Category Archives: Municipal spending

Being a Fiscal Impact City: Long-Term Planning

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Introduction

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

Framework for Long Term Planning

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

A summary of the key steps should include:

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

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

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

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

Role for Fiscal Impact Models

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

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

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

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

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

Being a Fiscal Impact City: Capital Budgeting and Asset Management

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Introduction

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

Framework for Capital Budgeting

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

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

Using Impact Analysis for Sustainability

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

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

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

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

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

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

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

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

Becoming a Fiscal Impact City: The Budget

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Introduction

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

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

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

A Framework for Budgeting

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

Qualities of a Good Budgeting Process

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

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

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

Sustainability Budgeting and Fiscal Impact Analysis

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

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

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

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

 

Sustainability Questions for Communitywide Engagement

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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.

Cities, Change and Sustainability

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Introduction

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

Fiscally Healthy City

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

 

The Fiscal Cycle

City Fiscal Cycle

Stylized History of U.S. Municipal Finances

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

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

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

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

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

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

Neighborhood Decline and the Favored Quarter

Neighborhood Decline

You can find decaying neighborhoods of all types across America.

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

Favored Quarters

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

 

DFW Fav Quarters

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

 

Rise of Modern Cities

19th Cent City Spending

19th Century City Spending.

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

 

Safety Costs

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

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

 

Megaprojects and Capital Hangovers

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Introduction

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

Manhattan Bridge

Manhattan Bridge, March 23, 1909. Wikimedia Commons.

Risks and Shortcomings of Megaprojects

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

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

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

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

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

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

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

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

Who vs. How Much?

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

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

Measuring the Costs of Sprawl

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Introduction

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

Variety of Urban Densities

Variety of Urban Densities

Practical and Rhetorical Definitions

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

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

Density is an Incomplete Measure of Sprawl and Smart Growth

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

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

Sprawl Cost Studies

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

Need for Immediate Solutions

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

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

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.