The Growth Ponzi Scheme, Crash Course Part 2

We in Encinitas know all too well about street maintenance deferred. The crash course from Strong Towns continues. This part will appeal to the more wonky among us who will have some real numbers to crunch in the examples.

In yesterday's post we pointed out how cities routinely trade the near-term cash advantages of new growth for the long-term financial obligations associated with the maintenance of infrastructure. Cities pay little for new growth, but receive enhanced revenue from the development. In return, the city assumes the obligation -- and the long-term financial liability -- to maintain the now-public infrastructure.

At this point, it is easy for any of us to see the perverse incentives underlying this system. Politicians are generally inclined to worry more about the next year than an event that will occur a generation into the future. The public is likely to join them, discounting the future commitments they are making in favor of added financial benefit today. It is near-sighted, yes, but this type of thinking is also part of human nature.

It is tough to forgo real benefits today for the theoretical enjoyment of an uncertain future. The ubiquitous nature of dieting books, dieting plans, diet coaches and diet foods, all in a land of unprecedented obesity, does a great deal to validate this observation.

Examining the underlying finances of our cities at face value, one must acknowledge the following: In order for our development pattern to financially work, the amount of revenue generated by the new growth must ultimately cover the expenses incurred by the public for maintaining the new infrastructure. If cities are not raising enough revenue to repair and replace their infrastructure, the system cannot sustain itself.

Understanding this, we began to collect hard numbers from actual projects and compare those costs to the revenue generated by the underlying development pattern. This work continues, but in every instance we have studied so far, there is a tremendous gap in the long-term finances once the full life-cycle cost of the public obligations are factored in. Without a dramatic shift of household and business resources from things like food, energy, transportation, health care, education, etc... and into infrastructure maintenance, we do not have even a fraction of the money necessary to maintain our basic infrastructure systems.

The following is a smattering of examples. We link to a further explanation of the underlying numbers for those with a deeper interest in our methodology.

Rural Road

A small, rural road is paved, with the costs of the surfacing project split evenly between the property owners and the city. We asked a simple question: Based on the taxes being paid by the property owners along this road, how long will it take the city to recoup its 50% contribution. The answer: 37 years. Of course, the road is only expected to last 20 to 25 years. Who pays the difference? Click here for this case study.

Suburban Road

A suburban road is in disrepair and needs to be resurfaced. The modest project involves repair of the existing paved surface and the installation of a new, bituminous surface. The total project cost was $354,000. We asked the question: Based on the taxes being paid by the property owners along this road, how long will it take for the city to recoup the cost of this project. The answer: 79 years, and only if the city adjusted upward its budget for capital improvements. For the city to recoup the cost of the repairs from the property owners in the development, an immediate property tax increase of 46% would be needed. Click here to read this case study.

Street Serving High Value Homes

A group of high-value lake properties petition 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!" We asked the 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? The answer is that 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. (Case study available on request.) 

Urban Street in Decline

An urban street section is in need of repair, which will consist of milling up and replacing the bituminous surface. The development along the street has stagnated for decades in favor of new growth on the periphery of town. As such, over the estimated life of the new street, the City expects to collect a total of $27/foot for road repairs. Depending on the alternative chosen, the cost for repairs is estimated to be between $80 and $100 per foot. (Case study will be posted next week.) 

Rural Industrial Park

A rural town has an industrial park that is stagnating. The park consists of 25 rural lots sized at roughly 2 acres each. As part of an undertaking to encourage more development in the park, the city engineer recommended serving the park with municipal sewer and water utilities. While the city is pursuing a grant to pay the costs, everyone understands that they will assume the maintenance liability, so we asked the question: How much private-sector development is necessary to sustain the infrastructure. The answer: $316,000 per lot. This is more than double the current rate of investment seen in the park. Click here to read this case study. 

Suburban Industrial Park

A suburban industrial park with full utilities was constructed in 1995. Over the years, the park has filled out with a mix of commercial and industrial uses. City officials, pointing to the park as a major success, seek to double its size. We asked the question: If the city could spend the same amount of money today and have the same return in terms of private investment, would this be a good investment. To answer the question, we applied an inflation adjustment to bring the 1995 costs into today's dollars and then compared that against the current tax receipts. If a $2.1 million project immediately induced $6.6 million in private investment, and if all of the income to the city were devoted to paying off a bond to finance the improvements, it would take 29 years for the park to break even. In that time, the businesses in the park would rely on other taxpayers to plow the streets, provide police and fire protection, etc... Of course, the $6.6 million of private investment happened over 16 years and was often subsidized, factors that would extend that payback period significantly. Click here to read this case study - see page 50.

Small Town Wastewater System

A small town received support to build a sewer system from the federal government back in the 1960's as part of a community investment program. Additional support was given in the 1980's to rehabilitate the system. Today, the system needs complete replacement at a cost of $3.3 million. This is roughly $27,000 per family, which is also the median household income. Without massive public subsidy, this city cannot maintain their basic infrastructure. It is, essentially, a ward of the state. Click here to read this case study.

Aggressive Expansion Project

A town that was represented in Washington by a major political powerbroker initiates a project that is designed to essentially double the tax base of the city. The project requires the dredging of a river to create a harbor, the extension of major infrastructure and the repair/replacement of existing utility systems. The projection is for the improvements to induce $32 million of private-sector investment. We asked the question: If the private-sector investment was guaranteed, how long it would take the city to pay off a bond for the project costs (since they are taking on the long-term maintenance obligation)? The answer: 71 years, far beyond the expected life of the improvements. Click here to read this case study.

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The last case is probably the clearest example of the perverse incentives of the American pattern of growth-based development. The city gets $9 million of federal money to induce new growth. It costs them relatively little. If the growth happens, they get the tax revenue. If it does not happen, they are out relatively little. This all works fine until the end of one life cycle, when large-scale maintenance or replacement is needed. At that point, the costs vastly exceed the ability of the city to pay.

And this is where the Ponzi scheme aspect kicks in, because what is the solution to this unsolvable problem? In America of the post-WW II era, that's easy: The solution is more growth.

When more growth is created, the city gets excess cash (in the near term). That cash can then be applied to the old obligations. So long as the city continues to grow at ever-accelerating rates, the system works just fine. But like any Ponzi scheme, as soon as the rate of growth slows, it all goes bad very quickly.

If you want a simple explanation for why our economy is stalled and cannot be restarted, it is this: Our places do not create wealth, they destroy wealth. Our development pattern -- the American style of building our places -- is simply not productive enough to sustain itself. It creates modest short-term benefits and massive long-term costs. We're now sixty years into this experiment, basically through two complete life cycles. We've reached the "long-term", and you can clearly see we've run out of options for keeping this Ponzi scheme going.

Tomorrow we'll look at how we've reacted to this lack of productivity and the position that has placed us in today. [Then] we'll offer some rational responses to this dilemma.

 by CHARLES MAROHN

This Crash Course is a product of Strong Towns and use is authorized via  a Creative Commons Attribution-ShareAlike 3.0 Unported License. 


Strong Towns is a 501(c)3, non-profit organization run by three professionals volunteering their time and resources to change America. If you would like to help us spread this important message, consider making a supporting, tax-deductible donation. We appreicate the support.

The Growth Ponzi Scheme, Crash Course Part 1

No, this isn't about our local man found guilty last year and finally surrendering (?) on Monday for his massive Ponzi scheme. The following isn't even written to specifically describe Encinitas. But, for the next five days this crash course in local government and the financial failures in store are spelled out to describe exactly how Encinitas is structured.

In the great American experiment of suburbanization following World War II, we redirected our county's extensive resources into a living arrangement unseen at any point in human history. We abandoned thousands of years of history, knowledge and tradition in building cities and towns in order to try this new -- and completely untested -- approach.

In a way, this was an odd thing for such a pragmatic generation, having been conditioned on financial depression, scarcity and war, to undertake. I don't think they ever saw it that way, however. The Great Depression had cut short efforts to improve the industrial city. With the automobile offering the promise of mobility for all, it was seemingly within our grasp for each American family to one day live the life of European royalty, complete with a country estate outfitted with all the modern trappings. America's ascendancy and absolutely financial domination worldwide made this dream appear possible. We likely never stopped to think it through.

What is more puzzling -- at least to those that think about it -- is how there has been so little questioning of the logic behind this arrangement. American suburbanization is a grand experiment, but one where the hypothesis -- suburban development provides prosperity -- is never really tested. It is basically a law, not a theory, that has crept into our ethos. It is only the collapse of the housing market, along with the much less talked about but even more consequential collapse of the commercial real-estate market, that has allowed critics of suburbanization to avoid the label "kook".

Suburban development has become equated with the American dream. It's continual propagation is nearly unquestioned. Even those who think we are in a deep financial hole that will take years to correct ultimately envision "recovery" to include a return to building more and more of this same pattern. But is that even possible?

Following World War II, there are four ways that American cities have grown (we call these the Mechanisms of Growth). They are: 

1. Government Transfer Payments
2. Transportation Spending
3. Debt
4. The Growth Ponzi Scheme 

Focusing initially on the first three, they all share two things in common. First, the initial cost to the local government for new growth is minimal. If the state or federal government provides a grant or low-interest loan to subsidize a project -- for example, the extension of a sewer or water line -- the local government may have to pay something, but it is nowhere near the total cost. Where the DOT comes in and builds a highway, widens a road, puts in a signal, builds an overpass, etc... there may be some local funds contributed, but again, the vast overwhelming majority of the money is spent by the DOT. When a developer comes into a community and uses leverage to finance a development project, and then when families or business owners come in and take on mortgages and real estate loans to acquire a property within the development, the local government spends little or nothing to make this happen.

That is the first characteristic these growth mechanisms share: a low initial cost of entry for cities. Even though the city gets local tax revenue from the new growth, it usually doesn't cost them much up front.

The second characteristic they share is that, with each increment of new growth, the city assumes the long-term liability of maintaining all improvements deemed "public". This typically includes sewer and water systems as well as roads and streets, but will also include treatment systems, pumps, water towers, meters and even storm water ponds. All of this stuff ages, degrades, breaks and ultimately needs to be replaced.

Put these two characteristics together and you have a key insight; Cities routinely trade near-term cash advantages associated with new growth for long-term financial obligations associated with maintenance of infrastructure.

To financially sustain itself then, a city or town utilizing the American suburban development pattern and making this tradeoff must believe one of the following two assumptions to be true:

1. The amount of financial return generated by the new growth exceeds the long-term maintenance and replacement cost of infrastructure the public is now obligated to maintain, OR
2. The city will always grow in ever-accelerating amounts so as to generate the cash flow necessary to cover long-term obligations.

Of course, with the suburban model, it is physically impossible for a city of finite dimension to grow indefinitely, let alone at amounts that accelerate forever. Even realtors are now starting to acknowledge that assumption #2 is not true. Later this week we'll show how assumption #1 is also not true, and by extension, why our pattern of development is a classic Ponzi scheme, one that we cannot fix or "recover" from.

by CHARLES MAROHN 

This Crash Course is a product of Strong Towns and use is authorized via  a Creative Commons Attribution-ShareAlike 3.0 Unported License. 

Public Lands Private Profits

Preview of 3 documentary stories to be released July 10 from Sierra Club and the Center for American Progress.

Whoops!

San Diego fireworks last 30 seconds when they all go off at once.


Read full story at Patch Poway with more pictures. One of dozens covering the blunder.

Additional: Fun Facts to Know and Tell from Think Progress

America imported $223.6 million in fireworks from China in 2011 — the vast majority of the country’s $232.5 million in total fireworks imports — while only exporting $15.8 million in fireworks to all international markets, according to U.S. Census Bureau data flagged by Industry Market Trends.  

Legislation pending in Congress could lower America’s economic standing in the fireworks world even further: Rep. Dan Benishek (R-MI) and Sen. Carl Levin (D-MI) have introduced a bill that would temporarily suspend duties on fireworks imported from overseas, making them even cheaper to buy than they already are. In the campaign finance realm, meanwhile, firework makers have dumped $1,149,280 into the coffers of Republican candidates, and $1,082,834 into those of Democratic candidates.

July 4, 2012

Bill Moyers on legalized bribery. 

Supreme Court Upholds Citizens United; Tightens Corporate Stranglehold on Campaign Finance

In 5-4 decision, court strikes down Montana ban on corporate donation law, strengthening Citizens United.

Tuesday is Dues-day: A People's History

Today is Dues-day, but what are the dues?

Paying attention . . . Yes, by simply schooling yourself on how our local governance is organized, who are the players, what are the screw-ups, where is the money and what things get reported you can legitimately call yourself a citizen, an advocate for democracy.

It has never been more evident than now that "history" is what is reported and recorded.  There is a great deal of unreported current events by our major media and local media every single day. Our city council only records action minutes which does not include any minority opinions or deliberations.  Almost nothing Teresa Barth says or does or the public says gets into the recorded minutes.  The videos become the only accurate capture of what is said.  And yesterday and today's Encinitas Myths cover the kinds of manuevers that get no coverage because civility and polite behavior disallow us all screeching at the top of our lungs that corruption is afoot!

Understand, civil discourse is a major goal of the candidates running for city council seats.  But, frankly the near comatose populace will never see the swindle right out in the open unless the press stops acting like stenographers reporting a balanced he said she said journalism.  It isn't balanced, it is often not legal or ethical - but the vast majority never hears.  Jim Bond loves this and so do his colleagues in the super majority.   I digress . . . Today's post is broader than our city council even though it is related. The quote at the end is a good message for our community right now.


Despite the highly fictionalized history being taught in US schools, characterized by timelines based on military actions and world leaders' lives, the late Howard Zinn devoted most of his life to the research and education regarding the history of the United States from the point of view of regular people.  It is a very different story and appropriate for this holiday week of über patriotism. 

Citizen Tip = History from the People's Perspective

Although this video was created during the Bush administration, nothing significant has changed and in fact has gotten worse in the areas of exceptionalism and imperialism discussed in this video.

“Civil disobedience is not our problem. Our problem is civil obedience. Our problem is that people all over the world have obeyed the dictates of leaders…and millions have been killed because of this obedience…Our problem is that people are obedient all over the world in the face of poverty and starvation and stupidity, and war, and cruelty. Our problem is that people are obedient while the jails are full of petty thieves… (and) the grand thieves are running the country. That’s our problem.”  Howard Zinn

Secrecy Locally and Globally

Have you heard? The next negotiating round of the Trans-Pacific Partnership will take place in San Diego, California from July 2-10, 2012. From Public Citizen, a trusted and extensive resource on the complete backstory.

The Trans-Pacific Partnership (TPP) “free trade” agreement is a stealthy policy being pressed by corporate America, a dream of the 1 percent, that in one blow could:

offshore millions of American jobs, free the banksters from oversight, ban Buy America policies needed to create green jobs and rebuild our economy, decrease access to medicine, flood the U.S. with unsafe food and products, and empower corporations to attack our environmental and health safeguards.

Closed-door talks are on-going between the U.S. and Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam; with countries like Japan and China potentially joining later. 600 corporate advisors have access to the text, while the public, Members of Congress, journalists, and civil society are excluded. And so far what we know about what's in there is very scary!

Here is a chance at democracy in action, alongside young activists from the Occupy San Diego and other groups working on behalf of the 99%. Saturday's march banging on pots and pans as they did in Quebec looks inviting.