Cities and Towns Must Plan for Diminished State and Federal Funds

One of our fundamental goals at Strong Towns is to call attention to ways our communities are vulnerable to economic and financial stress due to development patterns. How we have developed our cities and towns has much to do with what, through local and state government decisions, we choose to support and subsidize.

Some of you may respond that subsidies don’t go to our small towns, or to big cities, or to this region or that. You’d be wrong. Over 90% of Minnesota’s cities (the definition of which includes small towns and central cities) received State General Purpose Aid in 2009, to support purposes ranging from public safety to streets and parks. In fact, as the graph illustrates, Minnesota cities rely on federal and state funds to varying degrees, as well as property tax – a subject for the future.

Sources: Office of the State Auditor; Minnesota State Demographer; Strong Towns analysis.

Some readers may note that as a state we have a vested interest in spreading resources across Minnesota. We point to the importance of school funding distributed to districts based on remoteness or concentrations of poverty, or revenue sharing in the metro area under the fiscal disparities program, and agree. 

However: Dependence on state and federal funding – regardless of arguments of equity and shared interests – does not comprise a sustainable fiscal or economic development strategy. We wrote last week about Minnesota’s structural budget problem; the Center on Budget and Policy Priorities reports that 35 states have similar challenges this year.

Although Minnesota cities escaped unallotment of local government aid funds this month, the future of state funding shared with local governments appears plainly bleak. This is not likely to change in the foreseeable future. The federal government, struggling with demands including entitlement spending for an aging population, may become more engaged locally – but a sea change in funding levels is not worth betting on.

 

Our point is not to convey fiscal doomsday. On the contrary, we are optimistic and confident in the ability of communities to devise ways to manage diminishing state and federal funding. But we need to change the ways we manage and develop our land for this to be successful. 

This trend represents an opportunity to reconsider land use, to create more productive uses of space by reflecting the costs of our development patterns in a more transparent way. When local actors have access to better information about what various development costs, homegrown innovation will carry the day. 

Cities in Bankruptcy

The idea of a city filing bankruptcy is difficult to fathom. How could such a thing happen? Isn't a city, in theory, able to simply raise taxes to cover their liabilities? If a city needs money in a pinch, can't it simply borrow it and pay it back later?

In reality, municipal finance day-to-day is not that much different from corporate finance. They both have to pay their bills. They both have to balance their receipts and their expenses. And when a municipality can't pay its bills - or decides not to for whatever logical or illogical reason - like a corporation, it can file for bankruptcy (except for a couple of states, where municipal bankruptcy is currently illegal).

Orange County, California, is probably the most famous recent example of a government declaring bankruptcy. Their bankruptcy was caused by large investment losses. There are rumors and speculation today that more governments are considering bankruptcy as an option. It has even been suggested that the State of California may file for bankruptcy. Certainly, the 2009 stimulus bill - which transferred hundreds of billions to governments - forestalled some bankruptcies.

Strong Towns has looked at the reliance on grants and aid amongst municipalities here in Minnesota. It is startling how many cities have government transfer payments as their predominant source of revenue. In fact, in 2009, there were three municipalities that funded less than 10% of their government through local taxation.

Checks for Local Government Aid in Minnesota are scheduled to be sent after Christmas. With the recent announcement that the state faces a $1.2 billion shortfall in the current budget - and with few places to cut - there are strong indications that LGA will be delayed, then reduced or eliminated. If more than half of a city's revenue comes from LGA, it is hard to see how that gap can be filled.

Some will blame the state for driving cities into bankruptcy. I would agree, but not for the reason most would suggest. Years of aid has not only created dependency but it has allowed cities to pursue an expensive and inefficient development pattern that can't be maintained without government transfers (one of our four Mechanisms of Growth). We've grown so used to this system that we hardly question it, but when you step back and consider the incredibly low return on investment we all see on our local infrastructure projects, it is a wonder we have made it this far.

It is unfortunate that the current economic crisis is forcing our communities to make this transition in a short and painful timeframe. Although, without being forced to change, many would continue to dig their holes deeper. The communities that will be most successful over the coming generation will be those that orient themselves with a Strong Town approach that emphasizes community-building and increasing the return-on-investment on existing infrastructure.

Friday News Digest

The first weekend in December marks the beginning of the baking season here at the Marohn household. I'm a little behind in buying my supplies, but that will change today. By month's end we (myself and my two little helpers, ages 5 and 2) will have baked or assembled more than a thousand sweets. If you swing by our offices here during the last half of the month, you are likely to be greeted by a tray that looks something like this:

Enjoy this week's news.

• Even before budgets were stretched thin, I saw cities here in Minnesota abusing the assessment process in order to avoid raising taxes for infrastructure maintenance. In general, cities can't assess for routine maintenance as it does not provide added value to the property. Many cities will set the assessment amount just low enough where it does not pay to bring legal action, but just high enough to make the added cash to the city significant. Seems like the officials in Burnsville were not aware of that little trick. The fact that so many cities do this should be another red flag that our development pattern is financially not affordable.

According to state law, the special assessment cannot exceed the increased market value of the property resulting from the improvement. Rob Thiry, who owns 13 acres in the neighborhood, has been assessed $24,000. [Bloomington attorney Karen] Marty said it is highly doubtful that the value of Thiry's property has increased anywhere near that much, if at all.

• Part of how we subsidize inefficient development decisions here in Minnesota is through the property tax system. We give farmers special tax status that keeps their property taxes artificially low. In recent decades, property owners wishing to live out in the countryside have had their taxes reduced even when they do not farm or have only a recreational, non-commercial farming operation. Wisely, this policy is now changing, but the effects of the change are dramatic in some instances and are creating predictable outrage in many areas.

In one extreme case -- a "shocker," in the words of [Scott] County Auditor Cindy Geis -- annual property taxes will skyrocket from about $5,000 to nearly $40,000. In others, they will increase by $1,000 or more.

• Those fake-farms could perhaps get their subsidy back and more if they just started growing corn that could be used for ethanol, despite the fact that other government incentives combined with a drop in demand and added fuel efficiency (remember cash for clunkers) has created a glut of ethanol. Left Hand...meet Right Hand.

To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuelsinto gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.

But nobody at the time counted on fuel demand falling in the United States, which is what has happened during the recession. And that decline could well continue, as cars become more efficient under other recent government mandates.

• The bizarre dichotomy that everyone acknowledges in private is that farmers are part of the land use problem. It is one thing to receive subsidy for agricultural practices and, if that were it, there would be some logic to it. But other subsidies, incentives and regulations that allow farmers to randomly subdivide their land into residential lots not only drives up land values to the detriment of profitable faming operations, but it leads to bizarre public debates such as this one. 

• We're going to talk a lot about transportation in the coming weeks, but I wanted to include this article on the deadly nature of rural roads. I'm not sure why there is all the confusion over the cause of higher death rates in rural areas. It is fairly obvious. In urban areas, high-speed roads are typically controlled access and local streets, where there are a lot of intersections and access points, are typically slow speed. In rural areas, we just mix them together so we have full access, high speed roads pretty much everywhere. Not only is this approach excessively expensive, it is deadly.

• I'm not sure about this, but the concept sounds interesting.

• For all of those that think the economics of scale have doomed the neighborhood, this article demonstrates that it is possible to start putting the pieces back together.

Until recently, supermarket chains focused primarily on the suburbs. The business model involved rolling out the same store with parking in front, again and again. When supermarkets did build in cities, they plunked down the same suburban box whenever possible. This approach worked as long as new growth was taking place primarily in the suburbs and the cities languished.

• There is a fascinating land use case that was just heard by the US Supreme Court. It involves a Florida program that "restored" shoreline. Once restored, the "new" shoreline was claimed by the government for the public. This effectively made properties that once were on the shoreline now second-tier development - a substantial loss of property value. Is that a takings? We'll find out shortly.

“You didn’t lose one inch,” Justice Stephen G. Breyer told the lawyer for the owners, D. Kent Safriet. “All you lost was the right to touch the water. But the court here says you in effect have that right because you can walk right over it and get to the water.” 

• We started the week here at the Strong Towns Blog talking about housing. Here is another interesting article that tries to capture the current tenuous state of the housing market. The article reports that nearly one in four mortgages are "underwater", owing more than the property is worth. And this is before any really radical decline in values. Advice to developers to take a year off seems more than logical.

• Like many other planners, I've found the book "A Pattern Language" to be brilliant and invaluable. Here is an article about the controversy with this book and its author.

• Finally, those of you that follow me on Twitter are aware that I caught the Brian Setzer Orchestra the weekend before last. They are phenomenal straight up, but playing Christmas music is even better. To help you get in the season - and maybe we can all encourage some snow to fall on my roof - here's BSO doing Sleigh Ride.