Municipal Solvency: How to Not Go Broke

There’s currently a lot of talk about why so many towns, counties, and states are going broke. “Teachers are getting paid way too much.”  “Cops and fire fighters have extravagant pensions.”  “It’s waste, fraud, and abuse.”  “It’s welfare queens.”  “It’s immigrants.” “It’s the Democrats.” “It’s the Republicans.” But here’s the truth. Even if you fired everyone on the government payroll and dissolved all social programs most jurisdictions would go broke in the long run anyway. The tax revenue that comes in from low value private development is simply inadequate to cover the ongoing costs of the very expensive public infrastructure that holds it together. Full stop. If towns don’t address this basic reality all the “solutions” they put forth will fail – and a lot of people are likely to get hurt in the process.

     

This is the small farm town in central Nebraska where my mother-in-law was born. It’s a tranquil, beautiful place full of kind and generous people and it represents one type of development that will keep itself solvent in perpetuity. This place has almost no public infrastructure and extremely low taxes. Each household or business provides for most of its own needs. People make do with gravel roads, private wells, septic systems, and the like. If your house catches fire that’s unfortunate, because the big red fire truck isn’t coming. The police probably aren’t going to get to you anytime soon, so know your neighbors well and keep a shotgun by the bed. There’s a plain vanilla school in operation, but don’t expect too much in the way of facilities. Churches and philanthropic organizations pick up the slack when it comes to social services, or more likely, there are no social services. This system worked well enough all over North America for the first three or four centuries of European settlement and it’s very much in keeping with the conservative small government, low tax, self reliant ethos of much of the voting population. Personally, I’m all for it. But most Americans don’t want to live this way. Our inner cowboy and frontier woman isn’t quite in line with our outer office worker and soccer mom. People actually like the services that government provides. We just don’t like paying for it.

   

This is Cincinnati, Ohio and it’s an excellent example of the other form of development that remains solvent for centuries. These two, three, and four story private buildings have a high value relative to the small amount of necessary public infrastructure that supports them. The sewer and water pipes, the road surface and sidewalks, the gas pipes and electrical cables are all compact and efficient so the per unit cost of building and maintaining these systems is in balance with the modest taxes paid by the property owners. That means there’s plenty of money left over in the city coffers to fund public schools, police and fire protection, parks, and other vital services. It also happens to be beautiful and built to last.

     

This is Kahului on the island of Maui. The development pattern here involves dispersed subdivisions of single family homes, distant shopping centers, and office parks all connected with an extraordinary amount of hideously expensive public infrastructure. The road widening never ends because the traffic load continues to increase year after year as more land is developed in the suburban pattern. Underneath these massive roads are all the attenuated pipes and wires that keep the private development functional. At the moment the vast majority of cost for this infrastructure is paid for by the state and federal government rather than the locals who use them every day. Those days are coming to an end. The Highway Trust Funds are in the red since gas tax revenue is in decline while the cost of maintaining the roads is sharply rising. Most state governments are functionally insolvent. And Washington has the printing press at the Federal Reserve Bank going full tilt. Sooner or later, for a long list of reasons, individual towns are going to have to fall back on their own resources and the numbers just aren’t going to add up for a lot of suburban communities.

     

For the past few weeks the city has been digging up the streets in my neighborhood here in San Francisco. The water pipes and other underground utilities are being upgraded since most of it is a hundred years old. Clay and iron pipes don’t last forever. So I decided to run a little thought experiment. What if the price tag for our one block segment of this work costs the city… a million dollars? And what if the people on our block had to pay for that work all by ourselves? What would the numbers look like?

 Google     

I walked up and down my street counting the buildings. There are 32 separate building lots that mostly measure 25′ x 125′.  There are 30 buildings. (Two of the lots are a parking lot/playground for the Boys and Girls Club on an adjacent street.)  Then I counted the number of individual homes. There were 124 residences. Some were large single family homes, some were duplexes and triplexes, some were backyard cottages, and some were apartments ranging from modest studios to grand four bedroom flats. There were also six businesses: a delicatessen, a bar, an architect’s office, a lamp store, a laundry, and a tech incubator. That’s a total of 130 individual accommodations lining the street. If you take that million dollar price tag and divide it by 32 lots it comes to $31,250 per lot. That’s a serious amount of money. If the million dollar cost of the project is divided by the 130 individual apartments and shops the per unit cost comes down to $7,692. That’s still real money, but much more manageable.

 Google  Google

I spent a big chunk of my childhood in Toms River in southern New Jersey. Here’s a typical residential street lined with ordinary 1960’s era middle class homes. This street happens to have 32 lots just like my block in San Francisco, although the blocks in the suburbs tend to be a bit longer and twistier. Each lot is at least a quarter acre, and each has a single family detached home on it. The infrastructure on this block is fifty years old so sooner or later it’s going to required a million dollars worth of water, sewer, and pavement work too. If each lot were assessed its share of that cost it would come to $31,250, just like my block in San Francisco. No one on the block in New Jersey would tolerate that kind of tax bill. And there’s no other way to slice it. For the time being the money for these on-going repairs and upgrades flows down from higher levels of government. But this will not always be the case.

      

Context is important. Here are photos I took of the nearby commercial corridor of the same vintage as the housing tracts. Decline has already begun to set in. Like most places across North America there has been a relentless push for new development out on the edge of town for decades. That’s left an economic vacuum behind in older neighborhoods. The old convenience stores, gas stations, restaurants (I use the term loosely), and furniture shops have no market value at this point. The longer they sit empty the more they pull down the surrounding property values. When the public infrastructure that supports these places finally begins to fail in earnest it’s not going to end well. People with resources and other opportunities move away. The vacuum is filled with poverty and neglect. It’s just that simple.

 Google

     

Some people may read this and come to the conclusion that I’m promoting a “stack ’em and pack ’em” policy of communist style apartment blocks, or assume that I think everyone wants (and can afford) to live in a place like San Francisco. Not so. Here’s an example of a village that has all the qualities of a financially solvent municipal infrastructure. The town is three or four blocks long, yet within this compact land use arrangement city services can be provided in a cost effective manner. The homes that are built outside the immediate town center have progressively fewer services the farther out they are. It’s simply a matter of creating a distinction between places that can be served efficiently and places that can’t and letting people choose which level of service they want relative to how much independence they can handle.