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Cost of Development

Kicking the can down the road

When a town can’t grow out, it must grow up.

To allow this to happen, cities can’t use the outdated suburban methods of financing for new growth. Doing so will be no more effective than running into a brick wall.

That’s exactly what is happening in the suburb of Roseville, a first-ring suburb north of St. Paul and home to the first Target big box store. The City of Roseville is looking to grow because, as the assumption goes, if you’re not growing you're dying. There is a large industrial parcel slated for redevelopment called Twin Lakes.

Ten years ago, the Twin Lakes comprehensive plan was developed (and the suburb even created a redevelopment project webpage). While the plan isn’t great, it isn’t all that bad either. It calls for commercial and mixed-use districts with walkable, connected places and frontages that include lively shop fronts, arcades, front porches and no blank walls.

There’s a problem. This plan will never see the light of day. The mixed-use redevelopment isn’t going to happen. Instead, the Planning Commission has approved a Wal-Mart.

Roseville is abandoning their decade old New Urbanism inspired plan, one that could help bring long-term resiliency to the community, for one that will bring a quick windfall of cash.

The city will immediately net over $410,000 in “park dedication fees” alone. All this “growth” and windfall tax revenue comes at a price – of which, has been detailed at great length on the Strong Towns blog comparing a traditional block versus a Taco John’s drive-through taco restaurant [see: The cost of auto orientation]. Eventually the bill will be due, and we’ll face the realization that the tax revenue collected will not cover the basic costs of maintaining the infrastructure. This is where we’re at today.

In all fairness, Roseville’s Twin Lakes project has been on the books for nearly a decade with little to show for itself despite receiving upwards of $1.8 million in state and local infrastructure grants (all of which the Wal-Mart will benefit from by the way).

The road block was that Roseville ran out of typical suburban mechanisms for growth; it has no greenfield sites and transfer payments between governments have dried up. Transportation spending didn’t help; including the construction of a Metro Transit Park and Ride Station north of the site. Even tax increment financing couldn’t grease the wheels. These factors were exacerbated by the fact that prior to 2007, suburban development was happening on the fringe. After 2007, suburban development just wasn’t happening.

Part of the problem is that the Roseville was unwilling to spend its own money, and it is this very reason that Roseville was recently sent to Court (and ruled against). In a ruling that flew under the radar, a judge ruled that Roseville’s proposed impact fee (or “voluntary development agreement”) was technically illegal. The City was attempting to levy fees for infrastructure on those looking to redevelop their property based on trip generation, as determined by the Institute of Transportation Engineer’s Trip Generation Handbook. The more traffic a development was to demand, the more the developer would have to pay.

This is backwards thinking, especially if you’re looking to create a medium density mixed-use community with retail next to a Park and Ride station. These developments generate lots of traffic (and that’s a good thing). Roseville was single-handily disincentivizing the exact type of development it actually wanted.The problem is that the suburb wanted growth, but didn’t want growing pains. It wasn’t confident that it could confront the general taxpayer and make a case for this redevelopment. The suburb’s unwillingness to make tough decisions that may have been temporarily painful have resulted in kicking the can down the road – the continuing of the suburban experiment.

To enable real growth, cities can’t use old methods. Cities need to be willing to throw their hats into the ring, create comphrensive plans with real teeth, and, to quote Chuck Marohn, “they can’t make the last person to the party pay a disproportionate amount of the freight.” He’s right. We can’t continue to use “local extortion schemes to make up for the lack of financial solvency the Suburban Experiment has wrought. We need to actually face up and address the issue.”

Current economic conditions have the American collective starting to question the idea of endless suburban growth – the false notion that we can simply build ourselves out of a problem. This is a dead idea. You can’t have real, sustainable growth without a few growing pains.

We have existing infrastructure that needs maintenance, and we can’t rely on new development (or park dedication fees) to cover the burden. We can’t keep kicking the can down the road and abandoning thoughtful plans in lieu of a quick cash payouts. Soon enough, there will be a generation that won’t be able to kick the can, and they’ll be mad.

Assessing our Future

The concept of a special assessment contains little dark secrets that city officials like to keep to themselves. The ability to assess the cost of maintenance -- a questionable concept at best -- is the only thing allowing many cities to avoid facing their true reality. Elected officials and the public need to understand assessments, their legal and practical implications, and the dramatic shift that is likely to happen as more taxpayers resist paying them.

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Last Friday, I received a couple of boisterous reactions by email to the Baxter assessment story I linked to. These guys were livid, and I suspect many others will be as I discuss it more fully here today. I too often forget that people don't know this stuff. I've been immersed in it for years and have, as a mostly powerless bystander, become numb to it. Thanks for the reminder -- this will be eye opening for many.

As we've discussed here for years, almost all of America's cities are financially insolvent. They have far, far more liabilities than they have revenue that they can tap into to pay for those commitments. This is the result of 60 years of the Suburban Experiment, a development pattern that creates (for a while) the illusion of wealth by allowing cities to exchange near term cash benefits associated with new growth for long term liabilities associated with infrastructure maintenance. We're now in the long term and, financially, everything is breaking down.

City managers and other public officials that argue with me on that last paragraph (and there are getting to be fewer and fewer that do) almost universally depend on one funding mechanism as the key to remaining solvent: the special assessment. 

For many cities, the special assessment is a magic money machine. The idea is simple. The city does a project. The costs of that project are assessed (charged) to the property owners that benefit from the project. To make things go smoothly, the city generously finances the project at reasonable terms and collects the money "painlessly" in the same way that property taxes are collected.

If it were only this simple.

Anyone who listened last week to the health care testimony at the U.S. Supreme Court knows that a big deal was made over the government's ability to tax versus the government's ability to collect money in other ways. Among other things, the 5th Amendment to the Constitution states that individuals may not:

...be deprived of life, liberty, or property, without due process of law...

The 14th Amendment ensured that states (and by extension, cities) would be bound by these same provisions. At the time it was adopted, the Obama administration argued to us -- the masses -- that the health care impact fee was not a tax, but to the court last week they insisted that it was. Why? Because the government has the authority to tax citizens but it can't take your property (money) by other means without due process (nor can they delegate that authority to others, aka: insurance companies). This is not a small nuance; it is the basis of our government.

What if the government decided that you should pay an extra $20,000 in taxes this year. Not anyone else, just you. That would be illegal, a violation of your rights to equal treatment under the law and due process. Now, if the government decided to tax every family an extra $20,000 in taxes this year, they may have a revolt, but the tax would not single out any one person (or specific individuals) and would thus be legal. There is a lot of legal nuance here and attorneys can and will argue over this for as long as we are a country, but in a broad sense, the government can't take your money unless they tax you or go through a process that affords you the right to appeal (like a fine you can argue in court or, in this case, a special assessment).

So special assessments are not taxes. It is a charge in exchange for a benefit. I'm going to go back and quote the 5th Amendment again.

...nor shall private property be taken for public use, without just compensation.

Here's how this applies: If the city takes your money to build a street -- not through taxing everyone but through a special assessment on you -- you have to receive "just" compensation. Is your compensation that you get to drive on the street? No, everyone has that right since it is a public street. So what is your compensation?

It is the value that is added to your property from the improvement. That is it. Period. End of discussion.

Let's put some real numbers on this. Your property is worth $200,000. The city goes out and improves the street in front of your house. The cost is $14,000 per property. After the project, your property is now worth $205,000. What is the maximum your special assessment can be?

The answer: $5,000. That is the amount that your property increased in value due to the project.

But the cost was $14,000 per property. Who pays the rest? That is where the general taxpayer comes in. If the project is for the public good, then tax everyone to pay for it. If the project benefits just you and a few others, that benefit will be reflected in the increased value of your property and can be captured through the special assessment process.

I actually find that Wikipedia (bless their souls) do an awesome job of explaining this. From their entry for special assessment (my emphasis added):

The property tax most citizens are aware of is known as an ad valorem tax. This tax is used to fund general or day-to-day government operations. An ad valorem tax is commonly levied on both real and personal property. A property tax is based upon a property's market value. The ad valorem tax levy is based upon a "millage rate" which never varies from parcel to parcel. The foundation principles for ad valorem taxes are that each property is valued according to its market value (equity) and that each property is taxed based upon a single millage rate that applies to everyone (uniformity).

Special assessment levies are not ad valorem property taxes even though they may be collected on a property tax bill. A special assessment is based strictly upon the concepts of "need" and "benefit." Special assessments require a finding that the public improvement is "needed" for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefit from the public improvement that was needed. The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner. This contrasts significantly with the ad valorem tax which is extracted to fund government operations that are designed to benefit all citizens.

If I could underline "measurable" twice, I would.

There are some of you that see the clear problem at this point, but for those that don't, let me point it out to you. You live on a paved road. You are refinancing your home and get an appraisal that says it is worth $200,000. The road in front of your house is in rough shape and the city needs to fix it, which they do in the weeks after your appraisal. The cost they want to assess you is $14,000. In light of the assessment, the bank requests a new appraisal. You had a paved road with cracks and potholes before and now you have a smooth, paved road. How much is your house worth?

Very likely, it is still going to be worth $200,000. If you had gone from a gravel road to a paved road, maybe you would have seen an increase in value. Maybe, but the form that appraisers use and the comparables they review don't get into the quality of the pavement. There is an inherent assumption that, since a property fronts a paved road and since the property owner pays taxes, that road is going to be maintained. It is a rare case that a simple maintenance project is going increase the value of a property.

Let me give you another example to drive this point home and show you that roads and streets are the least of our problems. Look at that water pipe buried in the ground. The one you've been paying a water bill for decades supposedly to maintain. Let's say the city knows that pipe is old and needs to be replaced before it becomes a costly maintenance burden and so they dig it up and put in a new pipe. How much more is your property worth now that it gets water from a shiny new pipe instead of an old, worn out pipe? Pretend you were out of the country for the six months that this happened and arrived home without knowing. Would you notice a difference? It is really hard to argue that something adds value when it is imperceptible.

Now the city managers, engineers and finance directors are all hopping mad at me. Let me ask their question for them: If there are four homes on a cul-de-sac and the city has to go in and fix the street, replace the sidewalk, replace the sewer pipe and the water pipe, and the cost is $400,000, who, Mr. Marohn, are you suggesting pays for that? Nobody is using that infrastructure except for those four homes. Shouldn't they each pay $100,000? Isn't that fair since they are the only property owners that benefit?

My answer is simple: It is public infrastructure, taken over by the city for maintenance through a public process, and it is now the city's to maintain at full cost of that maintenance, minus any increase in property value the project might create. If the city did not think this infrastructure served a public purpose, it should not have taken it over and assumed the maintenance liability.

Now that is very inconvenient -- in fact it is devastating -- to the wishes of city officials. As we've demonstrated many times, the amount they are collecting through property taxes and fees pays only a tiny fraction of the cost of maintaining this infrastructure. The rest they assume they can make up through government transfer payments, taking on debt and through special assessments. If they can't -- and they really can't, if they are challenged -- it destroys their budget and the gig is up.

I've found that there is an art to assessing improvements that keeps this all from turning too ugly for a city. Let me again go back to the Wikipedia entry for special assessments:

Among the unique characteristics of the special assessment is one that makes a special assessment particularly onerous for ordinary citizens. A special assessment levy enjoys a legal benefit known as a "presumption of validity." This means that it is much harder and usually, much more difficult to appeal than the ad valorem property tax most citizens are familiar with. This happens because it is difficult for the ordinary citizen to recognize that an error in the special assessment procedure or methodology has occurred and the resources a taxpayer must use to fight a special assessment levy are more expansive and costly than resources to fight an improper ad valorem tax on their real estate.

If your real estate taxes are messed up, you go to a hearing with some proof of that and there is a board that, while not always accommodating, will typically hear reasoned arguments. If your special assessment is messed up, you have to go court. Not only that, before you go to court you have to file proper objections with the city indicating that you are contesting the assessment. This all has to be done within certain time frames or your right to appeal is lost.

To fight your assessment, you will need to hire an attorney and an appraiser willing to testify in court. This is going to cost you between $6,000 and $10,000. Let's say that your assessment is $14,000 -- are you going to pay $10,000 in hopes of getting a verdict, at the district court level, that is 100% in your favor and that the city -- with more resources and more to lose -- won't appeal to higher levels? Not likely.

So there is an incentive for the city's approach to become devious. Keep the assessment low enough to where it is more expensive to fight it than to simply pay it. Make the project complicated -- don't simply fix the infrastructure but improve it in some marginal way, like a wider shoulder or something -- so that more expertise is needed to ascertain what is going on. Make the assessment process as prefunctory and opaque as legally permissible to avoid the opportunity for substantive objection. Of course, since this is all being done for the "greater good", the deviousness is justified as what is needed to "get things done". At least that is what we tell ourselves.

I've seen poor, uneducated people living in trailer houses assessed more than their home was worth. I've seen well-heeled property owners negotiate their own "insider" terms of assessment. I've seen citizens forced, through the assessment process, to pay for improvements that actually devalue their property and their neighborhood. The end of our video, Conversation with an Engineer, lays out this irony of ironies.

In recent years when property values were rising and the real estate market was liquid, the special assessment process ran into few objections. If the assessment was too high, people could sell their property, typically make a lot of money, and buy something else. Progress was not worth fighting over since all seemed to be benefiting. Today is a much different story. Add to rising property taxes to falling home values and a frozen housing market, and I anticipate there will be some aggressive resistance to the special assessment process.

And when that happens, even the smug city officials that believe they have everything under control, that they need not be concerned with the public return on investment, that special assessments are the perfect tool for routine maintenance -- even they will need to acknowledge that we've long passed the time when we need to start building strong towns.

 

For those of you visiting us today, you'll notice some dramatic changes to the website. Let's call it StrongTowns.org, Version 3. While it is still a work in progress, you can see where we are headed with getting our message out there. The website is such an important tool for that. We hope you find it helpful. I want to acknowledge my friend, Jen Krouse of Steepletown Studios, whose brilliance has not only orchestrated this transition but I believe pulled out more of the substance in our message than I thought was possible. If you need web site assistance, I can't recommend her highly enough.

Minnesota's stadium debate; one-dimensional thinking

In my home state of Minnesota, we are having an urgent debate over the future of one of our major sports franchises. As we work through the options, it is critical that we adopt a Strong Towns approach. Whatever public dollars are committed must leverage the billions of public dollars we've already spent -- and committed to spend -- maintaining our existing highways, streets, parking ramps, transit lines and other infrastructure, money we are finding increasingly difficult to find.

Some background for our many non-Minnesota readers. The hometown football team, the Minnesota Vikings, currently plays at Mall of America Field (formerly the Hubert H. Humphrey Metrodome, a name that went out of style when it was discovered that Mr. Humphrey's estate was not going to pay as much as MOA for the privilege of having their namesake be a stadium nobody wants). For a variety of reasons -- none of which are that important to this discussion -- the Vikings would like a new stadium. Significant portions of Minnesota's political class would like to help them build one. Since the MOA Field lease expires after this season, there is a sense of urgency to get a deal done.

I'm going to suppress a lot of my unrelated opinions regarding the state of sports franchises, the idea of public subsidies for sports stadiums, the relative necessity and comparative worth of professional sports to a community, etc... There are plenty of other blogs in that space and it's not what we're about here anyway. Let's assume the stadium is going to be built and the cost sharing will be roughly 1/3 state, 1/3 local and 1/3 team. What I'm most interested in is where.

There are three options being floated.

  1. A site in the second-ring suburb of Arden Hills formerly used by the U.S. Army to manufacture ammunition. The Army decommissioned the site and designated it as "excess property" to be turned over to local governments and/or sold at auction. A new stadium, along with related development, would consume 260 acres, property that would need environmental remediation to make use of. This is the team's preferred option.
  2. Renovate the current Metrodome and give it to the team.
  3. Build a new stadium on a new site in downtown Minneapolis. Some private landowners are pushing a site currently used for a farmer's market.

Let's apply some Strong Towns thinking. We're all about building resiliency here. How do these alternatives make their respective communities stronger, leveraging existing infrastructure investments to obtain a higher rate of return on public expenditures? How speculative are these alternatives and how viable will they be in various market conditions?

The first thing to note about the Arden Hills site is its relatively remote location. On the following map I've circled Minneapolis and the potential new stadium site in Arden Hills. It's not like this site is close to anything. From Minneapolis or from St. Paul, you're looking at a drive that will be at least 20 minutes in good conditions. From Bloomington -- where the airport and MOA are located -- you are probably at least a half hour away. And it should be noted that a trip by car will be mandatory to the Arden Hills site. Neither of the light rail lines runs anywhere near and neither does our northern commuter rail line. I suppose some special bus routes could be put in for gameday, but the bottom line is that the Arden Hills site does not fit into any current transportation plan.

In fact, in terms of using existing infrastructure investments, the Arden Hills site fails miserably. While the numbers fluctuate based on who you talk to (and it seems like some rosy-scenario accounting is being employed), extensive highway improvements will be necessary with the least-expensive number on the table currently being $131 million

The Minnesota Department of Transportation pegged the number at $131 million Wednesday, including $46 million in local road improvements and another $85 million in improvements need in nearby trunk highways like Interstate 694 and I-35W.

Initial estimates had put the cost at closer to $240 million.

"I think it's a more manageable number," said Vikings vice president Lester Bagley. "I think it's also very important that the governor and MnDOT are trying to work with us on this, and to give us some momentum and progress toward resolution."

In contrast, the current Metrodome is on the light rail line. There is a stop at the stadium. You can get on the light rail line in Bloomington or (soon) St. Paul or you can ride the commuter rail line in from the northern suburbs and end up at the Metrodome. The rail lines are coordinated with the bus system, further expanding options. There is a ton of parking currently at the site - no additional parking would need to be built. And while it is obvious, it needs to be stated that many more Minnesotans live within walking or biking distance of the current Metrodome site than will ever live in Arden Hills.

Pretend you're the owner of the Vikings with a new stadium in a remote location. You are trying to maximize your revenue per seat. Two years into the new stadium, there is an uprising in Saudi Arabia, a new government emerges there that is not inclined to like us and, subsequently, gas prices spike to $8+ per gallon. At that point, you may wish your fans had some options besides a long car trip. Strong Towns 101 tells us that increasing options builds resiliency.

Forget about the owners, though. Let's look at the public's investment. We've already made multi-billion dollar investments in highways, parking, transit systems, sewer and water systems and other infrastructure that serve the existing stadium site and other development nearby. We've already given tax subsidies to some businesses in the vicinity of the current stadium to get them on their feet. We've made other investments in a new theater and library, as well as baseball and basketball stadiums nearby. There is a major public university campus up the street that gets significant ongoing public support.

Here's my question: where's the public's return? Minnesotans have made these investments counting on the private sector coming in and capitalizing on them. If we don't get billions of dollars of new private sector investment around these light rail lines, how are we going to make that public investment pay off? If we don't fill in these empty or low-use lots we have and get all our vacant condos and retail space in productive use, how are we going to afford to maintain all this stuff we've already built?

Spending public dollars to divert private-sector resources to a remote location while leaving a huge hole in the middle of billions of dollars of prior public investment would not just be counterproductive, it would be an enormous self-inflicted wound. If the private sector wants to invest private money to develop the Arden Hills site, there should be no objections. For public dollars, however, we need to be far more judicious.

Another major factor weighing against the Arden Hills site from a Strong Towns standpoint is the speculative nature of the proposal. The current owners are successful real estate developers from New Jersey. By successful, I'm suggesting that they have made money in recent decades developing real estate. It is reasonable, from their perspective, to think that they could develop a 260-acre site profitably based on their past experiences. In fact, their preference for the Arden Hills site is based on that assumption.

The team's conceptual plan for buildout of the Arden Hills site.

This is a model that has been done successfully before, most recently in Brooklyn with the New Jersey Nets, an example that is not identical, but rhymes. Malcolm Gladwell did a great piece on this explaining how New York developer Bruce Ratner purchased the Nets and proposed moving them to a new site in Brooklyn largely as a way to access the power of imminent domain for his real estate project. Finances forced him to eventually unload the team, but as Gladwell points out, that really wasn't a problem.

Did Ratner even care that he lost the Nets? Once he won his eminent domain case, the team had served its purpose. He's not a basketball fan. He's a real estate developer.

The Arden Hills site does not require imminent domain. Besides some environmental work (which the team believes will go quickly but others disagree), the site is ready to go. However, there is nothing there right now. This is totally a build-it-and-they-will-come undertaking. The success of this project ultimately depends on many businesses opening or relocating to the site along with many families doing the same.

Let's not even debate whether or not this is realistic given the high foreclosure rates and high level of commercial vacancies in the northern suburbs. If you are the team owners, you have faith that the economy will turn around and we'll be back to go-go-growth again. If that happens, they are in position to gain from that.

But from a resiliency standpoint, that is a huge gamble. What happens if this winds up to be a boondoggle? A stadium in the middle of nowhere? What if the public sinks $600+ million dollars into this and the only thing we get is a new stadium and a few hundred million dollars of new infrastructure to maintain? What if the market demands something different in the years ahead (as some emerging trends suggest)? As we look into the future, are we really certain it holds so much excess prosperity to take such a huge leap with public dollars?

Redeveloping the current Metrodome site, in contrast, is a much sounder public investment. We don't have to bet on future development -- it is already there and happening. While the condo and loft market has slowed down, a lot of units have been built near the current stadium. Even so, there is a lot of room left for even more redevelopment. And none of it will require additional infrastructure. It's all there already, a sunk cost for the public. If we were to redevelop the Metrodome site, the maturing process that has been going on for decades around the Metrodome (enhanced by the recent rennovation of the Guthrie Theater) would continue. The platform for growth is already there. A long-term commitment to the Metrodome site and a new stadium could only be a catalyst for additional private-sector investment.

There lies the catch for the Vikings. The new private-sector investment around the Metrodome would be spread out amongst many, not reserved exclusively for the ownership of the Vikings. New development would be the product of many little ideas by many minor investors; comparatively small bets on the future of specific sites near the current stadium. Some of these projects would work great. Some would be less successful. While this lacks the grand vision of the Arden Hills plan, it is far more resilient. Instead of creating a too-big-to-fail situation in a second ring suburb, we would be leveraging a significant public investment for a broader, more market-based and -- dare I say -- natural investment approach.

In my TEDx talk and in prior blog posts, I have focused on the urgent need to leverage public sector investments for greater public return. Too often we disregard the ability to create capturable financial value from our public projects. While my comments in those articles have dealt with courthouses, parks and schools, shouldn't the burden for a public return on investment be all that much greater when the public dollars are going to subsidize a privately-owned sports stadium?

I respect the governor's desire to create jobs. I respect the Vikings' need for a new facility. I respect lawmakers' need to do something to resolve this situation. None of this absolves us from our obligation -- especially during this difficult economic transition -- to move beyond single-dimension thinking. Any public spending on a new stadium must make Minnesota a stronger and more resilient state. The Arden Hills location does not come close to doing so and should be rejected. The focus of state officials should be on renovating the existing site or finding a nearby site that leverages the same set of existing public investments.

That would be a Strong Towns approach.

 

Additional Reading

 

Dig, baby, dig

Our systems for funding new infrastructure are stuck in the 1950's. Our systems for funding maintenance of existing infrastructure are not serious. Combined, these approaches create outcomes that can't be justified by people considering themselves rational, let alone great.

Transportation for America has released a report on the state of bridges in the United States. It should be eye-opening for anyone even mildly engaged in the debate over the future of America's infrastructure. Titled "The Fix We're In For: The State of Our Bridges", the report details, in a state-by-state, county-by-county breakdown, exactly where we stand. 

For example, in my home state of Minnesota, we have 1,149 bridges that have been determined to be structurally deficient, meaning they require significant maintenance, rehabilitation or replacement. According to Transportation for America, the cost to address all 1,149 bridges is $500 million. But we're not going to focus on this sad fact; others have that covered just fine. Today we're going to look again at the Old Economy Project that Refuses to Die, also commonly called the St. Croix Bridge.

The St. Croix bridge is a proposed $670 million crossing of the St. Croix, a river forming the border between Minnesota and Wisconsin. The city of Stillwater has long advocated for the new bridge as a way to address their congestion problem (the current bridge, which is deficient, runs right through town), to the point where their council gave money to a group promoting the bridge, a contribution which turned out to be illegal. The nearest high-capacity bridge is eight miles away to the south. 

The Stillwater Bridge (B) crosses the St. Croix river about eight miles north of the I-94 bridge near Hudson (A).

Let's stipulate for the sake of this conversation that the new St. Croix bridge is a worthy project (it's not, but let's pretend that it is). At a time when Americans are being forced to make some really difficult financial decisions, particularly about infrastructure spending, the reason why this project is likely to proceed while 1,100+ of our deficient bridges receive little funding is important to understand. Understanding that reason will illuminate why we are in such a dire financial situation, why our infrastructure is failing and why nothing we are likely to do will make the problem better.

The St. Croix bridge is a very expensive project. It is projected to cost more than the estimate for fixing ALL of the 1,149 structurally deficient bridges in Minnesota.

Without knowing the numbers, it would be fair to assume that the St. Croix bridge is really critical in terms of traffic volume. Not so. The bridge is projected to carry 16,000 vehicles per day. For comparision, Minnesota's 1,149 structurally deficient bridges carry a combined 2.4 million vehicles per day.

This seems insane, and it is. Why would a state full of rational people spend $670 million on one bridge to carry 16,000 cars when we already have 1,149 bridges carrying over 2.4 million cars that are in a state of critical disrepair? Why would we not spend the money first on maintaining the bridges that we have? What business do we have adding more bridges to the inventory when we do not have the resources to maintain our existing ones?

The answer is so simple and it is the key to understanding why our national infrastructure systems are in such miserable shape.

We can get money from Washington to build new infrastructure, but it is really difficult -- if not impossible -- to get money from Washington to maintain existing infrastructure.

Put simply, maintenance is a local issue. Building new -- expansion -- is something we fund out of Washington D.C. through any number of programs or appropriations. But the catch is always that the drudgery of maintenance falls lower on the government food chain. In other words, it is up to Minnesota to maintain its bridges. There is some federal money there that it can go after, but largely the existing bridges are the states's financial responsibility. The fact that there are 1,149 bridges in critical disrepair points out that this system is not working real well.

Minnesota can say no to the St. Croix bridge money, but in doing so it will not receive an equivalent amount of money that it can use to maintain its existing bridges. If Minnesota says no, the St. Croix bridge money will just go to some other state. Neither the congestion problem in Stillwater nor the problem of the 1,149 deficient bridges will be solved. A pragmatic local politician, understanding that a new bridge solves Stillwater's problems and won't create any significant liabilities for the state for 50 years or more, makes a rational decision and supports the project. Only a handful of people reading this blog right now will be around to bear the financial burden of fixing this bridge when it someday becomes deficient.

Think that through for a second and put yourself in the place of the person fifty years from now. There will be a deficient bridge in Stillwater that will then be in need of maintenance. It will serve only a small number of cars, but the cost will be astronomical -- far more than can be afforded or that can be justified by the traffic volume. Do our grandchildren and great grandchildren put up the money to fix this bridge or do they just ignore the problem?

Well, if they follow in our footsteps, they will ignore the problem. Today we have 1,149 bridges just in Minnesota that were built generations ago that are now ours to maintain. We're not maintaining them.

And why would we? I don't ask that lightly, but simply point out that few of these bridges are high-return investments. The same thought process that is pushing the St. Croix bridge project forward was used to justify all of these other investments. We've not created any systems to ensure that these investment could be financially justified or to capture any value out of them once they were built. With the gas tax, our only incentive at the federal level is to encourage people to use more gas. Building more bridges whenever there was a congestion problem, regardless of whether or not it could be financially justified, responded to this incentive perfectly.

We're two generations into this folly. Look around and see what we've created. We have failing infrastructure everywhere. The cost to maintain it all far outstrips our ability to pay, let alone any amount we could justify spending based on the value created. We've put ourselves into enormous debt not only in government but especially at the household level just trying to keep this system going. So what do we do now?

Apparently, at least for the time being, we just keep digging the hole deeper. Dig, baby, dig.

 

Related Reading

 

[Note correction: I made a mistake and took a number from the wrong column for the amount of traffic on Minnesota's structurally deficient bridges. The correct number as reported by Transportation for America is 2,436,031. The post now reflects the correct number. My apologies for that mistake. -Chuck Marohn]

Measuring Productivity

In an age of austerity, we need to make our public investments go further. No longer is it acceptable to simply analyze public projects in one dimension, such as cash flow or job creation. Our projects need to leverage our limited revenue to do all that and much, much more. Our top priority today needs to be on making our places more productive.

Thank you to everyone who engaged with us on our two "Infrastructure Cult" pieces last week. The response was overwhelming and I apologize to those who have emailed me and have yet to hear back. We're working on it and some other things soon to be released. Thank you for joining us here each week and for all of your support of the Strong Towns movement.

In last week's Friday News Digest, I wrote about the work of Joe Minicozzi, whose speech from CNU 19 I had included in an earlier podcast. While we at Strong Towns often start with the public cost for infrastructure and then compare that to the revenue yield from the property it serves, Minicozzi comes at the productivity equation from a different -- and thought provoking -- angle.

Let me share an analogy from Minicozzi's CNU talk: When we look at the productivity of a car, we measure it in miles per gallon. The question we ask is, how many miles does a car travel per gallon of gas used? We are comfortable with this approach because it is vastly more logical than a miles per tank calculation. Nobody asks: how many miles can I travel on one tank of gas? We all understand that, while a Hummer may have a bigger gas tank than a Honda Civic, it does not make nearly as productive use of gasoline.

Cities often vigorously pursue that large business -- think Wal-Mart -- instead of the small ma-and-pa shop under the guise that the large business is going to generate more tax base. The same with the big house in the suburban subdivision. That sheetrock palace is paying a lot more tax than the little house on the city block. Isn't it logical that a city will be better off if they have more of these large businesses and homes?

Minicozzi's analogy would suggest that revenue per lot is a poor measure of success. The large business may provide a lot of tax base, but it also chews up a lot of land and requires a lot of infrastructure. Same with the house on the large lot. A better way to measure success, and true productivity, would be to look at the tax base on a per acre basis.

Seem abstract? Let me give you a real example.

At my other job with Community Growth Institute, we are working with the City of Pequot Lakes, MN, to expand their Grow Zone, an area in town where we helped establish a form-based code two years ago as part of a plan to promote business development. Last month we analyzed two streets that had just been reconstructed as part of a routine city maintenance project. What we found affirms Minicozzi's premise.

2nd Street in Pequot Lakes, MN.

The street reconstruction cost $180/foot. These costs were actual construction costs from 2010, so there is nothing theoretical about them. The tax base calculations were based on (1) the city's current budget, (2) the city's current tax rates and (3) the actual assessed value for each property. We assumed a 20-year life span for the street and put the total revenues collected over that period of time into a present value (at 4% for anyone interested). The results reveal two streets in the heart of the city's downtown that are not even close to being productive.

Street #1

  • Total cost for street reconstruction: $104,400
  • Total revenue collected for maintenance over one life cycle: $23,400
  • Revenue gap in current configuration: ($81,000)
  • Percent of project covered by adjacent tax base: 22%

Street #2

  • Total cost for street reconstruction: $126,000
  • Total revenue collected for maintenance over one life cycle: $50,000
  • Revenue gap in current configuration: ($76,000)
  • Percent of project covered by adjacent tax base: 40%

These are streets -- especially Street #2 -- that, if you asked a local to name the five most productive streets in town, would assuredly be on the list. It has some of the largest businesses and the town's major employers. Even so, the taxes collected from the adjacent properties are not even remotely close to covering the basic maintenance costs of the streets that serve them.

The premise of our work there is not just identifying this imbalance, but solving it. The standard "miles per tank" approach would suggest that we seek to attract another large business to locate along this street. That would be the wrong move.

In the spirit of Minicozzi's work, we analyzed the yield from each property along the streets. The one with the highest total value is also one of the city's largest employer and a business that the community values greatly (with good reason). It consumes five acres in the heart of downtown and, while it pays over $14,000 per year in property tax to the city, the yield is only $2,860/acre.

Major business in downtown Pequot Lakes. Tax yield: $2,860/acre.

In contrast, a small little shop that had lost its tenant and was currently sitting vacant -- a place that, quite frankly, nobody in the city government much values -- paid only $1,200 per year in property tax. However, it only consumed a quarter of an acre. Its yield: $4,960/ acre.

Vacant business in downtown Pequot Lakes, MN. Tax yield: $4,960/acre.

To be successful, the City of Pequot Lakes does not need to attract another large employer to build a new business. All it needs to do is get this run down little shop reactivated -- something that is actually much easier to do -- and then create an environment that would allow 20 more of them to be built along this same street. This is also doable over a longer time horizon. When all you need are a bunch of these modest-sized establishments, all of a sudden there is tons of room for growth.

I can already hear the chorus of objections from the "jobs first" crowd. They will say that the low-yielding, big business is creating a lot of jobs -- many of them high-paying -- and this little shop, even on a good day, will create few. They will argue that economic development is all about job creation and so focusing on this small end of the spectrum is missing the point.

I could question the basis of that assumption, but instead let me point out the obvious fact that always makes these economic development people angry. From the city's perspective, there could be a thousand jobs at that business and a billion dollars worth a sales run through there. None of that will change the property value and thus none of it has any bearing on this city's revenue. You can argue that tax laws should be changed to provide for a local income tax and a local sales tax (some places have one or both of these, but not Pequot Lakes), but until that happens, the only way this street pays for itself is by becoming more productive from a tax base standpoint.

That is not to say that jobs are not important. They are. But they are one factor in many. We can spend a million dollars to attract or create a job, but if that job doesn't generate any financial return to the community, it is going to be hard to repeat that effort. In an age of austerity, we need to make our public investments go further. 

This brings me to a final, obvious question: If these streets are not productive, why are we building them this way? There is a long answer to that (and I am currently working on a book proposal to answer it), but the short version is this: we've not had to bother about productivity until now. Since the end of World War II, we've been so wealthy and had so much growth that, for most parts of the country, the productivity of our places did not matter much. If it created a job, it was good. If it brought in a new business, it was good. We didn't ever pause to worry about what happens when the maintenance bill comes due.

Those bills are due now, and more are arriving each day. We don't have anywhere near the money to maintain so many unproductive places. What we face is a choice between a chaotic reset or a strategic contraction -- one where we intentionally divert our limited resources into those endeavors that are most productive while we seek -- block by block and neighborhood by neighborhood -- to improve the productivity of our places.

At least, I'm optimistic that we still have time to choose.

 

Additional Reading

 

You can join our conversation here by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

The ridiculous Old Economy project that won't die

Whether you were in the majority of American voters that in 2008 opted for "change you can believe in" or are part of the majority of American voters that in 2010 opted to "change" that change, you likely have a deep-seeded frustration with the seemingly unstoppable inertia of the status quo. Our economy is trying to change, to transform itself, yet we cling to a fantasy that American Economy V.2005 was not only "real", but that it can be brought back from the dead with just the right bit of prodding.

No project I am aware of encapsulates this Old Economy way of thinking more than the Minnesota/Wisconsin St. Croix River Bridge. We have written about this project before (Victory on the St. Croix, but over what?, March 10, 2010) and the bizarre politics surrounding it (Michelle Bachmann and the St. Croix Bridge, March 18, 2010).

With America clearly in the throes of pending austerity, with Mn/DOT's budget bleeding red ink as far as the eye can see, with Americans extremely wary of continued deficit spending and clearly expressing that at the ballot box, with a Presidential Deficit Commission recommending major changes in how we do business (and catastrophe if we do not make some tough choices), and now - and this is unbelievable if you ponder it for a while -- we have the head of the FDIC writing this past week that the next debt crisis will be in the United States (see Ireland), I assumed this project was dead.

When the National Park Service gave all the politicians "cover" to back out of this ridiculous project by ruling that it violated the Wild and Scenic Rivers Act, I assumed the project was dead.

Silly me. Until our economy implodes under the sheer weight of its own insanity, no Old Economy project will ever die.

In the latest effort to keep hope alive for bridge supporters, a "formidable" lobbying organization called the St. Croix Bridge Coalition is headed to Washington D.C. to make their case. They are seeking two things; an exemption from the Wild and Scenic Rivers provisions and $668 million.

For those unfamiliar with the project, here is a quick synopsis: The Minneapolis/St. Paul Metropolitan Area has expanded horizontally for decades in the Ponzi-scheme fashion we have thoroughly discussed here at Strong Towns. This has pushed new development across the St. Croix river and into Wisconsin, where not only is the eastern shoreline being developed but some nice, affordable country estate lots are available for people who don't mind the commute in from the far exurbs.

As more people have exercised their right to live in an area far removed from where they work, congestion has increased, especially through a schizophrenic, but beautiful, little town called Stillwater, which has both embraced hyper-growth and shunned it, depending on the day of the week. The ante to transfer congestion someplace else and keep the Ponzi-scheme rolling by opening up more land for development across the river is $668 million. Of course, all of the proposals have this project being paid for by someone other than those that directly benefit. The general taxpayer, or more precisely, future generations of taxpayers since it is all borrowed money, will pay for this project through state and federal government contributions.

Those that read our series on the Staples overpass and TIGER II will not be surprised to learn that the St. Croix Bridge Project comes complete with fraudulent benefit/cost analysis, this time showing that the "benefits" exceed the project costs by six times. While the cost is truly in dollars paid by us, the "benefits" are quality-of-life and accrue to people who choose the lifestyle of living near Stillwater or in Western Wisconsin. A full 85% of the "benefit" (an estimated $758.1 million worth) is time these people will save in their travels while another 10% (estimated at $90.3 million) is in a theoretical reduction in the distance they have to travel.

The coalition seems hopeful it will find salvation in a new anti-environmental, pro-roads group of legislators personified by local representative, and Tea Party favorite, Michelle Bachmann. Acting the part of a political contortionist, Bachmann recently indicated that earmarks for transportation projects in one's district are not really earmarks. I guess it depends on what the definition of "is" is.

Bachmann told the Star Tribune she supports a “redefinition” of what an earmark is, because, she said: “Advocating for transportation projects for ones district in my mind does not equate to an earmark.”

“I don’t believe that building roads and bridges and interchanges should be considered an earmark,” Bachmann said.

While we've vigorously indicated here at Strong Towns that we are a non-partisan organization (and we are), I've not hid the fact that I am a strong fiscal conservative who has never voted for a Democrat in my life. We have others here equally committed to the other side of the political equation, but I'm writing this particular piece and refer to my politics only to properly frame my outrage.

The St. Croix River Bridge project would be a ridiculous project if we were a rich country. We're not. Spending such obscene amounts to subsidize the lifestyle of a small percentage of commuters and enrich an even smaller handful of potential property owners and developers is morally bankrupt. Doing it on borrowed money when we have immense, unfunded maintenance obligations on infrastructure we've already built is a travesty.

Are we insane? We're swimming in debt, an unfathomable wave of financial obligations is sweeping over us, we have limited prospects for growth and all of the signs of an empire in decline. What kind of a people even ponder funding such an outrageous project under these circumstances?

Dan Hoxworth wrote an opinion piece last summer in which he compared the reconstruction of the 35W bridge, which collapsed in 2007 killing 13 people, and the St. Croix bridge. It is a great piece, which included this quote:

No one would question the importance of reconstructing the I-35W bridge, with its 140,000 vehicles crossings daily, at a price of $234 million. But $668 million to accommodate 3,000 more crossings daily [above current usage on the Stillwater bridge]? Is that a wise expenditure of tax dollars?

We're stuck in an Old Economy model that places immense value on saving small increments of commuting time. This was counterproductive when we were employing scores of people building tons of houses on the periphery of major metropolitan areas. Now that we are no longer building in that model, clinging to these same values is crazy. It wasn't real then. We can't wish it -- or spend it -- into reality now.

If we truly want change as Americans, we need to look in the mirror. We can't oppose projects in someone else's district and support those in ours. We can't campaign against debt and then borrow to enrich our own position. We need to demand, before we spend any more money on propping up this system, that there be a real financial analysis done that addresses the true financial return of every project.

The time has come to start building an America full of Strong Towns.

 

Join our conversation by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

Costs and Benefits, Part 5 (Finale)

Costs and Benefits, Part 5 (Finale)

What this series is meant to do is to pull back the curtain for people who assume that, when we make investments in infrastructure, the government is ultimately getting money back -- through new income tax, sales tax, property tax, etc... -- in an amount that exceeds the cost of the project. Nothing could be further from the truth.

Costs and Benefits, Part 4

Costs and Benefits, Part 4

This is a continuation of our in-depth look at the way that cost/benefit analyses are done to justify infrastructure spending, particularly in large grant programs such as the recent TIGER II. Today we are looking at the cost side of the equation.

Costs and Benefits, Part 3

Costs and Benefits, Part 3

This is a continuation of our in-depth look at the way that cost/benefit analyses are done. We are talking specifically here about a TIGER II project for an overpass in the city of Staples, MN. Today we're covering the safety, carbon reduction and maintenance arguments.

Costs and Benefits, Part 2

Costs and Benefits, Part 2

Last week we started our examination of the types of financial analysis that are done to justify infrastructure projects in typical funding programs such as TIGER II. Our analysis today focuses on a project in the city of Staples. The Staples project presents a mechanism to demonstrate, in depth, how a typical cost/benefit analysis is done.

Costs and Benefits, Part 1

Costs and Benefits, Part 1

Many people assume that, when we invest in infrastructure, "the government" gets back - by whatever means and at whatever level - cumulatively more money than it puts into a project. There are others who know that this is not remotely true.

The TIGER sleeps tonight (in Staples)

The TIGER sleeps tonight (in Staples)

The second round of Transportation Investment Generating Economic Recovery (TIGER) grants are landing just as a tumultuous election season is coming to an end. In "normal" times, the grants -- nearly $600 million worth -- would allow politicians to claim they are doing something to, as the name implies, invest in transportation and thus generate an economic recovery. This time around that claim seems to have much less traction.

The Mailbox: Joplin Fire Hydrants

Who should pay, and how they should pay for fire hydrants is the center of a debate in Joplin, Missouri.  I'm curious to know what Strong Towns thinks about this.

The City of Joplin, MO, has contracted with a company called Missouri American Water (MAW) to maintain their water utility. As the article presents it, Joplin and MAW are renegotiating their contract agreement and have a question over who should pay for fire hydrants.

This article contains terrible journalism (probably because it is a television clip) as it doesn't answer a number of key questions.

  • Why is the current contract being renegotiated? Has it expired or is that just a standard feature?
  • How is the maintenance of other parts of the system handled? When a watermain breaks, who pays for that?
  • How are extensions of the current system handled? When a new subdivision goes in and new pipe is needed, who pays for that?

At the end of the day one thing should be clear: In the current system, if you are receiving water from MAW you are going to pay for the hydrant. The question really comes down to whether or not it makes more sense to do that under the umbrella of the contract or as part of a city tax.

In general, it makes more sense to make the fee for maintaining the hydrant part of the contract. MAW doesn't seem to be disputing that concept:

"When the city needs a fire hydrant at a location, they call us," [Christie] Barnhart [of MAW] says.  "We go and install the hydrant.  At that point the hydrant is no longer an asset of Missouri American Water.  It becomes property of the city, and we maintain it for them."

It also makes no sense for the city to pay for hydrants as part of the general levy. Where's the connection?

What really needs to be understood is why this expense exists. Hydrants aren't just needed randomly across the system. They don't just grow up from the ground and then need to be maintained. The standard for water systems commonly used by engineers in the Midwest has a spacing between hydrants of between 300 and 600 feet. This is to facilitate connection by fire fighting equipment at a radius that still allows for flow and pressure, given the head loss in the fire hose. 

That means that the need for the new hydrants is due to an expansion of the system (unless the existing system was built without the proper hydrants, but I discount the possibility). In an expansion situation, the problem of paying for hydrants makes no sense.

Why should existing customers, who are already paying to support the existing system, pay even more for expanding the system to new customers? What's in it for them?

Let me give an analogy. I run a restaurant and you come there every day for lunch. One day I increase the rate of your sandwich by 20%. You ask why and I say, "It is to pay for the new restaurant up the street I am opening." What would you say? You would likely say, "Let the people up the street pay for their own restaurant." You would be right.

But that is not the way that local government works. When it comes to our development pattern, we are collectively as schizophrenic as possible.

In the left brain: Growth is good. We need new growth so we have additional tax base and additional revenues into the system. We all benefit from growth and should collectively invest in it.

In the right brain: New growth is expensive. We can't afford all of these hydrants (or the water line for that matter). Let's get someone else to pay for that. It is bankrupting us.

Our advice is easy.

Joplin, if you can't afford the hydrants, the water main and the other costs of new growth, how does that new growth benefit your community? If it doesn't create more wealth for your town than it costs you collectively to service, it is just making you poorer. Adopt a new pattern of development that actually makes your town financially stronger, not systematically poorer.

The worst thing that can be done in Joplin is to hide the costs of growth by rolling them into incremental increases in water rates or sales taxes. The developers and new property owners in the areas of new growth should pay for the costs of their endeavors, including hydrants. And if the economics of maintaining their infrastructure does not make sense, then the public should not assume the responsibility for maintaining it. Otherwise the Ponzi scheme nature of the development pattern just becomes a hidden tax on the existing poor to pay for the soon-to-be poor.

 

I love Missouri and we would love to do a Curbside Chat in Joplin or in any other community across the United States (or elsewhere, if asked). You can sign up here to start the conversation in your community. You can also get more Strong Towns discussion by joining us on Facebook or Twitter. Thank you for the question and thank you to all of our readers. Keep doing what you can to build Strong Towns.

Chasing our tail

For some decades, local transportation policy in the United States has been a never ending game of whack-a-mole, with the "mole" being "congestion" and the "whacker" being "public money". Like whack-a-mole, our efforts are ultimately futile as congestion will always rear its ugly head no matter how thoroughly we pound it. This approach has to end if we are to have any sanity in our fiscal situation and any hope of becoming a prosperous nation again.

We've explained before how congestion is the bane of the suburban development pattern (Shiny, Happy Cars - June 2010). A system that separates everything into pods and then requires everyone to drive between pods ceases to function when overwhelmed with congestion. Like a highly-charged immune system, engineers and public officials are ready to pounce at the first signs of congestion. The only problem is, congestion is not a virus but a symptom of a greater disease: a development approach that is bankrupting us.

We've also written extensively about the delusion that exists in Rogers, MN -- a city that is "next in line" for its payday of government assistance. Their plan is to transfer huge sums of American wealth to their local economy (primarily through earmarks for transportation spending) so that they can support some fast food, gas stations and a huge Ponzi scheme of TIF-financed big box retail. This delusion is not unique to Rogers - it is one of the ways that similar communities across the country have achieved their decade-in-the-sun for nearly sixty years. Rogers is just next in line (and dammit, don't you dare take away the public trough they are entitled to).

Neighboring Rogers are the cities of Albertville and Otsego. Together, these communities form an axis-of-foreclosure -- they have been some of the places hit hardest in Minnesota by the downtown in housing values. This has only made them more desperate to kickstart growth in the only way they know how: a suburban pattern using someone else's money. They are essentially asking the American taxpayers to double down on investments that have been shown to not pay off, using Old Economy logic in doing so.

Albertville's biggest "investment" today -- the economic engine for the community -- is an Outlet Mall. No, excuse me, a Premium Outlet Mall. The concept is that people from the distant regional centers will use the interstate highway to travel to what is essentially a glorified strip mall. This is a very resilient model only if you have no concerns about the endless supply of cheap fuel that is necessary to make it viable.

In their words:

“Albertville has been an excellent location for the Albertville Premium Outlets. Albertville is positioned between two major markets, has strong pass-by traffic on I-94, and is located in the fastest growing area in Minnesota. We are extremely pleased that within our first two years of business, the Albertville Premium Outlets ranks in the top 20 outlet centers in the country.”
Sally Dunfer
Albertville Premium Outlets

Success like this comes at a cost, and that is where congestion comes to the fore. Today patrons of the outlet mall traveling west from the Twin Cities metro region must exit the interstate, turn left onto County Road 37, drive about a mile, then turn right at a signalized intersection before proceeding another quarter-mile or so to the premium outlets. Such a complex and low-speed end to the journey is not only bad form, it is quite un-American. Especially for those traveling by limousine.

The solution is simple: to reduce this congestion and provide a more direct route for Minneapolitans to get to their premium garb, a new priority access ramp needs to be constructed off of the highway. The cost: $8.74 million.

As reported in the local paper:

The estimated $8.74 million project along Interstate 94 involves constructing a collector and distributor lane starting at the County Road 37 interchange and leading westbound directly to County Road 19 near the outlet mall stores.

It is, in essence, a dedicated on/off ramp that maintains higher speed limits than a frontage road, and has a direct distribution point.

Why get there slow when you can go fast, especially when the cost is a measly $9 million? And if you have a hard time believing this project could be true, it gets worse. Guess who is being tapped to pay most of the cost? Everyone.

Cost Distribution

  • Albertville: $1.26 million
  • Otsego: $440,000
  • Wright County: $1.64 million
  • State of Minnesota: $5.44 million

The funny thing about this story is that it came to my attention from reporting on Otsego's agreement to pay the $440,000. They had originally been asked by Albertville to pay $1 million. Why the neighboring city would contribute a dime to such a project is beyond me - and apparently the reporter of the article as well - but not the Otsego City Administrator.

And though some may question why the city would even consider allocating $400,000 to the Albertville project, Robertson says it is a good faith gesture between the two cities that is meant to benefit both cities later.

The Otsego administrator points to projects that will need the mutual cooperation of both cities, such as spacing agreements for future intersections along County Road 19 and a future proposed project for a Kadler Avenue interchange.

But even as Otsego joins Albertville in a kind of mutually-assured-destruction pact designed to obtain as much state taxpayer money as possible while we are still pretending there is money there, they hedge their bets in case something goes wrong.

Robertson says if future Albertville city councils back off from the joint powers agreement between the two cities, Otsego will simply stop making its payments to Albertville.

Likewise, if Otsego fails to make its annual payment, Albertville will cease to offer financial and lobbying assistance to projects that benefit Otsego.

The kind of love that lasts forever.

Our nation is a collection of towns and neighborhoods all reacting to these bizarre incentives. For generations we have utilized large sums of other-peoples-money to live beyond our means at the local level, all under the guise of "growth". That growth costs far more to sustain than it returns in revenue to the community. If you wonder why we are broke at nearly every level of government, one only need to look at cities like Albertville, Otsego and and Rogers and understand that, in our current pattern of development, they are not the exception. They are the rule.

As a final note, what do you think the chances are that Albertville residents would tolerate this congestion if the cost sharing were reversed and they had to pay $5.44 million while the state paid only $1.26? I think the prevailing sentiment would be, "what congestion?". Local residents would never support such a project on their dime because, even with our warped way of looking at such things, nobody can pretend there would be a return out of that investment.

If we want Strong Towns, we need to demand that our public officials invest our money in projects that make our places stronger and more resilient. We must focus less on how quickly we can move people through town and focus more on understanding why they may want to stop. That is a Strong Towns approach.

 

I'll be heading to Denver for the Community Matters '10 conference starting tomorrow. Our blogging may be a touch erratic this week in terms of timing, but check back regularly as I'll be doing updates from the conference. As always, you can join us for an extended conversation on Facebook and Twitter. Please tell a friend about the Strong Towns movement and how our nation can grow stronger by first strengthening our towns and neighborhoods.

The Infrastructure Bank

On Labor Day, president Barack Obama announced a plan to spend $50 billion on infrastructure projects, part of an overall stimulus package designed to alleviate employment problems and jump start the economy. It is also a bow to political reality in that anything the president was to propose in a heated election season, especially where the other side of the aisle smells blood in the water, would be opposed, but infrastructure spending - the perennial favorite pork-laden entree for representatives of each party - would be opposed less vehemently. This is smart politics in a period of time when all politics is seemingly rotten.

The president's plan does include one fascinating proposal that is warming the cockles of wonkish hearts everywhere: the establishment of an infrastructure bank.

Obama also called for a permanent funding mechanism, an infrastructure bank, to focus on paying for national and regional infrastructure projects. Officials provided few details of how the bank would work.

For non-wonks, an infrastructure bank is not a bank the way it is commonly thought of (except it will get its money from the government, so in that sense I guess it is like many modern banks). An infrastructure bank is -- as designed -- an independent entity that would receive federal dollars for infrastructure and then distribute them using a non-political evaluation. In theory, the money would go to the projects with the greatest return on investment, be they local, regional or national in nature. Projects would compete and our limited dollars would go to those most worthy.

In another wrinkle, the bank would be free to tap into private capital. The infrastructure bank would then function as an investor, seeking a return on infrastructure investments through the use of tolls, fees or other direct mechanisms. In this way, limited federal dollars could be combined with capital from the private sector to the benefit of all.

While the Obama proposal lacks specifics (it is just a proposal, so that is not a criticism), William Galston of the Brookings Institution explains some of the likely details:

There is widespread agreement that it should focus on large regional initiatives that cut across jurisdictional lines and that its decisions should be made by a board of governors insulated from traditional political pressures. To reach the scale at which it could make a real economic difference, it must be able to leverage a modest amount of publicly provided capital to attract much larger amounts of private capital, which would demand a reasonable rate of return. To provide it, most projects the bank funds would have to generate revenue streams from user fees and other sources. The bank could supplement these fees with subsidies that reflect the gap between the private goods projects generate and the public goods whose value cannot be recaptured from individual beneficiaries.

Reaction from the geek-o-sphere has been rather positive. The Christian Science Monitor had an overwhelming supportive piece, pointing out the populist appeal of taking the pork-barrel out of the hands of politicians.

Oddly, despite the political timing of Obama’s proposal just weeks before the election, such a bank would help remove some pork-barrel politics that now influence the construction of highways and mass transit. Projects would be decided on their merits by an independent board within an infrastructure bank – and for one simple reason. The bank would need to pay back its investors. 

Robert Puentes of Brookings, oft-quoted here and a long-time proponent of an infrastructure bank, actually suggested that the Obama proposal may not go far enough, although he too lauded the innovation of the bank:

First the good: there are several key reforms that promise to change the way transportation infrastructure projects are funded and chosen on the federal, state, and metropolitan levels. A merit-driven national infrastructure bank could be the vehicle for green-lighting projects that have the highest return on investment rather than the greatest political reward.

We have not discussed the concept of an infrastructure bank here on this blog, even though it would seemingly align with our emphasis on return-on-investment when it comes to infrastructure spending. The reason is simple: I have thought about it a lot, but I don't have a strong opinion on it. I suspect Jon and Ben are likewise disposed.

My initial reaction to the approach is skepticism. The first thought that crosses my mind is Fannie Mae and Freddie Mac, the quasi-free-market behemoths that have not only enabled destructive development on a massive scale, but have done it all the while privatizing the gains and socializing the losses to the tune of literally a quarter of a trillion dollars (and counting). The best laid plans....

My next hesitation comes from turning decisions on national priorities over to what essentially would be quasi-bureaucrats. The only thing scarier (and more dangerous) than a corrupt political class is a corrupt bureaucracy. At least the former has some accountability, if only nominal. The latter has none. This is one of the arguments made in The Economist:

If we generalise Mr [Steven] Pearlstein's [proponent of an infrastructure bank] reasoning, we end up with, at best, a ruthlessly rational and efficient Singapore-style technocracy, which wouldn't be so bad, but isn't anybody's idea of liberal democracy. More likely, we would end up with a system even more corrupt, corporatist, and inefficient than the one we've got, but with fewer of the protections afforded by democracy.    

These arguments being said, if I were stood up against the wall and asked to stick with the present politically-driven, pork barrel spendfest of projects that not only squander what wealth we have left but do it in a way that actually makes us financially weaker when the long-term commitments are calculated, OR support an infrastructure bank, give me the bank. At least with the bank we have a chance to have some return on the public investment, at least in the near term.

To strengthen the infrastructure bank proposal, we also need a plan to address the trillions of dollars of infrastructure already in the ground that has a negative ROI. How do we increase the return on these investments or, alternatively, wind down our long-term commitments in these places? Proponents of an infrastructure bank look at it as a way to get more money, but it really just redirects capital (perhaps efficiently) and in that sense does not address the long term gaps in funding that exist (in Minnesota the gap is $50 billion over the next 20 years).

An infrastructure bank may be a good first step, but we have to admit that it is an easy one. Figuring out what to do with the long tail of public commitments that have little or no actual value is even more perplexing. The reality is that these commitments will likely be "devolved" to the lowest level of government, with only token financial support to accompany the "gift". An infrastructure bank may hasten this process, which only makes the need for towns and neighborhoods to start working towards a Strong Towns strategy all the more critical.

 

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Tuesday thoughts on where the money went...

A couple of quick things on our off-day (we try to publish here at STB Mondays, Wednesdays and Fridays).

First, I was told yesterday that, of the collection of photos that showed overbuilt streets, the configuration in this picture "didn't look so bad."

My response is that this would be not bad if the design objective is 30+ MPH traffic meeting head on without the need to slow down. If you adopted a more reasonable standard that would design for neighborhood speeds and, understanding the very low volume in these neighborhoods, very low speeds when cars met, you could literally cut this driving lane in half.

Here is a picture of one such street in Walker, MN, that we have posted here in the past.

This street from Walker is still a little wider than it needs to be. A car can park on each side and two cars can still meet, although the closeness will prompt them to slow down. With the very low volume of these streets, the width could be reduced even further so that, on the relatively rare occurrence that two cars meet head on, they would have to pull over and let one other pass. Before big budgets and auto-centric design mania, the yield design was quite common.

My larger point is less about the street widths (I'll write more about the urban design later in the week), but more about the overall expense of it all. If you can drive 10 mph faster due to the wider streets, after a quarter of a mile you would save a minute and a half (and that assumes there are no stop signs or other intersections). Is it worth literally tens of millions of dollars in added expense for a few seconds a day?

Of course not, but as I'll show later this week, that is not the only cost.

One other observation. It would be argued vehemently by the Brainerd fire department that these wide streets are necessary so fire trucks can get access quickly in an emergency. It is a public safety issue, which has been argued at every level of this debate across the entire country. It is interesting to observe that Brainerd spent all this money ensuring that the streets had great emergency access but, as a result, do not have the money to maintain their fire department or the response time of a full-time staff (but they do have a jaws-of-life for when those high speed cars collide).

Communities looking for a different approach would do well to get a copy of a new book by the Institute of Transportation Engineers on a context-sensitive approach to neighborhood street design.

Gambling on Growth

This week the St. Cloud Times, a daily newspaper from St. Cloud, Minnesota, ran the most insightful and revealing series I have read on the impact of the housing crisis on towns and neighborhoods. 

Photo by Kimm Anderson of the St. Cloud Times

I start this post with a disclaimer. My wife is a reporter with the St. Cloud Times and was a principle author of this series. She heads up their investigative team as well as reporting on county government and environmental issues. Outside of being the person I have chosen to spend my life with, I can dispassionately say that she is professionally very good at what she does. She is also incredibly smart and, as such, does not need her husband to tell her how the world works. In fact, more times than not, it is she informing me.

We have two little girls, ages five and three. A few months ago between the continuous adolescent questions, endless giggles and squealing, book reading, baths and food preparation (all of which we love), she told me that she was working on a series on failed developments. We talked a little bit and, in the intervening months, swapped stories occasionally as her life and mine overlapped more than usual.

When I went to Las Vegas with her earlier this month for the Investigative Reporters and Editors Conference (and some R&R for me), I was able to meet her partner in this investigation, Britt Johnsen. It was interesting to get a glimpse into their thought process as they prepared to finalize the series, especially juxtaposed with our location in a city that hyper-reflected the trends they were uncovering.

I am reading this series for the first time this week just like everyone else, only I am giddy because finally someone is starting to scratch the surface on this Ponzi scheme we call "growth". Unfortunately for this blog, my wife is a big part of it putting the story together. It would be unfair to her, her sources (which she does not share with me) and her career for me to comment thoroughly on the series. Her professionalism and journalistic-ethic is something I am in awe of. I do not want to diminish her amazing work here by commenting in a way that may get mixed up with what she has produced.

So, as someone who is immersed in land use policy (but also as a husband who is very proud to be married to someone so brilliant), I am going to pass along to our readers this amazing investigative series. A quote from one of the articles will set this up for our readers:

Almost every community financial adviser David Drown works with has made some improvements to infrastructure, such as roads and sewer treatment plants. When the expected growth doesn’t happen, it puts financial strain on the city, Drown said.

Almost every city can handle a year or two of little or no growth, Drown said. “But if this were to linger three or four or five years, it’s going to be a significant problem for a great number of communities,” he said.

Cities should be looking three to five years down the road and restructuring debt if necessary, Couri said.

“If they don’t start working on it now, they’re going to be behind the eight ball,” he said.

 

Gambling on Growth from the St. Cloud Times

Photo by Jason Wachter of the St. Cloud Times

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The Cost to Cities of Auto-centricity

In America, our older cities - the ones that were founded and initially matured during the railroad era or prior - have a DNA that lends itself well to an efficient development pattern, with vibrant neighborhoods and town centers. Unfortunately, since the 1950's we have systematically abandoned these areas to focus on new development on the periphery. The deterioration of these neighborhoods and the underutilization of the expansive infrastructure serving them is a uniquely American phenomenon.

The atrophy would not be so bad if we had simply walked away from these areas to focus on the next new thing. If we had done that, they would have largely taken care of themselves. What has been most damaging is our attempt to retrofit, through zoning and transportation "improvements", these historic places into a new pattern of development. We've had a sixty-year policy to convert these walkable neighborhoods into auto-oriented lesser-suburbs.

This approach is very expensive to build. It is cost-prohibitive to maintain. And it actually lowers property values in the process while encouraging residents to flee to greener pastures (literally). In retrospect, it is about the most self-destructive policy we could have put in place. We've been doing it for two generations.

In a new era of financial instability and scarcity, we have a marketing approach for towns looking to rebuild and capture a higher return on their existing investments: offer one-car living.

According to Forbes, the average person spends $9,641 annually "for the privilege of driving." That is over $19,000 per year for a family with two cars. If a family could live with one car, that is a significant savings. For cities looking for reinvestment, it could be critical.

Look at the numbers in terms of home values. If a family could move to a neighborhood where the daily necessities of life are within walking distance, they could have only one car and thus have $9k more to spend on a house. Let's say they allocate half of that to their home purchase. Just $4,500 per year would yield and additional $70,000 in home value. For aging cities seeking investment capital, securing these dollars is low hanging fruit.

Especially when shunning them is so massively expensive. It costs a tremendous amount of money to convert local streets into highways. It also costs both sides of the ledger - lost revenue and added expense - to maintain blocks and blocks of parking. Taming the automobile and making it part of the public realm within towns and neighborhoods - not the sole defining feature - will increase property values and spur investment.

Consider this pitch:

Anywhere, USA, is yesterday's town. Move to Someplace, USA, where we have abundant housing that is well priced along with neighborhood schools, parks, churches and shopping all within walking distance. Spend your money on a better way of life. Avoid the costly commute. You can even live with only one car. In Someplace, USA, we cater to the discriminating consumer - the one that understands living better should actually cost less.

Of course, to deliver on this promise, cities needs to stop inflicting harm on themselves. Stop building highways through town. Tame the automobile and make it share the public realm. Make it more convenient for people to stay in your town for their daily needs than to drive out. Throw out the zoning code and adopt a mixed-use, form-base pattern of regulation. Start capturing public investments - schools, parks, civic buildings - in historic neighborhoods, and do it not to attract people to drive in from outside the community, but to improve the quality of life for those living there. Stop investing in new growth on the periphery.

Build a Strong Town. People and investment will flock to you.

 

If you think what you read here at Strong Towns needs to be part of the broader public discussion on the future of America, please recommend our site to others. We appreciate all of the feedback and support as well as the tremendous growth in readership. Thanks to you, the movement to build Strong Towns is gaining momentum.

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The Mailbox: Tower Historic Harbor "Renaissance"

We received an email asking us our opinion on a project taking place in Northeastern Minnesota in the city of Tower. The project, which is described in detail on the city's website, would dredge a river channel to create a new harbor and then build a new town around that harbor near the existing city. In the words of the local State Senator, this would be Minnesota's version of San Antonio's River Walk. The cost is somewhere around $9 million.

This is a small town and an even smaller circle of people involved in the machinations of the project, so I've not included the name of the individual that sent the email or some of the other background information. In discussing the project, the emailer offered the following thoughts:

It is rare anyone asks about whether the initial purpose of a project is questionable, but lately I and some of my associates have started rolling our eyes. Rural airports with five hangars expanding by a thousand feet to "serve possible business expansion", or atv trails with beneficial economic impacts listed as a supporting reason. Remember, these are always public money; the project on the above link is to be funded with state and federal money. They speak of a renaissance, but I envision a half open hotel with a coffee bar closed between September and Memorial day employing a few East European summer visa workers slinging coffee to the occasional wandering boater. This after dredging a river and harbor , building jetties into the lake and disturbing wetlands.. millions in public cash. The distances on Vermillion are great, and even many locals sarcastically describe visitors traveling the length of Vermillion rather than hitting a closer resort.

All of this to save a city dying because it no longer has a reason to exist.

Today I would like to do a Strong Towns analysis and take a critical look at the numbers behind this project. I'm going to rely on their website and some other publicly available data.

Let's just start by looking at this investment in terms of the existing size of Tower.

Project Cost: $9 million

2008 Population of Tower: 498 (295 housing units)

In rough terms, this is an investment of state and federal (and a modest amount of local) dollars of $18,000 per person, $30,500 per household. This is roughly the entire income of the median household in Tower. That is quite a significant investment! In fact, in proportionate terms it would be like the city of Minneapolis making a $7 billion investment.

In terms of tax base, the investment looks even more disproportionate. The entire tax capacity of Tower in 2008 was $351,000. The Tower website indicates that the value of the proposed improvements following the project is "expected to exceed $32 million". If you assume that they hit that number (there are strong reasons to believe they won't get anywhere close to that in the new economy), that would yield an additional taxing capacity of $480,000.

Value of Improvements: $32,000,000

Average Tax Classification Rate: 1.5%

Projected New Tax Capacity = $32 million x 1.5% = $480,000

Tower's 2008 tax rate is just under 80%. That means, when the project is done, the private sector has worked its magic and everything is completely developed as imagined, Tower will see an additional $384,000 per year in property tax revenue.

Tax Revenue = Tax Capacity x Tax Rate

Projected Tax Revenue = $480,000 x 80% = $384,000

It is certain that project proponents will argue that the overall economic growth created in the area will generate more revenue than just $384,000, but they will argue that based on their perception, not reality. In Minnesota, without special legislation authorizing a local sales tax, the only taxing authority a city in Minnesota has is the property tax. There is no other mechanism, outside of fees, for cities to raise revenue.

So if this is a good investment, are the taxpayer's of Tower willing to make it?

They would be crazy to do so. If the $9 million were loaned to Tower at 4% interest with the generous provision to pay it off just from the tax receipts from the additional growth, the first year's interest would be $360,000. If the entire $32 million in private investment they hope to get were built in the first year, it would take 71 years to pay off the $9 million investment.

These are absurd numbers. It is clear that the good people of Tower would never make this investment, even if their lofty projected returns were guaranteed, because it does not make any sense. But they are not making the investment. The American people are. This is a really neat project. I like the concept. But as a country, is this the type of speculative investment we want to make? Is doing more of this really going to bring us prosperity, even if it works out exactly as they dream it will?

Of course not, but the tragedy here is not the fact that this project is a bad public investment. The real tragedy is how the beautifully-designed town of Tower has been left to decay while the politicians and professionals focus everyone on the next big idea. If you truly want to be outraged, check back with us next week for that analysis.

Our emailer astutely summed up what is going on.

Before I read your site, I would end up analyzing a  small town like Tower with a population viability analysis. Why did it initially exist? What was the resource that drew the population? Was that a long term sustainable proposition? Why did it then fail? A place like Tower, the answers were fairly simple; it formed before the Mesabi Range when the railroad did not wish to cross the extensive swamps south of the Giants Range and either timber,  gold or iron was speculated there. It was then sustained by the artificial construction/mining  boom that lasted over two decades until 1980. Of course since then, like all of Northeastern Minnesota, it has declined despite massive public spending.

Multi-million dollar gimmicks cannot save Tower. America can prosper when we focus cities like Tower on Strong Towns solutions that make better use of their current investments instead of focusing their energies (and our money borrowed from China) on the big gamble just outside of town. Doing that would be a true renaissance.

 

If you think what you read here at Strong Towns needs to be part of the broader public discussion on the future of America, please recommend our site to others. We appreciate all of the feedback and support as well as the tremendous growth in readership. Thanks to you, the movement to build Strong Towns is gaining momentum.

You can continue this Strong Towns conversation by posting a comment or by joining us on Facebook or Twitter.

The Cost of Development, Walker Industrial Park

As part of my role with Community Growth Institute, I have been working with the small town of Walker, MN, to update their comprehensive plan in a Strong Towns mode. When we started the project, one of the top priorities of community leaders was to justify, through the process, a multi-million dollar extension of infrastructure to their industrial park. Six months later, that is no longer true.

I'm really proud of the hard work Walker residents have put in on this plan, not just attending meetings but spending time thinking through and discussing some difficult issues about their community. Sincerely questioning your own core assumptions is not an easy thing to do. That makes the following excerpt from the current draft of their plan all the more remarkable.

Not only that, it is yet another example of the actual cost of development - something rarely even pondered in America, despite being so critical. If you read the following and are astounded a community would ever consider such a project, brace yourself. On this blog, you can read many other examples of projects even worse - just the tip of our collective iceberg. You should also check out our Mechanisms of Growth to get an understanding of how this is happening over and over again across America.

****

The City of Walker has set aside land on the outskirts of town for a potential industrial park. The area is platted and a sewer and water system has been installed. Unfortunately, the sewer and water system have not functioned as intended and their failed performance threatens future development within the park.

A proposal to extend municipal sewer and water systems to the industrial park to remedy the situation has become a major discussion point in this planning process. The project demonstrates the tradeoff between near-term gain and long-term liability that faces the city with every infrastructure expansion project. In this instance, even with the lost opportunity inherent in an underperforming industrial park, running utilities to the park is a bad investment.

According to the City Engineer, the expansion project has the following general parameters:

  • Estimated Cost: $1,916,000
  • Lots Served: 25
  • Cost per Lot: $76,640

For the sake of analysis, it was assumed that the project could be financed at a rate of 4% over a period of 30 years. If so, the annual cost of the city would be:

  • Annual Bond Payment = $110,750

If it is further assumed that all development in the park is taxed at a Commercial/Industrial rate (in other words, there is no residential development in the park), the valuation needed from each property can be determined as follows:

  • Each lot’s annual share is $110,750 / 25 lots = $4,430/lot

To generate $4,430 per lot, the following post-development value would be needed:

  • Value = $4,430/lot / 0.02 (industrial tax rate) / 0.70 (city tax rate) 

                                = $316,400

This analysis also assumes:

  • All of the tax generated from the industrial park will go to paying debt. None of the tax base from the new growth will go to lower the overall tax burden for other residents.
  • All of the lots will develop to an average value of $316,400 within one year of the improvement being completed. A phase in over a number of years – which is obviously what would have to happen – will increase the value needed. In the interim, the general fund will need to cash flow the project, which will mean higher taxes or reduced services.
  • There will be no Tax Increment Financing or other incentives that will reduce the amount of tax paid to the city as part of development of the lots.

It can be argued that, even if the taxpayer ends up subsidizing development in the industrial park, it is worth it to have the jobs and the other investments in the community those jobs would create. The proper way to phrase that as a question, however, would be this:

If the City were to invest $110,750 per year for the next thirty years on economic development, how should it invest that money for the highest return?

When phrased in this way, the central argument for installing infrastructure becomes less appealing. The relative expense and risk of such an undertaking is great compared to other alternatives. If it costs $110,750 to (hopefully) attract one business a year that can create 20 jobs, how much would it cost the City to induce twenty existing businesses a year to each create one job? The latter undertaking will not include ribbon cuttings or other outwardly visible signs of “progress” that come along with large projects, but it is financially much sounder over the long run.

The lesson of the Industrial Park analysis is that infrastructure expansion should not automatically be synonymous with economic development. Infrastructure systems must serve the community, not the other way around.

 

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