Mixed Income and Housing Variety

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Introduction

After reflection and conversation, I realized the need to clarify a term used in last week’s post. In listing the benefits of traditional neighborhoods, I recommended their ability to support a mix of family incomes. Urban sociologists and poverty researchers mean something very specific when they use the term mixed-income. I actually meant something different and, this week, will clarify and elaborate on the similarities and differences between mixed-income housing and traditional neighborhoods with a variety of housing types.

What Did I Say Last Week?

The relevant section began: “Traditional neighborhoods offer other benefits that strengthen the local economy. This helps households and local government financial stability. These benefits include supporting: competitive industry clusters, mixed-income populations and local businesses.” Later I elaborated with: “Traditional neighborhoods provide a variety of housing types: rental units of all sizes, town houses and single-family homes. This lets a neighborhood accommodate residents at every stage of their life cycle as their incomes and space needs change.”

Variety of House Sizes in a Low Income Neighborhood. Google Streetview.

Variety of House Sizes in a Low Income Neighborhood. Google Streetview.

What Does Mixed-Income Really Mean?

The Mixed Income Research Design Group, a nonprofit of academic researchers, defines mixed-income housing as a deliberate effort to create socioeconomic diversity in a given area. It may apply to a single building, a larger development or an entire neighborhood. Mixed-income housing is a deliberate policy to improve the circumstances of low-income households through economic integration. This is an important objective, but was not the primary focus of the policies I advocated last week.

The benefits of traditional neighborhoods I referenced come exclusively from their physical form. There is nothing incompatible in the two concepts. Indeed, traditional neighborhoods may be the best way to pursue the goals of mixed-income housing policy. My emphasis, however, was on the superiority of traditional neighborhoods in improving the fiscal and economic health of cities compared to alternatives. By offering a variety of housing types and sizes, such neighborhoods should be more sustainable by attracting a healthy mix of households at every stage of life. This contrasts to a subdivision with a single housing type of interest to a narrower range of households. The benefits so far from mixed income housing are perfectly obtainable from a traditional neighborhood form.

Mixed Income Motives and Outcomes

Mixed-income housing improves the lives of poor families, but has not achieved all the intended goals. Mixed-income housing has been delivered by demolishing high-density public housing projects or tenements and replacing them with lower-density structures. The new developments emphasize small apartment buildings or row-houses with open space. There may also be a percentage of units set aside to sell or lease at market rates. These units can attract higher income households to the community and improve the development’s financial performance. The federal Hope VI program has been extensively implemented and studied, as an example.

According to scholars with the Urban Institute, there three main goals for mixed-income housing policy:

  • Racial, ethnic and income integration
  • Improving employment and income for poor families
  • Improving environmental conditions of poor families (housing, neighborhood safety, etc.)

The Urban Institute has also summarized the research on the results of these initiatives. The greatest success has been with improving environmental conditions. Poor families enjoy better housing stock and have access to more retail and other services. They also show improved mental health, probably from a greater sense of safety in the newly designed communities.

Unfortunately, there has been little improvement in integration or building more diverse social networks across income levels. Research shows class remains a powerful barrier. Families at significantly different income levels do not interact in meaningful ways even when living near each other. This probably explains why there are some improvements in employment but no significant increases in income. The assumption was that low-income residents would grow their social networks and therefor improve access to better jobs. Researchers also note that without deliberate skills and education improvements, changing housing does not improve income prospects.

Housing Mix and Traditional Neighborhoods

Traditional neighborhoods are defined by their physical form: street grids, a variety of parcel sizes and a variety of housing unit sizes. Intentional mixed-income communities can meet the definitions of a traditional neighborhood. Given the research on mixed-income housing, a traditional neighborhood will probably attract households that are similar in socioeconomic terms. Since a traditional neighborhood has a variety of housing size units, those units should be accessible at a variety of price points. Smaller units should cost less than larger units. This may allow the entry of relatively lower income families. The range of incomes in a traditional neighborhood will likely be greater than in a typical subdivision. Regardless, traditional neighborhoods can support households throughout their life cycle as their incomes change and their spending changes.

Restoring and building more traditional neighborhoods can improve the overall financial and economic health of a city, which is our primary focus at Axianomics. Traditional neighborhoods are better for families at any income level. A neighborhood that can help families stay in place, but efficiently transition through stages of life will create a great deal of loyalty and stability. It will be a neighborhood of people who pay close attention to local government decisions and who are active in their cities because they feel they have a stake. These are all great things and should be applauded.

Our cities will need something more to help communities increase social connections between income groups. A renewed civic capital seems critical for building more sustainable cities. Later this year we will look closer at that. Next week, however, we will continue our examination of the costs and benefits of different neighborhood forms.

Benefits of Traditional Neighborhoods

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Introduction

Last week we looked at how and when sprawl-type development is a financial burden for cities. Today we consider the economic benefits of an alternative to business-as-usual sprawl. There are many options other than a typical sprawl subdivision beyond dense, high-rise urban living. Today we will focus on one called traditional neighborhoods. The intention is not to critique sprawl verses traditional on aesthetic grounds. Both have merits there. The focus in on the economics.

Traditional Neighborhoods

A traditional neighborhood is still relatively low density in its appearance. It will have a mix of small residential, commercial and institutional buildings sitting on a variety of parcel sizes. Buildings usually look similar from the street because of a uniform height and setback. Closer inspection will reveal a variety of building widths and depths that add variety to the product mix. The mix will also include homes with detached or shared walls. The image below is a Google street view of two neighborhoods this author has lived in. It nicely captures the distinctions that matter for our discussion today.

The top picture is a traditional neighborhood built in the 1920s in Richmond Virginia. Notice the variety of building types on the same block. To the right, you can see single family row houses. On the left, you can see a small multifamily building. The same street includes smaller row houses, detached mini-mansions and a corner convenience store / market. Some of the homes have garage apartments on the back alley.

The bottom image, a 1970s Dallas Texas subdivision, is a typical single-family home neighborhood with detached houses, rear entry garages and nice front yards occupying the setback from the road. Curb-loaded sidewalks border each street. Nearly all these homes have identical configurations: four bedrooms, three bathrooms and a two-car garage.

Subdivision vs. Traditional Neighborhood

Subdivision vs. Traditional Neighborhood

Both neighborhoods are green, attractive and in high demand. Both can easily be considered suburban, compared to the dense, high-rise living advocated by many sprawl haters. Both are relatively easy to build and can be created with modern construction techniques. Prices will depend on the overall supply and demand. Interestingly, in many cities, the traditional neighborhood homes fetch higher prices implying that the market could support more of these products. Also, as we pointed out last week, traditional and subdivision neighborhoods can decline. There are run-down examples of both in most cities. Traditional neighborhoods do have some economic and financial benefits, however.

Private Benefits of Traditional Neighborhoods

Traditional neighborhood homes are generally on smaller lots. This reduces per unit costs. They use less land. Given standard construction practices, homes on these smaller lots also require smaller foundations and roofs. That lowers construction and maintenance costs. Developers install a little less utility infrastructure because of the shorter setbacks. For many households, living in this kind of neighborhood permits them to reduce the number of cars they own. Households will tend to drive each car they own less in these neighborhoods.

Public Sector Benefits

Transit services can cover traditional neighborhoods at a lower cost since more people are a short walk to the bus lines. City infrastructure maintenance costs are lower because local government inherits a smaller infrastructure inventory with a traditional neighborhood. Public services such as police and, especially fire protection, can be more efficiently delivered given the higher household and business density per acre. Neighborhood security is improved from visibility of the street from close-set buildings and higher pedestrian traffic. Other services such as libraries and parks can draw on a larger population in walking distance. More frequent, smaller parks can be smaller and easier to maintain and can sometimes even provided by the neighborhood itself since it serves a limited market.

Benefits to the Local Economy

Traditional neighborhoods offer other benefits that strengthen the local economy. This helps households and local government financial stability. These benefits include supporting: competitive industry clusters, mixed-income populations and local businesses.

Cities with a traditional neighborhood form can accommodate clusters of businesses in related industries in a small area. Historically, the private sector took advantage of this by quickly establishing districts for the various trades and manufacturers. The proximity of similar businesses lower the costs of securing workers, suppliers and customers. Proximity also supports innovation because spontaneous interaction of these entrepreneurs and workers in the neighborhood permits the rapid exchange of ideas. Today, highly competitive clusters of technology startups, designers, and other high-end services thrive in traditional neighborhoods for these reasons. This gives their home cities a competitive advantage.

Traditional neighborhoods provide a variety of housing types: rental units of all sizes, town houses and single-family homes. This lets a neighborhood accommodate residents at every stage of their life cycle as their incomes and space needs change. People can enter a community as young singles in studio apartments. Then they can start a family in a larger apartment or buy a home. When it is time to downsize, options are available. All survey evidence indicates that people generally want to age in place once they pick a neighborhood. Typical subdivisions with a single housing type are prone to booms and busts as the founding generation seeks more affordable options in their later years. Some of these subdivisions recover, some don’t. Traditional neighborhoods thus offer cities a more stable tax base compared to single-product subdivisions.

Finally, traditional neighborhoods support small-scale mom and pop businesses. They offer a variety of building types and many households in walking distance without the need for expensive parking. Most traditional neighborhoods support small clusters of retail with professional services, bars, restaurants, markets, repair shops, etc. These may occupy some or all four corners of an occasional intersection – not every corner. Scattered, lone commercial buildings are also typically available for businesses in these neighborhoods. These sites often are focal points for surrounding households.

The arguments here are not meant to say traditional neighborhoods are better in every case. Survey research varies, but there appears to still be a strong preference for single family homes. This product can easily be accommodated in traditional neighborhood form. Our argument is that cities have given up many economic benefits by changing their building and land use regulations to facilitate subdivision sprawl. Today, there is a growing market for traditional neighborhoods but city ordinances often make this form illegal to build. This is unfortunate because these economic benefits go right to the bottom line of private and public decision makers. What to do? We certainly can’t abandon eighty percent of our housing stock and build entirely new neighborhoods all at once. In the following weeks, we will look further at the costs and benefits of traditional and sprawl neighborhoods and at how communities can make changes that will put them on a more fiscally sustainable path.

Land Use and Fiscal Stress

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Introduction

This is the first of two posts to consider land use in the context of fiscal stress. Land use and the way cities are built has received a lot of attention, especially from planners and architects. Today we will look beyond some of the typical “costs of sprawl” arguments. The reality is that suburban-type development may or may not be a fiscal strain on a community. It depends on some broader economic forces at play.

Land Use Defined

Land use is not the same thing as zoning. Zoning regulations identify the permissible uses for a piece of property called a parcel. Land use is what is happing at this moment on that parcel. That could be, for example: single family residential, retail, manufacturing or agriculture uses. Zoning may allow many different uses. What may be more important for the fiscal implications of land use are the ways an activity takes place on a parcel and the way the supporting buildings and infrastructure are positioned and built on the parcel.

Land Use as a Source of Fiscal Stress

When we hear someone mention that sprawling development is costly for they are singling out what most of us would recognize as suburban land uses. The argument is that this type of development brings higher costs for local government than urban land uses. Suburban development patterns provide for fewer buildings per acre because of the need to accommodate the movement and parking of automobiles. This land use pattern also reduces building density with requirements that buildings be set back a minimum distance from the property line for aesthetic or safety reasons.

No doubt this pattern of development requires more public infrastructure per private building (say single family homes.) They need more linear feet of water pipes, storm drains, streets. Longer streets require more street lights and so on. There will be more infrastructure to maintain and eventually replace.

There can also be higher operating costs for general city services such as police and fire protection. The police department will need more vehicles to patrol the more spread out area. More fire stations will be need to be built, staffed and provided with trucks to maintain an adequate response time in a less densely built environment.

Whether a city with this type of land use is or will experience fiscal stress because of the higher infrastructure and operating costs depends on local market conditions. If the private buildings are valued high enough, then they will support the property taxes that are needed to maintain the greater burden. Some low-density or sprawling neighborhoods represent a severe burden for a city while others may be a net contributor to municipal coffers. It all depends.

When Sprawl Might Matter: Right Side of Town

A sprawling neighborhood becomes a problem for municipal finances when there is insufficient demand for those communities. The condition of the overall metropolitan or citywide market and specific submarkets make all the difference. On the macro level, metropolitan areas face different degrees of demand by households and businesses. This can depend on the health of local businesses, amenities and levels of services among other things. Cities with less overall demand will have a harder time supporting a lot of higher cost suburban development. Cities in high demand will find it easier.

Within an urban area, the location of the neighborhood can make a great difference in overall demand. The problem is that in most metro areas, only a fraction of the neighborhoods are in high demand. This has been referred to as the favored quarter concept.

The idea is that the high-demand, and hence, high-value neighborhoods tend to be all on the same side of the traditional downtown and they then to be clustered into about 1/4th of the overall city. In Dallas, this quarter is on the north side. In Houston, it is to the west of downtown. In Fort Worth, it is on the southwest side. A series of interesting maps showing favored quarters across the U.S. is found here.

For individual suburbs it can make all the difference in the world where they happen to be located. One group of former farming communities will inherit the good fortune of being in the path of the ever-expanding favored quarter. These suburbs will have an easier time, overall maintain infrastructure and services because of their higher-demand properties. Sprawl may be sustainable for some of these cities indefinitely. That is, if they are not someday passed by for even newer communities further out in the favored quarter. Sprawl has the most devastating impact on suburbs that are on the “wrong” side of a metropolitan area. They may not be able to sustain their existing suburban infrastructure and municipal services once their original neighborhoods begin to decline in value (become less appealing on the market.)

For central cities, they generally include the full spectrum of these suburban neighborhoods. It is an empirical question whether the central city’s favored quarter can support the infrastructure and service needs of the entire city. This often motivates cities to attempt redevelopment projects that increase demand for lower-end neighborhoods. Gentrification often follows.

When Sprawl Might Matter: Density

There are also degrees of sprawl. Across the nation, there is a clear difference in residential density in the suburban parts of cities. Generally, the further west one goes, especially in the sunbelt, the denser the neighborhoods are. This reflects the changing climate across that vaste region. In the Southeast, there is more leap-frog development with large open spaces maintained between subdivisions and larger lot sizes. In the Southwest, home lot-sizes are much smaller in relation to house size. Suburban densities are four times higher in cities like Phoenix or Los Angeles than they are in Atlanta or Raleigh. Texas cities have suburban densities that are somewhere in between. All things being equal, these different densities require different amounts of infrastructure to serve. This means there will be differing costs for these regions at least when it comes to infrastructure There is not a lot of data on differences in service costs when we have different types of suburbanization.

A final fact to consider is that we have examples across the country of failed neighborhoods with every type of residential land use: high-rise tenements, brownstone row houses and single family home neighborhoods. All these having fallen into decay and abandonment, usually for some of the macro-level market conditions we listed above. For that reason, we need to look beyond the simple arguments that suburban sprawl is unsustainable. It certainly is less sustainable, but that relative qualifier makes all the difference for specific cities.

Next week, we take a slightly different angle on the costs of sprawl by considering the economic benefits cities give up when they switch from more urban to more suburban neighborhood patterns.

History of Fiscal Crises

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Introduction

As we pointed out recently, from a fiscal point, there has never been a golden age for American cities. The history of cities in this country is also a history of reoccurring fiscal crisis. Our cities seem to have been in hard financial times since they first grew from small towns and added modern services.

Early Urbanism in the U.S.

There were few real cities in the U.S. until the mid-1800s. City growth was tied to industrialization. Before that, professionalized city services and major capital projects were few and far between. This kept city spending low along with the risk of overextending financially.

The founders did not comprehended cities in the Constitution, which limited its attention to powers of the national and state government. The 10th Amendment reserved rights for states to set policy on the remaining, unnamed issues. States focused their attention on enabling counties to provide limited services to the mostly rural population.

Throughout the century, local communities lobbied state governments to continually increase the scope of city responsibilities. Population growth, new wealth and new technology made cities more complex and challenging to live in. As towns grew, states supported citizen-led charter initiatives to create new cities.

By the end of the 19th century, cities had added the authority to provide the range of services, that a modern urban dweller would recognize and expect: water, sewer, streets, police, fire, waste, parks, libraries, and so on. At the same time, state governments had imposed severe restrictions on local governments that prevented cities from directly administering those services. The most common arrangement was for state legislatures to appoint boards of local citizens who would administer the budgets and staff of city departments. Even the nation’s greatest metropolis, New York, in the 1890s only had direct control over a fraction of its budget.

State control was imposed to establish political party control at the local level. Cities were now important and city jobs and contracts were key prizes in political patronage systems. State control was also motivated by a series of municipal bankruptcies from poorly thought out and executed capital and economic development projects.

Cities were growing and their economies were becoming more complex economically and, as mentioned, their citizen and business leaders were seeking more modern services and infrastructure. Under our fiscal federalism system, localities were in keen competition with each other. They began taking on increasing amounts of debt. A series of financial crises and a major economic slow-down or depression in the 1870s revealed the precarious state of these cities finances. The response was state legislatures imposing those restrictions on city operations.

Modern City Financial Crises

Things didn’t improve much in the 20th century. The public administration revolution brought a more professional civil service to the national and some state governments. The initiative had less impact on localities. Local accounting practices were still poor. This made oversight very difficult. initiatives at There have been a series of financial crisis phases in American cities so that it is questionable whether there has ever been a time when cities were financially sustainable.

Localities also innovated ways to circumvent state debt restrictions. Again, much of the debt was for capital projects, but increasingly cities turned to debt to fund their newly professionalized police and fire departments and to support growing park and library systems. Poor management practices and lack of reporting or oversight requirements meant cities were operating recklessly. This behavior was exposed by the Great Depression.

Following WWII there was another, more surprising fiscal crisis era. Our metropolitan areas were generally booming. The problem, however was that within metropolitan areas, central cities were reaching their peak population. They became land-locked, unable to annex land because they were being surrounded by newly incorporating suburban cities. At the same time, older central cities were losing middle-class households to the suburbs. In addition, there was increasing out-migration from older cities to southern and western states. These changes brought about a period of sever central city financial crisis, especially in older regions of the country.

In the last half of the 20th century, the sunbelt boomed as formerly small cities grew into large multimodal metropolitan areas. New suburban expansion in the form of homebuilding and a retail explosion fueled city coffers in the South and West. Throughout the period, many older cities either continued to decline. As in the past, economic recessions revealed that U.S. cities were not so financially sustainable, even in the Sunbelt.

The 2001 and Great Recession finally saw a change in municipal philosophy. Cities were no longer able or willing cover financial crises with a mixture of tax increases and budget cuts. Cities North, South and West used mostly budget cuts to get through the dotcom recession. The situation was even worse in the Great Recession. Throughout the 21st Century, city spending levels bounced up and down, but in most cities they have not broken through to new highs. It appears that cities seem to have entered a period of sustained fiscal stress in the good and bad years.

What’s Next?

Given this timeline, we can see that there have been city financial crises as long as there have been modern cities. As cities have grown, they have continually run up against external economic pressures that challenge the traditional ways of doing business. Changes in the larger economy have continuously threatened cities as they first scrambled to modernize to serve an industrial population, and in recent decades, as population migration and economic change pulled the rug our from under these cities again. What can be done about it?

The answers are likely to be different for each community. Our brief fiscal history here only hinted at some of the many causes of fiscal stress for U.S. cities. The solutions will involve addressing the ways cities operate, their financial practices and the way they deliver services. A better way forward also means shifting away from the high-cost, subsidized economic development practices that more than once have undermined the fiscal health of communities they were attempting to help. In the following weeks, we will take a closer look at specific fiscal threats to our cities and what can be done about them.

Issues for 2017

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Introduction

We want to start the new year suggesting some important themes and issues local leaders will face in 2017.

Infrastructure

Both presidential candidates promised big infrastructure initiatives. From all indications, the Trump administration will take a different approach than past presidents. In keeping with his campaign themes, the objective appears to be promoting economically viable upgrades in key systems. The method will rely more on incentivizing public-private partnerships than by providing direct funding to states and localities. This may take the form of localities partnering with business to finance projects with the private sector paid back through operating revenue. One consequence may be that communities with weak economies will have fewer infrastructure opportunities. Healthy communities will be in a position to further their advantage by attracting more private investment capital.

This may be a window for localities to implement pilot smart cities initiatives. Broadband should be their priority given its potential to support business and workforce development. Success there will mean finding ways to make it sustainable to serve low-income communities.

Migration and Jobs

Interstate migration rates are returning to pre-Great Recession levels. There has been a long-term decline in migration in recent decades, but the Great Recession caused a dramatic reduction. Lack of new job opportunities outside tech hubs and energy producing regions kept people in place. We should see even more migration to western and southern states in the new year. Growing areas will face new service and infrastructure demands. Communities losing population will be trying to manage their public sector with a smaller economic base.

Migration in 2017 will reflect low oil prices. Energy producing regions will generally not be such strong draws. Though, Texas should continue to see migration to cities in the I-35 Corridor: Dallas-Fort Worth, Austin and San Antonio which have more diverse or tech-focused economies than Houston. Florida, Georgia and North Carolina will continue to grow in the South. The Rocky Mountain West will keep attracting California migrants.

Nationally, we can expect to see continued weak labor markets. 2017 will bring more headlines of workers being replaced by software and machines, the continued growth in the gig / freelance economy. Recent research shows that most new jobs created during the recovery were non-traditional contractor or part time. This trend will continue. Automation will continue reducing the need for corporate-based manufacturing, administrative, retail and even white collar jobs. Local leaders will face fewer more difficult challenges. They will need to adapt their economic development strategy. The objective will be to craft cost-effective ways to make their communities easier places to start businesses and train for a constantly changing and narrowing labor market.

Watch out for the States

As always, one of the biggest factors in local finance and development are policies by state legislatures. With legislative sessions starting soon, local governments can expect more efforts to limit their flexibility and potentially change economic development policies. State budgets are relatively stable, except with lower revenue in energy producing regions. Local leaders who want to preserve their freedom of movement need to pay close attention to these bills and rally their representatives and senators to their position. Restrictions on economic development incentives may emerge in several states, including Texas.

Not So Purple

The presidential election once again highlighted the biggest divide in America – that between urban and rural areas. The fault lines fall somewhere in the suburbs. Older suburbs share many policy and cultural similarities to central cities. Newer suburbs, exurban and rural areas similarly have some political affiliation. Economically, however the nation’s MSAs have little in common with rural America and small towns. Federalism once permitted states to set their own policies in key areas. Today, the individual states are often divided. Solutions will not be easy when it comes to key community building strategies like business and workforce development. Employment and income is increasingly concentrated in a few dozen MSAs. Most other regions need to learn to manage with stable or declining economies.

Holding the Line on Expenses

With housing prices continuing to increase this year, property tax revenues will improve in many communities, especially in the large metro areas. Local leaders will face pressure to restore services cut in recent years. As the largest budget categories, police and fire funding can easily consume all new revenue. Infrastructure backlogs also demand attention. At the same time, cities need to begin thinking of ways to shore up pension and retirement benefit systems. Current asset price highs have papered over structural problems in many public pension programs, but a market correction would reveal many unsustainable systems. Prudence recommends that citizens and local leaders pay close attention to the upcoming budget. These relatively good budget times are opportunities to replenish rainy day funds and have serious conversations on building a more sustainable public finance. These conversations should address the appropriate role of local government, sustainable service levels and innovative ways to achieve acceptable results for less money.

We hope you have a safe and prosperous 2017!

Causes of Fiscal Stress

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Introduction

We spent the last several weeks outlining a framework to improve municipal financial sustainability including goals, indicators, community engagement and long-range planning. Today we introduce potential sources of fiscal stress for America’s cities and towns. Every community is unique, but many of these factors are impacting most places.

Two Centuries of Change

There was no golden age of sustainable urbanism in the U.S. Urban America has grown and changed continuously for two hundred years. (Before that there was no significant urbanism, only a handful of small towns.) Towns grew into cities and conditions and concepts of fiscal health changed with them. These changes altered what was economically viable for businesses, households and city governments. Population growth, new techniques and modes of organizing were reinforced by new energy sources like coal and oil. Growing wealth, knowledge about public health and sanitation and political and cultural changes increased demand for more services and influenced the way cities were built and the way municipalities operated. As cities aged and economic competition increased among them winners and losers emerged and economic health varied across the country. Always, these shifts influenced new rounds of public and private cost-benefit calculations.

The simplest definition of municipal financial health is that municipal operations are not so large or complex to be sustained through its existing revenue system. The local private economy that is the source of wealth for government operations may or may not be capable of supporting higher revenues. That circumstance will vary from place to place. When a city’s circumstances change from fiscal health to fiscal stress it may be because of internal or external changes or both. Solutions will also vary depending on local circumstances. Changing service levels, trying to enhance the local economy or both may make sense. Making the right choice as a community depends on what specific factors contributed to the fiscal stress. There are several candidates to consider. Some of these changes have been happening throughout U.S. urban history, others have been more important at certain times. Some are a bigger factor in some parts of the country that others. We present these in no particular order, though evidence exists for all these in at least some cities today.

  1. Landuse that no longer takes advantage of traditional urban form (positive spillovers from proximity and agglomeration.) Spatial segregation of uses, too much private land in unproductive uses like parking and setbacks are examples. This requires more infrastructure per acre and more municipal fleet and staff requirements to serve the private sector.
  2. Economic changes in the location, size and mix of industries and businesses. Technology change and continuing competition shift the fortune of local industries. In some communities, the tax base declines. There are also fewer self-employment opportunities nationally as industries become dominated by larger firms.
  3. Shrinking tax base from a shift in tax types. Over the 20th Century, taxation generally became more regressive. Property taxes and sales taxes tend don’t generally increase proportionately to higher household incomes.
  4. Changes in fiscal federalism. Federal government aid to cities grew over the last century, but began declining in the last 40 years. Many states have not increased local aid, resulting in a net decrease in this revenue source to cities.
  5. Post WWII pension and retirement benefits have become a growing burden for local governments as their workforces matured. The dependency ratio increased as even the Sunbelt boom towns built out. Health costs have recently grown much faster than than any revenue source or other spending categories.
  6. Higher debt service. This may be a symptom of stress when it results from using debt for operations. It can be a contributor to stress when the underlying economic base weakens and what looked like prudent investments in years past become stranded sunk costs.
  7. National and regional population migration that weakens the markets of origin and increases service demand in the destination markets. Origin cities see a decreasing private sector trying to support the operating and infrastructure of a formerly larger city.
  8. City growth. As cities grow in population, their spending per capita increases faster than population growth. This has been the case since industrialization in the mid 19th century. Americans continue a long-term trend of crowding into larger cities and suburbs where demand and provision of services is at a much higher level than in small cities and towns.
  9. New awareness of public health and environmental risks promoted greater demand for infrastructure upgrades especially in water and sewer systems. Citizens have also generally demanded high levels of public safety protection.
  10. Technology innovation has also added to the service burden of cities. For example, development of steam-powered fire engines allowed a smaller crew, and lower brigade costs. However, formerly volunteer or privately funded services moved onto municipal books.

This is a long list and we will spend much of the new year taking a closer look at some of these. Finding answers for financially strapped communities means not making reactionary decisions. Solutions based on fads or what another community tried can squander scarce resources. Cities did not become fiscally stressed overnight. Some of these trends have been in place for well over a century. Change for the better will probably need to be gradual and thoughtful as well. There is no golden age of American urbanism to return to, but most every community has the capacity to make positive changes. We will need to work out the answers that make sense in each place.

Next Week

Next week, we will present a few predictions for economic development and municipal finances for 2017. If you would like to know more about how Axianomics can help you put your community on a more sustainable path let us know.

Planning for Fiscal Sustainability

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Introduction

We are continuing our series of posts on building a more sustainable community. This week we introduce a framework for long-range planning that can tie together the elements we have introduced over the last several weeks.

Context and Scope

The Government Finance Officers Association provides a good introduction to long-term financial planning. Their definition of long-term planning as a combination of forecasts and strategy is useful in the context of fiscal sustainability. Forecasts are our best educated guesses of how key economic and finance variables are likely to change. Strategy is simply considering how those forecasts may impact our goals and identifying actions to improve the chance we get outcomes we want. This is all easier said than done.

Every city has an annual budget process, but planning adds new dimensions and takes time. It requires more than just looking further down the road. It also requires a more open and transparent process where city staff can support local leader decision making and help the public understand the costs and benefits of different levels of public services.

Though planning takes time, any community can afford some level of forecasting and strategic assessment. The key is finding the right balance. One option is to include phasing the process in over a few years, adding more functions. Another approach is to do long-term forecasts for select departments every few years so that all city operations are addressed at least once every two or three years.

The most important factor is that long-term planning become part of the annual budgeting process. The forecasts can help assess risks and needs in the upcoming annual budget. The extra value comes from the longer-term forecasts and how their results can inform changes in overall financial policy. These forecasts can also identify the need be proactive with operating procedures and capital projects.

Key Elements of the Planning Process

Using the GFOA outline, here are our recommendations for how to set up a long-range planning process:

  • Time Horizon – five years is adequate for operational planning. Economic forecasts are unreliable beyond five years. If a community wants to consider longer term consequences they should identify a number of long-term scenarios with varying economic conditions and service assumptions. They can then simulate how these would impact their budget and key fiscal sustainability indicators.
  • Scope – The plan should cover all major funds. The general fund is the priority, but enterprise fund analysis can be just as important to maintaining the viability of those fee-based operations.
  • Frequency – Communities should evaluate at least some of their economic, revenue and operating drivers annually. This helps make the long-term approach a recognized and expected part of the process for decision-makers and the public.
  • Content – The plan should include all types of financial indicators discussed last week: economic and demographic, revenue, spending and operations, debt and infrastructure.
  • Visibility – The plan needs to be a highly visible part of the annual budgeting process. As we pointed out previously, community engagement is key to making these key decisions with public input.

Willingness to pay for services and decisions on priorities require solid public involvement up front. If not, a community may find it difficult to sustain those efforts down the road.

Engagement and City Staff

If communities are going to become more fiscally sustainable, dialogue is at the foundation of the process. We recommend community engagement at each phase of the process. Citizen advisory councils can help staff and local leaders communicate the complexities to the public. By carefully nurturing this translation process, city staff and local leaders can make sure that citizens can constructively contribute to the discussion.

Running a more open and transparent process may raise staff concerns. Staff may worry about their ability to deliver effective and efficient services if the public has greater access. The opposite may be true, however. Current budgeting practices wait too long to engage the public. Cities build a proposed budget and have a big reveal when elected officials and engaged citizens can react. This process involves too much confrontation and can feed public cynicism about government and bureaucrats. In the public reaction, sometimes the political consequences are that staff knowledge and experience is ignored and decisions are made based mostly on emotion.

That technical knowledge found in city halls across the country can be better used in a well-coordinated long-term financial planning process – if that process is inclusive and transparent. Staff can support public decision making with their skills and experience. They become like consultants to local leaders and the public in the planning process. They can help others understand the costs and benefits of short term budget decisions. They can also help local leaders understand the long-term consequences of major changes in the economy and city services, (or be the translators of that information if provided by outside consultants.) In this way, a more open, long-range planning process should strengthen the role of city staff, help local leaders make better decisions and lead to results that are more satisfying to the entire community.

Next Week

Next week, we begin a series of posts looking at some of the major causes of current city financial stress.  Axianomics can help your community implement a long-term financial planning process. Let us know what you want to accomplish.

Indicators for Fiscal Sustainability

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Introduction

We are continuing our series on building a more fiscally sustainable community. This week we will look at standard fiscal indicators and how they can help local leaders make more sustainable fiscal and economic choices.

Broad Categories of Indicators

There are two broad categories of fiscal and economic indicators. The first category covers economic or social activity outside the organization. These include measures of community population, jobs and other economic and demographic indicators. These are important because they determine municipal resources through the tax base. They also influence need for municipal services and infrastructure spending.

The second class of indicators measure features of municipal operations and finance. These are internal or organizational indicators. These reflect a combination of policy choices by the city and the influence of external indicators.

There are many metrics in each category. Our review will focus on high-level, summary indicators. After starting with these high-level indicators, each community may want to identify more detailed metrics that are important for its circumstances.

Revenue Indicators

Most cities begin budgeting and planning by reviewing revenue performance and projecting future revenue. This is practical, but communities could just as easily start budgeting by looking at service needs. It would be an interesting experiment if a community were to begin budgeting with an ongoing engagement process similar to the one we discussed in recent posts. The goal would be to developed a budget that citizens were willing to pay for. This might support sustainability by starting with citizen willingness to pay rather than automatically budgeting to the maximum available revenue. Whatever process a city uses, key revenue indicators for sustainable finance include:

  • General operating revenue by source in total and per capita terms
  • Grant and other inter-local agreement revenue

Operational / Service Indicators

City revenue sources differ some from state to state, but spending priorities are similar. Public safety, parks, libraries, streets and other infrastructure dominate general fund spending in every city. Detailed studies of major programs can find potential improvement and efficiency opportunities, but tracking overall spending is a good place to start. Important service indicators include:

  • Growth in total and per resident expenses by function or department
  • Total employment by function and department

Operating Position Indicators

A city’s operating position means its ability to balance its budget on a current basis with current revenues. A sound operating position will support day-to-day liquidity and prevent a city from having to dip into operating reserves for ordinary expenses. Every city will experience periodic emergencies, but repeated drawdown of reserve funds is a sign of long-term structural financial problems. In these cases, a city needs to have a serious conversation with taxpayers. The community needs to decide if it is willing and capable of supporting current service levels or whether city operations need to be simplified. The most important operating position indicators include:

  • Total annual revenue minus total spending
  • Liquidity measured by ratio of cash and short term investments to current liabilities
  • Fund balances

Debt and Infrastructure

It can be helpful to citizens and decision makers to report debt indicators with key infrastructure indicators. This will improve understanding of the conditions of city capital assets in the context of debt capacity. Key debt and infrastructure indicators include:

  • Net debt per-capita
  • Total debt-service as a percent of tax base
  • Road, bridge and other asset conditions

External Indicators

There are many economic indicators that help local leaders understand what is influencing city spending and revenue. The most important to track are total population, total households, household income and jobs in the city. Central cities may also be interested in measuring commuting and other indicators of how their services are supporting nonresidents.

Fiscal analysts and economists have identified hundreds of potentially useful indicators. It is a good idea to start with a small set and learn what you can from them. Any community will gain important insights from the few listed above. For more detailed information you can consult the Government Finance Officers Association and the International City/County Management Association.

Next Week

Next week, we will look at the long-term financial planning process for fiscal sustainability. For more information on how Axianomics can help your community build and use a fiscal trend monitoring system, fill out our contact form.

More Community Engagement for Sustainable Planning

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Introduction

Last week, we emphasized the importance of citizen involvement to build a fiscally sustainable community. This week, we focus on specifics to help local leaders and the public move away from reacting to day-to-day challenges and toward a longer-term discussion on priorities.

Stuck in the Present

Local leaders and the public will benefit from an ongoing two-way engagement. Currently, both sides tend to react to limited feedback. Local leaders mostly only hear complaints about specific service problems. Average citizens have a limited concept of municipal operations and tend to lump all public services under “government” no matter what level of government is responsible. For these reasons, current communication tends to support reactionary responses.

Elected local leaders get a general affirmation from success at the polls. Voter feedback is typically responding to high-level priorities promoted by the candidate. Municipal elections seldom depart from generic calls for fiscal responsibility, public safety or more economic development. It is difficult to communicate specifics while campaigning, so there is little detailed information on what exactly the voters are sanctioning the candidate to do. Typically council members and mayors begin exploring options once in office.

Professional city staff like City Managers, Department Directors have detailed knowledge on how to help elected leaders deliver on campaign promises. These staff, however are often overworked and struggle to maintain existing services. They spend much of their time “putting out fires” that are called out by public complaints. It is difficult for staff to have the time to maintain an ongoing dialogue with the public.

The public is also generally reacting to what they perceive as failures in a limited set of municipal services. Missed garbage pickup and slow street repairs are concrete experiences for citizens and can prompt a call or email to their council member or the city’s hotline. Unfortunately, the usual way citizens learn about the more arcane public policies is through a crisis. A good example in the media lately is the serious financial stress of public pensions such as the Dallas Police and Fire Pension Fund or the Illinois Teachers Pension Fund.

Even in circumstances where two-way conversation is possible, such as town hall meetings, the items under consideration are often only incremental changes in the budget. There are few instances where the public has the chance to reflect on long-term policies or discuss the overall vision for their communities.

Tools for Citizen Engagement

Building a community engagement process that shifts a city from reacting to proactive discussions about the future takes time. This is a cultural shift that will need to be implemented over the long-run. There needs to be education all around – for elected and professional leaders and the public. It is best if cities start with a specific issue or take advantage of the rare opportunities that come along with strategic plans or citywide comprehensive plans. Each community should thoughtfully explore how it wants to conduct the engagement process. Some helpful questions to ask include: Is this process for a one-time action like a city strategic plan or comprehensive plan or for ongoing feedback for a city service? Are citizen interests homogeneous or are there specific groups or neighborhoods that are more affected than others? What is the budget in terms of staff time and funding for conducting the engagement process?

With goals in hand, there are many tools for improving community engagement. One-way methods to communicate issues and options to the public include council briefings, reports on city websites (such as budget documents, performance measures or annual financial reports) and citizen surveys. Two-way methods include the notice and hearings process, town-hall meetings, focus groups and facilitated feedback sessions and social media.

Both one-way and two-way tools have a role to play. The important thing is to use the tool with the intention to shift the discussion to questions of long-term priorities and sustainability. This requires asking the public to consider the costs and benefits of city programs, services and investments. It also requires getting citizens to think explicitly about when those costs and benefits will happen. As examples, some choices have high up-front costs and offer benefits over the long-run. This includes investments in infrastructure paid out of current funds. On the other hand, using debt to fund infrastructure spreads costs among taxpayers today and in the future.

Everyday Language and Citizen Perceptions

Once cities select their communication tools, they can focus on the content. City budgets and operations are very technical. Successfully engaging the public means local leaders translating cityspeak into terms the public can understand. One approach is to recruit a volunteer community group to review presentations and reports to identify confusing terms and jargon.

The public also needs to understand the big-picture of city operations, not just the high-profile services they see every day. Police, fire, streets, parks and libraries are visible. The attorney’s office, fleet management and debt service are among the many mostly invisible city functions. Concepts like “overhead” are a useful term for summarizing support departments. Debt burden can be broken out by service area showing what past investments are being paid off. For example: 50 percent for streets, 25 percent for parks and 25 percent is for the new library.

Finally, local leaders can help citizens understand municipal services and finances in the overall context of local government. It is easy for tax payers to confuse what their money is funding. Simple summaries of total local property tax by school district, county and city government help citizens better appreciate exactly what they pay for municipal services. This can help citizens give good, specific feedback on exactly what is important to them.

Next Week

Next week, we will identify some specific metrics that local leaders can use to track and communicate the fiscal and economic health of their communities. For more information on how Axianomics can help your community start a community engagement process fill out our contact form.

Community Engagement for Fiscal Sustainability

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Introduction

Last week, we looked at factors that influence local leader’s ability to put their communities on a more sustainable fiscal path. Today, we will look at how changing the public engagement process is essential to achieving better long-term fiscal outcomes.

Citizen Demands and Changing Economic Circumstances

The U.S. has a strong tradition of community input into local government decisions. Immediately after the American Revolution, local offices that were once appointed by colonial governors became elected positions. The New England Town Hall model practiced direct democracy even earlier. Historically, citizens participated in local politics by voting, campaigning or running for office, attending hearings and keeping up through the local press.

The current mix of municipal services came about through a long-term process of increasing citizen demands for government as the economy grew and changed. This took many decades. As the economy grew and became more complex with industrialization, communities across the country sought new city services: professional police and fire departments, better streets, water supplies and garbage disposal. City budgets grew with their local economies and the changing ideas about the appropriate role of government.

The scope of municipal services has changed very little in decades. Yet, economic and fiscal conditions are very different than in the era of growing local government. Today, many cities face ongoing financial stress. The reasons for this stress come on the spending and revenue sides of the equation. There are growing salary, benefit and retirement costs and a seemingly never-ending list of technology and equipment upgrades. At the same time, the tax base has stagnated, even in communities with growing economies. Growth in services, declines in manufacturing, internet sales and other factors have reduced the share of the economy subject to local taxation. In the face of these new constraints, demand for city services have not changed. Any hope of improving local fiscal sustainability must begin with new conversations with and among citizens.

Reexamining Demand and Costs for City Services

Many cities appear trapped in an incremental budgeting process. They practice an ongoing series of short-term adjustments to deal with what are long-term, structural challenges. The results gradually weaken city services, harm morale and recruitment and increasing citizen frustration. Incremental budgeting is a prudent strategy in good financial times. It slows spending growth. It also works during temporary downturns by managing painful cuts until funding returns to a growth trend. It is not a great strategy when communities face systematic financial stress. Incremental budgeting becomes kicking the can down as financial strain builds.

The solution is a deliberate engagement with the public that goes beyond the annual budget hearing. The challenge is to have conversations on priorities that help local leaders make tough decisions with the full support of their constituents and stakeholders. Local leaders need to begin a new community engagement process if they want to achieve lasting reforms. Historically, public participation in municipal finances was annual outreach for input on the proposed budget. That budget seldom represents a major departure from the previous budget. Town hall participation is usually very low. Programs facing cuts rally friend’s groups or neighborhood associations, but there is little real dialogue and the point of contention is simply a change in funding levels. There is no discussion of priorities in the context of long-term change. There is no really useful feedback to local leaders who what to build a more sustainable city.

Information for Change

The economy is always changing. Recent trends have been hard on local governments. Nationally, job and income growth is becoming more and more concentrated in fewer and fewer localities. Migration, rural to urban, and from north to south weakens the tax base in the cities losing businesses and residents. The destination cities face growing service demands and the risk of budget hangover down the road. State and national government finances are in little better shape so not much help can be expected from them. Cities need to develop a clear picture of their economic foundation and how that is changing. Local governments should be rethinking their services and operations with these long-term changes in mind.

Local leaders also need to develop good measures of the costs and benefits of municipal services. This is the only way to determine what a sustainable level of services might look like. Municipal services can be very technical, but this information needs to be collected and packaged in a transparent way so it can support a serious public discussion. Communities need this information to set priorities and identify when they need to look for alternative, lower-cost ways of achieving their goals.

Armed with this strategic economic and operational information, local leaders can start having conversations with their citizens. This type of engagement can change public perceptions of local government. The current approach wears down citizens and city staff and nurtures nothing but a mindset of diminished expectations. This can be demoralizing and wasteful for a community. When presenting a clear description of the long-term costs and benefits of city services, local leaders help citizens explore and articulate what is most important. The community can begin to feel empowered and in partnership with their government.

Next Week

Next week, we will take a deeper dive into community engagement and look at specific practices to build citizen participation and commitment. Part of the answer is helping citizens reimagine their role in creating a more fiscally sustainable place to live. In the meantime, let us know how we can help your community begin the journey to fiscal sustainability.