I've repeatedly made the claim that Texas 2016 is essentially California 1986. Texans pride themselves on having a high growth, dynamic economy, free of legacy costs and burdensome regulations....just like California did a generation ago. Heard of Ronald Reagan? California was once considered a fairly conservative state, at least financially. California got started on the Suburban Experiment three decades ahead of Texas (thanks to a more forgiving climate) and has arrived at the logical destination three decades earlier. The Lone Star State need only look west for a preview of coming attractions.
Texan Andrew Card, former Transportation Secretary under George H.W. Bush and Chief of Staff for George W. Bush, observed that things in Texas are all spread out and that makes it easier to make transportation investments, ostensibly because there aren't all those pesky places people want to go to getting in the way of all that building...and stuff. He contrasted that with the Northeast where, you know, it's more expensive to build (read: property is more valuable).
This exchange does illuminate policymaker's backward thinking on infrastructure investments. We measure success in terms of how much we can build instead of how much return we get for what we build. The transaction is the objective. Full stop. That is to be expected from an economy run in Ponzi scheme fashion (benefits today, consequences decades in the future).
It's fascinating to watch this play out in major cities like Dallas, where a recent budget document reveals the midlife crisis stage of a systems failure. I'll use some slides from that presentation to illustrate the problem hidden in plain sight.
1. Rising Revenues
Property values are climbing -- either from new construction or appreciation of existing properties -- and this means more revenue for the city coffers. In fact, property values are expected to grow at percentages many multiples of the economy and of inflation. This is a situation that has persisted for years since Dallas is in the Illusion of Wealth phase of the Growth Ponzi Scheme. Theoretically such robust growth should solve all ills, but it doesn't. Why? Because the investments they are making gives them growth but also enormous liabilities, essentially a negative return-on-investment.
Note the little box on the slide that equates growth in property tax base with general fund revenue AND more debt service (aka: more debt). The built-in assumption here is that the more money we have, the more we can borrow. For governments, that's a really dangerous and undisciplined view of debt. Which is why....
2. High Debt Levels
....debt levels are persistently high. Three out of every ten dollars received by collecting on the wealth of Dallas (in the form of a property tax) goes to pay debt on past projects. If the city was using this debt for legitimate cash flow, the levels would change over time as cash flow needs ebb and flow. We would expect to see the same variation if the city were using the debt to make high returning investments. In that case, those investments should start to pay off and, thus, reduce the amount of debt. What is actually happening is that the debt is simply being used to expand the city's annual spending ability. I call this dangerous because it exceeds levels we would consider safe, and I call it undisciplined because debt is being treated casually as cash flow when it's clearly not.
The budget presentation has an entire separate section for capital improvements, treating these investments (with no talk of return) as if they are separate undertakings instead of the starting and ending point of the....
3. Persistent Structural Deficits
....ongoing budget problems Dallas is facing. How can Dallas be growing robustly, have relatively high tax rates and yet have persistent and large budget deficits? It's not wasteful government. It's not incompetence. It's not right wing crazies starving the government beast. The problem is that growth on the top line is not turning into growth of the bottom line. For each dollar of revenue the city is receiving, it is taking on far more than a dollar of liability and expense. In the second life cycle of the Growth Ponzi Scheme, that can be covered up with debt (done that) but, ultimately, the lack of financial productivity starts to produce recurring, structural deficits that have no obvious cause and no apparent solution.
The city will deal with this in 2016 through a combination of tweaks, across the board reductions, more debt and perhaps even a modest tax increase. None of those responses will deal with the underlying causes of the problem (unproductive development patterns) or change the trajectory of decline for Dallas. This means that the residents of Dallas will continue to....
4. Dissatisfied Population
....become even more dissatisfied with the way things are going. Increasing taxes combined with a steady reduction in services have really angered the population. And with good reason. Interestingly, the most important issue for Dallas residents (see survey below) is "maintenance of infrastructure" which they also have the lowest level of satisfaction with. This is basic stuff -- the un-sexy bread and butter stuff of city government -- that people rightfully expect to be done, yet it's elusive for bureaucracies and politicians.
Just maintain what you've already built, we say. We can't, they respond, but we can get matching funds to build more, and we can't say no to that because, you know, growth.
While Dallas, and thousands of cities just like it across the country, will argue over tax rates, who is paying their fair share, the levels of assistance from the state and federal governments, burdensome mandates, wasteful government, corporate welfare, "those people" and the like, the underlying problem is clear but will largely go unmentioned in high level conversation: Dallas is not financially productive. There is too much area to service and maintain and not enough wealth to do it. There's too much stuff and not enough place. Dallas, like nearly every major city, is an agglomeration of bad investments.
These are not solvable problems in the sense that they cannot be solved through a combination of tax rates, service cuts, debt and new investments. They can only be addressed -- and then only with difficulty -- by a different approach to building and development. And a lot of time. Fortunately, the residents of Dallas are begging the city to take the first logical step: focus on maintenance. Stop building anything new -- stop digging the hole deeper -- and simply get rigorous about maintaining what is already in the ground. That's step one. The easy step. If you can't find a way to do that and you hold a position of power, get out of the way and make room for someone who can.
California is a basket case, right Texas? Wrong. They are just ahead of the times.
(Top photo of Dallas City Hall by Daquella manera [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)