Category Archives: Research Trends

Sales Tax and Fiscal Sustainability

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

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

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

Texas taxable sales per dollar of state GDP

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

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

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

Cities, Change and Sustainability

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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.

 

Mixed Income and Housing Variety

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Introduction

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

What Did I Say Last Week?

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

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

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

What Does Mixed-Income Really Mean?

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

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

Mixed Income Motives and Outcomes

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

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

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

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

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

Housing Mix and Traditional Neighborhoods

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

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

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

Issues for 2017

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Introduction

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

Infrastructure

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

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

Migration and Jobs

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

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

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

Watch out for the States

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

Not So Purple

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

Holding the Line on Expenses

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

We hope you have a safe and prosperous 2017!

Causes of Fiscal Stress

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Introduction

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

Two Centuries of Change

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

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

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

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

Next Week

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

Research You Can Use: September 2016

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Introduction

The last week of each month we bring your attention to valuable trends we discovered in our reading. This month we want to draw your attention to the challenges and opportunities that drones present to cities, a national spotlight on Texas cities’ economies and politics and the latest trends in state government revenues.

 

Cities and Drones

In June of this year, the Federal Aviation Administration (FAA) issued rules governing the use of drones in U.S airspace. U.S. drone sales grew from 700,000 in 2015 to an estimated 2.5 million in 2016. The National League of Cities (NLC) prepared a short briefing and a longer report on these rules and offer some helpful suggestions to cities. The good news is that the FAA’s final rule on drones give cities the flexibility to craft locally-appropriate policies. In particular, NLC suggests cities focus on two issues when enacting drone ordinances: (1) address drone take off, landing, and operations through zoning and land use authority and (2) have an ordinance that punishes reckless operators. There are also many opportunities for cities to include drones in their inventory for a variety of uses.

For your consideration: Cities and Drones

 

All-Texas Issue of City Journal

City Journal, a leading publication in the field released a special issue titled Texas Rising. City Journal regularly presents rigorous, thoughtful and creative writing on all things urban. Topics include how Texas’ economic strength comes, in part, from how each of its major metropolitan areas have different industry mixes. This gives Texas economic diversity. Several articles also dive into state and local politics and the fiscal conservativism and economic opportunity that makes the state a magnet for business and families. At the same time, migrants from other states may be putting pressure on some communities to take stronger regulatory roles.

For your consideration: City Journal: Texas Rising

 

State Revenue Conditions

We always urge local leaders to pay almost as much attention to their state government’s finances as they do to local conditions. State legislatures often make up for their revenue shortfalls with cuts in local aid and new mandates that can shift program costs to local governments. This month we want to share cautionary state revenue updates for Texas and for the nation overall.

Earlier this month, the Texas Comptroller’ office released its revenue report for the fiscal year that just ended. The report compared actual revenues for fiscal year 2016 to what the Comptroller’s office projected originally. General revenue in Texas came in at $49.9 billion. This was 1.3 percent below the forecasted amount. By category, sales tax, oil production and regulation tax and natural gas tax revenue were also below projection. Franchise tax revenue came in 10 percent ahead of the earlier forecast.

On the national level, the Rockefeller Institute, the leading university center on state and local finance, reported year-over-year growth in state taxes were 1.6 percent in the first quarter of 2016. Preliminary data showed state revenue decreasing by 2.1 percent in the second quarter of 2016.

For your consideration: Texas 2016 Revenues, and Rockefeller State Revenues

 

What’s Next

Next week, we will report out some of the work we are doing on local economic development and city public finance. In the meantime, take a look at these reports and let us know how we can help you make better choices for your community. Contact

Research You Can Use

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Each month we share some findings and trends we discover in our efforts to track issues that are critical for municipal success. For August, we want to call your attention to recent research on open data, advanced industries and police and community engagement.

 

Public Attitudes on Smart Cities and Open Data

Smart Cities, a catch-all for more effective government use of information technology, is a hot topic. The agenda so far has been driven by vendors with technology solutions looking for government problems to solve. City governments have been slow to adopt because of budget constraints and waiting for other cities to assume the pilot role. What about the public attitude on government and data issues? The Pew Research Center looked at public perceptions on the topic. The bottom line is that citizens have mixed opinions about government’s ability to effectively use these tools. The good news for cities is that citizens view local governments more favorably than their state and federal counterparts in this area.

For your consideration: Americans’ View on Open Government Data

 

Advanced Industries and Economic Growth

Brookings Institution Metropolitan Policy Program continues good work tracking the fortunes and role of America’s advanced industries. They define advanced industries broadly. It goes beyond traditional information technology. The focus is on any industry that extensively uses science and research-driven processes to make tangible or intangible goods. It includes sectors like autos, life-science driven companies and traditional information technology, among others. Their latest report found that 60 percent of the economic and job growth in recent years was in these advanced industries. Over 100 metropolitan areas had growing advanced industry sectors. Fifty-nine were slowing or declining over the period. The rest were flat.

For your consideration: America’s Advanced Industries: New Trends

 

Better Police and Community Engagement

As our recent blog pointed out, policing is the largest operating budget item for cities and towns, and the foundation of local government’s legitimacy in the public eye. Recent shootings across the country have focused more attention on the central role of law enforcement in our democracy. There are clearly opportunities for learning and understanding all around. Education and engagement for local governments and citizens is a good place to start. The U.S. Conference of Mayors released a lengthy collection of efforts to bring police and citizens together for dialogue. There are many great ideas and successes in these efforts already.

For your consideration: Community Conversations

 

What’s Next

Next week, we will report some of the work we are doing on local economic development and city public finance. In the meantime, take a look at these reports and let us know how we can help you make better choices for your community. Contact Axianomics.