by Michael Kovacs
If you’re a sports fan, especially a baseball fan, you’ve probably seen the movie Moneyball with Brad Pitt. It’s the true-to-life story of the Oakland A’s and how manager Billy Beane, with a small budget to pay salaries, uses the expertise of his assistant’s math and statistics to figure out that players who get on base can make a big determination of whether a team will win or lose. They go on to win their first playoff series in years and made the playoffs for four consecutive years on their low budget. It’s a great movie. I highly recommend it.
Cities are a lot like a sports team, and what we do is similar to what Billy had to do. He had salary money and used it to get players for a value, who could get on base. As City Managers, we help set the direction of our cities with our planners and councils, and as we build out, we have a finite amount of land along with our finite ability to maintain and replace (ideally) the infrastructure we accept. We use up land in our respective city limits/extraterritorial jurisdictions, and accept infrastructure dedicated from developers in order to create tax base from the value of private investments made.
Not all development is fiscally productive. Urbanization, or more accurately, sub-urbanization, is not necessarily prosperity. The hard sobering fact is that, when permitting development in our cities, we’ve hired anybody, regardless of whether or not they can get on base, and we wonder why we don’t win. We plan for and receive, thousands of acres of low and middle value residential developments with a ton of future infrastructure liabilities using our scarce lands. We don’t do the math on whether or not a new development will make the city richer or poorer. In a tax and fee adverse environment that is growing increasingly hostile, with the majority of our citizens struggling and frustrated with us (and everything), shouldn’t we know this?
Let’s start playing to win by daylighting the financials of what’s happening and encouraging more fiscally sustainable development. What if we actually grew stronger with every development? Here’s an idea I would love for you to try: Score development proposals based on fiscal productivity. Add that to the mix. Of course, be careful and always listen to your city attorney. There are a number of consultants that can perform fiscal analysis studies to help out, but beware, don’t take a developer’s numbers at face value. Don’t even use their consultants if they’ve offered to pay for the service. The answer is already “it makes money, don’t worry about it.”
“It’s common that if big upfront one-time “gives” by the developer are factored in, along with the initial permitting and impact fee revenues, the development is a money-maker in its first few years, but look beyond the first lifecycle using a 40 year outlook.”
Run your own numbers on revenues and expenditures, or hire and pay for your own consultant to give you the real answers. It’s common that if big upfront one-time “gives” by the developer are factored in, along with the initial permitting and impact fee revenues, the development is a money-maker in its first few years, but look beyond the first lifecycle using a 40 year outlook. We use 40 years in Fate because that is the lifecycle of a concrete street, which is what we require in new developments. Of course, for the first 30 years, the road only has minor issues (if it’s built well) but the last 10 years, years 30 through 40, are just horrible for maintenance and the driving/biking public’s traveling experience.
We are still working on our methodology to do our deep-dive analysis, but make sure you use Chuck Marohn’s overall fiscal sustainability benchmark of at least 20 to 1, private tax values to publicly dedicated infrastructure, with 40 to 1 being the ideal.
That’s the first step, and it’s easy. Any citizen sitting in the audience of a Planning Commission’s meeting can see the tax value the developer is claiming at build-out, and then ask how much infrastructure will be required to make the development work, and what will be turned over to the city. If your city staff or developers don’t know, that’s the first warning sign. If they do (we require that on all our applications), you can easily run a quick ratio. Most suburban layouts won’t make it, though they can pass the test if they minimize infrastructure and get values up high enough. Currently, the City of Fate has an overall ratio of private to city/public of 19 to 1. We know we have to be very intelligent about any new areas, and build fiscally super-productive cool places or we’re in trouble as our neighborhoods build out.
It’s no secret, though not widely understood, that cities don’t (for the most part) collect any depreciation expenses in our tax and utility rate structures. We’re all cash, or modified-accrual in the enterprise funds as best. Governmental accounting …. Try running a business that has no depreciation expense in your price structure. What happens? When you need to reinvest in capital, what do you do? You sell debt and move your prices up enough to cover your debt service.
The problem in local government is that after a while, the public gets tired of the continuous debt issuance and tax levy increases. We can’t keep up with all the declining old infrastructure, so we let it go. Public safety costs go up to patrol the declining area, the schools go bad, and it’s over. The death spiral begins. Actually, it was set in motion years ago when the development was approved.
We ran depreciation costs for several new proposed developments last year in Fate; one was almost $1,000,000 annually. That one development would require an 8% increase in our operating budgets if depreciation was collected and put into a capital replacement fund. Just for that one neighborhood.
If capital replacement work or dedicated savings for future capital replacement don’t equal the depreciation expenses, your city or county is in decline. As Lewis McLean, our municipal finance guru in Texas, has said, failure to maintain is the first “soft bankruptcy.” ‘If you can’t fix your roof, you won’t be in your house long.’”
So how do you figure annual depreciation expenses anyway? Take the value of the dedicated infrastructure, then divide by the number of years it will last. In our case, a concrete street and the drainage, water, and sewer lines within it, will last 40 years, and that’s an accounting standard we already use in our certified annual financial report (CAFR). If you’re curious, you can also see the decline on what’s already built by looking up the depreciation expenses by function that are all required to be in the supplemental information in your city’s or county’s CAFR. If capital replacement work or dedicated savings for future capital replacement don’t equal the depreciation expenses, your city or county is in decline. As Lewis McLean, our municipal finance guru in Texas, has said, failure to maintain is the first “soft bankruptcy.” If you can’t fix your roof, you won’t be in your house long.
It’s easy to criticize, I agree, but what does a fiscally productive development look like? We approved a rezoning in 2016 for a small project for 32 townhomes surrounding a little dog park/recreational courtyard, that backed up to some two story vertical mixed use (four shops on the ground floor and four apartments), set on Fate Main Place, our Main Street. The ratio of private to public investment of that little gem: … 36 to 1. The developer pledged to widen a few streets to be able to do some on-street parking, which we allowed, and we’ll accept that little infrastructure addition to maintain and eventually replace. No new water tower, no new special tax district, no traffic impact study, no new thoroughfare to punch through pristine rural hills of open space…
It’s time to start deploying tactical planning, growing slow and steady, building on our existing grids, getting denser while creating place, and showing the real costs of developments to our policy makers. Let’s start going for walks and base hits. Get on base, and our cities will start winning.
Michael Kovacs has served as City Manager of Fate, Texas (a Dallas suburb) for nearly 3 years, and has over 19 years of experience in city management. Reprinted with kind permission of Strong Towns.