Cities and counties across the United States are experiencing chronic fiscal stress, and the reason has nothing to do with Republicans or Democrats and everything to do with what Chuck Marohn calls the “growth Ponzi scheme.”
“Why are cities going broke?” he asked at a forum hosted by the Partnership for Smarter Growth, Coalition for Hanover’s Future, and the Virginia Conservation Network at Randolph-Macon College last night. “We can’t we keep the grass in the parks mowed? Why can’t we keep the library open past 5 o’clock?”
After World War II, the United States embarked upon a massive, society-changing experiment that departed from the accumulated wisdom of millennia of experience of building cities. That experiment, commonly referred to as suburban sprawl, changed the growth paradigm from building places with a pedestrian orientation to building places with an automobile orientation. Over the course of just two or three decades new zoning codes and highway construction transformed the character of cities across the country. Initially, that experiment seemed to work out well. Now the fiscal flaws are evident for all to see, and the system is on the verge of collapse.
In the post-World War II era, developers and government struck a deal: Developers would build a subdivision or shopping center, including roads and utilities, and then would turn over the infrastructure for local government to maintain. Early on, the arrangement seemed like a great deal for government. Taxes on the houses and commercial buildings generated loads of cash flow while the infrastructure cost almost nothing to maintain. In a typical cul de sac development in the mid-1990s, infrastructure would cost the builder $6,600 per development. Less visibly, localities had to spend thousands more on infrastructure outside the subdivision, such as arterial roads and highway interchanges. Everyone ignored the fact that it would take, say, 37 years to recoup the cost of all that infrastructure through property tax revenues. Because infrastructure costs little to maintain when it’s new, new subdivisions proved to be revenue gushers. But over time, roads required more and more maintenance and subdivisions began operating tax-wise at a net loss.
What was the solution? Build more new subdivisions and use the surplus revenues to cover deficits from the old subdivisions. Use good money to cover bad, like a Ponzi scheme. But at some point it’s impossible to build enough new subdivisions (strip malls, office parks, etc.) to cover the deficits. That’s where the nation is now, said Marohn. For thirty years, local governments enjoyed the “illusion of growth.” Now they’re facing the reality of chronic fiscal stress. Absent changed policies, they’ll follow Detroit into the abyss. For many, it is too late.
“We need growth so bad today that we’ll do all sorts of crazy stuff,” Marohn said. “We’re lending money to people we know can’t pay it back. We’re desperate for growth. We have to have it or everything falls apart.”
The United States is hitting the limits of its ability to fund more growth. There is no rabbit to pull out of the hat to rescue the nation from its predicament.
As an example, Marohn cited Lafayette, La., a city that is reasonably well run administratively yet experiences chronic fiscal stress. An in-depth analysis of its development patterns revealed that its downtown and older neighborhoods, which are compact and densely developed, net out fiscally positive but that the majority of the city, especially newer areas built according to suburban zoning codes, net out negatively. The median family in Lafayette makes $45,000 a year and pays $1,500 in local taxes. To cover the cost of the its growing infrastructure liability, the city would have to raise taxes to $9,000. “That will never happen,” he said. “Lafayette will have to make some very hard decisions about what to maintain and what to let go.”
Not all cities are in equally bad shape. Some grew more slowly and built less hop-scotch, low-density sprawl that inflated the expense-to-revenue ratio of its neighborhoods. Some have more flexible zoning codes that allow more adaptive reuse. And some are more willing to change than others.
“We should not accept decline as normal,” Marohn said. The answer is not some top-down Marshall plan. It’s the opposite — a bottom-up approach that emphasizes small, low-risk, high-return investments based on intimate local knowledge. Over time, small incremental improvements — bike lanes, cross walks, tree plantings, sidewalk widenings — can go a long way to rebuilding the tax base. The highest-return investments, he suggests, are those that enhance pedestrian and bicycle mobility. They make places feel safe and inviting. Their scale is a single block or intersection at a time.
The advantage of making small, safe bets is that if nothing gets better, you haven’t squandered much money. You haven’t mortgaged the farm, so to speak. But if the small bets do work out, you learn from experience and replicate the successes. In every community, Marohn says, there is a abundance of “pennies, nickels and dimes laying on the ground.” Over time, small improvements, leveraged by private investment, can create enormous value. “This is how we build wealth: slowly and incrementally.”
Marohn also abhors the rigidity of zoning codes and preaches the virtue of flexibility. Municipal planners suffer from the illusion that they can divine the future and anticipate the proper mix and location of residential, commercial and industrial property for the foreseeable future. But markets are too dynamic for anyone to predict long-term demand for different categories of real estate with consistent accuracy. A resilient city, he says, is flexible. A big-box building surrounded by a huge parking lot, typical of suburban development, is difficult to recycle into a different use. A single building set in a downtown street grid is very easy to switch from one use to another. Flexible development patterns like those found in downtown areas will prove more resilient in times of change than inflexible patterns. “Zoning codes are some of the most destructive things we have,” he said. “We need to rethink them.”
Thirdly, Marohn suggests that cities need to make it easier for entrepreneurs to bootstrap new businesses. While some 240 cities and regions across North America decided to chase the Amazon second headquarters, the economic-development deal of the decade, only one can win. Will Amazon HQ2 be a net gain to a community after a realistic accounting of costs and tax revenues and adjustments for incentives? Color him skeptical. It is more prudent, he says, to foster new business formation, which can be helped through a prudent relaxation of building codes, zoning codes and other regulations.
“If we play the Wall Street game, if we play the Washington game, we’ll get wiped out,” he said. By embracing new fiscal analytics, relaxing zoning codes, and embracing a philosophy of making small, low-risk, high-return public investments, America’s cities and towns can prosper.
(This article first ran in Bacon’s Rebellion on October 25, 2017)