Tag Archives: infrastructure

Being a Fiscal Impact City: Capital Budgeting and Asset Management

Posted on by

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.

Megaprojects and Capital Hangovers

Posted on by

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.

Land Use and Fiscal Stress

Posted on by

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.

Issues for 2017

Posted on by

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!