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.

Construction in Dallas

Fiscal Impact Analysis and Sustainability

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

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

What is fiscal impact analysis?

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

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

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

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

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

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

History of Fiscal Crises

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.

Causes of Fiscal Stress

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.

Economics and Politics of Property Taxes

Introduction

Property taxes are the largest source of general fund revenue for local government in Texas and across the U.S. This tax is more stable than sales taxes when it comes to economic cycles. It is also more important in Texas than in most other states. It often escapes public perception, but cities account for a very small share of the total property tax burden.

Property Tax Nationally

The Rockefeller Institute refers to property taxes as the financial backbone of local government in the U.S. It accounts for nearly three-quarters of total local tax collections and is the main way localities fund K-12 education, police, fire, parks, and other high-profile services. Property taxes are also the foundation of a local government’s capacity to issue debt for capital projects. Local governments collect over $400 billion annually in property taxes.

Texas Property Tax

The current property tax system in Texas dates from 1979. In that year, reforms were implemented to the local property tax process and the final vestiges of the statewide property tax were eliminated. In Texas, counties, cities, school districts, municipal utilities, community college districts and other special districts may levy a property tax.

Property tax is levied on land, improvements (structures) and revenue-generating personal property (also known as business personal property.) When homeowners and businesses receive their estimated tax bills in the fall, they are seeing the combined tax owed to all local governments. According to data from the Texas Comptroller, in 2014, $49.1 billion in property tax revenues were collected by local governments. The largest share was for school districts. Schools consumed 55 percent of all Texas property taxes. Counties took the second largest amount at 17 percent. Cities accounted for only 16 percent of the total. Special districts claimed the remaining 13 percent.

Residents and businesses often fail to notice the distinction when faced with the total tax bill. This can be a challenge to city leaders. Not every household has children in the local schools, but core city services are familiar to all and used by many. In the public eye, their total property taxes may appear to go entirely to support police, streets, parks and libraries. It is easy for citizens to note deficiencies with these city services and then compare them to their total tax bill.

The risks for city leaders is compounded because total collections by other local governments is increasing faster than for cities. Since 2009, total property tax collections have increased by 23 percent. City property tax revenue increased by 19 percent. At the same time, school districts took in 23 percent more revenue. Counties saw a 25 percent increase in property taxes. City leaders may need to assume a greater role in educating constituents on this issue.

Economics of Property Taxes

Property taxes are a sort of stabilizer on municipal budgets. In economic downturns, appraised property values respond slowly. The full effect of a downturn may take several years to be registered in property values. Nationally, property tax revenue fell for three years after the bottom of the Great Recession. If that decrease had been as quick and automatic as the decrease in sales taxes, the necessary budget cuts would have been devastating to local governments. The slower decrease gave local leaders time to streamline and reorganize services. Further, since cities set their rate annually, they have some flexibility in adjusting to changing economic conditions.

In Texas, state “Truth in Taxation” automatically gives cities an effective tax rate that yields the same revenue as last year. Falling property appraisals drive up these effective tax rates automatically. By simply adopting the effective rate, a City Council can avoid the risk of a roll-back proposition and election. In very difficult economic times, however, City Councils may choose to adopt a lower than effective rate, but they need not do so under state law.

This process works in reverse as well. In a booming real estate market, the slow adjustment of appraisals, and in Texas, the threat of a roll-back election, puts a damper on municipal budget growth. This also helps city leaders by encouraging them to plan carefully. There is a perpetual need for basic services regardless of where we are in the economic cycle.

Next Week

Come back next week where we will look at the second largest general fund service for most cities – fire / rescue operations. In the meantime, sign up for email updates and let us know how we can help.

Development is more than economics

Welcome

Axianomics helps local leaders make tough fiscal and economic development calls with confidence. We are glad you found our blog. Here, we will track municipal budget and revenue trends, highlight effective development and capital investment practices and update you on the economic indicators that matter. We use this first post to introduce our perspective on public finance and economic development. We also discuss Axianomics’ services that will help you maximize your return on development investment.

Our Perspective

All politics are local, because the economic consequences are felt locally. Governments make choices that impact the economy. Then, the health of the economy sets the practical limits on government action. When policy recognizes the economic and political dimensions of development, the choices governments make can strengthen the economy. More private investment can be levered to complement public spending to achieve the community’s goals. Economic strategy and implementation must be inclusive to reduce political obstacles and make the most of public and private resources.

People we Help

If you take responsibility for your community’s fiscal and economic health, we are here for you. We define local leadership broadly. You may be a City Manager, CFO, budget or economic development director. You may be an elected official or a business or community advocate. Regardless of your title, if you are vested in your community making more effective and efficient development choices, we can help. We ground our research, forecasting and impact analysis in your local context. You don’t make choices in a vacuum. Your political and economic reality probably includes some or all of the following:

  • Competition, near and far, for talent and investment,
  • Shifting industry and workforce fortunes,
  • Citizens who want more efficient, transparent and responsive government,
  • Organizations with outdated worldviews, models and processes, and
  • Legacies of good and bad choices from the past

Our Capabilities

We bring the best analysis and most effective perspectives. We can do this because we focus on the ways research and analysis makes the biggest impact at just a few points in the policy process. We work where it helps most during: Discovery, Strategy and Validation. We offer:

  1. Discovery tools that show the current health of your community, benchmarked against state and national trends. These include community economic profiles and asset maps.
  2. Strategy tools that help you set goals and identify options. These include economic development strategies, scenarios and economic forecasting.
  3. Validation tools that help you evaluate the costs and benefits of projects, and track progress. These include fiscal and economic impact analysis and custom community indicators.

See our Services page for more information.

What’s Next

Axianomics means the law of value. We define value broadly, because you and your stakeholders value more than just economic efficiency. A little analysis at the right time can make all the difference in the world.

Come back next week where we will review our research into changing state economic performance, and discuss what it means at the local level. In the meantime, sign up for email updates and let us know how we can help.