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Rational Responses

Memphis’s U-Turn: How the City is Committing to a Stronger Future

Memphis’s U-Turn: How the City is Committing to a Stronger Future

Equipped with “grit and grind”—but also with a whole lot of good data on the financial consequences of past development decisions—Memphis, Tennessee is taking smart steps toward a bottom-up renaissance. Just ask its Chief Operating Officer, Doug McGowen.

Risking Some Tough Talk

Risking Some Tough Talk

You can’t build stroads, subsidize big box stores and accept endless edge development, and have that work out for you just because you threw a block party, painted a mural and put in a temporary bike lane.

Why Did This Town's Entire Police Force Quit?

Why Did This Town's Entire Police Force Quit?

When a small Massachusetts town made national news as its entire police force quit, it was easy to have preconceived notions about what the moral of the story must be. Then a reader from the town reached out to give us this far more nuanced and interesting explanation.

The Road Ahead for Cobb County

The Road Ahead for Cobb County

Cobb County, Georgia, has long been all-in on debt-fueled, unsustainable growth, and faces a tough road ahead as poverty grows and its ability to provide services declines. What are some rational responses to this predicament?

You Can't Have It All, but You Can Have Most of What Matters

You Can't Have It All, but You Can Have Most of What Matters

We have chosen a rural life—who pays for our infrastructure? The short answer is: we don't have much of it, but we take care of our own needs. Strong towns require strong citizens: people who learn to take control of their lives and do for themselves things that are doable.

A Simple Idea for Flint

A Simple Idea for Flint

It's possible that large parts of Flint could be served with really high quality water for drinking and sanitation at a fraction of the cost while preserving the existing, lead-infested system for fire fighting purposes only.

Roads and Debt

Roads and Debt

5 steps to tackle transportation funding insolvency.

Built-In Advantages

Built-In Advantages

Scranton, Pennsylvania is not a wealthy place, but it is a place with underappreciated intrinsic wealth. Bet on older mid-size cities like Scranton, whose built-in advantages leave them well-positioned to weather future economic disruption.

Best of Blog: Complex Cities

Best of Blog: Complex Cities

Cities are complex places. We need to embrace the complexity, and the difficult and sometimes painful feedback that comes along with it, if we want our cities to grow strong and resilient. Best of Blog 2014.

Rational Response #5: Require a real ROI

When we start to have a conversation about how to rationally respond to this complex set of problems we have created for ourselves with our post World War II development experiment, Rational Response #1 was to stop. Stop building more of the projects that are providing a negative return to the community, gradually sucking the wealth out of it.

Stop is very dissatisfying because, when faced with a problem, human nature prompts us to do something. We don't elect the politician that promises to do nothing, after all. So after we've stopped and reassessed our approach, we need to ensure that the capital investments we make from now on have a real return on investment.

For a real ROI calculation, we also have to make sure we are talking about dollars. Engineers, planners, economic development professionals and other advocates of the current approach have become quite skilled at concocting phony ROI numbers. Your analysis needs to be from the local government's point of view, which means a real evaluation of dollars in versus dollars out.

Understand that if this was easy, we would already be doing it. As you start to undertake Rational Response #5, you are going to find that pretty much all of the projects you were doing in the old system have a negative ROI. Your professional staff, your development community and others used to the current growth paradigm will want to throw up their hands. They will ask, "What are we supposed to do?"

The answer: We're supposed to do projects that make our community more prosperous.

The current project set you have and the recent projects you have done won't pencil out. That's the point. We're doing things wrong today and a rational response is going to help you change to something that works. For projects to pencil out financially for the community, they are going to look different than they do today. Be ready for that.

Finally, your staff is also likely to tell you (if they are being forthright) that for some projects this math can't be done, that they can't really know what the real return on investment will be because they don't know how a development is going to build out. Those projects would be correctly called "gambling" and gambling is something that should be left to the private sector.

Cities are guardians of the public balance sheet, not gamblers at the casino. If your ROI analysis requires you to assume future growth rates to make things balance, you're doing it wrong.

Rational Response #4: Establish Service Areas

Americans today have the choice between three different lifestyles: rural, urban and suburban. These are the same choices that have been available throughout history but, until we blurred the differences in our Suburban Experiment, those choices meant something very different.

As our governments cope with economic transition, those differences need to matter once again.

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Rural areas are for the pioneer. The hearty. Or for the infrequent getaway. Growing up on a farm along a little road distant from town, we knew that the fire truck was not going to get there quickly. If there was an injury on the farm, the ambulance wasn’t going to arrive in seconds or even minutes. When it snowed, we weren’t going to get plowed out as quickly as those in town would and, in fact, we may have a number of days where we weren’t going anywhere. That was okay; we made due. We never saw a policeman, rarely heard from the local government (zoning?), but we knew when all the neighbors were bringing in their hay. Our cellar was full of vegetables, the shed full of split wood and a loaded shotgun sat behind the door. It was a really good life I feel fortunate to have enjoyed.

Urban areas were for a completely different type of person, someone wanting to live in a totally different way. There the ambulance would show up right away. In fact, the hospital was just up the street for many places. The policeman patrolled the streets. There was shopping and parks and schools, all within walking distance. I had many friends who lived in the city and, while their life was very different than mine, it was also pretty good.

Prior to the Suburban Experiment, suburban areas contained a unique blend of people. I would call them upstarts, although they could easily be called the poor. In the traditional development pattern, the core of the city contained the most valuable land and the more affluent would congregate in the surrounding neighborhoods. On the edge of this was where the poor lived. This was the pre-automobile version of walk-until-you-qualify. As the city continued to mature, the forces of incremental growth would be directed inward, upward and outward with the latter being where these upstarts would be able to make modest investments that could grow over time. This was where you got the tiny house that could be added on to when the kid was born. It was also where the slums would sometimes coalesce. When things worked out right – when the party was good as Ian Rasmussen described – things got incrementally better for everyone.

To start responding rationally to the complex set of problems we’ve created, we need to actually reestablish a relationship between the productivity of the place and the services that we are able to provide. This means looking at our community and clearly spelling out geographically where those high service areas are. It would look something like this in my hometown of Brainerd, MN.

Here’s how I would distinguish each area.

In other words, where we have places that are financially productive – where the traditional development pattern is being used to create, capture and grow the wealth of the community – those are the places where the collective investment (taxes) can support the lifestyle choice of those choosing to live there. This would be true in urban areas where service demands are high and in rural areas where (and this is important) service demands are low.

In the places in between, where the pattern of development simply does not support a high service level, there the services become more al-la-carte. We will keep your taxes low – we’re not going to ask you to subsidize anyone else – but we also can’t subsidize the lifestyle that you’ve chosen for yourself. We’re not going to rip up your street, but when it falls apart, we’re also not going to fix it. You’ll need to do that. We’ll come out there with the fire truck, but we’re going to charge you for that.

In short, we’re creating a system that more closely correlates demand for services with willingness to pay. Someone moving to a community, understanding these different service levels and tax/fee structures, can choose the situation that best suits them.

Now I grasp that there are some practical problems here with the tax system. In most cities, you can’t establish different taxing areas and charge residents in different neighborhoods a different rate. Today any city can pretty much do the rest, and in a future rational response, we’ll talk about some changes to the tax code that would help cities align their service demand with the productivity of their development pattern.

And it should be said: those property owners in the fee for service areas that want to be designated high service areas can easily do so. They need to agree to a development pattern that includes continuous, incremental growth (there will be no process providing them an opportunity to oppose that accessory apartment next door or that coffee shop up the street) and pay a much higher rate of taxes.

One final note on the poor and disadvantaged in our communities. My greatest apprehension with our current pattern of development is that, after the transition that a lack of financial productivity is forcing upon us, it is the poor that are going to be trapped on the edge of each community – just like they have been for thousands of years – only here in North America it will be in suburban areas with horrible transportation, public safety and health provisions. That fear should not keep us from responding rationally to correlate willingness to pay with the provision of services, but it should prompt us to ensure that our urban areas continue to offer a broad range of price points within a financially productive built environment.

 

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And if you'd like more of my work, check out my book, Thoughts on Building Strong Towns (Volume 1). It is a primer on the Strong Towns movement and an essential read for those wanting to get up to speed quickly.

Rational Response #3: Prioritize

The idea of prioritizing is predicated on completion of an inventory (see Rational Response #2). We first need some basic understandings of the infrastructure systems we have committed to maintain:

  • How much do we have?
  • What are the maintenance costs?
  • When do those costs come due?
  • What is the revenue stream to cover those costs?

Once a community has completed an inventory, one thing will be abundantly clear: there is not anywhere near the revenue that will be needed to cover all the commitments the local government has made.

This then brings us to Rational Response #3: Prioritize. I used to talk about this in terms of "triage" but that really doesn't capture this interim step, which is really more of a conversation about core values. If we've promised to spend $1 and we only have 20 cents coming in then we -- the entire community -- have some tough decisions to make.

The inventory will help that conversation get serious because math doesn't lie. Ultimately, the dialog needs to evolve to a ranking system, one that reflects the priorities of the community. Maybe your city will decide that all of the streets that elected officials and their friends live on are the highest priority (essentially, the current system) or maybe your community will come up with a more nuanced and dispassionate approach. Either way, the conversation needs to be broad and deep and the results apparent to everyone.

I'm personally inspired by the rational approach used in the 1990's in Oregon to address a similar problem in health care; not enough money for too many needs. Here's what was done to establish a priority list.

The commission established 17 categories of health problems — for example, acute conditions that can be fatal and for which treatment provides full recovery, acute conditions that are treatable and unlikely to be fatal, chronic conditions that are unlikely to be fatal, maternity and newborn services, and preventive care of proven efficacy.

All diagnoses and their treatments in the medical and surgical armamentarium were assigned to one of these categories, and the categories were ranked according to 13 criteria, including life expectancy, quality of life, the cost effectiveness of a treatment, and whether it would benefit many people.

Treatments that prevent death and lead to full recovery were ranked first, maternity care was ranked second, and treatments that prevent death without full recovery were ranked third. Treatments that result in minimal or no improvement in the quality of life were ranked last.

The diagnosis and treatment items were then prioritized within the categories on the basis of outcomes data, a scale for the quality of well-being, and a consideration of the reasonableness of the rankings.

The interesting thing is that the results of the list were very logical (that didn't make them non-controversial). Vaccines and basic pre-natal care -- very low cost treatments that have significant impact in reducing mortality (and other health care expenses) -- shot to the top of the list. The second bone marrow transplant for the septuagenarian with terminal cancer did not rank as high. These are brutally tough choices, but they need to be made deliberately and publicly.

For me, the infrastructure equivalent of vaccines and pre-natal care would be the parts of the system that are revenue positive. We vaccinate people for pennies and we end up not having to pay later to treat them for a terrible virus. Easy money. If we have a block that is going to cost us $100,000 to maintain over the next two decades but will yield us $500,000 over that same period of time, that's a no brainer. Our inventory will help us identify those.

Conversely, the equivalent of the second bone marrow transplant for the elderly individual with terminal cancer would be those parts that are massively cash flow negative and have zero chance of turning that around. This would be the mile long paved road on the edge of town that serves the mayor's house. The city's never going to collect enough money to make that obligation pay.

These would be the two ends of the list -- everything else would sit in between on the spectrum -- but note that creating a priority list does not mean we're going to take the next step and defund certain parts of the system. That's a whole other conversation. What we're talking about here is just getting a prioritized list assembled based on shared values. When you're done, it will look something like this:

1. Main Street, 1st Ave to 4th Ave

2. Oak Street, 2nd Ave to 6th Ave

...

295. Smokey Hollow Road, County Rd 5 to cul-de-sac

In the next rational response, we'll talk about what to do with this list once it's been created. 

As a final note, and just to head off the classic, knee jerk response, understand one thing...let's not pretend that what we're doing with the status quo is either fair nor equitable. It is clearly not. And let's not also pretend that some state or national standard would make it so. The best shot at a fair and equitable approach we have -- and it's a goal worth pursuing, one I believe in -- is to have these decisions made at a level of community where people know their neighbor and have to look each other in the eye.

It will be messy, no doubt, but any community will be better off owning messy than inheriting stupid.

Rational Response #2: Inventory

Most cities of any appreciable size have a capital improvements plan (CIP). With a veneer of credibility often provided by professional consultation and/or some limited public input, the CIP purports to outline the spending priorities of the community. A typical CIP identifies five years' worth of projects with a ranking that denotes their order of priority. It all looks and feels very professional.

Unfortunately, the typical CIP is nothing more than a wish list, one that is destined to get a city deeper into the Ponzi scheme without some serious inquiry.

In a legal sense, a city is an incorporated municipality. Like any other corporation, it has assets and liabilities that should be reflected on a balance sheet. It also has cash flow, which is the net of the amount of money coming and going each day. Many an otherwise successful business has gone bankrupt by not understanding the difference between their cash flow and their balance sheet.

Local governments have annual budgets that run into the hundreds of millions. They manage assets worth billions. And they have dependent partners -- property owners -- that control hundreds of billions of dollars in assets. But shockingly, despite their critical nature, local governments have no accounting of their long term liabilities.

Doubt me? Here's some simple questions for any local government to answer. See if yours can pass.

Streets

  • How many square feet of street do you have?
  • How many square feet of sidewalk do you have?
  • How many lineal feet of curb and gutter do you have?
  • How many storm sewer manholes and intakes do you have?
  • How many lineal feet of storm sewer do you have?
  • What is the condition of each of these components?
  • When will each need to be repaired?
  • What is the projected cost of that repair? 
  • What is the revenue stream that will cover that laibility?

Water System

  • How many feet of water pipe do you have? How many valves? How many pumps? How many meters? How many water towers and storage tanks?
  • What is the condition of these water system assets?
  • When will each component need to be repaired?
  • What is the projected cost of that repair?
  • What is the revenue stream to cover that liability?
  • How large is the water treatment facility? How much additional capacity does it have?
  • What is the current condition of the water treatment facility?
  • What anticipated expenses are necessary to keep the water treatment facility running in the coming decades?
  • What are the range of unanticipated expenses given present operating conditions?
  • Given current growth rates, when would expansion of the system be necessary? What would the approximate cost of that expansion be?
  • What is the revenue stream that is expected to fund the ongoing maintenance?
  • What is the revenue stream that is expected to fund system expansion?

We can go on and look at the sanitary sewer system, public parks and public buildings in this same way.

These are basic questions any well run organization should be able to answer without too much problem. The answers won't always be precise -- they never are when you are looking into the future -- but there needs to be a general sense of where we're at. A balance of assets and obligations.

Many times in my career I've seen conscientous city council members presented with a plan to do some type of expansion to the system. As part of deciding whether or not to go forward with it, they'll ask some of these basic questions. There's never a satisfactory answer, one that gives confidence that we know what we're doing. At best, the council member can get the city to perform a "facilities study" to get some of these answers. 

Facilities study? Seriously? Maintaining a running inventory of your assets and obligations is a basic part of operating and maintaining a system. If you have to do a facilities study to find out what facilities you have, you have a total mess.

That means most local governments are a total mess because few have even a basic inventory, let alone maintain a record of present condition, anticipated future expenses and corresponding revenue stream. Yet, how can any city staff member recommend, or any public official approve, for the incorporated municipality they serve to take on additional obligations when there is no basic accounting of current obligations?

Let's look at another local government obligation: pension funds. Imagine that a pension fund did no accounting of the assets it had, had no projection for future demands, had no understanding of its revenue stream and how that matched up with liabilities, but just simply looked at the money coming in each year and the money going out each year. If the money coming in exceeded the money going out, well then reduce the pension contribution because the fund obviously is bringing in too much money.

That's insanity! No pension fund could operate this way and we all understand that. We need to also see that cities cannot continue to operate this way either. It's simply not responsible.

All local governments need a thorough accounting of their assets, their liabilities, all of their future obligations and the corresponding revenue stream for each. This is a matter of day-to-day operations for any competent department head. It is the bare minimum obligation any local government has to its residents.

If you want to be a Strong Town, you have to actually measure whether you are. Do an inventory. The results will shock you.

Rational Response #1: What it means to STOP

Last week Chuck wrote Rational Response #1: Stop, in which he says:

Any city that wants to be financially strong and healthy needs to stop making investments that cost more over the long term to service and maintain than they generate in wealth. They need to stop accepting grant funding or "donated" infrastructure that they ultimately will not be able to sustain. They need to stop pursuing that quick fix solution, whether it is a new business we can pay to move to town or a big project that will put us on the map.

When we talk to people about the need to stop, sometimes they aren't clear on exactly what we mean. After all, it's always easier to agree about broad principles than implementation details. So, I thought it would be a good idea to dig into this a little deeper.

Here are some brief, real-world examples of things most cities need to stop doing:

#1. No new roads.

I borrow this from my friend Ian Rasmussen, who likes to bring it up all the time. Excessive construction of unproductive roadways has been the chief sin of the suburban experiment. The first step for a town that wants to deal with the crisis head-on is to not allow the construction of any new roads, or the widening of any existing roads, in their jurisdiction.

#2. No new subdivisions.

The conventional housing subdivision is the second most ubiquitous offense of the suburban experiment. The more people live in pods designed to be car-dependent, the harder it is to restore a productive, fine-grained land use pattern in your town. Instead of new subdivisions, communities should focus on filling in the abundant vacant and underutilized land served by existing public infrastructure.

#3. No increase in curb cuts.

The third biggest problem with the Suburban Experiment is the proliferation of Stroads -- roads meant for long distance travel but degraded by frequent intersections, driveways, stop lights etc. Over time these stroads will need to be converted to either streets (where safety and accessibility are the top concern), or roads (where safety and travel time are the top priorities). On a street, frequent driveways disrupt the public realm and reduce accessibility and safety for non-motorists. On a road, frequent driveways degrade travel time and introduce dangerous traffic conflicts. Either way, the conversion to a more appropriate type starts by keeping the number of driveways to a minimum. For stroads that should be streets, techniques like shared driveways and rear access should be used. For stroads that should be roads, development should not line the road, nor access it directly, but instead access a street network that has a limited number of connection points to the road.

#4. No new parking

Places built in the suburban experiment model tend to utilize between 50 and 80% of their land area for car accommodation. Seeing as those facilities cost a lot to maintain and create vastly less economic value (compared to any kind of building, for instance), cutting back on the percent of land dedicated to the car should be a top priority for any town. Most of the car-only land is used for parking, and in most cases the supply is vastly greater than the demand. The simplest solution? Get rid of all parking requirements immediately, and let property owners figure out their own parking supply. Encourage infill redevelopment where excess parking supply is currently available (which is probably just about everywhere).

#5. No new ordinances

A common reaction when cities decide they want to bring about some kind of change is to add new zoning categories and stick them on empty land around town. But the zoning and entitlement process is already a big, overcomplicated mess in most cities, and adding complex new rules doesn't help fix the existing problems. Communities should take a long, hard look at their zoning ordinances, and look for ways to fix problems by subtraction rather than addition.

#6. No new public debt

There is such a thing as prudent debt, but American cities and towns have not had much experience with it for the last three generations. Until towns can stabilize their long-term financial picture and demonstrate that there is enough existing tax base to cover current and future obligations, towns should not enter into any new debt. Even when the financial situation stabilizes, a Strong Town should remain very cautious about entering into public debt in the future, and only consider debt obligations that can be serviced within the community's existing surplus cash flow, even if the debt-funded investment fails to perform.

These examples don't necessary cover everything that every town will need to do, but they cover the most common - and most controversial - steps. If a town wants to face the end of the suburban experiment and unwinding of the growth ponzi scheme head-on, these are good places to start. Once a community has stopped doing the things that are hurting it, then that community can start to look forward and start working on healing the damage already done and building a better future.

Rational Response #1: Stop

"If you just avoid blowing up, you'll live a long life."

- Nassim Taleb

I've been speaking with communities, public officials and professionals for years about the Growth Ponzi Scheme, the Illusion of Wealth brought about by the first life cycle of the Suburban Experiment, how debt fragilizes local governments, how we need to focus on high return investments and support productive development patterns. I routinely am asked the same question.

"Okay Chuck, you've told us what not to do, but what should we do?"

In other words, we know we can't stop eating fatty foods, leading a sedentary lifestyle and smoking two packs a day, so what else do you have in your bag of tricks there? What is the magic pill or silver bullet that can make everything work out.

Of course, there isn't one. Staying away from fatty foods, avoiding a sedentary lifestyle and stopping smoking is the proven (albeit difficult for some) way to lead a long and prosperous life. Staying away from horizontal expansion, avoiding auto-centric development and stopping the subsidies for financially unproductive growth are the most important things a city can do to be successful.

First, do no harm.

I understand this is easier said than done. There are doctors out there that will treat the symptoms of unhealthy lifestyles the same way there are professionals that will "treat" unhealthy development patterns. This is very seductive. My grandfather, who died severely overweight with adult onset diabetes, used to take an extra shot of insulin when he wanted another piece of cake. I'm not an expert on diabetes, but I suspect that is not how it was supposed to work.

It is especially difficult to give up the Growth Ponzi Scheme when there is a popular cultural concensus that new growth in the post-WW II model provides prosperity. We need to confront that myth daily, but having an incorrect consensus does not make Rational Response #1 any less important.

Any city that wants to be financially strong and healthy needs to stop making investments that cost more over the long term to service and maintain than they generate in wealth. They need to stop accepting grant funding or "donated" infrastructure that they ultimately will not be able to sustain. They need to stop pursuing that quick fix solution, whether it is a new business we can pay to move to town or a big project that will put us on the map.

If you can avoid blowing up, your city will be successful. If you want to build a Strong Town, stop doing things that make your place more likely to blow up.