Being a Fiscal Impact City: Long-Term Planning

Posted on April 12, 2017 by Axianomics

Introduction

In recent weeks we looked at how adopting a fiscal impact approach to operating and capital budgeting can help a community make more sustainable choices. This week we apply the same logic to long-range fiscal planning.

Framework for Long Term Planning

Long range planning, according to the National Advisory Committee on State and Local Budgeting (NACSLB) is a process to assess the long-term financial implications of current and proposed policies, programs, and assumptions. This process creates appropriate strategies to achieve a community’s long-term goals. Though finance officers and budget managers are daily working with a city’s budget, revenue and operating numbers, financial planning expands their awareness of how these statistics relate to each other and to external variables like economic indicators and demographic trends. Taking a long-term perspective helps these local leaders improve their awareness of options, potential problems, and opportunities. The range of issues that they can examine with this approach includes revenues, expenditures, and the service implications of changing or eliminating programs or adding new programs, services, or debt.

A summary of the key steps should include:

Analysis of financial trends
Assessment of problems or opportunities facing the city and potential actions to address them
Long-term revenue and spending forecasts
Consideration of how these trends relate to citywide and departmental goals set out in strategic or comprehensive plans

Such a process is not just a forecast. It engages all internal departments, key external stakeholders and the general public in so far as all these have some role in setting and helping achieve key goals.

The NACSLB identifies several best practices that can support the long-range planning process including:

Prepare multi-year revenue and spending forecasts using a variety of methods
Evaluating and understanding how changes in the tax base and revenues will impact city operations
Examination of tax exemptions, incentives and other policies that can reduce revenue
Prepare multi-year projections of spending for each fund and for current and proposed programs
Evaluate revenue and expenditure options together, and present these relationships so elected officials and the public can understand the implications of changes in service levels and revenues and how they can impact each other.

Role for Fiscal Impact Models

Other best practices are also presented in the report. For our purposes we want to highlight how fiscal impact analysis can help tie these steps and practices together. The goal is to improve fiscal sustainability with the model, not just use it to evaluate individual projects. Using a full fiscal impact model is the most direct way to use this process to analyze revenue, spending and economic data in ways that help policy makers and the public understand the consequences of budgeting decisions. These decisions may appear harmless when looked at in an annual budget presentation. A community risks making very wasteful and politically damaging decisions without taking a longer term perspective.

First, a good fiscal impact model will make use of extensive, custom information on the city’s spending, revenue and staffing. This detailed data is the only way to make meaningful and accurate predictions of the consequences of changes. At a minimum, the historical data in the model should include enough years of data to see how they budget and how revenues change in good and bad financial times. A full business cycle is a good starting point.

Second, the model will connect these municipal financial statistics to activities in the real economy. Service costs will change based on the population, employment level, industry mix and physical form of the city. As these external factors change, local leaders need to be able to predict how their service demands and resources are likely to change, too.

Third, the model should give local leaders a projection that is long enough to help them make good decisions. A five to ten-year projection is usually adequate for most operations and department-level variables. For capital infrastructure or other longer-lived decisions the projection should go out at least as far as the infrastructure is expected to last and to include maintenance and replacement costs.

Because of these features of a good fiscal impact model, a city can combine its revenue, operation and economic forecasting in a single package that will help the community understand where they stand in terms of their goals and the means to achieve those goals. As always, there needs to be extensive citizen engagement in these processes so that when setting sustainable goals, local leaders can win the support of the community. When the community understands the consequences of these choices, and what can happen when there is a downturn, it will be easier to stay the course.

Being a Fiscal Impact City: Capital Budgeting and Asset Management

Posted on April 4, 2017 by Axianomics

Introduction

Last week we saw how adopting a fiscal impact perspective with the operating budget improves municipal sustainability. Even without doing formal analysis on every project, local leaders can start helping the community think in terms of the long-range costs and benefits of city service levels. This week we turn to capital budgeting and capital asset management. Fiscal impact analysis will help a community align its vision with long-term sustainability. Capital assets – long-lived investments such as buildings, infrastructure or equipment are essential to delivering municipal services. They enabling the private sector to operate more effectively. Unfortunately, many communities have over invested in infrastructure given their tax base. Many also fail to properly manage these assets – either because they find that their tax base cannot support appropriate maintenance or because they don’t have simple procedures to help them get a handle on their real capital needs and costs.

Framework for Capital Budgeting

To begin with, cities should have formal policies set out in a capital budgeting process. Even when cities have good processes in place, they tend to run them in isolation. This makes it harder to learn about community needs and the economics of different ways of satisfying those needs. Without going into too much detail, capital budgeting and management process should include clear definitions of what counts as a capital project and what doesn’t. It should also include common sense policies like making sure the city covers maintenance costs first and isn’t doing deferred maintenance on some assets while trying to build new capital projects. It should look at the total lifecycle costs of the assets. That includes routine maintenance and the staff and materials to run and repair the asset. The process should also include metrics for asset performance that are related to the community outcomes the city wants to impact. There needs to be extensive citizen involvement and the process needs to be linked to other major plans like the city strategic plan and comprehensive land use plan.

Cities have been building up their capital assets over decades if not centuries. Often, documentation was an afterthought. It can be a considerable task just to inventory existing assets, but it is the necessary starting point to understand long-term costs and needs. Above the ground assets like streets, buildings, signs and street lights are relatively easy to address. Unseen assets like water mains, wastewater and storm water systems and other utilities are more difficult to inventory. Once the process is in place and the existing assets are mapped how can fiscal impact analysis support long-term sustainability?

Using Impact Analysis for Sustainability

Communities should invest in assets because they help deliver services. Impact analysis helps communities evaluate capital assets in the context of those services. This helps build a strong conceptual link between the city operating budget and the capital budget. Sustainability requires that all the costs of a service be accounted for, and they need to be covered by adequate revenues. Failure to do this is leads to deferred maintenance. They looked at operating and capital costs in isolation and didn’t try to understand how each service and its associating capital resources contribute to the total municipal budget burden. Fiscal impact analysis is a framework that can integrate these two dimensions of the capital decision. At a minimum the analysis should consider four dimensions when evaluating existing capital assets or evaluating potential new investments:

The source of funding and its appropriateness to the life of the asset
Potential impacts on the supply of the associated service from changing technology
Changes in the demand for the service from demographics and economic trends
Legal and regulatory issues that may impact the supply or demand for the service

This type of analysis will give decision makers an idea of the cost effectiveness of the asset in question relative to the desired goals. Fiscal impact analysis can help answer several other key questions:

Is the current production process for a municipal service cost effective long-term (this requires including both operating costs and the associated capital equipment?)

Can the government afford to maintain and eventually replace the capital assets? Our cities are full of underused and abandoned capital projects because of poor planning or a misguided belief that the investment responded to a long-term need. Entertainment and sporting venues are prime examples.

Can the city achieve its vision and performance goals with the approach being proposed? Just because the city has always provided a given service does not mean that the old way is still cost effective or effective at all. There are many public, private and hybrid methods for delivering a given service.

Finally, what are the costs of deferred maintenance? How much deferred maintenance can the asset survive, and for how long before its functioning is compromised? For example, Road quality degrades in a nonlinear fashion. There is a gradual decrease in road performance for several years, then, in a very short time, a road will rapidly decay. Cities should understand the consequences of not maintaining their assets.

A fiscal impact model can help decision makers understand the answers to these questions. Such an analysis documents the full lifetime costs of a capital asset or an entire class of assets. These costs can be compared to the overall municipal tax base. Most communities will enjoy many years of near-maintenance-free benefits from their new capital investments. Eventually, they will face the choice of either maintaining those assets or letting them degrade. Failing to maintain an expected level of service reduces the desirability of the community. The response from the private sector may be a swift loss of confidence in the local government. This can start a downward spiral that the community may not recover from. It is too easy for families and businesses to vote with their feet. Building a fiscal impact process into capital budgeting is very cost-effective insurance against this unhappy outcome.

Becoming a Fiscal Impact City: The Budget

Posted on March 28, 2017 by Axianomics

Introduction

Once you decide to become a more sustainable organization by becoming a fiscal impact city, and have had the serious conversations we recommended last week, what’ next?

A good place to start is with your budget process. Budgets are an ever-present feature of local governments. Most cities are either in the process of planning for, developing, approving, implementing or reviewing their budget. The calendar is full of budget-related responsibilities, actions and deadlines. In too many communities, the budget process dominates everything else puts staff into a continuously reactive mode. They may be focusing more on the internal demands of the budget process than on trying to connect their resources and processes to solve community challenges.

With some minor changes, your budgeting process can be reoriented into a tool to improve long-term organizational sustainability and a way to proactively help you realize your community’s vision. There will still be hard decisions. Community engagement and politics will still be a central part. The rest of this post shows how a budget process can be gradually reformed through using a fiscal impact mindset. The result will help cities realize their community vision and build a more sustainable organization.

A Framework for Budgeting

As a reference point, we will be using the budget framework developed by the National Advisory Committee on State and Local Budgeting. This framework, set down almost twenty years ago, is still one of the best starting points for local leaders who want to be proactive and focus on long-term sustainability. We will give a quick overview of this framework then talk about how a fiscal impact mindset can work in it to turn budgeting into a true tool for organizational sustainability and community prosperity. Though they define budgeting as the planning, implementing and evaluating the provision of services and capital assets, we limit our discussion this week to the operating budget. We will look at capital budgeting in a later post.

Qualities of a Good Budgeting Process

The National Advisory Council emphasized the need for budgeting to go beyond annual balancing of resources and options. They intended their report to help governments upgrade all phases of budgeting: planning, development, adoption and execution. To begin with, the entire budget process should be goal-driven. These are goals beyond preserving departmental operations with given resources. The critical difference in a good budgeting process is that it starts with community needs, vision and issues. These should motivate the government’s quest to create a suite of services that can meet those needs, realize that vision and address the issues that are most important. The budgeting process sheds light on cause and effect, the real issues, so management and elected officials can make the tough decisions and tradeoffs that are always necessary because resources are limited.

In addition to being linked to goals, they emphasize that a good budget process:

Takes a long-term perspective – cities should look at impacts of budget decisions over many years and use the process to determine the sustainability of programs and services.
Is focused on outcomes and results – the outcomes of the resource allocation process are the services the city provides. These should have measurable results – impacts on the community issue they are designed to address.
Provides information and incentives to staff (and other stakeholders) – budgeting should inform decisions makers and increase stakeholder participation. It should also close the loop with all stakeholders.

Sustainability Budgeting and Fiscal Impact Analysis

Fiscal Impact Analysis is usually associated with evaluation of specific policies or development projects. How can this approach support annual budgeting? It isn’t cost effective to produce a formal fiscal impact analysis for every little decision. What is important and possible is to start thinking in fiscal impact terms when making these decisions. Stakeholders, elected officials and staff should all be aware of how resource allocation decisions produce winners and losers. Shifting funding from one area to address a priority is a good choice, but it is helpful to understand what the community is giving up with these decisions. Adopting the perspective and language of cost benefit analysis is the first step in applying fiscal impact analysis. Being aware of the consequences of tradeoffs in resource allocation and documenting the likely changes in service levels are concrete ways to start the process.

A further step requires collecting more information so local leaders can understand the costs per unit of service for various programs, the outputs of those programs and the associated changes in community indicators. This additional data does not exactly prove cause and effect, but can give hints of the relative effectiveness of different approaches to solving the same problem. Not all programs are easy to measure and have a more complicated relation to community outcomes. Still, the data collection and evaluation process can improve decision making.

The final step is to conduct a complete fiscal impact analysis of a policy change. This analysis will measure program costs and document the budget, revenue and economic impact of that change so that policy makers can see what it means for the organization and the community. Combined with community indicators and standard program performance measures, a fiscal impact analysis will help those responsible for setting the budget be well informed. Those decision makers can also share this information with constituents so that everyone is clear about the tradeoffs and likely consequences. This type of analysis can be applied to a part of the budget, the major programs or departments or to the entire budget. When applied to the entire budget it is a useful input into long-range financial planning which attempts to evaluate budget, revenue and impact out at least three years.

Becoming a fiscal impact city is more than a resource challenge. It is a major leadership and cultural challenge. The difficulty is building the organizational culture that can function in this more transparent way and building in community engagement and education processes so the public can increase their support for the hard choices local leaders need to make. In the following weeks we will look at other areas where local leaders can improve organizational sustainability by becoming a fiscal impact city.

Sustainability Questions for Communitywide Engagement

Posted on March 22, 2017 by Axianomics

Every city can improve its fiscal sustainability. Fiscal sustainability means the providing the services that meet the needs of households and businesses without taxes and fees that harm competitiveness relative to other cities. A core practice to improving sustainability is building a culture that uses the fiscal impact approach through its decision-making processes. This includes its budgeting, planning, capital programs, operations and economic development. Improving sustainability, however may not mean any given city can still maintain the level of services it offers today over the long run. Local leaders need to start a deliberate process where they engage city government and the private sector. That process will help the community come to terms with the capacity of its economy to support its needs. It will also result in types and levels of public services that strengthen and complement the efforts of households and businesses to create value.

High levels of comprehensive municipal services are a relatively recent development. Before WWII, most smaller cities and towns provided very modest services. Fire departments in most communities were volunteer. Police departments were small. Infrastructure was crude. Post war suburbanization, expanded retail sales and federal grant programs for water infrastructure gave most cities the resources to provide a high and consistent level of services to most Americans living in metro Politian areas. That type of easy economic prosperity is available to fewer cities today.

Economic prosperity is the foundation of sustainable city finances. Economic change in recent decades has separated communities into a small number of big winners and a larger number of losers and also-rans. While most U.S. cities have not experienced the absolute economic decline seen in older industrial cities, most have underperformed compared to the small pack of very high growth metro areas. Most communities are facing an ongoing struggle to maintain roads and other infrastructure, pay staff and cover retirement benefits. There are a few options cities try to address this challenge. They raise taxes and fees. They cut services. They make often wasteful bets on economic development subsidies. Eventually service levels will adjust to the ability of the local economy to support them. The challenge and opportunity for cities is to get to that point as quickly as possible. This frees more resources for private initiative. It also improves the effectiveness of the services government continues to offer. The best way to make this transition is to do so deliberately and before a crisis forces a city to make foolish and damaging fiscal choices.

Rationalizing public services with the capacity of the local economy can happen through a thoughtful and inclusive process. This is more likely to happen when cities are proactive and begin before economic circumstances force them. This does not mean a painless process. It is likely, however, that starting this process now will build a stronger community that is more heavily engaged in local government decisions. This type of community building will help implement the policies that result from the deliberate process to become a fiscal impact culture. To start, local leaders can begin a citywide dialogue around collectively answering three questions.

How do we want to define sustainability as a community? The concept of sustainability needs to be defined in ways that all stakeholders can understand. There is no absolute right answer since sustainability is a relative term. Time frame is one variable. A community can set goals that strive for shorter or longer-term sustainability. Effectively answering this question also means refining the community’s vision of itself and its role in the regional, national and perhaps even international economies. Every community aspires for more and better. That was relatively easy during America’s long history of rapid economic growth. Today, in a mature national economy, and one with opportunities for local growth more limited, communities need to take a realistic look at what they can be. This does not mean there is no hope or role for aspiration. It does mean that successfully reaching a vision will require one that is more imaginative than just more of what they already are.

What is the community will to rationally examine service levels, economic capacity and pick an appropriate balance? Once a community has established a creative, realistic vision, it is in the position to explore the role of its services in achieving that vision. Though most Americans are accustomed to the full set of municipal services, not every city will be able to maintain all these services at the level they currently provide. Communities will need to be much more creative is thinking about how they want to achieve the functions of traditional services. For instance, reduced risk from fire is an important goal. Achieving that goal can be helped by changing the building code to increase the fire resistance of buildings and mandating sprinkler systems. These regulations lower the need for firefighting capacity in the long-run. This does not mean eliminating the fire department, but it does mean rethinking how this and every other major municipal service is delivered and funded.

What is the community’s capacity to carry out this process? This is actually the most important question for local leaders to ask and it should come first in their process. We introduced it last since answering it requires a little understanding of the other two questions. This question requires local leaders to evaluate their own motives. It means assessing the culture of their municipal government and the availability of the right skill sets, time and other resources. If motives, culture and resources are up to the task then a city will be able to start the process of building a fiscal impact culture that enables sustainability.

A community that goes through an inclusive discussion of these three questions will gain many benefits. The most important and enduring benefits of this process include shaping a realistic, creative and shared vision for what the community wants to be, rationally rethinking the purpose of local government and identifying the benefits the community wants. This experience will help local leaders build the administrative infrastructure and city culture that makes sustainability the centerpiece of all its major decisions. Then when it comes time to take up a specific tool like fiscal impact analysis or cost-benefit analysis to inform local decision making, it will be in the best position to put those tools to proper use.

Taking these steps may be a frightening prospect for city leaders, but the potential benefits outweigh the risks. It may be far easier than the alternative where economic crisis, either local or national forces changes in even more painful ways. With growing service costs, taxpayer unrest and an uncertain economy, taking these steps may be the only way for local leaders to effectively accomplish the goals they have set for their community in the long run.

Fiscal Impact Analysis and Sustainability

Posted on March 14, 2017 by Axianomics

Development agencies, governments and businesses have long used fiscal impact studies. Sometimes these studies are intended to justify a favored project. Sometimes, there is genuine interest in learning whether the project is a good idea for the community. A fiscal impact analysis is a powerful tool for helping local leaders and the entire community understand whether a project or policy change will improve or harm local-government finances. Doing one-off studies of individual projects can mislead local leaders. This is because stand-alone studies can fail to demonstrate a cumulative impact over time that overwhelms departmental service levels, utility and infrastructure capacity. A more holistic approach is better where the fiscal impact process informs public operating and investment decisions throughout city government.

A community can also miss a golden opportunity by only conducting stand-alone studies of its major projects. It misses the opportunity to use the fiscal analysis process to help reorient local public and private decisions to a more financially sustainable way of doing business. Over the next few weeks we will be showing cities how they can take full advantage of fiscal impact analysis not only to help them understand major, individual developments, but to use the fiscal impact process to improve overall operations. Today we will give you a quick overview of fiscal impact analysis as a primer. You can find more information on fiscal impact studies by downloading our local leader’s guide here.

What is fiscal impact analysis?

Fiscal impact analysis measures how local-government revenues and service costs change because of a change in the economy or the local government itself. The change can be a public or private capital investment or a change in government policy. The analysis subtracts government costs associated with completing and supporting the project from the revenues the project generates for local government. Many types of projects can be evaluated with this kind of model:

Construction or renovation of residential or commercial real estate
Business expansions or closures
Public works investments in facilities and infrastructure
Changes in government staffing, equipment and operations
Fee and tax changes
Land use changes (rezoning, annexations and build-outs)

Cities should use fiscal impact analysis to evaluate any major policy change or development. The time and effort are worth it. Some of the benefits of the study include: discovering potential infrastructure bottlenecks, learning the operating budget and revenue consequences of the project and helping the community understand the timing of these costs and benefits. Still, a community doing one-off studies of individual projects can miss the bigger-picture opportunities fiscal impact analysis offers.

Over the next few weeks we will take a closer look at how local governments should rethink their fiscal planning, forecasting and operations using a fiscal impact lens. Essentially, cities can use fiscal impact analysis as a process to make their key development, financial and operating processes work together to put their organization and their local economy on a more sustainable path. This not only helps them understand the implications of individual choices, it helps them:

Connect the dots between economic development, planning and budgeting processes
Build an organizational culture that makes short term decisions that are consistent with long-term goals and sustainability
Improving citizen and elected official confidence that the city resources are being well managed

Next week, we will look at the strategic and tactical choices a community needs to make if it wants to use the fiscal impact process to help improve long-term sustainability.

Sales Tax and Fiscal Sustainability

Posted on March 7, 2017 by Axianomics

The Texas economy has been a top performer for many years. Indeed, even with the ups and downs of the national economy, since 2002, Texas’ economy grew at an 5.7 percent annual compound rate. As the economy changes, however, all states, including Texas are facing a fiscal challenge. As the economy includes more services and fewer goods, traditional sales taxes are bringing in less revenue.

Based on reports from the Texas Comptroller of Public Accounts, Texas has seen its taxable sales activity grow by only 3.1 percent annually. With no income tax, sales taxes are a major source of state revenue (26.4 percent of the total in 2015).

Another way of looking at this is to compare taxable sales to total economic activity. Even as the economy has grown, the amount of taxable sales has continued to shrink (see chart.) In 2002, a dollar of gross state product generated 6 cents of taxable sales. That amount fell to 5 cents in 2008 and was down to just over 4 cents by 2015 (most recent data.) This is clearly an unsustainable path. Since cities in Texas also rely heavily on sales taxes, they are facing the same situation. Local conditions may differ and some cities have healthier economies than others, but the trend will be the same.

Texas taxable sales per dollar of state GDP

A changing economy means less sales tax revenue even with growth.

With growth, there is more demand for services: schools, police and fire being the largest categories for local governments. But the available resources are not keeping up. If the circumstances get bad enough, a future Legislature will face pressure to broader the sales tax base to cover more services. As a fiscally conservative state, however, cities, towns and the state government in Texas will likely choose to cut spending rather than seek new revenue sources.

This makes it critical for local leaders to focus on how to make their communities more sustainable through their development policies, land-use patterns, regulations and municipal operations.

Cities, Change and Sustainability

Posted on February 28, 2017 by Axianomics

Introduction

Earlier in February, I had the opportunity to speak to visiting students and faculty from Korea at UT-Dallas. Most of these visitors are focusing on architecture, engineering and public policy so they are usually interested to learn about U.S. cities, governance and economic development. The following are some of the slides I shared. These focus on our early research into why so many cities find themselves in tough times financially. You can find the full briefing, which also covers some basics of Texas municipal government here.

Fiscally Healthy City

We define a fiscally healthy city as one that, over the long-run, its tax base and revenue system supports its services and infrastructure without causing competitive disadvantages.

The Fiscal Cycle

Stylized History of U.S. Municipal Finances

The roots of municipal fiscal insecurity are largely from a lack of transparency and citizen engagement. That means… Lax fiscal practices and poor choices until… Major economic crisis reveals the level of ongoing fiscal stress. It is a regular pattern.

There was no golden urban age. U.S. cities have been trying to catch up to their constituents’ demands for more and better services for 200 years:

Population growth
Technology change (business practices and energy sources)
Awareness and costs of health and environmental risks
Political and cultural changes
Economic competition from federalism

Land use remains an ongoing challenge for cities. Cities shifted from a largely urban form to a majority suburban form. This has several consequences for sustainability:

More unproductive space per parcel (setbacks, parking)
Requires more public infrastructure per private building
Requires more city fleet and staff per household / business
More privacy, more space

Sprawl has higher internal and external costs, but mostly internal benefits. It is a higher-cost way of occupying the land. Over time, some cities can afford it, some not.

Neighborhood Decline and the Favored Quarter

You can find decaying neighborhoods of all types across America.

Any neighborhood, urban or suburban can decline. A city’s prospects depend on how much of its favored quarter remains inside its corporate limits. The fortunes of suburbs largely depends on which side of town they lay.

Favored quarters everywhere. Pinks = household inc. > $100K, blues < $25K.

Dallas and Fort Worth each have a favored quarter, north and southwest, respectively.

Rise of Modern Cities

19th Century City Spending.

U.S. cities modernized in the middle of the 19^th century. They added professional police and fire departments, adopted libraries and cultural facilities, built parks and all the modern infrastructure we associate with a city: paved streets, water mains and other utilities. Since that time, city spending has grown faster than city population. Larger cities have been spending more for over a century.

Growing public safety costs, adjusted for inflation and population growth.

In the 20^th Century, those services that were adopted in years past cost more and more. This is partly because we are a more metropolitan nation. There are more large cities with residents that have similar, high expectations about the appropriate level of municipal services. It is also because cities produce their services with a lot of labor. Local governments have done little to replace staf with automation, but there have been significant increases in the capital equipment that have helped these staff improve the effectiveness of operations. Still, worker costs keep increasing. Cities will need to look for different ways of delivering services if they hope to stay solvent in coming years.

Megaprojects and Capital Hangovers

Posted on February 21, 2017 by Axianomics

Introduction

Megaprojects are big, high-profile, long-term capital investments that typically costing over $100B. These projects are high-risk and are often finished over budget. Worse, many fail to make a real contribution to local or national economies. They can waste a community’s time, attention and resources and harm long-term fiscal sustainability. Their popularity is hard for any community to resist. Local leaders concerned about fiscal sustainability can apply lessons learned from mega projects to any large capital project. After all, a relatively modest capital project can be mega for a small city.

Manhattan Bridge, March 23, 1909. Wikimedia Commons.

Risks and Shortcomings of Megaprojects

According to Bent Flyvbjerg, in a Cato Institute Policy Report, megaprojects are incredibly seductive to designers, engineers, politicians and construction contractors. Their size, economic impact and aesthetic qualities make them a favorite of many. This lure makes it easy for decision makers to overlook or discount the risks. Given our focus here on local leaders who take responsibility for their community’s fiscal and economic health, we recommend much of Flyvbjerg’s assessment, particularly the following:

Projects with long planning periods increase the chance of unforeseen changes or complexities. These include price increases or technology changes that undermine the original motive for the project.
These projects, as conceived by their champions, are singular or unique. That means there are few existing lessons to apply. They also offer few lessons for future initiatives because of their uniqueness.
These projects are hard to oversee which increases the risk of cost overruns and mistakes. A phenomenon called the principal-agent problem applies here where those doing the work are able to conceal their performance from those paying for the work.
Mission creep is especially risky with mega projects. Even minor changes can add huge costs.

In addition, we would have a few other concerns with mega projects, or any relatively large capital initiative. Those concerned with local sustainability should also consider the following:

Community influence and control tends to be lower on these projects. They are seldom conceived by the average taxpayer. They will be designed by technocrats. Expert opinion and analysis will usually be given more weight than the perspective of those who will have to live with the results.

Sustainability is enhanced by small, incremental and slow solutions. Projects which are huge, all or nothing and tend to promote haste give too little time to learn and change the approach if they are not working out. Small, community-driven infrastructure projects can deliver more widespread benefits.

Relatively large projects are more likely to be beyond the capabilities of the local community. This means that the contracts and the funding for the project will go to outsiders. Small-scale initiatives can be identified, designed, constructed and evaluated by local talent and local labor. This keeps scarce resources in the community and builds experience for local firms.

These projects can also severely distort decision-making for many years. In the meantime, businesses, households and governments will have made other long-term investment decisions because of the existence of the mega project investment. Megaproject failures will not be replaced and can strand all those other smaller investments.

Beyond these considerations, local leaders should also beware of the large economic impact benefits of mega projects. More careful analysis is needed.

Who vs. How Much?

Since mega projects are big, they will have a big economic impact. Economic impact studies always bring good news since they tally total spending and increase that with some multiplier. What is more important locally, is how the costs and benefits of the project are distributed throughout the community and over time. Project costs and benefits are seldom shared equally in a community. They are often not shared equally by current and future generations. A good cost-benefit analysis can help local communities better understand the real economic consequences of pursuing a large project.

Finally, local leaders need to dramatically increase the level of dialogue in the community if they are considering a big project. The engagement process slows the project, giving more time to consider the real costs and benefits. It also builds community support, especially if the project is complex, hard to understand or poses potential risks. Some mega projects are worthwhile, but they deserve extra scrutiny because their legacy will be with us for a long time.

Measuring the Costs of Sprawl

Posted on February 14, 2017 by Axianomics

Introduction

Cities are complex and that makes it hard to measure the costs and benefits of sprawl. Most real cities have a mix of neighborhood types built over generations. Real estate markets are highly regulated. Passionate voices in the debate can exaggerate claims. Still, there is growing evidence that some neighborhood types cost cities more to serve. These findings can guide city planning, but the built environment changes very slowly. Strategies beyond smart growth are needed to help communities become more sustainable in the short run.

Variety of Urban Densities

Practical and Rhetorical Definitions

Sprawl and smart growth are not helpful terms for development and planning. The debate has rendered them stereotypes that have more emotional appeal than practical application. To its opponents, “SPRAWL” means a gluttonous waste of land where buildings are widely scattered across the land with no logic. It destroys valuable farm land and drives nature back on its heels. Likewise, foes of “SMART GROWTH” pronounce that it robs people of their property rights and compels them to live in hovels or like sardines crammed into dark towers.

In fact, most cities were built over generations and centuries. They have neighborhoods that represent the best and worst types of sprawl and smart growth. Real estate markets are heavily regulated by state and local ordinances. There are always people who think their property rights are being restricted no matter their favored urban form. In addition, real estate markets are distorted by federal laws that influence home and commercial financing. Given these complexities, ideal studies of the costs and benefits of neighborhood form will look at small sections of a city and carefully measure the many qualities that account for neighborhood form. Unfortunately, most research so far has looked at entire cities. They also tend to use density as the measure of sprawl.

Density is an Incomplete Measure of Sprawl and Smart Growth

Research that focuses on density alone can’t give good guidance to city planners and builders. As we saw recently, other qualities are more important to the attractiveness and efficiency of neighborhoods. Things like distance between uses, lot and building sizes, sidewalks and the road networks define whether a neighborhood is sprawling or not. These are really qualities of neighborhood design that determine if density causes problems like congestion and higher costs or whether it promotes efficiency and housing value.

Up to the early 20^th Century, U.S. neighborhoods had a density of over 30 units per acre. This was accomplished with row houses and small apartments mixed among single-family homes. These are not generally considered sprawling communities. A typical single family neighborhood by the mid 20^th Century had 4 to 6 units per acre. These are generally considered sprawling. At the same time, new urbanist or traditional neighborhood design approaches can deliver mostly single family communities that have densities up to about 25 units per acre. These communities successfully combine the connectivity and efficiency of smart growth with the privacy and open space benefits of traditional suburbs. With the limits of density as a metric in mind, what do we find in the cost of sprawl literature?

Sprawl Cost Studies

There is a growing body of research that confirms sprawling neighborhoods and, or, lower density neighborhoods increase municipal infrastructure and service costs. The following results are drawn from reports you can find here, here and here. Sprawl increases delivering municipal services. Many case studies and nationwide reviews reveal savings that range from 5 to 40 percent. The most detailed and objective studies find at least 5 to 10 percent savings. We should consider these as absolute minimum savings from smarter development regulations. There are diminishing returns to the benefits of density. Service costs fall the fastest when the population density increases from 500 per square mile (essentially rural) to about 2000 per square mile. Memphis and Tulsa have densities at 2,053 and 1,992, respectively. There are additional, but smaller savings moving to 4000 people per square mile. Denver (at 3,923) and San Diego (at 4,020) are examples. Many northern Dallas council districts and suburbs in southern Collin County are also built at about a 4,000 per square mile density. There appear to be slight additional savings for additional increases in density.

Need for Immediate Solutions

Cities with a lot of room to grow have a lot to gain from policies that let the market deliver less sprawling neighborhoods. There are also opportunities to gradually redevelop sections of existing communities with smarter development. Cities should provide the flexibility for the large minority of households who want to live in a more traditional, low-density urban neighborhood. From a property value standpoint, many cities can also benefit from permitting, but not subsidizing, much higher densities where the market demands it. Given the long life of a neighborhood, however, it will cost too much and take too long to radically or quickly rebuild our cities. We need more than land use changes to deliver immediate sustainability benefits.

We have spent several weeks studying sprawl and found opportunities for building better cities. In the short run, all cities will need to do more than just change their land-use regulations. Cities need to engage the businesses and households that call them home. Our cities need serious discussions about the services residents want and their willingness to pay for them. Those discussions are the foundation for reforming city operations to improve municipal effectiveness and save money today.

Qualities of Traditional Neighborhoods

Posted on February 8, 2017 by Axianomics

The term sprawl is too vague for applied policy work. As we discovered previously, there are different degrees of sprawl. We recommend that it is better to consider the traditional neighborhood as the benchmark for local policy. Then we can compare how a community differs from that standard. In our work, Axianomics is focusing on the qualities that make a neighborhood traditional. These qualities can me measured, but this kind of careful, detailed measurement at the neighborhood level has seldom been completed. As a reminder, a traditional neighborhood is the basic form for U.S. cities up until about the 1920’s. Communities didn’t build a lot during the Great Depression and WWII. After the war, however, the vast majority of new development departed from these following characteristics of traditional neighborhoods:

A road system with many interconnections, typically a grid
A fine-grained variation in land use (that is, the potential for multiple uses on a single city block, but also on adjacent blocks)
Houses in a variety of sizes and number of bedrooms
Infrastructure that permits easy walking between land uses

While such a neighborhood can have a high density of buildings per acre, density is only a potential result of these qualities. Build a neighborhood the traditional way and you can reap some of the efficiency benefits of density. In fact, density without these qualities is a recipe for congestion and a low quality of life experience. These four qualities permit a relatively dense neighborhood that is pleasant and that offers privacy and open space to those who want single-family living.

It might be helpful to identify the opposite qualities of a traditional neighborhood. A neighborhood with the following qualities will have a more difficult time delivering the efficiency benefits of density while also producing a high quality of life for residents:

A road system with few intersections, often with many cul-de-sacs
Large, mutually exclusive zones of uniform land uses
Housing that lacks a variety of sizes and number of bedrooms
Infrastructure that makes walking between uses difficult (incomplete sidewalks, lack of crosswalks, walls between land use zones)

The figure below is a highly-stylized picture of two neighborhoods that match our definitions. The neighborhood on the top is an extreme deviation from traditional neighborhood qualities. The neighborhood on the bottom meets the four qualities of a traditional neighborhood.

Traditional (Bottom) and Nontraditional Community Forms

Moving from left to right, the top community has five separate zones: a large shopping center with several pad sites, a garden apartment complex, a single-family home subdivision, a school, and a low-rise business park.

The community on the bottom is centered on a cluster of mixed and single-use commercial buildings that accommodate retail, office and sometimes apartments. Structured parking serves car travelers to this district. Small apartment buildings surround the neighborhood commercial core. None of these buildings are over two stories. Single-family homes cover most of the community. These homes include row houses near the larger buildings, and a mix of small townhouses, duplexes and larger houses. The school is integrated into the neighborhood.

The bottom community probably supports a slightly larger population and job base, but on less than half the land of the non-traditional community. It takes very careful analysis to accurately assess the costs and benefits of these two neighborhood types. Next week we till turn to the available research, keeping these neighborhood qualities in mind.