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Monday
Aug152011

Measuring Productivity

In an age of austerity, we need to make our public investments go further. No longer is it acceptable to simply analyze public projects in one dimension, such as cash flow or job creation. Our projects need to leverage our limited revenue to do all that and much, much more. Our top priority today needs to be on making our places more productive.

Thank you to everyone who engaged with us on our two "Infrastructure Cult" pieces last week. The response was overwhelming and I apologize to those who have emailed me and have yet to hear back. We're working on it and some other things soon to be released. Thank you for joining us here each week and for all of your support of the Strong Towns movement.

In last week's Friday News Digest, I wrote about the work of Joe Minicozzi, whose speech from CNU 19 I had included in an earlier podcast. While we at Strong Towns often start with the public cost for infrastructure and then compare that to the revenue yield from the property it serves, Minicozzi comes at the productivity equation from a different -- and thought provoking -- angle.

Let me share an analogy from Minicozzi's CNU talk: When we look at the productivity of a car, we measure it in miles per gallon. The question we ask is, how many miles does a car travel per gallon of gas used? We are comfortable with this approach because it is vastly more logical than a miles per tank calculation. Nobody asks: how many miles can I travel on one tank of gas? We all understand that, while a Hummer may have a bigger gas tank than a Honda Civic, it does not make nearly as productive use of gasoline.

Cities often vigorously pursue that large business -- think Wal-Mart -- instead of the small ma-and-pa shop under the guise that the large business is going to generate more tax base. The same with the big house in the suburban subdivision. That sheetrock palace is paying a lot more tax than the little house on the city block. Isn't it logical that a city will be better off if they have more of these large businesses and homes?

Minicozzi's analogy would suggest that revenue per lot is a poor measure of success. The large business may provide a lot of tax base, but it also chews up a lot of land and requires a lot of infrastructure. Same with the house on the large lot. A better way to measure success, and true productivity, would be to look at the tax base on a per acre basis.

Seem abstract? Let me give you a real example.

At my other job with Community Growth Institute, we are working with the City of Pequot Lakes, MN, to expand their Grow Zone, an area in town where we helped establish a form-based code two years ago as part of a plan to promote business development. Last month we analyzed two streets that had just been reconstructed as part of a routine city maintenance project. What we found affirms Minicozzi's premise.

2nd Street in Pequot Lakes, MN.

The street reconstruction cost $180/foot. These costs were actual construction costs from 2010, so there is nothing theoretical about them. The tax base calculations were based on (1) the city's current budget, (2) the city's current tax rates and (3) the actual assessed value for each property. We assumed a 20-year life span for the street and put the total revenues collected over that period of time into a present value (at 4% for anyone interested). The results reveal two streets in the heart of the city's downtown that are not even close to being productive.

Street #1

  • Total cost for street reconstruction: $104,400
  • Total revenue collected for maintenance over one life cycle: $23,400
  • Revenue gap in current configuration: ($81,000)
  • Percent of project covered by adjacent tax base: 22%

Street #2

  • Total cost for street reconstruction: $126,000
  • Total revenue collected for maintenance over one life cycle: $50,000
  • Revenue gap in current configuration: ($76,000)
  • Percent of project covered by adjacent tax base: 40%

These are streets -- especially Street #2 -- that, if you asked a local to name the five most productive streets in town, would assuredly be on the list. It has some of the largest businesses and the town's major employers. Even so, the taxes collected from the adjacent properties are not even remotely close to covering the basic maintenance costs of the streets that serve them.

The premise of our work there is not just identifying this imbalance, but solving it. The standard "miles per tank" approach would suggest that we seek to attract another large business to locate along this street. That would be the wrong move.

In the spirit of Minicozzi's work, we analyzed the yield from each property along the streets. The one with the highest total value is also one of the city's largest employer and a business that the community values greatly (with good reason). It consumes five acres in the heart of downtown and, while it pays over $14,000 per year in property tax to the city, the yield is only $2,860/acre.

Major business in downtown Pequot Lakes. Tax yield: $2,860/acre.

In contrast, a small little shop that had lost its tenant and was currently sitting vacant -- a place that, quite frankly, nobody in the city government much values -- paid only $1,200 per year in property tax. However, it only consumed a quarter of an acre. Its yield: $4,960/ acre.

Vacant business in downtown Pequot Lakes, MN. Tax yield: $4,960/acre.

To be successful, the City of Pequot Lakes does not need to attract another large employer to build a new business. All it needs to do is get this run down little shop reactivated -- something that is actually much easier to do -- and then create an environment that would allow 20 more of them to be built along this same street. This is also doable over a longer time horizon. When all you need are a bunch of these modest-sized establishments, all of a sudden there is tons of room for growth.

I can already hear the chorus of objections from the "jobs first" crowd. They will say that the low-yielding, big business is creating a lot of jobs -- many of them high-paying -- and this little shop, even on a good day, will create few. They will argue that economic development is all about job creation and so focusing on this small end of the spectrum is missing the point.

I could question the basis of that assumption, but instead let me point out the obvious fact that always makes these economic development people angry. From the city's perspective, there could be a thousand jobs at that business and a billion dollars worth a sales run through there. None of that will change the property value and thus none of it has any bearing on this city's revenue. You can argue that tax laws should be changed to provide for a local income tax and a local sales tax (some places have one or both of these, but not Pequot Lakes), but until that happens, the only way this street pays for itself is by becoming more productive from a tax base standpoint.

That is not to say that jobs are not important. They are. But they are one factor in many. We can spend a million dollars to attract or create a job, but if that job doesn't generate any financial return to the community, it is going to be hard to repeat that effort. In an age of austerity, we need to make our public investments go further. 

This brings me to a final, obvious question: If these streets are not productive, why are we building them this way? There is a long answer to that (and I am currently working on a book proposal to answer it), but the short version is this: we've not had to bother about productivity until now. Since the end of World War II, we've been so wealthy and had so much growth that, for most parts of the country, the productivity of our places did not matter much. If it created a job, it was good. If it brought in a new business, it was good. We didn't ever pause to worry about what happens when the maintenance bill comes due.

Those bills are due now, and more are arriving each day. We don't have anywhere near the money to maintain so many unproductive places. What we face is a choice between a chaotic reset or a strategic contraction -- one where we intentionally divert our limited resources into those endeavors that are most productive while we seek -- block by block and neighborhood by neighborhood -- to improve the productivity of our places.

At least, I'm optimistic that we still have time to choose.

 

Additional Reading

 

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Friday
Aug122011

Friday News Digest

Two weeks ago my DVR stopped working. I'm not a huge TV watcher but, when I do sit down, the DVR keeps my time efficient. Losing it made the tube nearly worthless to me. Then the TV itself went out. Ours was a 1995 vintage set that, while only 26 inches, needed a moving crew with a forklift to relocate. While we enjoyed some good reading time with it gone, I must admit that I kind of like our new 32" flatscreen. So that's what was happening on the edge of the set all those years it was cut off.

Enjoy the week's news.

  • This has been kind of a crazy week with our two postings on the ASCE report (Monday | Tuesday) generating a ton of emails, phone calls and comments. Among them, we'd like to thank Kevin Klinkenberg at his New Urbanism Blog for linking to our piece and adding his kind words. I typically find it bad form when the author of a piece quarrels with every poster in the comments section, so I generally lay back and, having spoken my mind with the post itself, let people react without my heavy hand. This week, though, I've been drawn into the discussion on Monday's post over at the New Urban News site. I must say, it has not always been civil (unlike most of the stuff here - thank you to our readers). After being a little frustrated today, I wanted to say thank you to the commentor @Kathryn who wrote:

Thank you for your calmly considered, fact-checking analysis, and for maintaining your tone in the face of less civil discourse.  I appreciate your willingness to "name the elephant" that you tackle in your site.  We need to think deeply about where we are, and where we are headed, and we are in peril from both fear-based propaganda and false beliefs about how prosperity is created (or, I would contend, even how prosperity is defined).  We also cannot think deeply together while sneering at one another.  I appreciate your refusal to do the latter, and your focus on the former.

(blush)

  • I also have to thank Strong Towns Evangilist Jake Krohn for not only sending me a quote from Upton Sinclair that I used repeatedly in this week's podcast (you'll have to listen to get the quote), but totally rocked in the New York Times' special section on the St. Croix Bridge. The section is an interesting overview of the Old Economy Project that Refuses to Die and the many perspectives that surround it, so it is worth a read even without the rubbnecking at Krohn's masterful work.
It's a shame that the planners from the Minnesota-based Strong Towns Group weren't involved in this debate, as they have presented a consistently coherent argument against the Stillwater bridge that is based less on the environmental sins of this plan and more on the general idea that this project represents a notable case of an "old economy" project that just won't die:
  • I met Joe Minicozzi at CNU 19 in Madison and was blown away by the deep, yet simple, insights that he had into the financial implications of our development pattern. It was so compelling, we ran his talk in one of our recent podcasts. Minicozzi's work was featured prominently this week in Glenwood Springs, CO, in an article that is well worth the read.

Across the board, other downtown commercial and mixed-use buildings outperform their big-box counterparts using the per-acre tax revenue comparison, both in Glenwood Springs and Rifle.

It's like comparing the value of a vehicle based on miles per tank (large-format commercial mall) versus miles per gallon (mixed-use downtown development).

“Many communities have tended to look at real estate on a miles per tank basis,” Minicozzi said in a recent interview. “But if you look at it on a miles-per-gallon basis, all of a sudden the data on that vehicle changes.”

  • There are a lot of cities that gambled during the boom years and rolled a snake eyes. This story on Pine Island, MN, was sent to me some time ago and got buried in the pile. It is worth dragging out here now if only to remind us what can (and ultimately will) happen when we veer from the path of resilience.

An alternative plan could be tricky for Pine Island, which promised MnDOT that the project would create at least 182 biobusiness jobs over the next nine years. Pine Island would owe MnDOT up to $3.65 million if the jobs aren’t created. The city could seek to renegotiate the deal, promising to create jobs in another field, but would then have to promise a “significantly higher” number of jobs than the 182, according to [Mn/DOT Project Manager Terry] Ward.

“The reason we want to see some results is because that was the overall reason why the project was funded to begin with,” Ward said.

  • If people were offended by our approach to the ASCE report and infrastructure funding in general -- essentially demanding that we invest in projects that have a real, financial ROI -- those people are likely to be really upset with House Transportation Committee Chairman John Mica. Representative Mica has said that, when it comes to transportation spend, we are only going to spend the money that has been collected. That means transportation spending will be limited to gas tax revenues, as was originally established. While I find this approach a little overly simplistic, the Infrastructure Cult is sure to apolplecitc.

Rep. Mica said he is insisting on a long-term bill because states and businesses need to have the certainty of the federal government's funding commitments before they embark on major construction projects. A short-term bill, he said, "gives you sidewalks, it gives you repaving."

Rep. Mica has proposed a six-year, $230 billion bill that would slash transportation spending by about a third from existing levels. His plan would be funded by gas-tax receipts. House Republican leaders, hoping to cut the deficit, have imposed rules forbidding borrowing money from general tax revenues to finance transportation projects.

Along the south coast, the Foothill South toll road is a 16-mile, six-lane highway to be funded by tolls that, for the project to pencil out financially, are expected to be so expensive that only wealthy drivers would choose to pay them.

  • A city that was, by their own admission, mismanaged discovers they have less money than they thought they had. Much less, especially for them. What do they do with no reserves and no "Plan B"? They beg.

[Planning Commissioner George] Custer says that half a dozen citizens have agreed to give the City a loan if a loan from the bank does not materialize, but the list of citizens will remain anonymous for now.

Not all of the citizens solicited to loan the City money were happy. Eddie Roberts, an 87-year-old man, and well-known figure in the City of Oakridge and Westfir, says Custer, a man he has never met, asked him to loan the City money, to which he replied no.

“Why would I loan them money if they can’t even balance their checkbook each month?” asked Roberts.

  • At Community Growth Institute (my other job), we have used Clockwork Media for our web page for the last ten years. We used to share office space with them when we were both startups. I have always liked them personally and it was no surprise for me to see them featured on bikewalkmove.org for their corporate bike culture. One of the top guys there, Chuck Hermes, commutes 40 miles a day by bike! That's leadership. Check out that article for some good ideas on creating a bike culture at work.

With co-founder Chuck Hermes leading the way, nearly 20 Clockwork employees choose to make biking a part of their daily (or in some cases weekly) routine. Chuck bikes more than 40 miles a day to and from Stillwater.

“I’m a life-long cyclist—I’ve had pictures of bikes on my birthday cakes for years,” Chuck says. “I take the Gateway trail to work almost every day. Sure it takes more time, but it also means I’m a more productive employee. And, maybe more importantly, I’m happier and I’m a better husband and father as a result.”

  • It has long perplexed me how the newest and most expensive of subdivisions will be lined with these hideous-looking utility boxes. It is the rare community that puts these warts in the right place. AT&T wants to add nearly 500 of the biggest kind to San Francisco, which is prompting some debate in one of America's most interesting cities.

The challenge is particularly daunting in a dense city like ours, where some older neighborhoods lack the street trees and shrubbery that can shield things like utility boxes from sight.

In such districts, there's no obvious place to hide the "telecommunications cabinets" that AT&T wants to install as part of an effort to bring fiber-optic service into homes and businesses. The cabinets are 48 inches tall, 52 inches wide and 26 inches deep.

Now multiply this by 495 - the number AT&T hopes to install, down from an original request of 726 - and it's no wonder groups like San Francisco Beautiful fought so hard to have city leaders put the telecommunications giant on hold.

  • If you are an elected public official, just take a minute and read this article. I've seen this scenario play out too many times, even by well-intentioned people.

When a council is divided into contentious voting blocs, an administrator has to pick sides - or do as little as possible.

"When you have two people on the council who are not happy, you can get in a difficult position if you make a recommendation and two of them don't agree," said Craig Waldron, who has been the Oakdale city manager for 18 years. "You are not necessarily creating the best future environment with them."

  • Thank you to my friend and fellow-NextGen'r Ian Rasmussen for sharing this video on the mathematics of our places. I found it fascinating and think you might as well, even if you are not necessarily a math person.

This weekend we pause here and honor my mother-in-law, who not only turns 70 but is one of the most generous and selfless people I've ever known. May you all be so lucky with your in-laws.

 

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Tuesday
Aug092011

ASCE "revises" report

Yesterday we wrote about the ridiculous piece of propaganda issued by the American Society of Civil Engineers and dutifully circulated by the media. The report was designed to paint a negative picture of America's future if we did not pony up trillions for engineers to build and maintain infrastructure. The central argument was that continued decline of our infrastructure systems would cost us $1 trillion over the next decade. To avoid this calamity, according to ASCE, would cost us a mere $2.2 trillion. This is modern engineer-logic, where spending $2.2 trillion to save $1 trillion is just plain common sense.

Interestingly, ASCE has now issued a statement clarifying its report. According to Brian T. Pallasch, CAE, Managing Director, Government Relations & Infrastructure Initiatives:

“ASCE is revising figures reported in the release of its recent study on the economic impact of underinvestment in transportation infrastructure.  The original report dramatically underreported the negative effect of Americans’ personal income due to failing transportation infrastructure. The report shows a clear and rapidly-expanding negative impact on Americans’ pocketbooks in both the near and long term, and a dramatically accelerating negative effect on GDP in the near- and long-term. Our original release projected that Americans’ personal income would drop by $930 billion by 2020 but recover slightly in 2040. The data clearly show that the effects will be dramatically more negative, with $3.1 trillion in personal income losses by 2040. The negative effects on American GDP will also expand dramatically over time, with a near-term loss of $897 billion and a near-tripling of that loss to $2.6 trillion by 2040.”

Ostensibly they want to be taken seriously.

Let's focus on the revised GDP number of $2.6 trillion by 2040. Last week we talked about budget projections in our Monday piece, Downgraded. We pointed out how the Federal government is using overly-optimistic projections of GDP growth and how just slight changes downward in those projections would mean trillions in lost GDP. In fact, a minor drop in the growth rate from 4% to 3% would cut $2 trillion out of the GDP by 2020.

Sometimes when you are throwing around a trillion here and a trillion there, it all gets kind of lost in translation. So, what I did to clarify this is to start with the 2010 GDP of $14.7 trillion and project out three different growth rates through 2040, ASCE's study window. I then compared that to ASCE's projection for cumulative lost GDP. When you bring these projections out to 2040, here is what it looks like:

This illuminates the absurdity. Even in the scariest scenario envisioned by ASCE's report, GDP loss amounts to a fraction of the estimation error between the different assumed rates of growth. When you get to 2040, the $2.6 trillion in cumulative loss pales in comparison to missing the overall growth rate in the projection by just 1%. This is statistic silliness.

This also shows how ridiculous 30-year projections are. Do we really have a clue as to what our economy is going to look like in 30 years? Yesterday I looked back to 1981 in an attempt to point out how much change has taken place in the last 30 years. The hubris involved in making a projection like this, with the precision they offer, is laughable.

Just for the mental exercise, let's take ASCE at their word and assume we lose $2.6 trillion cumulatively in GDP. Since we tax at roughly 20% of GDP, that would mean the U.S. Treasury would lose out on $540 billion in revenue over the next 30 years. Contrast that with the $6.6 trillion they are suggesting we spend over that same period and you start to get a sense for how backward this logic is.

When I said yesterday that this felt like a cult, this is what I meant. We have collectively believed for so long that spending on infrastructure is the key to prosperity that we don't even bother to check if it does. I don't think ASCE even checked their own numbers. They simply looked at the estimates for lost GDP, etc... and said, "That sounds pretty bad." Then they looked at their projection for how much money they and their allies wanted to shoot for in the appropriation and said, "That sounds right."

They are all so brazen they didn't even bother to notice that the amount they wanted to see spent was more than the amount they claimed we would lose!

Or did they notice but thought we would be too stupid to figure it out? If they did, it worked. I've searched all over Google news and can't find a single story or blog that did anything but parrot this report's findings. Just like in a cult, nobody questions this stuff.

You'll note ASCE never took the annual transportation appropriation they were calling for and ran that dollar amount out to 2040. That would not have been good propaganda. 

ASCE's report is an embarrassment to the engineering profession. This revision merely adds insult to injury.