Texas Property Tax: The Big Picture

Introduction

This month, we will take an in-depth look at property taxation in Texas. The property tax is the most important source of revenue for Texas cities, accounting for almost half of municipal revenues. The property tax is the primary local revenue source for local school districts. This time of year, property owners will receive their appraisals from their local central appraisal districts’ (CADs.) A certified tax roll will be delivered to local governments in July. That tax roll will be used by city councils, school boards, county commissioner’s courts and various special districts to set property tax rates for the upcoming budget year. This week, we will provide a high-level review of property taxation in Texas for local leaders. In following weeks, we will examine trends in property tax based and rates in the DFW area and methods for forecasting property tax revenues.

History of Property Tax in Texas

Josh Haney provides an interesting history of the property tax in Texas. This tax, in place since before Texas independence was a huge source of both state and local revenue. For much of early statehood it amounted to more than half of state revenues. With local responsibility for administration, tax appraisals varied wildly from community to community. A standardized system, that ended state use of the property tax, also created the local appraisal districts in 1982. This gave us the current form of property taxation still in place today, though numerous statutory and constitutional changes have refined it.

Tax Year Cycle

The property tax cycle can be divided into four phases. Appraisal districts are required to appraise properties based on their value as of January 1 each year. CADs generally complete this process by the end of April and notify property owners of their appraisals. The CAD will also provide local jurisdictions with this preliminary information by the end of April so cities, counties, school districts and special districts can draft their budgets for the following year. This information informs decisions for operating and capital budgeting. Next, property owners can protest their appraisals. Appraisal review boards will complete these disputes by July. CADs must provide local taxing jurisdictions with a certified property tax base roll by July 25th. This value will be used by local governments to finalize budget preparation and set a tax rate. Local governments must set this tax rate after approving the budget and before September 30. The final phase of the tax year begins on October 1 when tax bills are mailed to property owners. Payment is delinquent on February 1 the following calendar year.

Truth in Taxation: Effective Tax Rate and Roll-Back Rate

The concept of truth in taxation, embodied in the Texas Constitution and state law essentially permits taxpayers to assess their property tax burden and influence the local political process that sets budgets and tax rates. The effective tax rate and the roll-back rate are important concepts under truth in taxation.

The effective tax rate is a hypothetical tax rate that would bring in the exact same amount of revenue as collected by local government in the previous year. This rate can change from year-to-year because it depends on changes in appraised values of existing property. If previously existing property appraisals are higher, then the effective tax rate will be lower than last year’s official tax rate. If property appraisals have fallen, such as during a recession, then the effective tax rate will be higher than last year’s official tax rate. The rate is calculated by excluding the value of new real estate constructed during the previous year.

The roll-back rate is a buffer to growth in property taxes that can be implemented by local taxpayers. It reflects the maximum tax increase a city government can adopt for its upcoming budget year without risking a roll-back election. According to the Texas Municipal League, there are half a dozen roll-back elections annually and a small majority are successful in rolling back the tax rate. The roll-back at the time of this writing is 108 percent of the effective tax rate. That means, that a city council can chose to adopt a property tax rate that is equal to or less than its effective tax rate without risk of a roll-back election. Rates set above 108 percent of the effective rate can trigger a citizen petition to call a roll-back election. Proposed legislation in the 2017 Texas Legislative Session would change the roll-back rate to 104 percent and make a roll-back election mandatory, without a petition.

In addition to excluding newly constructed property from the calculations, the effective and roll-back rates only apply to the portion of the tax rate that supports general government operations. The fraction of the tax rate that supports debt service (called interest and sinking or I&S) is not subject to the roll-back provision.

Statewide Trends in Property Values

Property taxes are generally calculated at the local level, by appraisal districts, for each taxing jurisdiction in the state. Changes in property tax bases can vary dramatically from community to community depending on local economic conditions. Given the overall importance of the property tax to local governments, we would like to have some baseline to easily compare tax base performance across the state. The Texas Comptroller provides us with a reasonable metric. It is charged with evaluating the appraisals made by local CADs for all the independent school districts in the state. The primary purpose of the property value survey is to support calculation of state funding formulas for K-12 education. It is not comprehensive, but provides some details to study statewide property tax base trends.

Based on these reports, between 2011 and 2016, the total taxable value of real and personal property in Texas grew 32 percent from $1.7 trillion to over $2.2 trillion. The annual increase was relatively consistent each year at over 5 percent. By comparison, for single-family homes, the statewide total has grown by 39 percent over the same period. Home property values, presented an increasing growth rate in recent years. This seems to reflect home price increases we have seen throughout the state. Annual increases in the last three years have exceeded 9 percent. Next week we will expand our analysis and take a closer look at DFW cities.

Changing Attitudes and Community Engagement

Local prosperity is like two sides of a coin. On one side, you have what the public sector does and the other you have what the private sector does. You can’t build a prosperous community without both. Like sides of a coin they are bound together. Public engagement is the glue that holds the two sides together. Proper engagement, whether for budgeting, long range planning or community development will transform the way both cities and their stakeholders work together for mutual benefit.

Done correctly, local leaders can build processes that harness the energy and initiative of households and businesses to build the tax base that will sustain the services needed by the private sector. The private sector also needs to reimagine its role and assume its place through a renewed civics.

Even with an economic recovery, many communities around the country face resource limits but expectations for services remain high. Local leaders like city managers, mayors and council members can take the lead in working with their communities to build an environment that will support both private and public pursuit of prosperity. Some local leaders are already pursuing a number of technical reforms, but these will not deliver the same long-standing results as community engagement. These include trying to do a better job with service delivery through more effective operations, adding on complex management systems and planning process and transparency in the form of open data.

We have talked before about community engagement here and here. In the remainder of this post we will discuss existing attitudes and how they should change to use community engagement to rebuild civics as a collective practice.

Currently our communities are too often characterized by assumptions and behaviors like the following.

Residents can:

  • Act like consumers and not citizens
  • Think local government is solely responsible for quality of life and economic development
  • Assume their responsibilities end with paying taxes, and sometime voting

City staff can:

  • Unveil policies and programs without a prior public discussion of options, implementation and consequences
  • Think the public is an obstacle to getting their job done
  • Assume private interests are automatically trying to cheat the public or others

These need to change and the root of that change can be found in better engagement by all. Sustainable communities will be ones where public and private activities are coordinated, complementary and mutually supportive. This can only happen with a more robust public engagement process.

For all but the most charmed cities, we believe prosperity in the next few years will require a renewed civics. That means residents and business owners will shift from being passive consumers of municipal services to partners with local government in securing successful community outcomes. They can reclaim their role as citizens and participants in local political life. At the same time, local leaders can coordinate a process from which a new community vision can emerge. City staff play their part by becoming consultants on how residents and businesses can make the most of local services and participate in collective outcomes.

Some examples of the changed attitudes and behaviors include:

  • Management and staff appreciating that community members have skills and assets that can help at each stage of the policy and operational chain.
  • City staff cultivating a mindset that expects the best of local families and businesses (without abdicating their responsibility to protect life and property.) Staff can start looking for ways to help the private sector solve shared problems.
  • City staff learning to craft important policies in a more participatory process that starts with open data and analysis. This process will maintain public participation in evaluating options and creating the implementation plan.
  • Citizens accepting that social, economic and community outcomes depend on their actions too. Public provision can’t possibly achieve meaningful gains in areas like neighborhood vitality, safety, sanitation and health.

Unless your city has all the revenue it needs and your community goals are being perfectly achieved, you are probably not taking advantage of all your community’s potential unless you tap it through real community engagement.

Placemaking for Sustainable Development

Introduction

Communities everywhere are looking for ways to strengthen their economic competitiveness and to do so in less wasteful and more sustainable ways. Placemaking and branding are sometimes considered too ephemeral to be a development strategy, yet, they are very cost effective. Given the importance of retaining and attracting talent, placemaking can be the centerpiece that helps coordinate and give other development tools coherence.

What is Sustainable Placemaking

Local leaders should think about placemaking as a process of facilitating the collective private initiatives of businesses and residents in each neighborhood. This may seem counter to the common notion that placemaking is a way of making your community more attractive to those fickle and footloose creatives. We believe that the sustainable success of every community will come from those who are already there and those who may want to join them in raising families and building local businesses. So the primary goal of placemaking is to do things that make the community better for those already there.

Placemaking and branding isn’t about turning a community into something it is not. It is about helping communities make the most of what they have, nurturing a shared vision that attracts local private interests to make their unique contributions. The community will experiment and generate businesses to meet the needs of the local neighborhoods. Some will fail, but others will survive and over time the business community will be fine-tuned to the needs of local and visiting customers.

Placemaking is important to making our cities and towns more sustainable because it increases the power of local businesses and residents to succeed in ways that reinforce local assets and nurture uniquely appropriate ventures to each community. These kinds of neighborhoods will have a much easier time satisfying their needs with locally grown businesses employing local residents.

The private sector does most of the placemaking. Local government can still help coordinate, reform regulations and provide small scale incentives that help guide private efforts in ways that multiply the impact. We recommend a bottom-up approach where local leaders engage the community to encourage competitive experimentation. These experiments can take a variety of forms, but they share a few things in common. First, they are the idea of residents and businesses, not outside consultants. Second, they should be small scale.

Placemaking only works at a fine-grained level. Generally, the place is somewhere that can be explored on foot. This reinforces people’s perception of the area as a place. It is hard to create a sense of place if you have to drive from venue to venue. Cities and larger districts can be supported by branding efforts. Branding can help communicate the assets of a place, but is secondary to place making. We always recommend that when working on a placemaking effort that the stakeholders actually walk it. They should also watch how others walk it.

Two Placemaking Tactics

Once you have engaged your community, it is okay to give them some broad parameters or concepts if they have trouble identifying some immediate initiatives. Two options include improving local connectivity and events.

Building connections helps local residents take advantage of existing assets. Most neighborhoods have separated land uses. In many cases, however, these land uses are nearby. Yet, they lack the physical infrastructure that would permit households and businesses to more easily access each other. There are often relatively low-cost ways to lower the barriers to connecting uses. This can increase value for residents and businesses. Ask what connections the community thinks would be most valuable. You can also observe pedestrian patterns to see where people are trying to overcome a failed public infrastructure. The presence of dirt paths along roadways or through abandoned parcels is a clear sign that pedestrians are trying to make connections. Painting crosswalks and other visual ques that let drivers know the route is used by pedestrians improves safety. Where low-cost interventions improve connectivity, and increase use, in the next round, the community may decide to reinforce these links with more permanent fixes like better signage, lighting and sidewalks.

Placemaking can be facilitated by regular events. Events can help build social capital in a community. These need not be extravagant. Indeed, they should start small with little cost. Gather the stakeholders and ask what they would like to do. With a small budget, several experiments can be tried by different interests in the neighborhood. The successful ones can be singled out for additional support. In every case, however, these programs will be more sustainable if they grow organically. Planning a first time, major blow-out event is a good way to build excitement that is hard to maintain the following year. Financial sustainability is also hard to maintain when you start with a big budget in year one.

Placemaking strategies are focused on helping a neighborhood identify its strengths and opportunities and make the most of its assets. Every neighborhood is unique and they will vary in their successes. Regardless of its potential, every neighborhood can become a sustainable, identifiable place. This gives its residents a sense of pride and makes a net contribution to the social, economic and fiscal sustainability of its home city.

Being a Fiscal Impact City: Long-Term Planning

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:

  1. Analysis of financial trends
  2. Assessment of problems or opportunities facing the city and potential actions to address them
  3. Long-term revenue and spending forecasts
  4. 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

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

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

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.