enjoy.

Have a great weekend. See you back here Monday morning.

 

If you value what you read here, consider a donation to help support the Strong Towns movement. Your support -- at whatever level -- will go a long ways towards giving us the resources and credibility we need to spread this important message. And tell a friend about us. It all helps us spread the Strong Towns message.

Wednesday
Mar282012

Albuquerque

I am going to take a little bit of time out from here in New Mexico to share an interview I did yesterday with a local reporter in Albuquerque. I'm doing a series of Curbside Chats -- well attended events with great feedback -- and was able to spend a little bit of time with Sidsel Overgaard, a reporter with KUNM (who, like me, has two daughters). She had some great questions and we were able to walk along and look at the landscape here in downtown, taking in what is working as well as what is not.

Unfortunately, there is a lot in that latter category. I really do like it here -- the people have been great and I see a ton of potential to make things work well -- but they are afflicted with a lot of places that just don't function. For example, between the city hall and the convention center is this public plaza. In theory this is the perfect place for a plaza. In practice, the design is just dead and lifeless. 

We walked down an adjacent street that was, in theory, a pedestrian mall. While the planners and urban designers had done a fair job with the public space, the adjacent buildings were completely out of scale and have this imposing, despotic feel. The result, again, was a space devoid of life. 

But then we got to the end of all of this highly-planned space and -- WOW -- there was some great street life. It just popped out and you could see how they were thriving, even though the street design there was not the best. It was almost as if, where the planners were absent, things worked.

All this reinforced to me just how far we have to go in the professional realm to get back to building places of value. Engineers, planners and architects have to unlearn decades of bad practices, and quickly.

Albuquerque gives me hope, however. Yes, they have their nasty STROADS and the wasteland on the edge that every major city has, but they have some quality places as well. I have never been here before and I was worried that it would be another Phoenix or Las Vegas, southwestern cities that -- at least with my skill set and vision -- seem nearly unsalvagable. That is definitely not the case here. There is a lot that is working and even more that could.

One of the big debates I walked into has to do with the construction of an interchange outside of town. It is the typical deal: spend hundreds of millions on one project to fight congestion, creates job and induce growth. And like all similar investments, there is no real return on the money spent. I offered that, if they were going to spend millions, I would recommend taking a tiny fraction of that (which is all it would take), bring in someone like Ethan Kent from Project for Public Spaces, and have him help the city reactivate that city hall plaza and the adjoining blocks. If they spent a million on that it would return many multiples of that to the city's coffers, far more than the proposed interchange project.

So this is all a very long introduction for this audio interview with Sidsel. It is posted in an edited format (3 minutes) on the station's main site and then in an unedited (22 minutes) format on her blog site.

Enjoy.