First steps to closing your city's (big!) resource gap
Last week, Jordan and I recorded an episode for our Go Cultivate! podcast where we discussed the growing resource gap many cities are facing and some simple steps city leaders can take to begin addressing it. Felix joined Jordan and I for a second follow-up discussion. In this companion piece, I’d like to expand on that conversation.
What is the ‘resource gap’ and where did it come from?
By resource gap, I’m referring to a growing deficit between the costs to address needs and wants of citizens and the money cities have available. Many cities (I would argue the majority) in this country are going broke. The postwar approach to development and growth has resulted in a development pattern that costs much more to serve and maintain than it produces in wealth and revenue to cover the costs. This gap is not readily apparent at first, but emerges when a city moves from a growth mindset to a maintenance and revitalization focus. Let’s briefly walk through how American cities have evolved and how this relates back to city finances.
Most American cities started with a downtown square or Main Street surrounded by a few blocks of neighborhoods, and a relatively small population. These older (pre-WW2) neighborhoods typically have narrower streets in a tight grid layout, with narrow lots and a variety of buildings and uses. This pattern of development consistently generates more property tax revenue per acre and has a relatively low service cost per acre due to the more compact form and narrower streets. This growth pattern continued (upward and outward) incrementally over time as the city’s population and resources allowed.
The old (pre-WW2) suburban pattern
The new suburban pattern
After WW2, our approach to development changed. Thanks to the invention of the automobile and the promotion of the American (aka suburban) dream, developers built acres and acres of suburban neighborhoods with larger lots, wider streets and cul-de-sacs all over this country in a matter of decades. This development pattern spreads people and buildings out, diluting the tax base per acre and increasing service costs. (Note: It’s not that we invented suburbs at this time. Those were already around. It’s that we changed the suburban development pattern to accommodate, principally, the automobile—and we’re living with the long-term financial, economic, environmental, and social consequences of that decision.) When we analyze the financial performance of these types of neighborhoods (in terms of revenue to the City), they typically appear heavily positive when they’re new. On the surface, it seems like revenue the city wasn’t getting before. However, they go well into the red when you factor in infrastructure maintenance and other service costs like police, fire, and parks.
When a city enters its fast-growth phase, it experiences a large quantity of growth in a short amount of time. Population increases rapidly while the average age of the city’s infrastructure and buildings drops (for a while). Much of this growth is in the postwar development pattern described above. It’s not uncommon to see 70% or more of a city’s land area given to suburban single-family neighborhoods. This is what I like to call the “Best Place to Live/Work/Play” phase, where everything is shiny and new. Everywhere you look there are new homes, new schools, new parks, new roads, and often, lots of new businesses, too.
Many of the Texas cities we work with are in this stage. As the developments come on-line, the city adds thousands of new residents and businesses, as does the tax base that comes with them, giving them a big boost on the revenue side. And, since most of the growth is financed by developers, the initial costs to serve them are relatively low. This presents cities with the illusion of wealth. Budgets balance fairly easily and elected officials often vote to lower the tax rate during this phase. New home, nice schools and plenty of shops and amenities, all with a low tax rate! Sounds appealing, right? (At least it does to the portion of people looking for these things, which I’m sure we’ll hit in a future post and podcast). We’ve seen this pitch over and over in North Texas as the growth continues to expand further and further out from Dallas and Fort Worth.
Here’s the catch. All of the infrastructure (the streets, water, sewer, and storm drain systems) that was put in initially by developers in the growth phase – typically just one or two decades – now has to be maintained by the City. As a city ages and new development tails off due to fewer greenfield sites, these maintenance costs begin to kick in. First, it’s spot repairs and preventative maintenance – line breaks, potholes, concrete panel replacements and other repairs that mitigate smaller failures but postpone the full reconstruction. Cities usually have budgets for these repairs. Some set aside a portion of their annual property tax revenue and/or have a street fee/tax in place to fund reconstruction of older streets, but it’s usually just a small percentage of the overall street network. Eventually the many, many miles of wide suburban streets and thoroughfares reach their age limit and have to be fully reconstructed.
This is when the resource gap rears its ugly head. The amount of money needed to replace all of these streets and other infrastructure is significantly more than what cities have in their budget. The costs of police, fire and other city services also increase as a city ages and grows in both size and population. When you add these costs together and compare it to the revenue generated by the development in the city, you get a deficit. And it’s usually a BIG number.
Cities at this stage begin to lean on debt for maintenance projects, which is a slippery slope. Bond elections are done every few years to fix a few streets – those lucky enough to pass the prioritization criteria developed by the City to select which projects on a list of hundreds will get funded. To make matters worse, the maintenance tsunami hits a city right about at the same time that its growth is stagnating. Revenue tied to new growth – like development fees and additional taxes – declines significantly, and in extreme cases it stops altogether. This often initiates a downward cycle of deteriorating neighborhoods, which leads to people and businesses leaving, which results in declining property values (and tax base). And all the while, those debt payments and maintenance costs continue to pile up.
So we can see where the costs come from. What about the revenue side? With all the growth and development, why don’t cities have enough revenue to cover the costs? This gets back to the development pattern. When we analyze the true cost of the postwar developments by allocating the deferred street maintenance and other service costs to them, what you find is that the majority of them lose money – a lot of money. A $300K home on a ½ acre lot may initially sound like a great deal for your city, but if the cost to serve it is more than that (which it often is), then you lose money. And when each individual transaction (development or property) is losing money, and you do this over the majority of your city, you create a gap. Again, it’s important to note than in the growth years, this approach looks to be financially viable and productive because you’re adding lots of $300K+ homes to your city. But, you have to account for the costs coming in the future.
In summary, many American cities that have experienced rapid growth after WW2 have built out a development pattern that requires more in costs than it generates in wealth and tax base. Few cities have accounted for their true maintenance liabilities and anticipated service costs for “life after growth.” And now, a growing number of American cities are struggling to find the financial resources to maintain the large amount of infrastructure that was built during their growth booms in the ‘60s, ‘70s and ‘80s. It doesn’t take much research or many trips around the country to see why older parts of the country are struggling to keep people and businesses, while places like Texas that still have room to grow and expand are adding them in record numbers. I won’t hesitate to say that it’s just a matter of time before the so-called “Texas Miracle” comes to a screeching halt, at least as it relates to the never-ending expansion of suburbs. At some point, there’s just not enough money in the system to maintain the amount of roads and infrastructure we’ve built in this country, let alone continuing to add more.
A 4-Step Plan to a stronger financial future
So if you’re a city leader and this makes sense, what can you do? In the podcast, I proposed four simple steps to get started. They are:
Step 1 - Admit you have a resource gap.
As the old saying goes, the first step to recovery is admitting you have a problem. City leaders have to be transparent and admit to each other and the community that the path you’re on is not financially sustainable. Ignoring it, hiding it, or not fully owning it just kicks the can down the road and makes the hole much harder (and more expensive) to dig out of.
Step 2 - Quantify and analyze the gap.
It shocks me to hear how many cities have not done the math to estimate what their total deficit is. There are tools and approaches cities can use to estimate their liabilities at a broad level all the way down to a detailed forecast by decade or even by year. Pictures help too, so pair the spreadsheet charts up with some maps showing revenue and net ROI (return on investment) per acre for the parcels in your city, and then analyze this information to get some context for which development patterns are performing well, as well as the ones that are the biggest drains.
Step 3 - Communicate the challenge and options to the community.
Once you get clean that your community has a gap between money coming in and what is needed to pay for all of your liabilities, you can go to the community with 3 choices:
Option 1 is to continue providing the same service levels, but ask people to pay more so that the costs are covered. In most cases, people are not willing or able to pay what it would take.
Option 2 is to have people continue to pay what they have been, but cut services to fit that revenue. This is effectively what is being done today in most cities. It’s why you see potholes, difficult decisions over what neighborhoods and projects get funding, and ever expanding, brutally long lists of “projects to be done later when funding is available”. Most people don’t want this option, either.
Option 3 is to do something in between. This is where we try to guide communities we’re working with. It means a combination of strategies to increase revenue and value capture from land and existing infrastructure while also reducing service costs.
Step 4 - Align resources and work intentionally & collaboratively to close the gap.
Cities cannot bridge these gaps alone, and it will take continued effort over a long period of time. Work to cultivate a culture of collaboration where every member of the community is investing their time, talent and/or treasure back into their neighborhoods. Utilize a mix of bigger efforts like overhauls of your Comprehensive Plan, Zoning Code and Development Regulations with a coordinated program of smaller, cheaper, faster projects to incrementally enhance quality of life at the block level and gradually stabilize and increase property values.
In some future posts and podcasts, I’ll walk through how we’re applying these four steps to Strategic and Comprehensive Plans for cities. I’ll also highlight a few of the strategies that can be applied to close the resource gap.
