So many of our cities and towns rely on federal and state government spending to prop up their local finances. We inherently know and understand that these are not reliable sources of revenue, yet local leaders continue to put their communities in positions where they are dependent on that money. Local leaders today need to fully consider the implications of connecting the future of their towns and neighborhoods to such a volatile partner.
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Last Friday I was doing the long ride home from Target Field, home of the Minnesota Twins, taking in the ongoing political drama on the radio. From standard talk radio to Minnesota Pubilc Radio to my one of my favorite podcasts from KCRW called Left, Right and Center, all the commentators were talking about was whether or not there would be a government shutdown. Likewise on Facebook when I got home. I had friends worried they would not be reporting to work on Monday and others cheering on one side or the other in this farcical game of chicken.
Now I'm sure to have offended some by calling this a "farce", but really....this latest argument was over the budget that was supposed to have been approved by October of last year. The amount of cuts finally agreed to in a budget that is estimated to be $3.8 trillion was just $38 billion. That's 1% for all you math wizards or, as they call it in Washington, a rounding error. Heck, we were off by 20 times that amount in our projection of this year's deficit. If this is not a farce, it is unclear to me what would be.
Part of our Curbside Chat presentation addresses the first Mechanism of Growth that our cities have used post-WW II, that being government transfer payments. For two generations, our cities and towns have counted on transfers from federal and state governments to fund -- in the name of "growth" -- basic infrastructure and services like roads, streets, sewer systems, water systems, public buildings, parks, trails, sidewalks and even things like planning and engineering and, yes, even lobbying (ponder the incestuous nature of that for a while).
This is where the libertarian in me takes over because the result is so obviously destructive. We had growth, for a time, but that growth was in a pattern (suburban and auto-oriented) that was not only destructive socially and environmentally but has made literally thousands of cities across the country financially fragile, dependent on the continued flow of government money and (they hope) new growth to sustain the systems that have been created.
I can't begin to count the number of communities I have been in where the engineer prepares the report for some vital improvement and then the city mobilizes itself, not around doing the project, but around getting a grant for doing the project. And most of the time we're talking about basic maintenance.
Often the grant business itself corrupts the process. Back in my early engineering days, I had a project where it was going to cost around $300,000 to fix a leaking pipe. It needed to happen because the city's wastewater plant was about to overflow and potentially catastrophically flood a river. Not good. But the total city budget was $150,000. That's annual. They had absolutely no financial means to do the basic maintenance on their system.
Unfortunately, no state or federal grant program would bother with such a small project. The answer I came up with, and was roundly applauded for, was to make the project huge. We came up with all kinds of "needed" expansions and upgrades until the total cost was $2.6 million. Perfect for the grant programs. The community would up taking on a $130,000 USDA loan financed over 40 years as their "fair share", politicians got some nice press releases and a grip-and-grin photo op, and the engineer (me) got a nice bonus. And the city now had all of this room for new growth. Everyone wins, right?
Working for cities and towns, I feel like they have become that caricature of the spouse that has married the philanderer, but can't bring themselves to leave. They know their spouse is lying - what they are hearing can't possibly be true - but they buy it anyway because they can't envision another possibility. They watch the games that are played and become attuned to the nuances of the errant behavior. They want to believe and make excuses when things don't go as they would in a normal relationship, but they are really in purposeful denial.
Or even worse, they aren't in denial but instead believe their spouse will change.
Here in Minnesota, Republicans have taken over the legislature for the first time in decades. Their plan to balance the budget includes cuts in local government aid. There's a catch though....the cuts are to come from cities that elect Democrats. And the world keeps turning....
At Strong Towns we have developed ten Placemaking Principles - axioms to live by for those wanting to build a Strong Town. The first one is this:
A Strong Town is financially stable and must not be dependent on government subsidy for the common maintenance of basic infrastructure systems.
The suburban development model is a Ponzi scheme. Without ever-increasing rates of growth -- an impossibility -- it cannot be sustained. The federal and state government is not a reliable partner, so having a plan that relies on their eternal good graces is not a plan rooted in reality.
As just one more example of the unreliability of our federal partner, let's go back to a piece we wrote a couple weeks back called Lessons from a PIG. In that piece we talked about how the growing federal debt is being financed more and more by short-term notes, treasuries that must be rolled over into new debt issuances every three months, as opposed to the long-term savings bonds that our grandparents used to give us for birthday presents. This short-term financing is akin to putting a large portion of our national debt on a credit card, a credit card increasingly payable to foreign creditors.
The current 90-day Treasury is at 0.16%, which means that a large percentage of our debt is financed at very low rates (nearly zero). Here is how that current rate compares to the rates paid over the last thirty years.
The average rate over that period of time is 5%. Okay, trusting spouse, you may want to believe that your partner is faithfully executing their duties, is faithful to your interests and generally has everything under control. So what happens when interest rates return to historical averages? What happens when we have to pay 5% on that $14 trillion? Think cutting $38 billion was hard? Try $700 billion, just in interest.
If rates follow what happened in our last big economic crisis, that of the late 1970's and early 1980's, we could be looking at 14%. That would be $2 trillion, just in interest. Good luck with that.
The finances of our towns are going to be disconnected from the finances of the federal government, at least in any positive way, whether we want them to be or not. A Strong Towns approach would be to start building local resiliency now using any federal or state assistance as money to finance the transition. The coming decades are more likely to be about contraction than growth, retrenching financially from the anomaly that was the post-WW II development pattern. That may be a tough reality to face, but face it we must.
The only thing we can really control is ourselves. Let's acknowledge the unreliable nature of our partner and turn instead to building Strong Towns.
- This time if different; Eight centuries of financial folly by Carmen Reinhart and Kenneth Rogoff
- The Black Swan by Nicholas Nassim Taleb
- Lessons from a PIG (March 23, 2011)
- Think Happy Thoughts (January 5, 2011)
- Waiting for SuperFed (October 11, 2010)
- Podcast: Is growth the solution or the problem? (March 10, 2011)
Thank you to our friend Jack Shelton for his donation to Strong Towns. We appreciate the support and I hope we can grab coffee again sometime soon. If you'd like to donate to Strong Towns, or if you are driving by and would like to grab coffee, we'd love to hear from you.