Local governments and their economic growth model: behavioral change needed?

Strong TownsFor decades people have sensed (and feared) that developers and land speculators have sold small towns bills of goods that inflate the cities expectations of returns on infrastructure investment. Groups like Strong Towns have finally quantified this sense by doing the numbers on the economic growth models we have employed since WWII. What they find is alarming. For example, I have suggested in the past that before towns (both Northfield and Dundas) commit to new housing development they should have a good inventory of

  • how many houses have been on the market for more than 3 and 6 months
  • how many houses have be de-listed without selling in the last 6 and 12 months
  • how many houses are in foreclosure
  • how many houses are underwater by more than 10% of the amount owed on the house

Some of these questions are harder to get answers to than others, but to make bets with the taxpayers money requires that we do our best to answer them. Enlisting the help of the experts (staff, realtors, bankers) would require a large grain of salt, since they are sometimes damaged by even the simple public knowledge of these data. And we elected officials too often abrogate our responsibility in favor of reports from those self-same developers, who love to ply us with eight-by-ten colour glossy pictures of the scene of the future crime.

So, the question I pose is this:

What changes in local governmental behavior (bonding, taxation, saving for future expenses, if any) do you think we should embrace in light of national and international issues like the end of the era of economic growth economies, global warming (for its local impact on agriculture) , and the debt crisis?

References:

During his 1949 inaugural speech President Harry Truman identified the development of undeveloped areas as a priority for the west:

"More than half the people of the world are living in conditions approaching misery. Their food is inadequate, they are victims of disease. Their economic life is primitive and stagnant. Their poverty is a handicap and a threat both to them and to more prosperous areas. For the first time in history humanity possesses the knowledge and the skill to relieve the suffering of these people … I believe that we should make available to peace-loving peoples the benefits of our store of technical knowledge in order to help them realize their aspirations for a better life… What we envisage is a program of development based on the concepts of democratic fair dealing … Greater production is the key to prosperity and peace. And the key to greater production is a wider and more vigorous application of modem scientific and technical knowledge." http://www.bartleby.com/124/pres53.html

We are like a poor person who scraped enough together to buy an expensive sailboat, only to find that they could not afford to maintain and keep it.

"The American Society of Civil Engineers released a report in 2009 giving the nation’s infrastructure a ‘D’ grade and identifying $2.2 trillion in repairs and upgrades that are needed over the next five years. For context, this is over $29,000 in the next five years for a family of four just to catch up. In the meantime, our infrastructure continues to deteriorate." http://www.strongtowns.org/facts/

The economic growth model (a variant of a Ponzi scheme) is over

"The “party” [growth without worrying about limits to growth] was humanity’s one-time-only opportunity to fuel economic growth and technological innovation with a bounty of cheap, abundant energy from fossil fuels. The harvesting of oil, coal, and natural gas has inevitably proceeded on a best-first or low-hanging fruit basis. While the Earth still possesses a wealth of unexploited energy resources, the cheapest and easiest-accessed of those resources have by now already been used. All of these fuels are in the process of becoming more expensive, and the various energy alternatives are limited in one way or another in their ability to replace hydrocarbons. That means we are currently seeing the end of economic growth as we have known it. The impacts for transportation, globalization, and world food supplies will be serious indeed." http://www.ecobuddhism.org/science/coal_oil_nuclear/party_over/

Economic growth models are essentially Ponzi schemes

"And here’s the ugly economic reality. All growth schemes that assume indefinite future growth are Ponzi schemes. Because nothing can grow forever in a finite world, and when growth stops, people who were hoping to make future gains are stuck." http://www.uwgb.edu/dutchs/PSEUDOSC/Ponzi.HTM

13 thoughts on “Local governments and their economic growth model: behavioral change needed?”

  1. Bruce,

    I don’t see any numbers stating how much the infrastructure costs cities to build and how the infrastructure is paid. Nor is it clear how much infrastructure costs to maintain, and how much the return is from the property taxes. Both of those numbers seem necessary before stating that infrastructure costs are too much to maintain.

    Don’t we also have to factor in the type of development? For example, the last two big box developments in Northfield are the hospital on one end of town and the middle school on the other end of town. How much do non-property tax paying entities cost us in infrastructure costs as opposed to a Target or Cub? We can probably afford lots of Targets and Cubs; they are probably what are supporting the other non-tax paying entities.

    Shouldn’t we analyze the type of development and the rate of return for the city on the various type of development before making a blanket statement about how infrastructure is too costly? Couldn’t we just up the development costs to offset any imbalance and let the market take care of the development costs? Shouldn’t we also figure in the infrastructure costs, present and future into public buildings to make sure that we don’t understate the real costs to the city for non-tax paying development?

    On the local level, the real problem may be the thirst of bigger and better public facilities which fuel the need to more and more development to get property taxes to pay for these public expenditures.

    1. David, the Strong Towns warning is to officials. The warning is that IF elected officials cannot ask the right questions and/or cannot get the numbers, then those public officials are flying blind and making decisions based on the 8x10s and a hard sell from someone who makes their money off the sale, not the upkeep. It does not claim the numbers will always say no, but if they do, then caveat emptor. And caveat emptor is doubly important when you spend the people’s money.

  2. This is an important conversation to have, but there needs to be less “probably”s and more actual numbers or else it’s just two sides arguing philosophies.

    Real numbers, acreage, ROI as returned through taxes paid, etc, will give a picture of the most advantageous way to pursue development. (Tracy Davis did a radio show on this recently)

    Cost benefit analyses should be mandatory before large projects are permitted, although some with more benefits which are difficult to quantify, like bike paths (sorry, David 🙂 ) need to be approved based on a larger, more complicated community benefit goal.

    I would hope, David, that when on the Council, you can look at a project for its objective first, and then insist on cost benefit analysis as a way to determine the value of the project… and I have a feeling the other new/returned councilor, also a David, will also feel that’s the right process.

    But if cost is always first on your mind, we will never ‘plant a tree’ … and remember what Robert Burns said to his gardener: “Aye, Jock, be plantin’ a tree; whist ye are sleepin’, it will be a-growin’ “…

  3. Kiffi,

    Actual numbers might help. But, if the numbers are used to justify our own personal preferences on development rather than a universal set of principles which hold true for everyone, we haven’t gained anything.

    To me, a good objective is a necessary, but not sufficient, reason for government intervention, or government funding. Planting trees is a worthy objective, but it makes a difference if the trees are $10.00 each or $100.00 each.

    In development terms, it is my understanding that business development yields the best net tax consequences and that non-tax paying development yields the worst tax consequences.

    Thus, if we want to have a consistent and fair policy regarding infrastructure costs that we can’t afford in the future (Bruce’s theory), we should require all development to pay for itself or require none of it to pay. What this should mean is that we shouldn’t allow non-tax paying entities to create new infrastructure costs (such as bike paths, new police station, new schools), and we should encourage businesses (which pay the highest taxes) to develop so that the existing infrastructure costs can be paid.

    The worst possible scenario is the one that have been pursuing – creating all kinds of new and additional government expenses – building bike paths, underpasses, new government buildings, etc. without having a means to pay for their development while at the same time limiting the those entities which pay more than their fair share of the existing costs. Under any theory of economics, Northfield’s system is by far the most expensive.

    This system falls the hardest on those least able to pay – renters, seniors, and other low income residential people, and those already paying at a higher rate – businesses.

  4. David –

    Let’s take the estimates for the so-called new business park envisioned half way between 35W and Northfield, just north of Highway 19. The second estimate of infrastructure costs was $29 million, which was projected to be “paid back” through taxes in 27 years. The third estimate of infrastructure costs was $40 million, let’s use a 35-year “pay-back” on that larger dollar figure.

    I’m sure Bruce would agree with you that the 87,000 square feet of retail space in the development would pay back the infrastructure costs faster than the 570 units of housing, as commercial property pays at three times the rate per dollar of value, and that the 110,000 square foot public school would not pay taxes at all. However, I think the point that Bruce is making is that if the infrastructure needs to be replaced in 25 years and there’s a 35-year pay-back, development doesn’t really “pay” the true costs of infrastructure.

    1. Ross,

      Rather than sounding the alarm about unknown developments, how about looking at the costs of past developments?

      How much did the Target development cost in infrastructure? How much did it return in taxes? How much did the Middle School infrastructure cost? How much did it return in taxes?

      If we are going to limit development to save on costs, doesn’t it make sense to limit non-property tax paying development and encourage taxpaying development?

  5. David –

    The Target/Cub development occurred right at the curb of all of our existing infrastructure. Developing where the necessary infrastructure already exists makes sense. Developing in the middle of a cornfield three and a half miles from the infrastructure doesn’t make sense.

    Please reread my previous comment. I agree with you that commercial development pays more in taxes than residential development. I also agree that the public schools don’t pay any taxes.

    It makes sense to develop near existing infrastructure; if there is a market demand for commercial, it should be built; if there is a market demand for housing, it should be built. I don’t think we should not build schools (if the population growth, or “market”, justifies the expansion) just because they don’t pay taxes.

    Hopefully, Bruce will get back involved with the conversation. I think his primary point is that the full cost of infrastructure should be weighed against the projected benefits of the development. Listening to The Roundtable, it seems that our next frontier is right across the highway from your beloved Target/Cub.

  6. There are two ‘costs’ for developments….initial infrastructure is one, and the other is ongoing maintenance. Most of the small towns in Minnesota that are in financial trouble because of developments are there because they allowed the “developer” to fund infrastructure costs by assessing it back to the developed property. While this was fairly common for years, in my mind it should never be allowed today. If the developer does not have the where-with-all to pay for the development costs (storm ponds, storm sewers, sanitary sewers, water mains, roads, trees, etc. etc.) then find a different developer. Using the taxing authority of cities for the upfront development costs is a path to disaster, as many communities are finding out. It is one thing to have a stalled development owned by a bank, but an entirely different thing to have the stalled development owned by a city.

    The second cost is one that should be examined closely. Once a development is completed the city is obligated to plow the roads, maintain the roads, and take care of the piped infrstructure. There are costs associated with that development that occur even if there are no buildings on the site.

    I would also say that generally cities have no business developing raw land for business parks, housing developments, etc. If the private development world cannot make sense of a development, then cities should not forge ahead. It is fine to have development work done by cities, but it should be limited to discussions with potential businesses, etc.

    Finally, I think cities have to be very careful about how they deal with housing. Housing needs seem to be best met by private developments. Cities should work cooperatively with developers to meet city goals for housing. But having the city march in and be a developer of housing is problematic. I have real issues with the City of Northfield planning various types of housing (HRA), while at the same time limiting the ability of private developers to create exactly the same type of housing (rental ordinance) .

    1. Ray,

      I’m in agreement with your observations and the general principles that come from those principles.

      I don’t know Northfield’s history on development principles, but it seems to me that the Comprehensive Plan is most focused upon what developments look like, not the economics of the development.

      It is also difficult to formulate a rational policy on development because the taxes generated are used to pay for services other than the development costs, namely the costs of running other parts of government.

  7. I do not have all the numbers nor have I done in depth study on the business park. My evidence is more anecdotal than empirical. With that being said we need to do something to make Northfield a more attractive destination for businesses to locate. We as a city have let a number of good employers leave without appearing to do much to keep them. Nor have we done anything to look for other employers.

    MOM Brands took their corporate headquarters staff to downtown Minneapolis. Now 5 years later they decided they did not need to be there. Instead of coming back to Northfield they go to Lakeville where they join Ryte Way who also left Northfield. Did the City even raise a finger to entice them back to Northfield? How about College City Beverage going across the street to Dundas? Now we see another small business that is growing up and leaving Northfield for the greener pastures of Fairbault.

    Speaking of Fairbault have you driven on I-35 and seen the devolopment on the North edge of town. Aldi, MOM Brands, and others have built new facilities out there in recent years.

    As a citizen of Northfield it appears to me that our city leaders are more concerned with building bike paths to nowhere, outlawing 3 stall garages, and circumventing public input on large expenditures than trying to build the business tax base of this city. But not to worry my house value fell 3% but my property taxes went up 7.6% so we must be doing something right.

    1. Bruce,

      Northfield has certainly earned a reputation for being a difficult development town (at least for businesses). Bruce M. hasn’t responded to my request for numbers, but it would seem logical that the least sustainable development is government and non-taxpaying development. Yet, I don’t detect much of a movement to limit that kind of growth.

      1. David, sorry, I was out of town for a bit, but I can tell you that nothing makes the city staff more uncomfortable than asking them to even estimate these sort of numbers as they are neither trained to think like this nor are they rewarded for doing so. That is why whomever we elect has to be savvy enough to guide staffs down these thought paths (paths which are seldom paved or well lit). From my position as an outsider to Northfield, I don’t have access to all the data, all I can do is play the agent provocateur to the Northfield City Council, hoping they can get staff to dig to the bottom of the numbers.

        That said, as a fiscal conservative I am extremely frightened when I see cities making fiscally irresponsible bets with the people’s money, Ray’s comments are right on the mark, we should never let a bank that is too big to fail make bets that are backed by the taxpayers. Conservative principles suggest that free-market high-flyers should be in a free-market environment, which means they must be small enough to be allowed to fail, otherwise they cannot be free-market entities. When a city makes a bet (on development) they should be as cautious as my old farming grandmother, who enjoyed playing penny-ante blitz but probably not so much taking out loans on the farm.

  8. Bruce M.,

    Your original question seemed to be directed at how government officials should change their behaviors based upon the belief that the costs of economic expansion outweigh the returns from that expansion.

    A brief history of Northfield’s approach to this question suggests that Northfield has no principled approach to this issue. The Comprehensive Plan is much more concerned with the (arbitrary) aesthetics of development than the costs. Most people want parks, trails, and other “green” development. But, even this development has significant costs taxpayer costs. When the project is government supported, there is generally little or no discussion about the costs. In fact, these projects often get the label of “investments” as if the government is somehow making money by building parks, trails, and parking lots.

    It seems to me that the first step to developing a sound economic growth policy is for the people to force the government to abide by the same rules as it creates for the private sector. If “Pay to play” is a good policy (which it is) then we shouldn’t be making exceptions every time government steps in. For example, Northfield intends to spend $1.6 million to build an underpass for Highway 3. Is this sound economic policy? Isn’t it more sustainable to use that same money to create infrastructure for a business to build and generate taxes?

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