When the return-on-investment calculation didn’t go as planned in Pequot Lakes (see Part 2 of this series), it revealed a series of existential questions lingering under the surface of my professional career. I believed I was doing good for the communities I worked for. I believed that the projects I worked on—as an engineer and as a planner—were helping communities grow and, more importantly, that the growth was a net positive for those places. I also believed that the world around me largely represented the free market at work, an expression of personal aspirations and preferences I was helping to fulfill. Was any of this true?
It is really difficult to analyze the cost and return-on-investment for municipal infrastructure. When someone asks me to show them the data that public infrastructure investment has bankrupted a city, I struggle because it’s an inelegant, rather simplistic, question. At least, it’s a question that could be answered either in a way that is simple but wrong, or in a way that is complex and correct.
Show me the person who has died from poor diet and lack of exercise. We can all likely identify someone, but you won’t find that diagnosis on a death certificate. Thus it is with unproductive infrastructure.
There obviously is a correlation between how prosperous a community is—how much wealth the community has in relation to its ongoing expenses—and the financial productivity of its infrastructure investments. But how to discern this?
I’m an engineer, so I’m burdened with way too much knowledge in some realms and not enough in others. This was especially true when I did these analyses roughly 15 years ago. For example, how much does a street cost? Well, that depends on the width of the street. It also depends on the depth of the surfacing material, whether that material is bituminous or concrete, the quality of the materials that have been specified and the time of year it is constructed. It will also depend on the quality of the base material—is it built on forgiving sand or on a swamp?—and how well the site drains. It will depend on how far materials need to be hauled on that particular site, the cost of transport at the time, the international market for asphalt, etc…
One can then look at the pipe. Is the sewer pipe installed extra deep, or the pipe upsized, in order to accommodate future growth? Is the water main given an extra loop, or increased in diameter, or provided with extra service connections, to accommodate anticipated new development? If the answer to any of this is affirmative, how should that extra cost be allocated? Where in the budget, and correspondingly where in the wealth of the community, is the burden for that cost placed?
I shared most of my early work with fellow engineers and it was roundly criticized on these kinds of grounds. Chuck, you can’t allocate the cost of that pipe to those property owners because the pipe is upsized for growth elsewhere. It was that kind of thing over and over. The only conclusion my fellow engineers would allow me to make was that the system was complicated, and everything was interconnected, so the only valid analysis was to look at everything at once.
Looking at everything at once, with the level of detail and knowledge required to satisfy myself and those early critics, was technically unfeasible (even in a small town). There is just too much happening, too many variables. So I started to think of the kinds of things that would be expected to happen if my beliefs were wrong. If cities were not becoming more prosperous due to the infrastructure projects I worked on, if they were becoming poorer, what should I expect to see happen? Well, I’d expect taxes to be going up (check), public debt to be rising (check), public budgets to be tight (check), growing backlogs of deferred maintenance (check), and basic services to be cut (check). I started to look at this kind of thing and the correlations became silly, like the way two financial analysts on CNBC look at the same numbers and draw completely different conclusions. They were circumstantial, but also multi-causal.
“It’s The System”
The conclusion people kept giving me was that “it was the system” I needed to look at. Sure, one project here or there might not have an immediate payback, but when the system was looked at as a whole, that is where the magic happened. It was as if each street that could be built, each pipe that could be connected, added magically to a growing and prospering whole. I started to call this the Quantum Theory of Economic Development, the notion that no individual component could be measured in isolation in a way that would be relevant to the rest of the system. I just needed to have faith in what couldn’t be seen, something my free market disposition made me inclined to want to do anyway.
I pondered the Quantum Theory of Economic Development for a long time until I realized that what I needed to understand it was an atom smasher. The proton colliders that have been constructed—atom smashers—smash two protons into each other to look at the debris. I once had them described to me as akin to scientists standing on top of the Empire State Building trying to figure out how a car operated. So they smash the cars together, look at the guts of what flies out, and try to see if they can reconstruct it. I would love to have been a physicist.
I realized that I could get to the base elements of a city by looking at its simplest components and drawing inferences from that. The simplest component of a suburb is a dead-end cul-de-sac. There is no through traffic. No commercial traffic. No upsizing for future expansion. No extra pipe or strange sizing or depth to accommodate future expansion. The cul-de-sac is, quite literally, the end of the line. The infrastructure in a cul-de-sac is as stripped down and simple as can be; it’s the bare minimum needed to make it work. If I could study the return-on-investment for cul-de-sacs, it would tell me a lot about what was going on in places where the infrastructure was more complicated.
And considering the investments we were making in others parts of the system to upsize and plan for future expansion, I realized that work was being done for the end result of getting the fully-developed cul-de-sac. In a suburban development pattern, the cul-de-sac is the gravy. It’s the cherry on top. Financially, if the Quantum Theory of Economic Development holds true, it should be the most profitable part of the system, the place with the most tax base for the least amount of cost.
The Humble Cul-de-Sac
At the time I was working through this, there was a maintenance project I was involved in presenting the ideal test case. It was 40 homes on a closed loop system and a dead-end cul-de-sac. No through traffic, no commercial traffic, and no future expansion. The street exists only to provide service to the homes along it; no homes and the street would be unnecessary.
A developer had built the street in the 1980s, a cost that was passed on to property owners. Those property owners paid that cost in their mortgage and counted it as part of their property value while simultaneously paying taxes to the city to maintain the street. After decades of use, the street needed a simple maintenance project. No large reconstruction; just basic maintenance.
The cost was $354,000. Again, because I’m an engineer, I’m going to emphasize that this wasn’t a full reconstruction project. It didn’t involve the replacement of any underground utilities. It was just a reclamation and resurfacing. Basic, basic maintenance.
I was able to get some assistance to calculate the revenue produced by these properties (I needed help because I didn’t know how—neither engineers nor planners have to know how to do this for their jobs). Annually, it was $44,473.
Here is where being both a licensed engineer and a certified planner—with both of those different sets of education, training, and experience—came in handy. As an engineer, I would simply have divided the cost by the revenue, maybe throwing in a discounting factor to respect the time value of money, and I would have concluded that the payback was eight years. Since the street was expected to last 25 years, some financial sacrifice up front would allow the city to have 17 years of revenue from these property owners unencumbered by their street maintenance costs.
Understand: engineers process things in this way because, to them (and to me at one point in my career), cities are systems of infrastructure. Said another way, it is the city that sustains the infrastructure, not the other way around. If your job is to build systems of infrastructure, those systems become the end unto itself. Of course all the revenue from the development would go towards the street because, without the street, there would be no homes and no revenue.
Early in my career, I did not yet understand what I wrote yesterday: that infrastructure is a platform for building wealth. Further, we build wealth because it allows us to do lovely and beautiful things, such as have a park. Or hold an election. Or plow the snow from the street. It is the wealth from the investment in infrastructure—it is the financial return from that investment—that our communities depend on to function.
Imagine a manufacturing company. The machines used in the manufacturing process must pay for themselves many times over, or they are not worth it. The productivity from those machines must cover the cost of the employees to run them, people to manage those employees, the facilities the machines are housed within, the electricity to operate it all, towels for the bathroom, post-it notes, holiday parties, and a huge collection of other things, not to mention some profit. With government, even if you strip the profit component out, the rest of this still holds.
A typical city will dedicate 10% to 15% of its budget to infrastructure. Much of that goes to new construction and expansion, but let’s pretend in this case that it all went to maintenance. And let’s pretend, in our cul-de-sac, that all that money just went to the maintenance of this particular local street. Not the drainage and underground utilities. Not the ongoing snow plowing or street sweeping. Not filling the potholes or sealing the cracks.
And let’s ignore any contribution the people along this cul-de-sac would be expected to contribute to maintaining the collector road, which was upsized on their behalf. Or the extra deep pipe, which was installed to accommodate them. Or the traffic signals, interchanges, frontage roads, lift pumps, water towers, or any other communal infrastructure investment they rely on to make their cul-de-sac work. Let’s ignore all of that and just assume that all of their share of the tax revenue allocated to infrastructure goes just to perform basic maintenance on their street.
At 10%, that’s a payback in 79 years. That’s just straight division, not accounting for any interest on a bond or discount rate to account for inflation, which would lengthen that term. I don’t bother with that extra math because 79 years is three times longer than the street is going to last anyway.
At 15%, the payback falls to 53 years, which is more than double the expected life of that street surface. These numbers are absurd, but they are pretty typical of what I was uncovering.
For the Quantum Theory of Economic Development to hold—for my belief in not only the value of my work, but the premise that my work was a manifestation of the free market I so believed in, to be affirmed—something had to be wrong. As my narrative made the rounds among the professionals I knew, the answer came back pretty unanimously: You need to look at commercial development.
What people were saying to me was: Alright, even if residential is a huge financial loser, we more than make it up with good commercial development. Your results are interesting, but not conclusive because they don’t take commercial development into account.
At this point I was becoming painfully acquainted with the words of Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” My salary, and my worldview, depended on me not understanding something I could not un-see. More on that struggle in the next part of this series.
(Cover image via US Department of Defense)