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Friday
Nov122010

Friday News Digest

I am leaving the family behind and heading out of town this weekend to a place I have not been since the spring of 2001, that being New Orleans. I am preparing myself for it to be quite different than the last time I was there. I'm not much of an experimenter when it comes to food, but on my last visit I fell in love with anything blackened, so this time I'll be looking for more of the native food. My trip is work, not pleasure, and I'm hoping to be able to reveal some of the details here next week. If you are going to be in New Orleans this weekend, give me a Tweet and we'll see if we can connect.

Enjoy this week's news:

  • It is powerful feedback when you hear your ideas taken and then independently put in a local context, as was the case with this strong editorial by Mike Gainor in the Pine City Pioneer. We held a Curbside Chat in Pine City back in September that was well attended, apparently including Gainor in the audience. We are so happy there is continued discussion there in Pine City and look forward to getting back there soon. Great article!

What the folks at Strong Towns believe is simple: the way cities and towns have been creating developments and infrastructure creates a short-term cash flow for the city, but in the end it costs more to maintain than it generates in return. Once maintenance costs start kicking in, the true price of the new growth becomes apparent. Cities and towns have been banking on endless growth, paying for today’s bills 20 or 30 years from now, but the cycle can’t be sustained forever. Once the economy slows, or the maintenance bills simply become too much, the city faces stark choices of slashing services, raising taxes, or both.

What it came down to for me was this: we have been building a lot of infrastructure as a city. The question is, how are we going to pay to keep it working?

  • Also, Professor David Levinson -- one of my favorite profs from graduate school at the University of Minnesota -- mentioned our series on cost/benefit analyses on his blog, The Transportationist. Professor Levinson, like me, is a civil engineer with a planning streak and so we always seemed to understand each other better than most of the others around us. I highly recommend his blog, which you can also subscribe to through Facebook.
  • Transportation for America, an organization we share a lot of common thought with, has been doing the "rah-rah" parade for TIGER II projects. A lot of community activists believe that more spending will solve our problems. Overlooking the fact that more spending is not likely to happen anytime soon and so some reality is in order, more spending on the current model is a losing proposition. We need rail, yes, and we need more transportation revenue but it has to be in a context that builds Strong Towns. It was sadly amusing to me that, in their cheerleader role, T4A seems to have forgotten that it was the railroad that made Staples in the first place, but the current development model that made it less than "whole".

“Finances for projects like this are almost overwhelming for us at the local level,” said Nelsen. “To give you some idea, the money from the federal grant was equivalent to ten years of our local tax levy. Without state and federal funds, we’d never be able to afford this project.”

And without those federal funds to support innovative projects like this one, Staples would still be a city divided by their transportation system, rather than a city becoming whole again.

  • In my Congressional District, Minnesota's 8th, we booted out the darling of the transportation lobby, James Oberstar (in fact, there was one story on how he had only one single campaign contribution from his district, the rest coming from fundraising outside). There are a lot of infrastructure advocates outside the 8th District that are perplexed by this -- many simply blame an angry, uninformed electorate that would seemingly harm itself by throwing out the guy who brought home the cash, others are even worse calling the district a "wasteland" that is "one continuous Federal highway project" -- but this is the same place that elected him by huge margins for decades and, even in the current election, went solidly for his party, the Democratic Farm Labor. Elections are complex, but I think that at least part of the reason why Oberstar was vulnerable was that, as we argued this week with the Staples overpass project, the grand bargain of pork spending is losing its allure.

[David] Schultz [of Hamline University] said this could have implications for Minnesota, especially the 8th Congressional District.

“It’s huge,” he said. “I like to jokingly tell people that every piece of asphalt in Duluth has Oberstar’s name on it.”

A sampling of some of the recent funding Oberstar secured includes $6.1 million for Duluth International Airport, $7 million to build a bridge over I-35, $5.5 million for the Great River Road Project in the state’s western region, and $2.3 million for the Paul Bunyan Trail, the Paul Bunyan Scenic Byway and the Paul Bunyan Trail Bridge.

In short, earmarks were an imperfect and ad hoc form of industrial policy. Unlike many other nations, the U.S. federal government never pursued a coordinated industrial policy in the decades after World War II. Opponents of industrial policy ultimately won the argument, but important voices on the Iron Range argued in support of just such a coordinated federal plan to support the vital steel industry and the iron mines.

Republican Senate leader Mitch McConnell says banning pork-barrel projects known as "earmarks" from congressional legislation is more complicated than it appears but that he is willing to consider such a ban.

McConnell says that ending the common practice of slipping funding requests for home-state projects into legislation won't cut spending.

  • My hometown of Brainerd is what we call here in Minnesota a "charter city", which means it operates under its own home-rule parameters. This has provided for all kinds of odd ballot initiatives (most memorably, a law allowing Sunday liquor failed by one vote about a decade ago). Currently, Brainerd residents are responsible for the cost of sidewalks adjacent to their property. Following this election, that cost passes largely to the city government. I know residents have fought the installation of sidewalks, and lobbied to have them removed, because sidewalks increase their assessment amount. It is not clear to me, however, that the city will have the vision to be pro-sidewalk where they need to be if the money comes out of their general fund.

Previously, a property owner was required to pay 100 percent of the costs of sidewalk repair or construction. With the approval of the City Charter amendment, the percentage determination will be up to the city council, depending on the particular project. The proposed charter amendment doesn't include the construction of new sidewalks in new developments but if the council requires a new sidewalk to be constructed in an area that doesn't have sidewalks, the charter amendment would apply.

  • I love the Daily Yonder, but this article on farm subsidies and food quality makes no sense to me. I have just four words: High Fructose Corn Syrup.

If the feds eliminated ALL farm subsidies, we would actually eat MORE calories. How's that? Well, the federal government limits importation of sugar and that raises the price of some foods while decreasing consumption. Get rid of the restrictions and we'd eat more, cheaper food.

  • Regarding agriculture, an interview with a former oil executive indicating that we will be at $300 per barrel gasoline within years contained this interesting quote on how our food consumption habits will change. I'm a  consumer of High Fructose Corn Syrup in the Mountain Dew variety and I suspect my transition to a more native diet may be a painful one.

And what we have to keep in mind is that oil is particularly useful in the transportation sector—starting with airplanes and boats and going on to trucks and trains and cars. About 97 percent of transportation depends on oil. So when we talk about oil production slowing down and reversing, you’re talking about a huge cost to the transportation sector. For instance, right now we don’t worry about winter when we go to the supermarket—you get a head of cabbage or lettuce, but it will say: “Grown in California.”

So, we’ll have to grow an awful lot of food locally, and perhaps even change our diet a bit to use more root vegetables that can be stored, as opposed to eating so many things that are perishable. That’s just one example of how peak oil will change our way of life.

  • Years ago, long before I was a father of two little girls, I played drums in a band and got to share the stage with a really fun group from New Orleans called Rockin' Dopsie, Jr. and the Zydeco Twisters. There is absolutely no chance they would remember me, but I may have to burn my Zydeco CD into my iPod before I board that plane to Norlens, if only for the memories. Enjoy some fun music and, most of all, enjoy your weekend.

 

Join our conversation by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

Thursday
Nov112010

Costs and Benefits, Part 5 (Finale)

What this series is meant to do is to pull back the curtain for people who assume that, when we make investments in infrastructure, the government is ultimately getting money back -- through new income tax, sales tax, property tax, etc... -- in an amount that exceeds the cost of the project. There is a common assumption across the population that new infrastructure built in the American model we use today is an "investment" in our future prosperity, an investment that pays real, dollar returns. 

Nothing could be further from the truth.

The reality is that we are spending enormous amounts of money on an American way of living that cannot be financially sustained. At this point in our development, nearly every project we do in the current American model costs us vastly more money than we will ever recoup in added tax revenues. Our economy is stifled and, despite our extraordinary efforts, we can't revive it, largely because we're choking on an infrastructure platform that sucks wealth instead of creates it.

We've used private and public leverage and a variety of perverse incentives to create thousands of local Ponzi schemes, each providing the illusion of growth and prosperity. It is not real, and we as a people inherently know that.

This week we've looked in depth at one project, a railroad overpass in Staples, MN. Staples was awarded a TIGER II grant along with other federal and state support totaling the entire cost of the project, $9.85 million. In their TIGER II application, they detailed the costs and the benefits of the project and concluded that there is a return of 8.7 times the cost of the project. As we've shown, the costs are all real dollar costs but the returns are nominal quality-of-life benefits, largely a couple minutes of saved time, that accrues only to the people of Staples and those that pass through.

As someone who has spent years around this type of analysis, I had actually grown numb to the fraud. This is the way all of these cost/benefit analyses are performed - it was old news to me. It took an hysterical reaction by an insider to my mild critique of this project to help me realize how many advocates have actually convinced themselves, and the public, that the claims of real benefits are true.

Reality is a much different picture. In the case of this project:

Direct Financial Costs - $16,140,000

  • Project cost: $9,850,000
  • 20 years of financing of the Federal contribution: $4,600,000
  • 20 years of financing of the State contribution: $380,000
  • Lost gas tax revenue: $640,000
  • 25 years of maintenance: $670,000

Direct Financial Benefits - $0

  • None

Social Costs 

  • The opportunity costs of spending $16,140,000.

Social Benefits

  • The ability for Staples residents, and some of those driving through Staples, to allocate time currently spent waiting for a train to other activities.
  • The ability for Staples residents, and some of those driving through Staples, to save on the wear and tear of their vehicles through a modest reduction in estimated daily driving distances.
  • Enhanced public safety, primarily through the potential for increased response time.
  • Modest reduction in fossil fuel consumption, which is debatable since similar projects have historically induced increased fossil fuel consumption.

If we are honest with ourselves, the question we are asking here is whether or not the benefit to Staples residents now being able to get to where they are going without interference from the train and to have improved safety access is worth $16 million of Federal and State dollars.

That is much different, and more honest, than asking whether or not a project that has benefits that exceed the project cost by a factor of 8.7 is worth the investment.

This entire series started with us trying to explain to infrastructure advocates, economic developers and those that defend that status quo why their plans are being met with increased skepticism. We are not uniformed and we are not ignorant. The average person may not know all the details we have presented this week, but they also are not stupid. It doesn't take a lot of deep thought to understand that the current approach of spending more and more money on new infrastructure while our existing systems rot is foolish. Now that austerity is being forced upon us, there are fewer and fewer defenders of this approach willing to look the other way hoping their day for a payout will soon come.

There are a lot of issues in this series that we have not touched on, the most obvious one being "JOBS"; the notion that infrastructure spending creates jobs and is thus always good. There is also the contention that new infrastructure creates new growth and that new growth will make up for all of the financial shortcomings with this project. If these topics interest you and you do not want to wait for me to come back to them in the context of this project, you can read some past posts we have done.

We'll get back to these discussions as well as look at the land use impacts, the bad incentives that are inherent to the current system and the way we would reconfigure state and federal programs such as TIGER II so that we were building Strong Towns.

Finally, we'll end this series for now with a line from yesterday's post: 

If readers take one thing from this analysis it should be this: The way we spend money today on infrastructure responds to our preferred lifestyle choices, but provides no financial return.

If you want your town to be strong and resilient, not fragile and dependent, then you need to move towards a Strong Towns approach. This will mean confronting, at the local level, the financial realities of the current American way of growth and development, then plotting a new course where the community's collective spending on infrastructure generates a real return on the investment. 

Other posts in this series:

  • Part 1, Background on cost/benefit analyses
  • Part 2, Review of time savings benefit and distance benefit
  • Part 3, Review of safety, carbon reduction and O&M benefits
  • Part 4, Review of the project cost analysis

 

Join our conversation by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

Wednesday
Nov102010

Costs and Benefits, Part 4

This is a continuation of our in-depth look at the way that cost/benefit analyses are done to justify infrastructure spending, particularly in large grant programs such as the recent TIGER II. We are focusing specifically here on a $9.9 million overpass being built with mostly Federal dollars in the city of Staples, MN. Before you begin reading this post, we highly recommend that you review Part 1 (background on cost/benefit analyses), Part 2 (analysis of time savings and distance savings benefits) and Part 3 (analysis of safety, carbon reduction and O&M benefits) of this series.

Today we are looking at the cost side of the equation. Going back to Part 1 of this series, we detailed a theoretical equation for conducting a public cost and benefit analysis that is as follows:

Government ROI: financial benefit + (constrained) social benefit > financial cost + (constrained) social cost

The "constrained" adjective is meant to indicate that the social benefits and costs are constrained by political and social constructs. We will look at financial and social costs separately.

Financial Costs

The cost of the project in dollars is $9.85 million. This is the direct cost, paid today, for building the overpass. Of this cost, $8.85 million is being paid by the Federal government and $1 million is being paid by the State of Minnesota.

It is important to understand where the money is coming from. The Federal money is coming from two sources: TIGER II and Federal Surface Transportation funding. The state money is coming from a direct bonding appropriation.

The original TIGER money came out of the 2009 stimulus funds, but TIGER II is a direct appropriation from Congress. In either case, it involves deficit spending. We are borrowing this money, which is $7.65 million of the Federal government's contribution. The remaining $1.2 million was appropriated from the Federal Highway Trust fund (Federal gas tax) in 2005, which was solvent at the time but is now also running a structural deficit

The State of Minnesota is also borrowing the money it is spending on this project, but unlike the Federal government, the State has a plan to pay the money back. On the Federal side, the deficit spending is essentially an interest-only loan (of which we are borrowing to pay a portion of the interest as well). 

With the current 20-year Treasury note sitting at 3.66%, the total amount of interest accumulated in the 20-year timespan is $8.3 million. In present value terms, this is an additional cost for Federal financing of $4.6 million. It should be noted that, without a plan to pay this debt down, the actual financing cost is infinite. If we just analyze the life of the project  -- 100 years -- then the present value of the interest is $16 million (assuming we keep our cheap borrowing rates for the next 100 years). This is the destructive power of compounding interest.

For Minnesota's portion, we're not sure the rate at which they bonded and so we'll assume the same, low federal rate. The big difference is that the State is paying off the debt, reducing the principle and and interest payments each year. We'll assume a 20-year bond, which yields a total of $380,000 in present day financing costs.

In summary, the financial cost includes both the project cost of $9.85 million and the present value of the financing costs, which is $4.6 million for the Federal government and $380,000 for the State government. These are revenue outflow commitments each level of government is making by funding this project using the mechanisms they have.

Social Costs

What this series is meant to do is to pull back the curtain for people who, when they hear that the benefits of a project exceed the costs by nine times, assume that the government is ultimately getting money back -- through new income tax, sales tax, property tax, etc... -- in an amount that significantly exceeds the cost of the project. There is a common assumption across the population that new infrastructure built in the American model we use today is an "investment" in our future prosperity, an investment that pays real, dollar returns. 

Nothing could be further from reality.

If readers take one thing from this analysis it should be this: The way we spend money today on infrastructure responds to our preferred lifestyle choices, but provides no financial return.

We are spending enormous amounts of money on an American way of living that cannot be financially sustained. At this point in our development, nearly every project we do in this model costs us vastly more money than we will ever recoup in added tax revenues. Our economy is stifled and, despite our extraordinary efforts, we can't revive it, largely because we're choking on an infrastructure platform that sucks wealth instead of creates it. We've used private and public leverage and a variety of perverse incentives to create thousands of local Ponzi schemes, each providing the illusion of growth and prosperity. It is not real, and we as a people inherently know that.

Despite our efforts to deny reality by using bogus analyses that convert nominal social benefits into monumental, but fictitious, financial gains, the emperor has no clothes. But understand, the "emperor" is not the city of Staples. It is not local economic development professionals, engineers and planners or even politicians.

The emperor that has no clothes is us, the American people. 

It is we who value that 45 seconds saved on a wider road over the money to invest in our schools. It is we who value the ability to live far from where we work more than we value having parks and quality public spaces. It is we who want to invest in a platform for easy growth in strip malls and big boxes rather than configure our communities for a slow, but far more resilient, economy. It is we who value our private space more than building communities we want to be part of.

And it is we who do not want to pay the enormous costs associated with our choices.

What is the social cost that we should weigh in a cost/benefit analysis on a project like the Staples overpass? Some would argue that the $16 million presents a lost opportunity. The money would be better spent educating our kids. Or finding a cure for cancer. Or providing for the nation's defense. We all have priorities we value.

But for me, the true social cost of our approach is how it has embedded in our minds the destructive notion that, as Americans, we can all get something for nothing.

We are the emperor, and we have no clothes. 

--- 

Posts in this series: 

  • Part 1, Background on cost/benefit analyses
  • Part 2, Review of time savings benefit and distance benefit
  • Part 3, Review of safety, carbon reduction and O&M benefits
  • Part 4, Review of the project cost analysis (Wednesday, November 10)
  • Part 5, A real cost/benefit summary (Thursday, November 11)

Future

  • Land use impacts
  • Bad incentives
  • What about jobs?
  • Proposal for a reconfigured TIGER III 

 

Join our conversation by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.