After spending Sunday completing my taxes, I sat down to write and found -- for the first time in years -- that what I was working on just wasn't going to happen. I've got a lot on my mind and my words, as they were coming out for this piece, just weren't coherent enough for me to share. So, at the suggestion of a friend who recommended sharing some of our older work with our new and expanding audience, I'm going to republish this piece from January 10, 2011. I'll take a second stab at my new work in the morning.
At the local government level our focus on jobs and growth obscures our understanding of the current financial turmoil as well as how we can actually create a sustained recovery. Jobs and growth are the results of a productive system, not a proxy for one. Until we reconfigure our places, sustained prosperity will remain elusive.
A large part of our Curbside Chat presentation is devoted to showing how our post-WW II development pattern fails to create enough revenue to financially sustain itself. We analyze real developments and compare their ongoing maintenance costs with the actual revenue they generate to show how our modern cities are financed like a classic Ponzi scheme, where revenue from new entrants is used to pay off past obligations.
From the perspective of the city or town, this is devastating. The whole is a sum of the parts, and when each part is running a deficit, it is easy to understand why municipal budgets are stretched beyond the breaking point. New growth may pay for itself, but only through one life cycle. After that, the costs to maintain the infrastructure dwarfs any tax revenue generated.
This analysis is also devastating to the cadre of professionals -- engineers, planners, economic developers, municipal financial advisers -- that make their living off of promulgating new growth. To them we blaspheme, challenging a belief that is nearly religious: more growth is always good. They'll respond to our analysis with something like the following:
But there is new investment, and that creates jobs and people buying stuff and all of that creates tax revenue. Your analysis is too simplistic. It is a bigger system and you don't take that into account.
I'm going to repeat a fact that we've stated before here at Strong Towns, one that makes some people -- especially economic development professionals and others vested in the current system -- quite angry: In nearly every American city, the balance sheet does not benefit from a new job.
Local economic development officials talk endlessly about creating jobs, jobs, jobs and the need to invest in job creation. Since most American cities have no income tax, these efforts produce no tangible financial return to the city. If we spend $100,000 at the local level to create jobs, there is no basis to believe that this will ever result in $100,000 being returned to the city through new tax receipts.
But what about sales tax? Again, few cities rely solely on the sales tax for any of their revenue and those that do get a pathetically small percentage of the total take. Where we are in Minnesota, cities are actually prohibited from independently enacting a local sales tax. They are only able to institute such a tax when it is approved by voters, approved by the legislature and tied for a set duration directly to a specific project. Any new jobs could generate millions and millions in sales and, except in rare instances, none of this revenue is going to be diverted to the municipal government. (If your city relies primarily on sales tax, you'll want to read this article and this article from 2014.)
Most local governments rely on property tax as their primary funding source. In a theoretical world, this should create every incentive to maximize the amount of property value while simultaneously minimizing the amount of ongoing liability -- particularly in infrastructure maintenance -- that the city assumes. In the real world, nothing like this happens. Cities fight each other -- through subsidies, waivers of regulation and other "business friendly" approaches -- for each new business, each new job, each new housing subdivision, giving little if any consideration to the long-term maintenance costs they assume.
All of this ultimately drives up local property taxes which, as any business will tell you, is not "business friendly".
Why does this happen? How can cities pursue policies that are so clearly contrary to their own long-term interests? The answer is simple: they have the incentives to do so.
Our Mechanisms of Growth -- the ways we have funded new growth for the last two generations -- cover up the true cost of our development pattern, creating the Ponzi-scheme comfort of new revenue today while postponing the day of financial reckoning, when the local government will be faced with unfathomable maintenance obligations, at least a life-cycle into the future.
In many places, we're a life cycle or more into this pattern and the growth has now stopped. Things are getting desperate, and will only get more so with each passing day. Contrary to our federal and state approach to "recovery", the answer to this problem is not more growth. The answer is a different development pattern.
Unfortunately, the entities that provide the primary incentives for the current pattern of development -- the federal and state governments -- are dealing with their own Ponzi schemes and funding shortfalls. They desperately need to lower their costs while simultaneously creating more income and sales tax revenue, local government budgets be damned. The sooner our local leaders understand that their interests are not aligned with the interests of state and federal policymakers, the sooner cities can begin to proactively shape their own future.
There is no magical mathematical formula that will allow our cities to take on more obligations than they can support yet remain solvent and productive places. More growth and more jobs are not the magic answers for local governments. To have a real recovery, we need a new pattern of development, one from which jobs and growth will ultimately flow. It can't be the other way around. We need to start building Strong Towns.