The Growth Ponzi Scheme
The pattern of development that most American cities have pursued over the past 75 years is not fiscally sustainable. Intuitively we know this is true. We’ve seen this bear out it many ways, with tight city budgets and a widespread belief that government is wasteful. Unfortunately, most people don’t understand why budgets are tight or government appears wasteful. Many of the costs borne by local governments are a direct result of our built environment, from maintenance to public safety.
To illustrate this point, imagine a typical single-family home in a suburban neighborhood. A very common size for a single-family home lot is 7,200 square feet, 72 feet wide by 100 feet deep. A typical street width is 40 feet and located under the street are water, sewer, and storm drain pipes which are typically publicly maintained. Every two houses, one on either side of the street, needs to generate enough tax revenue for the upkeep of 2,880 square foot of road and 72 linear feet of water, sewer, and storm drain pipe or the city will face a deficit for this small portion of the community.
Unfortunately many typical single-family homes don’t generate enough revenue to cover these maintenance costs. The size of the deficit for each house varies greatly from place to place given different construction costs and tax revenue. Strong Towns recently had a wonderful examination of this on a typical street in Fate, TX, where the property tax revenue won’t pay for the maintenance costs for nearly 17 years on infrastructure that has a 5 to 7 year lifespan.
The cost of providing public safety services to spread out single-family neighborhoods is also much higher than in compact communities, and the nature of the service is different. Police in compact, walkable neighborhoods are able to get out of their squad cars and walk the streets. This allows them to get to know the neighbors and generally have a better relationship with the residents they are protecting.
That same type of community policing is not possible in single-family neighborhoods. In these more spread out places, police rely upon their cars to quickly get anywhere they’re needed. They cannot respond quickly enough when they’re on foot. The reliance on their cars makes it much more difficult to get to know the neighbors. The type of policing is different simply due to the built environment.
The cost of providing public safety services in suburban neighborhoods is also relatively more expensive. More police and firefighters are needed to keep response times down because everything is more spread out, despite the reduced demand in single-family neighborhoods compared to more compact communities.
Cities end up relying upon other sources of revenue to subsidize these costs since these single-family neighborhoods don’t generate enough tax revenue to cover the maintenance and public safety expenses they generate.
One of the prime ways cities have subsidized these neighborhoods is by building more single-family communities. When they are new, single-family communities are a cash cow. They generate significant revenue from all of the new houses but don’t yet have much of a maintenance burden since they are brand new. In addition, developers are often required to improve surrounding roadways and other infrastructure, and pay impact fees for public safety, which then reduces the near-term maintenance costs of existing nearby infrastructure and provides revenue to bolster the public safety responses throughout the city.
Of course, those new homes and new infrastructure don’t stay new forever. Eventually the maintenance costs go up and the impact fee windfall is spent, while the tax base remains relatively static. After each cycle like this, the city will be in worse shape than it was before, and the cycle will repeat itself. Just like a Ponzi Scheme, these cycles will need to repeat forever into the future or the entire system will collapse.
Some cities, like Detroit and San Bernardino, have already experienced this collapse, while many others are slowly going through it. The only way to stop this cycle of unsustainable growth is to build in a way that creates a fiscal surplus while there is still demand for growth. Largely, this means building the highest intensity uses with the least amount of demand for public services possible. With enough growth that produces a surplus, it may be possible for cities to raise revenues to pay for future costs associated with existing neighborhoods, or at least soften the landing.
[Note: This is one article in a longer series on fiscal solvency of cities, part of a larger look at how local communities can address global issues related to climate change, housing affordability, the local economy, the fiscal solvency of cities, and public health.]
