The real reason why local governments often have to raise taxes or revenue or go bankrupt:

by trenzpruca

I usually hate it when a post begins with something like, “I was going to write about___ but___.” So I won’t. What I was going to write and did is included at the end of this Diary. It is basically a discussion of some studies regarding growth, development, and physical planning that appear in a blog called, “Strong Towns,” that I found interesting.

What I did decide to do, however, is meander a bit and speculate about some things that the blog suggested to me.

Having a career arc extending from running one of the more active at the time civil rights groups existing during the dark ages of the movement, writing much of the plan and legislation for what still remains one of the nation’s most significant land use control programs, California’s Coastal Program, and administering major portions of it, chairing California’s High Speed Rail Authority, interspersed with attempts to save the world within the counter culture, reforming a state’s mental health laws, a religion’s liturgy, a city’s approach to homelessness and so on as well as succeeding and failing at various professional, personal and financial endeavors more times than I care to admit, I have developed the arrogance to believe wholeheartedly that experience breeds wisdom and I know what I am talking about. I also have never found a run-on sentence I have written that I have not fallen in love with. (Note, for the literalists reading this, actually I do not believe that experience equals knowledge and success implies competence. There is too much anecdotal and scientific evidence floating around that supports that they do not to think otherwise.)

Because of my interest in physical planning and development and its interplay with economic, social and political thought and action, I found the studies described in “Strong Towns” worth noting for the simplicity with which they identify the problems they examine. The authors of the blog write from the perspective of consultants arguing for adaptive reuse of existing urban areas. Despite the potential self-promotion, their analysis appears spot on. They do however, it seems to me, fail to recognize that the syndrome they criticize in the suburbs eventually may repeat themselves even in the “walkable cities” they envision.

About 80% of the posts I have written, here and in other venues like Daily Kos, attempt to address, sometimes well and other times not so well, a simple contention that there may be a ghost in the machine we call humanity. That unless we consider the possibility that humanity rather than the apex of evolution may be little more than a doomed branch of the evolutionary tree and compare the implications of each assumption, we may be limiting our ability to understand what is happening and what needs to be done to assure our own happiness and survival.

For example, Malthus’ analysis of the relationship between population and resources may be only the tip of the iceberg. Consider the following from the ever perceptive Brad DeLong:

“To put it another way: In 1870 the daily wages of an unskilled worker in London would have bought him (not her: women were paid less) about 5,000 calories worth of bread–5,000 wheat calories, about 2½ times what you need to live (if you are willing to have your teeth fall out and your nutritionist glower at you). In 1800 the daily wages would have bought him about 3,500 calories, and in 1600 2,500 calories. Karl Marx in 1850 was dumbfounded at the pace of the economic transition he saw around him. That was the transition that carried wages from 3500 calories per day-equivalent in 1800 to 5000 in 1870. Continue that for another two seventy-year periods, and we would today be at 10,000 calories per unskilled worker in the North Atlantic today per day.
Today the daily wages of an unskilled worker in London would buy him or her 2,400,000 wheat calories.
Not 10,000. 2,400,000.”

Even were we to convert from fossil fuels to renewable energy will we as a species also be able to restrain our seeming insatiable desire to consume ever more resources in order to secure better lives? I am not so sure, but at least, if we do eliminate fossil fuels, we will have a little more time to see if we can figure things out.

So let’s look at what “Strong Towns” had to say:

The Real Cost of Infrastructure Development

A report, a few years ago, from “Strong Towns” a development think tank argues that the first generation of suburbia was built on and maintained by savings and investment, but the second was built and maintained by borrowing tons of money. We are now entering the third generation. We are out of savings and investment and easy money, now what do we do?

They also point out that in every case they studied, the useful life of an infrastructure investment paid for by borrowing from the private market was less than the time it took to pay back the loans. What this means is that almost every community that invested in infrastructure by borrowing will likely face the need to substantially raise taxes or file for bankruptcy should growth slow or stop.

Finally, the report found that, in almost every case where a developer paid for or otherwise donated infrastructure improvements as part of its development in return for the community assuming responsibility for operation and maintenance of the improvements, eventually the community required a tax increase to pay for their continued maintenance and replacement.

It used to be that in embarking on an infrastructure project, the costs for future operation and maintenance were budgeted for and automatically carried over to subsequent budgets or, as another way to handle it, operation and maintenance funds were established and funded as part of the original budget. One of the centerpieces of the Reagan Revolution was abolishing this practice so that his administration could appear to have cut spending in the budget while also permitting them to raid the sequestered maintenance funds to use on other programs. I know this because I was high-level bureaucrat during his administration as Governor of California and saw it first hand. Not only did this practice push-off the burden onto to future generations (like ours today) but by masking the true long-term costs, it encouraged the orgy of borrowing that marks current governmental policy worldwide. This was neither traditional liberal nor conservative orthodoxy, but a cynical ploy to obtain and hold power by pandering to the economic elite.

If it comes either to pandering to the rich or pandering to the average person, I know which side of the street I would prefer my elected politicians to set up their cribs.

At this same time, Wall Street and the banking industry were just getting geared up to promote new products to fund government by financing a host of long-term investments that would in fact rarely be paid off. Their representatives prowled the offices of both Governor Jerry Brown and Ronald Reagan as well as the State Legislature arguing that the State’s capital investments were under leveraged. They argued that trough the magic of leveraging existing capital projects money could be freed up to allow the leveraging of future good and needed projects without ever needing to raise taxes. It seemed like magic, money for nothing.

Jerry Brown, as was his predilection, was more than dubious but many of those surrounding him bought into it urging him to consider the parks and natural areas that could be preserved and the jobs created from the projects funded. Brown ultimately gave in, but to his credit, the projects he did agree to were smaller and fewer than those urged on him by his advisors.

The Reagan administration on the other hand, bought into it because many of its senior officials came out of the financial industry (The Democrats had not yet peopled their administrations with ex-financial industry personnel) and it appeared to be a good way to transfer tax revenue and spread profits around to the administration’s supporters while appearing to benefit the economy without raising taxes.

As a result, there followed an orgy of borrowing by all levels of government to fund and pay for capital expenditures. It was seen as a good way to obtain infrastructure without raising taxes. The products themselves were structured by the lenders. The resulting financial structures were often more complex than they had been previously. The legions of bankers, economists and financial advisors that descended on government pushing the loans clearly outmatched the ability of public bureaucrats, whose job it was to protect the public purse, to adequately analyze the fiscal implications of the deals. They were also cowed by the politicians who had bought into the program hook line and sinker and clamored for the projects. They also were pressured to approve the deals by their bosses, many of whom came from the industry and hoped to return there when their stint in government was over.

As a result, questionable loans were made. Things that had not been regularly financed before began to be so. At times, in the case of financing infrastructure projects, exaggerated estimates of the life of what was being financed and things like increased maintenance costs as the infrastructure aged were forgotten.

This system did not collapse like a punctured bubble as it often does in the private market because as my grandfather an owner of a construction company advised (and Paul Krugman confirms), one should contract with the government whenever they can because the government always pays their bills, no matter the state of the economy. The profits may be smaller and the money worth less because of inflation, but you had your money. (Alas, as the financial industry crept further and further into the operation of government, they demanded their profits match those they could receive in private deals. They then began to insist that government guarantee that their profits not be discounted through inflation even though the inflation may have been caused to a great extent by their own activities. As far as I know, not a single investigator has studied how and why this happened.)

Eventually, both Republicans and Democrats, rich and poor climbed aboard the bandwagon. They were followed by a host of political appointees from the industry who given their experience with these things joined government as advisors and executives. Whether they were liberal or conservative they could see nothing amiss. Republicans were happy taxes were not being raised during their watch while the private market got the contracts for the work. Democrats were thrilled for the jobs.

The real reason why local governments often have to raise taxes or revenue or go bankrupt (Hint, it is not from spending on social programs, education or public security):

According to “Strong Towns” as described above, we are now in the third cycle of suburban development in the United States.

Although “Strong Towns” analysis reflects US suburb growth patterns, it most likely also applies to larger areas and their infrastructure development including countries. What we build and pay for with debt [whether public or private] generally has not included accounting for replacement costs or operation and maintenance beyond the infrastructure’s estimated life cycle, which as a rule is less than the payback period on the bonds used to build it in the first place. This would be like borrowing for your weeks food agreeing to pay it back in installments over two weeks, then borrowing the following weeks food on the same terms hoping that somehow the nourishment can be converted into increased earnings. The syndrome compulsive gamblers suffer resemble this.

Case study: “Free roads’ are a myth”:

A group of high-value lake properties petitions the city to take over their road. They agree to pay the entire cost to build the road — a little more than $25,000 per lot — in exchange for the city agreeing to assume the maintenance. As one city official said, “A free road!”

Question: How much is the repair cost estimated to be after one life cycle and how does that compare to the amount of revenue from these properties over that same period?

Answer: It will cost an estimated $154,000 to fix the road in 25 years, but the city will only collect $79,000 over that period for road repair. To make the numbers balance, an immediate 25% tax increase is necessary along with annual increases of 3% with all of the added revenue going for road maintenance.
(See Strong Towns for more examples)

The author introduces their studies with the following:

Since the end of World War II, our cities and towns have experienced growth using three primary mechanisms:

Transfer payments between governments: where the federal or state government makes a direct investment in growth at the local level, such as funding a water or sewer system expansion.

Transportation spending: where transportation infrastructure is used to improve access to a site that can then be developed.

Public and private-sector debt: where cities, developers, companies, and individuals take on debt as part of the development process, whether during construction or through the assumption of a mortgage.

In each of these mechanisms, the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.

The other is the realization that the revenue collected does not come near to covering the costs of maintaining the infrastructure. In America, we have a ticking time bomb of unfunded liability for infrastructure maintenance. The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that’s just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes.

The reason we have this gap is because the public yield from the suburban development pattern — the amount of tax revenue obtained per increment of liability assumed — is ridiculously low. Over a life cycle, a city frequently receives just a dime or two of revenue for each dollar of liability. The engineering profession will argue, as ASCE does, that we’re simply not making the investments necessary to maintain this infrastructure. This is nonsense. We’ve simply built in a way that is not financially productive.

We’ve done this because, as with any Ponzi scheme, new growth provides the illusion of prosperity. In the near term, revenue grows, while the corresponding maintenance obligations — which are not counted on the public balance sheet — are a generation away.



Today’s Quote:

“Sicarius… celebrated the feast of the Nativity… with Austrighiselus and the other neighbors…. The priest… sent a boy to invite some of the men to come to his house for a drink. When the boy got there, one of the men he invited drew his sword and did not refrain from striking him. He fell down and was dead…. Sicarius… took his arms and went to the church to wait for Austrighiselus. The latter heard about this and armed himself…. [B]oth parties suffered harm…. Sicarius got away unnoticed… made for his homestead… leaving behind… his silver, his clothes, and four of his servants who had been wounded. After he had fled, Austrighiselus broke into the building, killed the servants, and took away with him the gold, the silver, and the other things. When they appeared later before the people’s court, the sentence was that Austrighiselus was to pay the legal penalty for manslaughter…. Sicarius, forgetting about these arrangements… broke the peace… invaded the home, killed father, brother, and son, and having done away with the servants took all their belongings and their cattle. When we heard this, we grew greatly perturbed…”
Gregory, Bishop of Tours.

“Perturbed?” Freaked out is more likely I would think.